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93–482 PDF 2015

S. HRG. 113–577 

INEQUALITY, OPPORTUNITY, AND THE HOUSING 

MARKET 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING, TRANSPORTATION, AND COMMUNITY 

DEVELOPMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING ONGOING CHALLENGES AND DISPARITIES IN THE 

HOUSING MARKET AND HOUSING FINANCE SYSTEM 

DECEMBER 9, 2014 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

ROBERT MENENDEZ, New Jersey, Chairman 

JERRY MORAN, Kansas, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

SHERROD BROWN, Ohio 

JEFF MERKLEY, Oregon 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

RICHARD C. SHELBY, Alabama 

BRIAN CHERNOFF, Subcommittee Staff Director 

WILLIAM RUDER, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

TUESDAY, DECEMBER 9, 2014 

Page 

Opening statement of Chairman Menendez .......................................................... 1 

WITNESSES 

Wayne T. Meyer, President, New Jersey Community Capital ............................ 2 

Prepared statement .......................................................................................... 23 

Responses to written questions of: 

Chairman Menendez ................................................................................. 78 

Mabe ́l Guzma ́n, 2014 Chair, Conventional Finance and Policy Committee, 

National Association of Realtors ......................................................................... 4 

Prepared statement .......................................................................................... 27 

Responses to written questions of: 

Chairman Menendez ................................................................................. 83 

Julia Gordon, Director of Housing Finance and Policy, Center for American 

Progress ................................................................................................................ 6 

Prepared statement .......................................................................................... 53 

Deborah Goldberg, Special Project Director, National Fair Housing Alliance ... 8 

Prepared statement .......................................................................................... 69 

Responses to written questions of: 

Chairman Menendez ................................................................................. 85 

(III)

(1) 

INEQUALITY, OPPORTUNITY, AND THE 

HOUSING MARKET 

TUESDAY, DECEMBER 9, 2014 

U.S. SENATE, 

SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND

COMMUNITY DEVELOPMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 11:20 a.m., in room 538, Dirksen Senate Office Building, Hon. Robert Menendez, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ 

Chairman MENENDEZ. This hearing will come to order. Let me 

apologize to our witnesses and to our audience. We had votes taking place, so we are starting a little later. 

The housing market was at the epicenter of the financial crisis 

and the Great Recession that followed. Lenders entered into risky 

and unsafe mortgages with bars which were packaged and sold to 

investors, all with a view that housing prices would keep bubbling 

upward. When prices stopped rising and the bubble popped, the 

devastation was broad for families, businesses, communities, and 

our financial system and economy. 

Today, the housing market, much like our economy, is rebounding, but important challenges still remain. The number of households in foreclosure has fallen from its peak, but it still exceeds 

600,000 nationwide. The number of homeowners in negative equity 

is also falling as prices have rebounded, but over five million homeowners across our country still owe more on their mortgages than 

the value of their homes. 

The national numbers, moreover, do not always tell the complete 

story, as experiences vary considerably across geographic areas, demographic groups, and market segments. In my home State of New 

Jersey, for example, nearly 6 percent of homeowners with a mortgage are in the foreclosure process, the highest rate in the Nation. 

In communities with high concentration of foreclosed properties 

or distressed borrowers, the consequences can be devastating and 

the economic recovery slow. Families looking to become homeowners or move up in the market also face challenges. During the 

boom years, lenders made and securitized risky loans that borrowers could not afford. But now, it seems that borrowers of more 

modest means, instead of receiving modest, responsible loans, are 

having a hard time getting a mortgage at all. First-time home buyVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
2 

ers in underserved communities, in particular, are feeling the impact. 

Today’s hearing will examine challenges such as these that still 

face us in the housing market. I look forward to hearing from our 

witnesses regarding the factors that may be contributing to each as 

well as potential solutions. 

Are there any other Senators who wish to offer an opening statement? If not, then let me introduce our witnesses. 

Wayne Meyer is the President of New Jersey Community Capital, a community development financial institution based in New 

Brunswick, New Jersey, whose work is well known in our State, 

and I want to thank you for making the trip from New Jersey for 

our hearing today. 

Mabe ́l Guzma ́n is the 2014 Chair of the Conventional Financing 

Committee of the National Association of Realtors and former 

President of the Chicago Association of Realtors, and she is testifying today on behalf of the National Association of Realtors. We 

welcome you. 

Julia Gordon is the Director of Housing Finance and Policy at 

the Center for American Progress, where she works on the future 

of housing finance, foreclosure prevention, access to sustainable 

mortgages and affordable rental housing, and other housing-related 

policies. We thank you for coming. 

And, finally, Deborah Goldberg is the Special Project Director at 

the National Fair Housing Alliance, a national organization dedicated to ending discrimination in the housing market. She plays a 

lead role in the Alliance’s public policy work on foreclosure prevention, mortgage lending, and financial regulatory and housing finance reform. We thank you for being back to the Committee, as 

well. 

So, let me just advise you all, your full statements will be entered into the record, without objection. I would ask you to summarize your statement for about 5 minutes or so, so that we could 

enter into a dialogue at the end of your collective testimony. 

And with that, Mr. Meyer, we will start with you. 

STATEMENT OF WAYNE T. MEYER, PRESIDENT, NEW JERSEY 

COMMUNITY CAPITAL 

Mr. MEYER. Thank you, Senator Menendez and Members of the 

Subcommittee, for this opportunity to speak with you today. My 

name is Wayne Meyer and I am the President of New Jersey Community Capital, which is the largest nonprofit community development financial institution, or CDFI, in the State of New Jersey. I 

would like to share with you several approaches that my organization has been taking to prevent and mitigate foreclosures and to 

stabilize distressed housing markets in New Jersey. 

First, I would like to briefly discuss challenges facing our State, 

because while the housing market has begun to turn the corner in 

some places, New Jersey is still very much in a housing crisis. The 

data bears this out. As of June 2014, 5.7 percent of homes in New 

Jersey were in foreclosure and 9.3 percent more were seriously delinquent, the highest rate in the Nation. Twelve-point-eight percent 

of mortgaged homes in the State had negative equity, comprising 

240,000 homes threatened by foreclosure and abandonment. ConVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
3 

currently, mortgage credit has been extremely inaccessible for even 

stable, moderate-income New Jersey homebuyers. 

Finally, New Jersey has the fourth-highest rental costs of any 

State, and these costs are rising, even as wages for the bottom 50 

percent of New Jersey earners has declined by a dollar an hour in 

the past year. As a result, many lower-income families are spending half their income on rental housing, which is simply unacceptable. 

For New Jersey Community Capital, an equitable housing market has been and remains a fundamental pillar for stabilizing 

neighborhoods and increasing the well-being and economic mobility 

of lower-income families. From our perspective, without economic 

mobility, there is no progress. 

In my written testimony, I have discussed four solutions that 

New Jersey Community Capital has developed to combat New Jersey’s persistent housing crisis. They center around our lending 

strategies, our Mortgage Loan Purchase Program, our real estate 

development arm and strategies, as well as mortgage lending. I believe that our holistic approach is one that, with the right support 

and partnerships, could be effective in many distressed communities around the country. In the interest of time, I would like to 

really highlight two of those particular programs that we believe 

are really important in addressing ongoing housing obstacles and 

creating opportunities to jump-start the housing market. 

The first is around lending. In New Jersey, we have witnessed 

an increasing shortage of capital from financial institutions to lend 

to nonprofit community development organizations and others who 

wish to acquire, redevelop, and put back into productive use vacant 

and abandoned housing. Every year, New Jersey Community Capital invests millions of dollars into the creation and preservation of 

hundreds of for-sell and rental affordable housing units in a very 

difficult financial climate. Since the advent of the economic crisis, 

we find that CDFIs like NJCC have taken on even a larger role in 

lending in this certain area. 

Furthermore, there has been a lack of access to mortgage credit. 

So, in response, New Jersey Community Capital is partnering with 

the State’s largest credit union to create a Credit Union Service Organization which will provide CRA-qualifying mortgage credit and 

credit counseling to qualifying prospective low- and moderate-income homebuyers that cannot access mortgages in their traditional 

market. 

Second, I would like to talk, if I may, about our ReStart Mortgage Loan Purchase Program. Senator Menendez, at a field hearing 

you held in New Jersey in 2012, when you held the field hearing 

in New Jersey, I talked about the need for us to be able to acquire 

mortgages while people were still in their homes, to get ahead of 

the problem, to be in the front end to make sure we can preserve 

home ownership. Over the last 2 years, New Jersey Community 

Capital has acquired 800 mortgages through FHA’s Distressed 

Asset Stabilization Program in New Jersey, and our goal is simple. 

It is to keep families in their homes through principal reduction, 

bringing the mortgage down to the current value of the house and 

ensuring that the borrower’s monthly payment does not exceed 35 

percent of their income. We provide all of our homeowners with 

4 

high-touch financial counseling through partnerships with local approved HUD organizations. 

Last, we have found in these pools that approximately 45 percent 

of the properties are vacant or tenant-occupied. We view these situations as opportunities to repurpose distressed properties into new 

affordable housing opportunities. It is especially valuable in today’s 

housing market, in which Government housing subsidies are so 

limited, that we can pass on our savings on the mortgage purchases both to homeowners and to new affordable housing. To date, 

we have kept 250 homeowners in their homes and provided over 

$20 million in principal reduction, and there has not been one redefault on any of those mortgages. 

Briefly, I would just like to talk about what we see as several 

low- or no-cost approaches that can be taken to advance the steps 

to recovery in New Jersey and elsewhere. The first is increasing 

nonprofit access to nonperforming mortgages and REO properties 

through the FHA Distressed Asset Stabilization Program and the 

FHFA program. New Jersey Community Capital has relied on the 

FHA program to acquire 800 mortgages, but more and more forprofit entities are winning these pools. To date, they have won 88 

percent of what the FHA considers to be Neighborhood Stabilization Outcome pools, and we believe that this has to change. 

Some of our solutions to this challenge include increasing direct 

sales of mortgage pools from FHA to nonprofits in NSO areas, 

awarding extra points to NSO bidders committed to social outcomes, and allowing nonprofits the first option to bid on NSO pools 

or other sets of targeted pools. We believe that FHFA should follow 

the lead of the FHA DASP program and incorporate the NSOs in 

their GSE auctions. 

Finally, I would like to talk about the continuing support of principal reductions as an effective foreclosure prevention strategy. We 

believe that many of our homeowners are so severely underwater 

that the only way to make sure that they stay in their home is 

through principal reduction. So, we advocate for increasing access 

to funding sources similar to the hardest-hit funds, potentially including Department of Justice settlement funds, a source that can 

carry a program like ours to thousands more homeowners. 

Thank you, Senator. 

Chairman MENENDEZ. Thank you. 

Ms. Guzma ́n. 

STATEMENT OF MABE ́ L GUZMA ́ N, 2014 CHAIR, CONVENTIONAL 

FINANCE AND POLICY COMMITTEE, NATIONAL ASSOCIATION OF REALTORS 

Ms. GUZMA ́ N. Thank you, Chairman Menendez and Members of 

the Subcommittee, for the opportunity to testify on behalf of the 

National Association of Realtors. My name is Mabe ́l Guzma ́n and 

I am a broker at @properties in Chicago, Illinois, and I am the 

2014 Chair of the National Association of Realtors Conventional Finance and Policy Committee. I am very passionate about the role 

of real estate in public policy, so much so that I took time away 

from my business to be here today. 

In my 17 years as a Realtor, this is thus far the most difficult 

market for homebuyers I have seen. In many respects, the U.S. 

5 

housing market is headed down the wrong path. We believe this is 

due to six major factors. 

First, our economy is still recovering. Employment and incomes 

are improving, but many earners still struggle with cash for 

downpayments and many homes are quickly snagged by investors 

paying cash, leaving little inventory for first-time buyers. 

Second, fees are hurting consumers. The overall cost of loans are 

at historic highs. The guarantee fees and loan level pricing adjustments charged by GSEs are hurting consumers. These policies result in billions of dollars of profits for the GSEs, but have had a 

significantly negative impact on mortgage lending. 

Third, despite a healthy portfolio, FHA premiums are very high 

and they require borrowers to pay mortgage insurance for the life 

of the loan with no opportunity to cancel. Quite simply, this hamstrings consumer buying power. 

I had the pleasure to work with the Vasquez family, first-time 

homebuyers, and they wanted to use FHA as an option to purchase 

and they could not because the fees were exorbitant and too expensive. They had two options, either not to buy and wait a year to 

do so and save more money, which was not an option because the 

trends in our city are that prices would have been 10 percent higher and they would have been priced out of the market. The other 

option was to do a conventional mortgage, which they ended up 

doing, but they pulled from their reserves to be able to make that 

5 percent downpayment. Then there was the issue of the closing 

costs. By using those reserves, they had less money to be able to 

pay for closing costs. So, I was able to negotiate with a seller that 

was willing to contribute 3 percent toward their closing costs, but 

that took over five offers to make that happen. So, through the 6- 

month process, we were able to have success, and now they are 

happy homeowners. 

Fourth, there are significant barriers to condominium ownership. 

We need changes to rules regarding owner occupancy ratios, project 

approval processes, and commercial space. Condominiums often 

represent the most affordable options for first-time homebuyers. 

I worked with a young man named Andrew Wikell [phonetic]. It 

took 3 years to find him a condominium under $200,000 in the city 

of Chicago, and we kept expanding our search. For him, it was the 

owner occupancy ratio. If a building had 55 percent tenants or nonowner occupied, it would not—he would not be able to get any financing on it. Though it was 55 percent nonowner occupied, within 

those units, anywhere from 5 percent to 15 and at times 20 percent 

had no mortgage, so they had no risk of default. We felt that it 

really should have been moved out of that ratio and put into 

owner-occupied status because the risk of default did not exist. 

Second, on commercial spaces, only allowing 20 percent is very 

onerous. Developers are creating transient-friendly buildings, additionally lifestyle centers, where the owner can come down, get a 

cup of coffee, do their dry cleaning, make a copy, even sit down and 

have a glass of wine. By reducing that to 20 percent, it has a double-negative. Number one, they have no potion to buy into that 

building which gives them so many amenities outside their other 

properties that they could choose, but second, it reduces commercial space, which creates small businesses an opportunity to open 

6 

in that building and create jobs. So, it is a job killer at the same 

time. 

Fifth, the underwriting process needs to be improved. FHA and 

GSEs have made concessions with respect to lender liability. Now, 

lenders need to improve the quality of their underwriting and halt 

preventable mistakes. In addition, Congress and the Administration can improve current credit conditions by addressing the 3 percent cap on fees and points. 

And, finally, foreclosure and short sales remain problematic for 

thousands of American families. The GSE and FHA alternative 

asset disposition programs actually reduce home purchase opportunities for owner occupants. Foreclosure prevention efforts need to 

be increased before loans are sold off to investors. In addition, NAR 

urges Congress to extend mortgage debt forgiveness to distressed 

homeowners who should not have to pay phantom income tax after 

enduring the stress and loss of their home in a short sale. Therefore, we need to provide more certainty in the short sale process, 

as well. We support Senator Brown’s bill, S. 361, to provide a certain answer to distressed homeowners. 

I worked with a client. We started the short sale process and we 

waited 1 year for an approval so that she can realize that short 

sale, and it never happened. Her loan was sold. The new investor 

who purchased that did not want to realize a short sale and foreclosed on the client, now adding another unit of foreclosure into the 

market as well as destabilizing a condominium property. 

Until we address these issues, our national return to prosperity 

will be jeopardized. Out of the nine previous recessions, seven of 

the recoveries were led by housing. 

On behalf of the one million members of the National Association 

of Realtors, thank you for this opportunity to testify and I look forward to your questions. 

Chairman MENENDEZ. Thank you. 

Ms. Gordon. 

STATEMENT OF JULIA GORDON, DIRECTOR OF HOUSING 

FINANCE AND POLICY, CENTER FOR AMERICAN PROGRESS 

Ms. GORDON. Good morning, Chairman Menendez and Senator 

Warren. My name is Julia Gordon and I direct the Housing Finance Team at the Center for American Progress. Thank you so 

much for convening this hearing on the critical topic of inequality 

of opportunity in the housing market. 

Today, our Nation’s housing recovery is neither strong nor equitably distributed, as Ms. Guzma ́n has described. Not only has the 

mortgage market shrunk nationally, but many communities, and 

especially communities of color, lag far behind other parts of the 

country, with hard-hit neighborhoods continuing to suffer the ongoing effects of multiple foreclosures, negative equity, vacant homes, 

and blight. And, as more families become renters rather than owners, rents have risen to the point where more than half of all renters spend more than 30 percent of their gross income on rent, 

which is considered the upper limit of rental affordability. 

Most people of color remain shut out of the conventional mortgage market, with more than 70 percent of African Americans and 

about two-thirds of all Latinos having FHA and other Government 

7 

programs as their only option. And, while less than 20 percent of 

all homeowners nationally still owe more on their mortgage than 

it is worth—than their home is worth, in the hardest-hit zip codes 

in the Nation, as many as three-quarters of all homeowners are 

still underwater, and in two-thirds of these zip codes, African 

Americans and Latinos account for at least half the population. 

Ironically, even as home prices experienced historic declines over 

the past 6 years, the tightness in the credit market meant that for 

too many households, especially families of color and lower-wealth 

families, they miss what could otherwise have been an ideal opportunity to access affordable and sustainable home ownership, and in 

many of these communities that already lost significant wealth due 

to the foreclosures, wealth continues to be exported outside the 

community as it flows to landlords who do not live there. 

It is not too late to turn this situation around, but we must focus 

our efforts on enabling more families to join the ranks of home 

ownership. At the same time, we must ensure that expansion of access not lead to any of the predatory and abusive market practices 

that led to the crisis. So, I do urge you as you hear calls to exempt 

more market participants from the Dodd-Frank mortgage protections, that we think very carefully about that. We believe that access can be increased significantly under the current rules. 

So, while there is no one silver bullet, there are many dials and 

levers we think we can move to increase access without opening 

the door to predatory or unsafe lending. First and foremost, Congress should complete comprehensive reform of the housing finance 

system. Uncertainty concerning the fate of Fannie and Freddie continues to weigh heavily on the market. S. 1217, the legislation 

passed by this Committee, provided a very useful framework, but 

did not sufficiently place the goal of access to affordable, sustainable credit at the center of the new system’s purpose. 

Until that effort is completed, FHFA and FHA have a great deal 

of power to make positive change. Just yesterday, FHFA released 

the news that Fannie and Freddie will offer a low-downpayment 

product for first-time homebuyers, a sorely needed first step in 

opening the conventional market to lower-wealth borrowers. 

We further recommend that companies update the credit score 

model used by their automated underwriting systems to improve 

the reliability of scores and the availability of scores for tens of millions of consumers, especially consumers of color. 

Additionally, FHFA should set strong housing goals and duty to 

serve requirements that push the enterprises to lead the primary 

market instead of lagging it, as they have been doing. They should 

pool for risk and set pricing based on what is needed to cover expected losses rather than continuing what has been a failed attempt to revive the private label market using unnecessarily high 

fees. 

To help struggling communities, FHFA should provide troubled 

borrowers with principal reduction modifications, which are the 

most successful form of assistance. It should also instruct Fannie 

and Freddie to consider direct purchase of forced place hazard insurance to protect both consumers and taxpayers from the kickbacks and inflated costs associated with mortgage servicers purchasing that insurance. 

8 

FHFA should direct Fannie and Freddie to begin contributing 

immediately to the Housing Trust Fund and Capital Magnet Fund, 

which will help provide affordable rental housing for extremely 

low-income families. 

As for FHA, which is now on track to fully replenish its reserves 

by 2016, we recommend revisiting the impact that premiums are 

having on access to credit and considering whether some reductions 

could provide sufficient additional volume to offset any cost to the 

fund. 

Both FHFA and FHA should ensure that any bulk sales of distressed mortgages promote both home retention and neighborhood 

stability. If designed responsibly, we believe these sales can offer 

better loan modifications, support neighborhood revitalization, and 

limit losses to taxpayers. But, if loans are simply passed off to the 

highest bidder without any protections, we will have missed an extraordinary opportunity. 

To further the work of fixing the broken mortgage servicing system, FHFA and FHA should join with CFPB and other prudential 

regulators to improve servicing rules further, revisit soon the issue 

of servicer compensation, and find a way to require sustainable 

modifications to homeowners after HAMP expires. 

Finally, as Ms. Guzma ́n mentioned, Congress must extend the 

Mortgage Debt Relief Act, at least through the end of 2015. 

Thank you again for inviting me to talk today. Together, we can 

work to create a more robust, fairer housing market that drives 

economic growth and promotes opportunities for America’s families. 

Chairman MENENDEZ. Thank you. 

Ms. Goldberg. 

STATEMENT OF DEBORAH GOLDBERG, SPECIAL PROJECT 

DIRECTOR, NATIONAL FAIR HOUSING ALLIANCE 

Ms. GOLDBERG. Thank you, Mr. Chairman. Good morning. Good 

morning, Members of the Subcommittee. Thank you for the opportunity to testify here today. My name is Debby Goldberg. I am a 

Special Project Director at the National Fair Housing Alliance, or 

NFHA. NFHA works with its 220 members in 37 States and the 

District to provide equal access to housing for millions of people. 

My written testimony touches on a number of topics, but my testimony here this morning will focus on the broken system for maintaining and marketing foreclosed properties, particularly in communities of color, and the long-term impact of these problems. 

Home ownership has long been a key to opportunity in this country, a path into the middle class. It has provided millions of families the means to create economic stability and build wealth. But, 

households of color have not experienced the benefits of home ownership to the same degree as their White counterparts, and for 

many households of color, home ownership is a thing of the past. 

Since 2008, five million families who were homeowners have lost 

their homes to foreclosure, and communities of color have been particularly hard hit. 

In April 2009, NFHA began an investigation into the marketing 

and maintenance of foreclosed properties, or REOs. In partnership 

with 17 of our members, we have inspected 3,726 foreclosed properties in 29 metro areas and 22 States. Some of these are in preVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
9 

dominately White neighborhoods, others in predominately Black 

and/or Hispanic neighborhoods. Many of these are stable communities where the rate of home ownership is high. At each house, our 

investigators evaluate more than 30 aspects of maintenance and 

marketing, including curb appeal, structural integrity, signage, indications of water damage, and the condition of the paint, siding, 

gutters, and downspouts. 

We have found that REOs in White neighborhoods were well 

cared for and well maintained, well marketed. They were more 

likely to have neatly manicured lawns, securely locked doors, and 

attractive professional ‘‘for sale’’ signs out front. Someone driving 

down the street would be unlikely ever to know that the property 

was for sale because of a foreclosure. 

In contrast, REOs in communities of color were more likely to 

have overgrown yards, trash on the premises, unsecured doors, and 

broken or boarded windows. They appeared abandoned, blighted, 

and unappealing to potential homebuyers, even though they were 

located in stable neighborhoods where the surrounding homes were 

well maintained. 

Further, these maintenance deficiencies were cumulative. That 

is, REOs in communities of color were more likely to have a greater 

number of deficiencies than those in White communities. These cumulative deficiencies lead to a host of problems. They can cause 

health problems, both physical and mental. They attract vagrants 

and criminal activity and may be fire and safety hazards. They also 

contribute to violent crime in a community. Research shows that 

for every 1 percent increase in the foreclosure rate in a census 

tract, violent crimes increase by 2.33 percent. All of these problems 

place an increased burden on municipal fire, police, health care, 

and other resources. 

At the same time, these poorly maintained REOs bring down 

property values, resulting in lower tax revenues for municipalities, 

even as they must expend more resources to cope with the problems created by the REOs. We have also found that poorly maintained REOs linger on the market longer before being sold and are 

more likely to be sold to investors, transferring wealth out of the 

community. 

Managing REOs differently based on the racial composition of 

the neighborhood in which they are located is a violation of the 

Federal Fair Housing Act. The Federal agencies responsible for 

overseeing the activities of banks, the GSEs, and other investors 

have both the authority and the obligation to ensure that they do 

not violate the Fair Housing Act in their maintenance and marketing of REO properties. Effective oversight can help stem the 

kind of problems our investigations uncovered. To date, only the 

Federal Reserve Board has taken action in this area. 

In our report, we outline a series of recommendations for addressing these problems and ensuring that communities of color 

have an opportunity to share in the economic recovery. One of 

these is for Congress to play an active role in oversight, both to 

shine a spotlight on the problems where they exist and to hold accountable Federal agencies with the responsibility to help prevent 

and solve these problems. 

10 

Further, we believe it is critical to create a path back to home 

ownership for families harmed by the foreclosure crisis and have 

described some of the steps necessary to do this. So many of these 

families are families of color, and they will constitute half of the 

potential homebuyers over the next decade. Helping them exercise 

that potential is not only the right thing to do, it is an economic 

imperative for our Nation. 

Thank you for the opportunity to testify here today. I look forward to your questions. 

Chairman MENENDEZ. Thank you all for your testimony. There 

is a lot of ground to cover here, so let me start. 

Several of you have discussed how mortgage borrowers’ credit 

scores have tightened sharply in recent years, and not only compared to the precrisis boom years, but also tighter than the more 

normal period before the boom. During the run-up to the crisis, we 

saw many instances of homeowners who once would have received 

modest, affordable loans instead receiving much riskier loans than 

they could possibly afford. And now it seems the response has been, 

instead of going back to matching the creditworthy borrower at the 

lower end of the distribution with affordable loans, these borrowers 

are being cut out of the market entirely. 

So, my question for any or all of you is what factors do you think 

are driving that trend? To what extent are the broader economic 

factors as opposed to tighter mortgage lending standards affecting 

this? And, to the extent that creditworthy borrowers are having a 

tougher time right now getting a mortgage, how has the impact differed across different populations or segments of the market? Who 

has felt it the most? So, one is why is it happening? Two, what are 

the factors? Are there factors beyond just having the pendulum 

swing the opposite way, and who is getting the worst of it? 

Ms. Guzma ́n. 

Ms. GUZMA ́ N. Yes. With regard to what is happening, is currently, banks have credit overlays. CFPB put out actually very rational rules that mitigate risk to any qualified borrower, but banking comes in. If there is a 41 percent DTI, debt-to-income ratio, 

which is the CFPB rule, they will say they need 43 percent. So, 

that eliminates 10 percent right there. 

Then, if they look at a credit score, 650 maybe being the average 

on a consumer, they will say, well, we need 680 or 700. That eliminates another subsection right there. And, credit—that number has 

nothing to do with risk. It is, rather, they have a lot of revolving 

debt or not. Many consumers actually prefer to pay cash, and we 

are looking at FICO 9, which is one of the new models that would 

actually help and introduce more borrowers into the market. 

The credit overlays do need to be removed, or buffers, as they 

say, because we have already gone through a sense of reform, you 

could say, with the CFPB. And, by the elimination of that, you 

would still have good creditworthy borrowers, rational lending, and 

you would see a reintroduction of opening that pool and access to 

more borrowers into the American dream. 

Chairman MENENDEZ. Does anyone else want to opine? Ms. Gordon. 

Ms. GORDON. If I could pick up on the fact that the lenders have 

these overlays and talk about why they have the overlays, it would 

11 

be hard for us to know exactly why, because every time we talk to 

lenders about it, we hear a different story, depending on what 

problem we are working to solve. 

For a long time, the concern had to do with the representation 

of warranty framework or the indemnification framework, lenders 

concerned about being forced to buy back their loans. Both FHA 

and FHFA have been doing their best to provide lenders with more 

certainty in that area. But, as soon as you hear more certainty in 

that area, you hear the lenders talk about other regulatory risks. 

You hear they talk about the DOJ settlements. 

There are a whole variety of reasons lenders have been putting 

forward about why they are not lending and it is very difficult to 

tell exactly what policymakers can do to change the fact that, at 

the moment, some of the biggest lenders, some of the biggest 

banks, simply do not appear to really want to ramp up their mortgage businesses, which is why I do think it is really important for 

us to focus on alternative mortgage channels, to focus on credit 

unions, CDFIs, smaller institutions. While, typically, the answer to 

that is, well, you can never scale that up to the point where it matters, I think that we would be doing ourselves a disservice if we 

did not really try to scale the efforts of the more mission-based organizations that have a desire and willingness to be in the mortgage business and to serve the communities that we are talking 

about. 

And, in terms of who is being left out the most, you know, lowwealth borrowers, but in particular, borrowers of color are being 

very, very deeply hurt, and I want to strongly support what the 

CFPB is trying to do in terms of collecting more and better HMDA 

data. We really need that data to understand what is going on. I 

would also urge CFPB to add a few more data fields and think 

about how we can also be keeping track of things like housing 

counseling and loan modifications, as well as the origination data. 

Chairman MENENDEZ. I have several other questions. I only got 

to one. You all expounded significantly on it. But, in deference to 

my colleagues, I am going to come back a little later. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman, and thank you all 

for being here today. Thank you for calling this hearing. 

You know, home ownership remains the principal way for most 

families to build economic security. But, access to mortgage credit 

is very tight. Only about half as many new mortgages were approved in 2012 as back in 2001, well before lending standards were 

loosened up in the run-up to the financial crisis. 

Now, Fannie and Freddie are responsible for a huge portion of 

the secondary mortgage market and that means their standards 

have a major influence on what mortgages are actually offered in 

the primary market. Since the crash of 2008, trouble with a mortgage or short-term job loss has left millions of Americans with 

dings on their credit scores, and moderate-income families, African 

American and Hispanic families, have been hit especially hard. 

But, instead of taking that into account in loosening credit score 

standards, Fannie and Freddie have gone in the other direction. In 

2012, the average credit score associated with a mortgage purchased by Fannie or Freddie was over 760. That is more than 50 

12 

points higher than the average credit score associated with mortgages they purchased back in the early 2000s, and more than 50 

points higher than the average credit score of the average American. To be blunt, Fannie and Freddie have put home ownership 

out of the reach of millions of creditworthy families. 

So, Ms. Gordon, I just wanted to start with you. Do you agree 

that Fannie and Freddie’s credit standards have played a key role 

in keeping many Americans out of home ownership? 

Ms. GORDON. Well, the answer is yes, but it is not just their credit standards per se. The whole direction of Fannie and Freddie’s 

policies since the conservatorship has been extremely conservative 

and not aimed at performing their chartered mission of serving all 

markets all times. 

Senator WARREN. Fair enough. I just wanted to focus in, though, 

in particular, on credit scores. It is an easy piece to get a hold of 

and an easy piece to talk with Fannie and Freddie about. We have 

got other aspects, I promise, we will—— 

Ms. GORDON. Sure. Absolutely, on the credit scores. I mean, it is 

partly because of the overlays, partly because they are using the 

old FICO model, and, you know, with a heavy reliance on automated systems as opposed to manual underwriting, they have some 

important exemptions from some of the QM standards but often 

are not able to use the compensating factors or do not want to use 

them. 

Senator WARREN. Well, that is right, and the data would suggest 

they are not using them—— 

Ms. GORDON. Right. 

Senator WARREN. ——right? And, Ms. Guzma ́n, you are out there 

doing real estate. Would you agree with that? 

Ms. GUZMA ́ N. Absolutely. 

Senator WARREN. OK. 

Ms. GUZMA ́ N. Absolutely. When we look at the HMDA filings in 

2006, 56.8 percent of African American and Black borrowers had 

an Experion credit score of 650 or less. When we are looking at 

FICO 9, this will result in increased acceptance of mortgage applicants. But, we also believe VantageScore is another model that 

they need to be using. First of all, again, that number, 650 or 675, 

does not indicate risk. It just means how much credit they have 

available to them. 

Senator WARREN. Right. 

Ms. GUZMA ́ N. With VantageScore, it takes into account rental 

payments, utility payments, and maybe even possibly, with many 

Latinos in our market, they send their children to parochial school. 

That is a big nut they have to pay on education every month. They 

should be using other methodology and have innovation within the 

organization to actually look at this and say, yeah, we need to now 

expand the way we give credit or how we determine who is a creditworthy borrower. 

Senator WARREN. Good. I think that is really valuable, and offering a lot of approaches that Fannie and Freddie could be using. 

You know, with Fannie and Freddie keeping credit so tight, especially at a time when housing is more affordable than it has been 

before, then it is bad for families, it is bad for the housing market, 

and it is bad for the economy across the board. 

13 

So, I want to ask about one other thing, and that is since the 

Government’s Home Affordable Mortgage Program, HAMP, began 

in 2009, more than 1.3 million homeowners have received a loan 

modification, and many of these modifications reduced the interest 

rates, which, in turn, lowered the homeowners monthly payments 

and helped people stay in their homes. About 90 percent of these 

modifications were designed so that interest rates would begin resetting and gradually increasing after 5 years. 

The first reset started last year, and according to an analysis of 

Treasury data by the Special Inspector General for TARP, after all 

of these resets are completed, the median monthly mortgage payment will increase by more than 20 percent for these families. 

Monthly payment increases will be even higher for those who needed the most help and, thus, received the steepest initial discounts 

in their interest rates. 

Now, researchers at Urban Institute’s Housing Finance Policy 

Center have estimated that the impact of these resets will hit hardest in 2016 and 2017, and that as a result, we may see redefaults 

of about 10 percent among this group. That translates to about 

100,000 families defaulting in the next couple of years. 

So, Mr. Meyer, I wanted to start with you. I was pleased to see 

that last week, Treasury announced plans to enhance the existing 

HAMP modification to avoid some of the problems that these resets 

will cause. Has New Jersey Community Capital looked at ways to 

help these families stay in their homes if they default again? 

Mr. MEYER. Yes, Senator. Thank you. We believe that it is important to engage with principal forgiveness and to make sure that 

the mortgage is right-sized to give the homeowner the best chance 

of success. But, a really important part, an important component 

of our program is a really high-touch financial counseling component, and it is not just to develop a mortgage resolution plan to 

keep the homeowner in their home, but it is also to support the 

homeowner on a go-forward basis. So, our counselors are staying 

with the homeowner after the mortgage is modified for a period of 

12 to 18 months to make sure that they stay on track. And, although our track record right now is 2 years, we have modified 

hundreds of mortgages and have not yet had one redefault. 

Senator WARREN. Good for you. Thank you, Mr. Meyer. 

I am going to follow the good example set by the Chair and quit 

there, but I do want to come back at some point to what Treasury 

should be doing about this on the modifications, as well. Thank 

you. 

Chairman MENENDEZ. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair, and thank you all for 

your concern and interest day to day in this challenge of reestablishing home ownership as a major driver of wealth for middleclass families. 

Ms. Gordon, I thought I would ask you a question, and it is a 

little unfair, because I have not briefed you in advance, but are you 

familiar with IDA programs, Individual Development Account programs? This is something that I became interested in in Oregon. 

I started the first IDA program that was west of the Mississippi, 

essentially in which low-income families, if they save toward home 

ownership, they get a matching grant under the program to enable 

14 

them to buy a house, pay closing costs, downpayment, and so forth. 

And, it has had a very strong success rate in home ownership. I 

also worked previously with Habitat for Humanity, where we 

worked with very low-income families to buy homes. 

And, the reason I raise this is when we look at the home mortgage interest deduction, it is our major home ownership program, 

but it does not extend to low-income families, and let me give an 

example of that. You buy a $200,000 house. You pay 4 percent interest—that is $8,000 of interest—at the beginning of the mortgage. It gets less over time. And, yet, the standard deduction currently is $12,400. So, you do not get one dime of help. 

And, one of the things that I have put forward periodically is the 

idea of adding on to the home mortgage interest deduction and 

with a grant program for those who do not take advantage of it. 

For example, if we were to have—we could kind of create a systematic IDA, still requiring matching funds if a homeowner was to 

take advantage of it for closing and downpayment, but take a value 

equivalent, kind of the value that they would have if they could 

have utilized the home mortgage interest deduction at a middleclass tax rate and give it as an annual grant or tax credit. 

Is that something you have taken a look at? This is where it is 

unfair, but the general idea—do you see where I am headed with 

the suggestion—to enable home ownership—— 

Ms. GORDON. Right. 

Senator MERKLEY. ——not taking away anything from anyone 

else, but to help empower home ownership among lower-income 

families. 

Ms. GORDON. I do see where you are headed and I think it is a 

very interesting idea to talk about. I do have to say that we have 

recommended actually converting the mortgage interest deduction 

into a credit so that we solve the problem of this enormous subsidy. 

I mean, the amount we spend on the mortgage interest deduction 

every year is bigger than the entire HUD budget, which is, you 

know, incredible when you think about it, and it really is benefiting 

those in the upper parts of the income scale. And, so, we do think 

converting it to a credit and capping it would help direct that subsidy to the people who need it the most. 

But, knowing that reform of that particular deduction is challenging, to say the least, and that comprehensive tax reform may 

be on the table, but will also be challenging to accomplish, you 

know, thinking about ways to tax advantage programs that help 

lower-income borrowers get into housing is very important and I 

would love to talk to you more about that. 

Senator MERKLEY. Thank you, because I think we spent about 

$70 billion on the mortgage interest deduction. 

Ms. GORDON. Yeah. Yeah. 

Senator MERKLEY. It would take just a few billion dollars to provide these credits at the lower end. So, I like to think of it as ‘‘yes 

plus’’ if you will, the possibility. 

I also wanted to—does anyone else want to make any comments 

on that? 

Ms. GOLDBERG. I would add just one thing, which is that I think 

it is a very interesting idea, as well, and agree that the way we 

15 

handle the mortgage interest deduction definitely disfavors people 

with modest means, which often means people of color. 

But, I also want to say that I think it is important for us not 

to fixate on downpayment. The downpayment is a huge hurdle for 

people of modest means to get into home ownership, and the truth 

is that if we look back beyond this most recent period of trouble 

in the mortgage market, we find that we actually know how to 

make low downpayment loans that are very sustainable, affordable 

and sustainable. If you do it right, with the right product, it helps 

to have housing counseling along with it, and we have a long history, actually, of being able to make low downpayment loans to 

low- and moderate-income people that are extremely successful, 

and we need to remember that history and revive that approach. 

Then, the IDA program will get you a lot farther and there will be 

fewer people who need that kind of help to get over the hurdle of 

getting into home ownership. 

Senator MERKLEY. Yes, fair point, Deborah. But, even with low 

downpayment loans, the downpayment and the closing costs together can still be a substantial hurdle to undertake. 

Ms. GOLDBERG. That is right. 

Senator MERKLEY. But, the type of thing I was just describing 

does not help just with the downpayment. It helps on an annual 

basis when you do not utilize the mortgage interest deduction as 

an alternative—— 

Ms. GOLDBERG. The ongoing cost—— 

Senator MERKLEY. As ongoing costs, yes. And, so, it mimics the 

effect of the mortgage interest deduction, if you will. 

I am out of time. So many questions, so little time. Thank you 

all very much. 

Chairman MENENDEZ. Well, we are going to have another round, 

so if you want to stick around, you will maybe have—if your schedule permits. But, let me—and I know Senator Reed is going to be 

returning shortly. He has a very significant interest. 

Let me—there is so much here. First of all, Ms. Goldberg, I am 

glad you raised the history of the low downpayment program and 

its efficacy and its success. I think it is going to be under siege in 

the next Congress, so we are going to have to remind people about 

the facts, not the creation of the image, and that is going to be a 

challenge. 

I want to get, since part of the focus of why I wanted this hearing, in addition to where we are at and what our challenges are, 

is also to drive here a point that I think is very real, and that is, 

certainly for many families, the whole essence of home, in addition 

to being the place that we nurture our families and raise them, 

represents the most significant, or in some cases the only source 

of savings. And, for half of American families, for example, home 

equity accounts for at least 60 percent of their net worth, including 

nearly 70 percent for the typical Latino family and about 60 percent for African American families, and almost 80 percent for families in the bottom 25th percent of income earners. 

So, with those numbers in mind, what is the implication of the 

current credit conditions for savings, wealth building, and income 

mobility? It seems to me that that is rather challenging. And, one 

of the things that we just—I think I perceive from this last election 

16 

is despite every major macroeconomic indicator, you know, the 6 

consecutive years of private job sector growth, the lowest unemployment in 6 years, the lowest deficit in 6 years, the lowest deficit 

as a percent of the economy by 40 years, the low gas prices, I 

mean, I could go on and on and on, but what is the reality for most 

families, is that incomes have been stagnant. If you add to that, 

then, the inability to have the single most significant source of 

asset and wealth to be stuck or not attainable, then you are creating an even more caste set of circumstances in our society. So, 

I would like to hear some of you address that, anyone who wishes 

to. 

Ms. GOLDBERG. Sure. Yes, it is absolutely true. Particularly for 

families of color, home equity has tended to be the largest single 

asset that they have. It is an asset that can be passed 

intergenerationally and that has been used very powerfully in 

many moderate-income neighborhoods around the country. Those 

neighborhoods were particularly devastated by the foreclosure crisis. They were the first neighborhoods targeted. They were equity 

stripped before we even invented some of the toxic products that 

eventually took down the whole superstructure. It has left people 

of color in a very bad position in terms of wealth. I mean, if Whites 

lost about a quarter of their net worth over the course of the crisis, 

African Americans and Latinos lost 50 or 60 percent of their net 

worth. It is really—it is really frightening and the disparity is 

huge. 

You know, also, going forward in the mortgage market, the majority of family formation is going to be people of color, and if we 

want to have a healthy mortgage market, if the White baby 

boomers want to someday sell their houses, we are going to have 

to find a way for people of color who are now even lower wealth 

than they were before the crisis to be able to come in and buy these 

houses. 

And, honestly, I think this is a national emergency and that we 

need to think very creatively and boldly about how we solve this 

problem. 

Chairman MENENDEZ. And, as some of you others answer, I wonder if you have any policy considerations for how we improve access 

to affordable home ownership for creditworthy borrowers. I do not 

want to lose sight that we are still looking for creditworthy borrowers. Ms. Guzma ́n and then Mr. Meyer. 

Ms. GUZMA ́ N. Well, absolutely. I was—I participated in the 

Neighborhood Stabilization Program, which targeted 25 communities in the city of Chicago, and predominately communities of 

color that were hardest high by foreclosures. A lot of those properties were bought through that program, and the first initial 

round was $55 million and Realtors played a big role helping the 

NSP recipient to actually buy a lot of those properties and then reintegrate them into the market. Additionally, they set up programs 

where first-time borrowers would have counseling. And, additionally, they would help them with closing costs. But, at the end, 

there were 2,000 units that were purchased. It is now a national 

model. 

And, on the competitive bid for the NSP on the second round, it was $98 million was awarded to the city because of the success of 

17 

the program, and it continues to grow. Four thousand units of 

housing were created, 75 percent rental, because, again, the market was in freefall. But, many communities were stabilized, and 

mostly in communities of color. 

It is wealth building. It is a wealth builder. It changes the dynamic of a family. To have prosperity, economic self-reliance, we 

really do need to reintroduce these borrowers back into their communities to create that stabilization and also economic prosperity 

for themselves. 

Chairman MENENDEZ. Mr. Meyer. 

Mr. MEYER. I agree that wealth building is such a challenge, and 

Senator, I may even take it a step further. In a lot of the neighborhoods where we work, more than 50 percent of the renters pay 

more than 50 percent of their income toward housing, which leaves 

them with very little other room for food, for health, for education. 

So, it is not just about wealth building. It is also about being able 

to put your housing costs into line with your income. 

So, what Ms. Guzma ́n’s point was around, the NSP program, I 

agree, that was a significant program. But, we are in an age of limited, shrinking Government resources. So, in New Jersey, for example, we receive $65 million of NSP monies. I think we did maybe 

a little less than 300 units with these funds, which is not a lot. And 

one of the policy changes we can make is to increase access to FHA 

mortgages, because through that alone, we have bought 800 mortgages at a discount. So we are able to repurpose 300 of these properties that are vacant or tenant-occupied for just a fraction of the 

cost of doing 300 units through NSP. I think that is a significant 

consideration. 

So, then the challenge becomes how do we put into the hands of 

nonprofits and others the inventory of assets that can create these 

opportunities for low- and moderate-income families rather than 

only selling them into private equity firms. I think DASP is a great 

opportunity to do that. I really do believe that. And, I think this 

opportunity is going to pass us if we do not act quickly on it. 

Chairman MENENDEZ. In this regard—and I want to turn back 

to Senator Warren, but just to keep this train of thought while we 

have it—Ms. Gordon, in your testimony, you discussed the FHFA’s 

recent announcement about allowing Fannie and Freddie to resume 

backing well underwritten loans with downpayments as low as 3 

percent in cases where borrowers can demonstrate their creditworthiness and ability to repay and with other compensating factors. What is the track record for well underwritten loans with 

lower downpayments with other compensating factors? 

Ms. GORDON. The track record is good. I mean, at Fannie and 

Freddie themselves, the difference in performance between a 3-percent down and a 5-percent down is almost indistinguishable, and 

we have worked with the Center for Community Self-Help—I actually used to work there—where we had a portfolio of many, many 

thousands of mortgages that were low-downpayments mortgages 

made to families with nontraditional credit histories or thin files 

and that were properly underwritten and were safe, sustainable 30- 

year fixed-rate mortgages, and we actually had a grant to follow 

very closely the performance of those mortgages and so we have 

been tracking them carefully throughout the crisis, and that portVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
18 

folio of loans, which, really, many people might have looked at and 

said, really, do you want to make these loans, they have performed 

better than any other cohort of loans except for the very prime 

fixed-rate mortgages. They have performed better than adjustable 

rate prime. They have performed better than any all day or 

subprime categories. 

Chairman MENENDEZ. So, these were not the drivers of the crisis. 

Ms. GORDON. These were not the drivers of the crisis. 

Chairman MENENDEZ. I ask, because we are going to hear the 

opposite of that. 

Senator Warren. 

Senator WARREN. Well, what does it mean when you say you are 

going to hear the opposite? 

Chairman MENENDEZ. No, no—— 

[Laughter.] 

Chairman MENENDEZ. No, no, we are comrades in arms on here. 

Senator WARREN. We certainly are on this one. 

So, I want to actually, though, ask you about another part of 

this. I want to raise another issue, and that is when a Fannie- or 

Freddie-owned mortgage goes into default, Fannie or Freddie buys 

the property and then resells it, and last year alone, Fannie sold 

more than $2.8 billion worth of property. So, when these notes are 

sold to homeowners rather than to investors or absentee landlords, 

families do better, neighborhoods do better. 

So, FHFA has a First Look policy that gives families and individuals first crack at buying these repossessed properties before the 

bidding is opened up to investors, but the policy is not working. 

The houses are priced so high during the First Look period—significantly above market value, according to many reports that we 

hear—that regular buyers do not really have a shot at this. The 

prices come down only later, when investors are moving in. 

So, I thought I would start with you again, Ms. Guzma ́n. As a 

Realtor, you have firsthand experience with the difficulties that 

borrowers are facing in today’s housing market. How do you think 

Fannie and Freddie could better ensure that these notes end up in 

the hands of owner-occupants? 

Ms. GUZMA ́ N. Well, it is beyond the First Look. I mean, getting 

the First Look and then being able to submit an offer right away, 

also, in a timely response on that offer, is completely different than 

the First Look, let the clock run out 10 days later, then it is a multiple-bidding process. That seems—you know, they say they want 

to support owner occupancy, but we find that it really kind of 

confounds everything. 

As I said, working with several buyers, it has been a multiple 

offer process. You know, they are writing five, six offers just to get 

into housing. The Vasquez family, I mean, with their three children, it ended up that we did not even get into a Fannie Mae property. We actually worked with a private seller and it worked out 

just fine. 

But, the First Look, it has to be more than First Look. It has to 

be First Look, first bid. 

Senator WARREN. Good. 

Ms. GUZMA ́ N. Give them a crack, and then after that, if it does 

not succeed, then, fine. Then go ahead and reintroduce it to the 

19 

public and let the private market go at it. But, it has to be First 

Look, first bid. 

Senator WARREN. Good. Thank you. 

Anybody else want to add on the First Look? Ms. Goldberg. 

Ms. GOLDBERG. So, our recommendation would be to extend the 

First Look period longer, but also, that any time the price drops, 

there should be a new First Look period—— 

Senator WARREN. Oh, interesting. 

Ms. GOLDBERG. ——so that, once again, people who want to live 

in the home as opposed to use it as an investment have an opportunity to take a shot at it. 

And, in addition, we would recommend that we remove the incentives for the preference for cash offers. We understand that a 

lot of times the real estate agents who list these properties are paid 

incentives to move things quickly. This means that when they get 

two offers, one of which requires the buyer to get a mortgage and 

the other one of which is a cash offer, if they’re going to get a bigger commission if they move the property quickly, then they’re 

going to go for the cash offer that can settle immediately without 

having to worry about whether and when the mortgage is going to 

come through. 

When it comes to both foreclosed properties and nonperforming 

loans that are under the control of either Government agencies, 

such as HUD, or Government-controlled entities, such as the GSEs, 

we need to be looking at these as resources to help stabilize communities. That means our approach to disposing of these assets 

needs to be mindful of both the bottom line for the agencies involved and also the bigger neighborhood stabilization efforts that 

are really needed. Those help shore up all the other mortgages and 

all the other properties in those same neighborhoods. 

So, we should make some changes to the First Look process so 

that we do not create incentives for investors and cash offers to get 

a preference. We actually have a settlement with Wells Fargo as 

a result of some of our REO work and a complaint that we filed 

with HUD under the Fair Housing Act. That settlement includes 

provisions addressing the First Look process. It mandates that any 

time there is a cash offer to buy a Wells REO and at the same time 

there is an offer from a prospective owner occupant that is as good 

or better but requires financing, the noncash offer must get preference. We would recommend that this be instituted across the 

board in First Look programs. 

Senator WARREN. Thank you—— 

Ms. GUZMA ́ N. I need to respond to that. 

Senator WARREN. I will let Ms. Guzma ́n respond, and then Mr. 

Meyer. 

Ms. GUZMA ́ N. I think it is ultimately, when offers come in and 

they are cash and/or if they are financed, we always recommend 

the financed deal, because, actually, it is a better price. So, we do 

not actually lean toward the cash investor ever. We want it to 

be—— 

Senator WARREN. You mean, we, the real estate—— 

Ms. GUZMA ́ N. We, the real estate, the Realtors—— 

Senator WARREN. The Realtors—— 

20 

Ms. GUZMA ́ N. I have represented REO properties for Bank of 

America and I have friends who worked on Fannie Mae properties, 

as well, and what it comes down to is that the investor—that person on the end that you do not see is making a decision to go with 

cash, even though we believe that the financed deal is a better 

deal. It is a better price. But, they do not want to wait. They do 

not want to wait. They would rather go ahead, especially, in many 

cases, just go with cash, because they figure it is going to be a 

clean deal and that is it. 

Senator WARREN. Same outcome. 

Ms. GUZMA ́ N. Yes. 

Senator WARREN. Mr. Meyer. 

Mr. MEYER. Senator, we have a fair amount of experience with 

the First Look Program, both with Fannie Mae and also through 

the National Community Stabilization Trust, and our experience is 

that they need more time. It would be helpful. But, we also advocate for a last look, because all too often, the price does come down 

and then the homes ends up in the hands of an investor. But the 

homeowner or nonprofit could have purchased it first if they had 

more time to do so. 

And, I have an example of that. About 2 years ago, I was working with Fannie Mae on a bulk transaction where we were going 

to buy 40 properties in a very targeted neighborhood and we 

thought it was an opportunity for us to really increase home ownership and also build neighborhoods. We could not get to an agreement on price. At the end of the day, they ended up selling it for 

less. You know, they ended up breaking it up and selling it into 

the market, but the price kept dropping and dropping and dropping. And, of course, nothing good happens when these properties 

sit on the market vacant. So I urge the consideration of a ‘‘last 

look’’ where homeowners and nonprofits have a final opportunity to 

buy before the properties end up in the hands of investors. 

I think another area where we can have success—and I really do 

believe this—we entered into a direct sale of nonperforming mortgages from FHA—it was to help with Sandy recovery. We purchased 517 mortgages. We paid a premium. The Office of Management and Budget calculated that premium. But, it was worth it for 

us to be able to get control of those assets and be able to repurpose 

them for the community stabilization outcomes we thought important: number one, keeping family in their home, and number two, 

when houses were vacant, to to offer them as affordable housing 

opportunities. 

I would urge that this direct sale approach continue to be developed, both at FHA and FHFA, and that they tighten the neighborhood stabilization outcomes to make sure that these properties do 

end up being used for community stabilization purposes. 

Senator WARREN. Well, I want to thank you all for these comments. They are very helpful. 

You know, I just think it is very important that the First Look 

Program actually work to help keep homeowners in homes and to 

help stabilize communities, not, as you say, a box to be checked off 

before the property gets shipped over to investors. So, thank you. 

It is really important. And, I appreciate all the ideas you have got 

for how it is that this program could be changed to make it more 

21 

effective for families and more effective for communities. Thank 

you. 

Thank you, Mr. Chairman. 

Chairman MENENDEZ. Thank you. 

One last question. Ms. Goldberg, you know, I guess maybe I 

know this or knew it, but hearing it from you is really bothersome 

to me, and that is the question of the differences on how foreclosed 

homes are treated in different communities. And, if a foreclosed 

property is less well managed in communities that are already facing challenges, does that not create a self-fulfilling prophecy that 

it is going to make it harder for it to recover at the end of the day? 

Ms. GOLDBERG. That is right, and it has a tremendous impact 

not only on the people who lost their homes, obviously, but on all 

the surrounding properties and then on the larger community and 

the resources available to the city to provide the kinds of services 

that are needed. 

You know, it has been estimated that the foreclosure crisis and 

the loss in value of property as a result is going to lead to about 

$2.2 million in wealth drained out of communities across the country, and half of that, $1.1 trillion—did I say trillion? I meant trillion. One-point-one trillion—— 

Chairman MENENDEZ. Around here, millions, you know, get lost, 

so—— 

Ms. GOLDBERG. Yeah—— 

[Laughter.] 

Ms. GOLDBERG. One-point-one trillion is expected to be drained 

from communities of color. So, the way these properties are managed and maintained and marketed is a huge piece of that. And 

making the First Look program work for prospective owner occupants is important, as well, because one of the things we found in 

our investigation is that certain neighborhoods become targeted by 

the owners of the REOs—whoever those may be, whether that is 

a bank or a GSE or some other investor—they become targeted as 

investor communities and then they put less money into fixing that 

house up and maintaining that house. And, so, then it adds to your 

self-fulfilling prophecy because those homes then become less attractive to a homeowner who is going to have to put a bundle of 

money into it to make it the kind of house they want to live in. 

And, so, dealing with these problems, creating the kinds of 

standards that we really need for marketing and for maintenance 

of these properties, making sure that the companies that are hired 

to do that work on the ground have the qualifications, making sure 

that the Federal agencies who oversee this whole process take that 

responsibility seriously and conduct that oversight, conduct enforcement where it is needed, that is a big piece of solving the puzzle, as well. 

Chairman MENENDEZ. So, this was your entity’s own investigation. 

Ms. GOLDBERG. That is right. We worked with 17 of our members 

across the country, but, yes. 

Chairman MENENDEZ. Well, and you also said that this was a 

violation of the Fair Housing—— 

Ms. GOLDBERG. That is right. So, that gives us another tool for 

addressing the problem. 

22 

Chairman MENENDEZ. Well, maybe we need an Inspector General’s report. 

It is unimaginable to me that with challenges already existing in 

communities like this, that there would be added with another 

challenge in which their properties would become less marketable 

at the end of the day as a result of a purposeful neglect, because 

you have to think of it as purposeful at the end of the day. It is 

obviously a judgment by those who own the REOs to treat them in 

a different way. 

Ms. GOLDBERG. That is right. 

Chairman MENENDEZ. If that is the findings, then we need to act 

upon that. That is very insightful. 

Well, with the thanks of the Committee for all of your insight, 

this record is going to be open for 7 days. I feel that there may be 

questions coming to you, so we would ask you to answer them as 

expeditiously as possible so we can complete the record. 

And, with that, this hearing is adjourned. 

[Whereupon, at 12:28 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

23 

1 CoreLogic. National Foreclosure Report, June 2014. 

2 CoreLogic. Equity Report, Second Quarter 2014. 

3 RealtyTrac. U.S. Foreclosure Market Report, October 2014. 

4 Joe Light, ‘‘Mortgage Lenders Set To Relax Standards’’, Wall Street Journal, Nov. 28, 2014. 5Laurie S. Goodman, Jun Zhu, and Taz George, ‘‘Where Have All the Loans Gone? The Impact of Credit Availability on Mortgage Volume’’, Journal of Structured Finance 20, No. 2 (2014). 6 National Low-Income Housing Coalition. Out of Reach 2014, 2014 State Summary. 

7Legal Services of New Jersey. Assessing New Jersey’s Progress in Combatting Poverty, September 2014. 

PREPARED STATEMENT OF WAYNE T. MEYER 

PRESIDENT, NEW JERSEY COMMUNITY CAPITAL

DECEMBER 9, 2014 

Introduction 

Senator Menendez and Members of the Subcommittee, thank you for this opportunity to speak with you about New Jersey Community Capital’s efforts to advance 

the housing and foreclosure recovery. I am honored that our experience may be of 

value in your consideration of solutions for communities across the Nation that continue to struggle with the devastation of the foreclosure crisis. 

My name is Wayne Meyer, and I am the President of New Jersey Community 

Capital, which is the largest nonprofit community development financial institution, 

or CDFI, in the State of New Jersey. I would like to share with you several approaches that my organization has been taking to prevent and mitigate foreclosures 

and to stabilize distressed housing markets in New Jersey. But first, I think it is 

important to discuss the challenges facing our State, because while the housing 

market has begun to turn the corner in some places, New Jersey is still very much 

in a housing crisis. 

Challenges 

Ongoing Foreclosures 

As of June 2014, 5.7 percent of homes in New Jersey were in foreclosure and 9.3 

percent more were seriously delinquent. 1 Those are the highest rates in the Nation. 

12.8 percent of mortgaged homes in the State had negative equity—that equals 

240,000 additional homes still threatened by foreclosure and abandonment. 2 Moreover, foreclosures are actually increasing in New Jersey due to its prolonged foreclosure process: in October 2014, foreclosure auctions across the State were 118 percent higher than in the prior year, the third highest jump in the Nation. 3

These numbers reflect dire outcomes, especially in low-income areas: hundreds of 

thousands of families facing the severe negative outcomes of debt and displacement; 

communities facing high vacancies and declining property values and their dire consequences on public health and safety; and a State facing major budget deficits in 

large part due to the crisis, which affects all of its residents. 

Barriers to Stable Housing 

It is also worth noting the barriers faced by many lower-income families trying 

to recover from the crisis and to regain housing stability. First, mortgage credit has 

become increasingly inaccessible: over the last 2 years, almost 98 percent of new 

mortgages have been extended to buyers with credit scores over 640, which is out 

of reach to even most financially stable moderate-income families, and while Fannie 

Mae and Freddie Mac’s new guidelines will relax mortgage credit standards, the impact of these changes will take time to take effect. 4 In New Jersey, the number of 

available home purchase loans decreased by 55.1 percent from 2001 to 2012, the second largest decline in the country. 5 So stable home ownership is less and less of 

an option for recovering families. 

At the same time, New Jersey has the fourth highest rental costs of any State, 

and these costs are rising, 6 even as wages for the bottom 50 percent of New Jersey 

wage earners has declined by a dollar per hour in the past year. 7 As a result, many 

more lower-income families are spending over 50 percent of their income on rental 

housing, in turn causing even greater economic and housing insecurity, with impacts that span generations. This cycle is hurting families across the State today, 

and without effective interventions, they will hurt thousands of additional families 

as foreclosures continue to release debt-ridden households into a high-cost rental 

market with extremely insufficient affordable housing options. 

Solutions 

For New Jersey Community Capital, an equitable and healthy housing market 

has always been and remains a fundamental pillar for stabilizing neighborhoods 

24 

and increasing the well-being and economic mobility of lower income families. As 

first and foremost a community development lender, we annually invest millions of 

dollars into the creation and preservation of hundreds of affordable housing units, 

both for sale and rental. In a difficult financial climate, we have diversified funding 

sources and created new medium-term lending products to continue to provide flexible capital for this purpose. 

But we know that this is not enough—development capital by itself does not prevent foreclosures or make mortgage credit more accessible, nor does our lending activity begin to approach the scale necessary to meet New Jersey’s growing unmet 

affordable rental housing needs. So we have taken up the task of innovating additional solutions to stabilizing New Jersey’s housing markets. 

ReStart 

The first of these solutions is a program we call ReStart. In 2012, we leveraged 

major investments from several financial partners to acquire two ‘‘NSO targeted’’ 

pools of nonperforming mortgages through the FHA’s Distressed Asset Stabilization 

Program, a total of 261 mortgages in the areas of Newark, NJ, and Tampa, FL. A 

year later, we partnered with private investors to directly purchase a pool of 517 

additional nonperforming FHA mortgages in the nine New Jersey counties most impacted by Superstorm Sandy. Cumulatively, the total unpaid principal balance on 

these mortgages was over $190 million. 

We were the only nonprofit to successfully win bids for multiple DASP mortgage 

pools, and the only thus far to complete a direct purchase from FHA. We are also 

the loss mitigation manager for a private purchaser of DASP pools in both Florida 

and North Carolina. We are using the provision of Hardest Hit Funds from each 

State and our existing mortgage resolution infrastructure to manage and resolve all 

occupied homes under the mortgages in their pools, a total of more than 300 homes 

that will be stabilized. 

Through ReStart, we are striving to produce 100 percent positive outcomes for 

homeowners and properties under the mortgages we acquire or manage. We first 

look to provide principal reductions to the distressed homeowners still occupying the 

homes, preventing their foreclosure and displacement. We are generally able to reduce the mortgages to 100 percent of current market value, with mortgage payments at under 35 percent of monthly income. We also provide these homeowners 

with high-touch financial counseling through local HUD-approved agencies, ensuring that they are stabilized for the long-term. So far, we have provided over 250 

successful principal reductions, totaling over $18 million in forgiven principal, to 

families in need. 

Mortgage modifications are just one component of the ReStart program, and not 

every home is owner-occupied, and not every occupant is in a position to sustain 

ownership. For homeowners who cannot or choose not to pursue a mortgage modification, we offer deeds-in-lieu of foreclosure and transitional assistance to help 

them attain new affordable housing. And for units that either were vacant or tenant-occupied—which account for about 45 percent of the units under mortgages we 

acquired—or become vacant over the course of the program, we are working with 

local community developers and contractors to rehabilitate them into new quality 

affordable housing opportunities. 

CAPC 

Our second major community stabilization innovation is Community Asset Preservation Corporation, or CAPC, which we incorporated as a real estate affiliate in 

2009. The foreclosure crisis has almost entirely impacted one-to-four-family homes, 

but in the State of New Jersey, there has been a dearth of affordable housing developers with the capacity to compete with speculators to acquire these abandoned 

real-estate-owned homes at a scale large enough to begin to reverse trends of neighborhood decline. 

Over the last 5 years, CAPC has used its capacity and expertise to acquire over 

320 housing units, the vast majority of which have been clusters of single-family 

properties, and it has partnered with local community developers in order to return 

them to productive affordable housing. CAPC has also developed the capacity to 

manage many of these properties as rental housing, which is a critical and otherwise unmet function that both ensures the productive occupancy of these units and 

meets the needs of the growing number of low-to-moderate income renters in New 

Jersey. 

CAPC will be serving a critical role in ReStart by acquiring and fostering the redevelopment of a number of the vacant ReStart properties. CAPC has also 

partnered with the City of Newark to serve as the lead redeveloper for 156 vacant 

properties that are primarily clustered in four distressed neighborhoods that the 

25 

City is targeting for revitalization. CAPC is continuing to work with local partners 

to redevelop and reoccupy these units. It has also begun a series of trainings to help 

local contractors build their capacity to partner on this effort and in other local redevelopments, and it has committed to providing the majority of the construction 

jobs through this program to local workers. 

Mortgage Bank 

Our next major step is the collaborative expansion of a Credit Union Service Organization (CUSO) to provide direct access to stable mortgage credit and credit 

counseling to qualifying prospective low- to moderate-income homebuyers that cannot access mortgages in the traditional market. We are currently developing a partnership with a major New Jersey-based credit union to build this platform. 

The CUSO will originate and service CRA-qualifying mortgages for potential lowto-moderate income buyers of formerly abandoned properties that we have redeveloped into affordable housing through ReStart or CAPC or have financed through our 

loan products, as well as buyers of other affordable for-sale homes across New Jersey. Each of these buyers will be required to complete credit counseling through an 

NJCC-approved agency, which NJCC will compensate for services, and therefore the 

buyers will be pre-approved for the available mortgage products. NJCC and its partners will also provide eligible homebuyers with access to downpayment assistance 

programs and other subsidies. We believe we can launch this critical effort within 

the next year. 

Needs 

Between our flexible lending products and the programs I have outlined for you 

today, New Jersey Community Capital is seeking to foster the comprehensive stabilization of New Jersey’s distressed families and communities: not only providing 

financing for rental housing, but directly developing and managing it on a large 

scale; not only preserving home ownership, but creating new pathways to it. And 

we believe that these are models that could be replicated in distressed communities 

across the country. 

But for these efforts to operate on the scale necessary to really bring New Jersey 

another step closer to recovering from its persistent foreclosure crisis, they require 

partnerships and resources from Federal and State government and from private financial institutions. Decision makers in each sector can together provide large-scale 

access to distressed mortgages and vacant properties and can make available substantial financial resources that will produce both social outcomes and substantial 

direct and indirect returns on investment. Today, I would like to suggest several 

low-cost or no-cost approaches that Federal legislators and agencies could take to 

advance these steps to recovery, in New Jersey and elsewhere. 

Improving Access to Nonperforming Mortgages 

To expand ReStart to more homeowners and more vacant properties, NJCC has 

relied on access to discounted pools of nonperforming FHA mortgages offered 

through DASP program auctions. The DASP program has been a huge and vital resource in our efforts to scale up our foreclosure recovery efforts. The program has 

preserved homes, minimized foreclosures, protected property values, and promoted 

broad-based community stability, and from our perspective, it is one of the last remaining foreclosure recovery programs to preserve and create home ownership for 

low- to moderate-income communities at significant numbers. 

However, this program has become increasingly dominated by profit-driven private investors, which have won bids on 98 percent of DASP loans, including 88 percent in designated Neighborhood Stabilization Outcomes (NSO) pools. We believe 

that it is critical that FHA refine the DASP auctions to make them more accessible 

to nonprofits and community-based organizations. Thus far, studies of the program 

have shown that nonprofits and community-based organizations have produced far 

more positive outcomes for homeowners and for communities. 

There are several straightforward solutions to this challenge. FHA could complete 

more direct sales of these mortgages to nonprofits, especially in NSO areas, where 

positive neighborhood outcomes such as foreclosure prevention and affordable housing creation are of especially high importance. Also, FHA could tighten NSO requirements by awarding additional points to those committed to social outcomes, or 

it could set aside certain mortgage pools on which socially motivated nonprofits 

would have the first option to bid. Finally, FHA could heighten minimum NSO outcomes, such as requiring that a certain portion of vacant properties be redeveloped 

and sold or rented as affordable housing. 

26 

Continuing Programs To Finance Principal Reductions 

Studies have shown that principal reductions are more effective than almost any 

other foreclosure prevention strategy, especially when paired with counseling. And 

these modifications benefit everyone involved: the homeowners, the neighborhoods, 

the mortgagees, and the local and State governments. But funds that are critical 

for producing affordable principal reductions have been difficult to access, and even 

more so now that Hardest Hit Funds are no longer available. We hope that similar 

funds can be made available for affordable principal reductions in places like New 

Jersey where the foreclosure crisis is still ongoing, including Department of Justice 

Settlement Funds. If more available, these funds could carry a program like ReStart 

to thousands more distressed homeowners. 

An alternative approach would be to incentivize financial institutions to partner 

with nonprofits to directly provide principal reductions to distressed homeowners 

under mortgages they are servicing. We are currently working with one major financial institution to directly acquire over 500 mortgages located in communities we 

serve, but this transaction is just one of many that could occur if greater incentives 

were in place. These incentives could take the form of CRA credits or a number of 

other benefits. 

We also believe that similar incentives—CRA credits perhaps being the best example—could spur financial institutions to increase access to stable mortgage credit 

for qualifying low-to-moderate-income families who are truly ready for home ownership. This could include the purchase of nonperforming mortgages that are modified 

and stabilized through programs like ReStart, as well as mortgages that have been 

seasoned though a program like our developing CUSO and would attain long-term 

success by being transferred into the conventional mortgage market. 

Expanding the CDFI Bond Guarantee Program 

Lastly, while we have used our existing resources and creativity to expand our 

provision of capital for affordable rental housing development, we simply do not 

have sufficient access to long term capital that is truly necessary for large-scale 

rental housing investments. The CDFI Bond Guarantee Program has the potential 

to be a truly momentous program in transforming the ability of CDFIs like ours to 

foster the large-scale creation of affordable rental housing, an especially severe need 

in places like New Jersey. The extension and expansion of this program will be 

transformative for the communities we serve. 

Conclusion 

In conclusion, I would once again like to thank the Members of the Subcommittee 

for their time and attention to this critical issue of saving our neighborhoods from 

the detrimental impact of foreclosures. And I would like to acknowledge Senator 

Menendez’ leadership in helping residents of our at-risk communities across our 

State. I hope this conversation can continue, as I believe that, with the right set 

of policies and programs, we can truly stabilize our distressed communities, to the 

benefit of everyone. 

27 

PREPARED STATEMENT OF MABE ́ L GUZMA ́ N 

2014 CHAIR, CONVENTIONAL FINANCE AND POLICY COMMITTEE, NATIONAL

ASSOCIATION OF REALTORS

DECEMBER 9, 2014 

28 

29 

30 

31 

32 

33 

34 

35 

36 

37 

38 

39 

40 

41 

42 

43 

44 

45 

46 

47 

48 

49 

50 

51 

52 

53 

1Prashant Gopal, ‘‘U.S. Homeownership Rate Falls to the Lowest Since 1995’’, Bloomberg, 

April 29, 2014, available at http://www.bloomberg.com/news/2014-04-29/u-s-homeownershiprate-falls-to-the-lowest-since-1995.html; Joint Center for Housing Studies of Harvard University, 

‘‘America’s Rental Housing: Evolving Markets and Needs’’, (2013) Table A–1, available at 

http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ahr2013lappendixltables.pdf. 2 U.S. Census Bureau, ‘‘Business Dynamics Statistics’’, available at http://www.census.gov/ 

ces/dataproducts/bds/. 3 Center for American Progress, ‘‘The Middle-Class Squeeze’’, (2014), available at https:// 

www.americanprogress.org/issues/economy/report/2014/09/24/96903/the-middle-classsqueeze/. 

PREPARED STATEMENT OF JULIA GORDON 

DIRECTOR OF HOUSING FINANCE AND POLICY, CENTER FOR AMERICAN PROGRESS

DECEMBER 9, 2014 

Good morning Chairman Menendez, Ranking Member Moran, and Members of the 

Subcommittee. My name is Julia Gordon, and I direct the housing finance team at 

the Center for American Progress, a nonpartisan think tank dedicated to improving 

the lives of Americans through progressive ideas and action. Thank you so much 

for convening this hearing on the critical topic of inequality and opportunity in the 

housing market. I greatly appreciate the opportunity to testify today about the state 

of our housing recovery and its relationship to the well-being of families and the 

broader economy. 

Research and our lived experience confirm the link between housing and opportunity in this country, from the many benefits of home ownership for families and 

communities to the central role of the housing economy on economic vitality. A 

healthy housing market, when coupled with appropriate protections to ensure responsible and sustainable lending, offers opportunities for young people to begin 

building wealth through home ownership, for growing families to access good schools 

and high-opportunity neighborhoods, and for older people to choose whether to age 

in place or seek a smaller or more supportive environment. 

Yet at present, our Nation’s housing recovery is neither strong nor equitably distributed. Not only has the mortgage market shrunk nationally, but many communities, especially communities of color, lag far behind other parts of the country, 

with hard-hit neighborhoods continuing to suffer the ongoing effects of multiple foreclosures, negative equity, vacant homes, and blight. We have turned back the clock 

nearly 20 years on home ownership rates, and rental costs are soaring relative to 

incomes. 1

Historically, the housing sector has led economic recoveries following downturns. 

Unfortunately, the market is not yet strong enough now to play that role, which is 

one of the reasons why the overall recovery still has a lot farther to go. While we 

have had 57 months of consecutive private sector job growth, too many people are 

still out of work or underemployed, small business formation remains depressed, 2

and consumer demand has not rebounded sufficiently. The combination of stagnant 

wages and rising costs for basic needs, including housing, has squeezed the budgets 

of all families in America, with the result that entering or even staying in the middle class has become increasingly difficult. 3

Despite this bleak picture, we see many options for policy choices that can help 

strengthen the housing market, aid struggling families, and revitalize hard-hit 

neighborhoods. In this testimony, we provide a set of recommendations to help. 

While no single recommendation is a silver bullet, taken together, we believe we 

could move the dial significantly. Many of these recommendations do not require 

legislative action, but can be accomplished by regulatory agencies, while others 

would require Congress to act. 

To increase access to safe and affordable credit, we recommend: 

a. Congress should complete comprehensive reform of the housing finance system. 

b. The Federal Housing Finance Agency should play a powerful role in increasing 

access to credit. 

c. As a provider of credit to so many underserved populations, the Federal Housing Administration should continue to improve access to and affordability of 

credit. 

d. Congress and regulators should support alternative mortgage channels, innovative products to reach underserved borrowers, and effective housing counseling. 

e. Congress should extend the Mortgage Forgiveness Debt Relief Act, and it 

should convert the mortgage interest deduction to a tax credit. 

54 

4 Johnathan Miller, ‘‘Real-Estate Appraisals Are Bubbly Again’’, Bloomberg View, December 

4, 2014, available at http://www.bloombergview.com/articles/2014-12-04/back-to-inflatedrealestate-appraisals. 5 Realtytrac, ‘‘Short Sales and Foreclosure Sales Combined Accounted for 16 Percent of U.S. 

Residential Sales in 2013’’, Press Release, January 22, 2014, available at http:// 

www.realtytrac.com/content/news-and-opinion/december-and-year-end-2013-us-residential-andforeclosure-sales-report-7967. 6 Bill McBride, ‘‘Preliminary: 2015 Housing Forecasts’’, Calculated Risk, October 31, 2014, 

available at http://www.calculatedriskblog.com/2014/10/preliminary-2015-housing-forecasts.html; Census Bureau data shows we averaged more than 1.5 million annual housing starts 

between 1998 and 2002. 7 Ellie Mae, ‘‘Origination Insight Report: October 2014’’, (2014) available at http:// 

www.elliemae.com/origination-insight-reports/EllielMaelOIRlOCTOBER2014.pdf; Historical 

FHA data available in HUD’s FHA Single-Family Mutual Mortgage Insurance Fund Programs 

Quarterly Reports to Congress, available at http://portal.hud.gov/hudportal/HUD?src=/programloffices/housing/rmra/oe/rpts/rtc/fhartcqtrly. 8Laurie Goodman, Jun Zhu, and Taz George, ‘‘Where Have All the Loans Gone? The Impact 

of Credit Availability on Mortgage Volume’’, (Washington: Urban Institute, 2014, available at 

http://www.urban.org/publications/413052.html. 9Statement of the National Association of Realtors before the United States Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Housing, Transportation, and 

Community Development, ‘‘Inequality and the Housing Market’’, December 9, 2014. 10 HUD, ‘‘U.S. Housing Market Conditions Historical Data’’. 11 Jed Kolko, ‘‘The Recession’s Lost Generation of Homeowners Isn’t Millennials—It’s the Middle-Aged’’, Trulia Trends, July 16, 2014, available at http://www.trulia.com/trends/2014/07/ 

recessions-lost-generation/. 12 Bipartisan Policy Center, ‘‘Demographic Challenges and Opportunities for U.S. Housing 

Markets’’, March 2012, available at http://bipartisanpolicy.org/library/report/demographicchallenges-and-opportunities-us-housing-markets. 

f. Regulators should collect better mortgage data to help identify problems and 

potential solutions in the market. 

In addition, to assist struggling families and neighborhoods, we recommend: 

a. FHA should improve its Distressed Asset Sale Program to better promote home 

retention and neighborhood stability. 

b. FHFA should take additional steps to aid struggling homeowners and communities. 

c. The Consumer Financial Protection Bureau should continue to improve its 

servicing rules. 

d. Policymakers should take steps to help renters, particularly very low-income 

renters. 

Background: The State of the Housing Market 

Overall, the national mortgage market today is significantly smaller than it was 

before the Great Recession, both in terms of overall volume and home sales. 4 The 

national home ownership rate has dropped from close to 70 percent to 64 percent. 

Cash investors made 29 percent of all purchases in 2013, way above their historic 

norm of 10–12 percent. 5 Housing starts remain depressed, and even optimistic projections for 2015 remain well below levels seen before the housing boom. 6

Additionally, access to credit remains tight. For a conventional home purchase 

mortgage, the average FICO score is 754. While FHA credit is easier to obtain, with 

average credit scores for purchase money mortgages around 680, it is still tighter 

than historical norms. 7 The Urban Institute estimates that approximately 1.2 million fewer purchase mortgages were made in 2012 than would have been the case 

had credit availability remained at pre-bubble 2001 levels. 8 Testimony today from 

the National Association of Realtors provides considerable additional detail on the 

size and condition of the market. 9

In terms of specific populations, home ownership rates for young people (ages 25– 

34) are among the lowest in decades. 10 While that could in part be explained by 

the timing of the Great Recession and by the later ages at which this demographic 

group is forming families, even 35 to 54 year olds (Generation X)—which should be 

in their prime home ownership years—have a home ownership rate lower than expected. 11

The health of the mortgage market is also important for the Baby Boomer generation, many of whom will soon be seeking to sell their homes. The Bipartisan Policy 

Center estimates that Echo Boomers—those born between 1981 and 1995—will 

drive 75 to 80 percent of owner-occupied home acquisition before 2020 as Baby 

Boomers sell off their homes. 12 Homes are significant reservoirs of wealth, and a 

55 

13 Calculations based on U.S. Census Bureau Housing Vacancies and Homeownership data, 

available at http://www.census.gov/housing/hvs/data/histtabs.html. 14Daniel McCue, ‘‘Baseline Household Projections for the Next Decade and Beyond’’, (Cambridge: Harvard Joint Center for Housing Studies, 2014), available at http:// 

www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w14-1lmccuel0.pdf. 15 Center for American Progress calculation based on 2005 and 2011 Survey of Income and 

Program Participation data, adjusted for CPI-U. 16Thomas Shapiro, Tatjana Meschede, and Sam Osoro, ‘‘The Roots of the Widening Racial 

Wealth Gap: Explaining the Black–White Economic Divide’’, (Waltham, MA: Institute on Assets 

and Social Policy, 2013) available at http://iasp.brandeis.edu/pdfs/Author/shapiro-thomas-m/ 

racialwealthgapbrief.pdf. 17 Center for American Progress calculation based on 2005 and 2011 Survey of Income and 

Program Participation data, adjusted for CPI-U. 18Low-lending census tracts defined as those with fewer originated home purchase loans per 

owner-occupied home than the median (2.15 percent) in 2012. Center for American Progress 

analysis based on 2012 HMDA data for applications for conforming loans for the purchase of 

1–4 family owner-occupied units. 19 Clea Benson and Alexis Leondis, ‘‘Lending to Minorities Declines to a 14-Year Low in U.S.’’, 

Bloomberg, September 24, 2014, available at http://www.bloomberg.com/news/2014-09-24/ 

lending-to-minorities-declines-to-a-14-year-low-in-u-s-.html. 20 Neil Bhutta and Daniel R. Ringo, ‘‘The 2013 Home Mortgage Disclosure Act Data’’, (Washington: Federal Reserve, 2014), available at http://www.federalreserve.gov/pubs/bulletin/2014/ 

pdf/2013lHMDA.pdf. 21Wei Li and Laurie Goodman, ‘‘A Better Measure of Mortgage Application Denial Rates’’, 

(Washington: The Urban Institute, 2014), available at http://www.urban.org/UploadedPDF/ 

2000031-A-Better-Measure-of-Mortgage-Application-Denial-Rates.pdf. 22The conventional channel includes GSE, bank portfolio, and private-label securities executions. The Government channel consists of FHA, VA, and USDA loans guaranteed by Government agencies. 

lack of sufficient effective demand for homes could significantly affect the retirement 

security and the ability to remain independent for these families. 

Perhaps most troubling, home ownership rates for people of color have dropped 

dramatically, with Latinos falling by 9 percent from their peak, and African Americans by 13.7 percent. 13 Because the majority of families formed in America going 

forward will be families of color, a steep reduction in the numbers of Latinos and 

African Americans buying homes spells trouble for the housing market for decades 

to come. 14

The drop in home ownership rates plays a significant role in the ever-increasing 

wealth disparities between Whites and people of color. The median White household 

lost 29 percent of their home-equity-based wealth between 2005 and 2011, while the 

median African American household and the median Hispanic household lost 38 

percent and 55 percent of their home-equity wealth, respectively. 15 Loss of home equity translates directly in overall asset reductions, especially for households of color, 

since their homes are their largest asset (for African American families, homes account for more than half of all wealth, compared to 39 percent for Whites). 16 Specifically, Whites lost about 26 percent of their net worth during this period, while 

African Americans lost 50 percent and Hispanics lost 61 percent. 17

Today’s lending patterns mirror our long history of unequal access to mortgage 

credit for low- and moderate-income and minority communities and borrowers. Census tracts with low levels of any type of home purchase lending are disproportionately minority (45 percent on average, compared to 33 percent in other areas) and 

lower-income (with an average income of 82 percent of area median income vs. 107 

percent of AMI in other areas). 18 In 2013, African Americans received only 4.8 percent of home purchase mortgages, despite making up 13 percent of the population, 

and Hispanics received 7.3 percent of these loans, despite constituting 17 percent 

of the population. 19 Minority households disproportionately lack access to the more 

affordable mortgage credit offered in the conventional market, as 70 percent of home 

purchase loans made to African Americans and 63 percent of these loans made to 

Hispanics in 2013 were Government supported. 20

Recently, the Urban Institute’s Housing Finance Policy Center developed a 

groundbreaking methodology for measuring the tightness of credit in the housing 

market. 21 This technique better accounts for the changing credit profile of applicants over time, an important adjustment because far fewer applicants with weaker 

credit profiles are applying for mortgages than did during the housing bubble (2004– 

07) or the more normal period of lending activity that preceded it (1998–2003). Most 

notably, in the conventional sector, 22 only 8 percent of conventional borrowers in 

the post-crisis period were of lower credit quality compared to 29 percent in the prebubble years, before the rise of the irresponsible practices that led to the crisis. This 

tightness in the conventional sector has a disproportionate impact on borrowers of 

56 

23Zillow, ‘‘Negative Equity Causing Housing Gridlock, Even as It Slowly Recedes’’, (2014) 

available at http://www.zillow.com/research/2014-q2-negative-equity-report-7465/. 24Peter Dreier and others, ‘‘Underwater America: How the So-Called Housing ‘Recovery’ Is 

Bypassing Many American Communities’’ (Berkeley, CA: Haas Institute for a Fair and Inclusive 

Society, 2014). 25 Corelogic, ‘‘National Foreclosure Report: March 2014’’, (2014) available at http:// 

www.corelogic.com/research/foreclosure-report/national-foreclosure-report-march-2014.pdf; 

Corelogic, ‘‘National Foreclosure Report: August 2014’’, (2014) available at http:// 

www.corelogic.com/research/foreclosure-report/national-foreclosure-report-august-2014.pdf. 26 HUD, ‘‘Economic Impact Analysis of the FHA Refinance Program for Borrowers in Negative 

Equity Positions’’, available at http://www.hud.gov/offices/adm/hudclips/ia/iarefinancenegativeequity.pdf. Family Housing Fund, ‘‘Cost Effectiveness of Mortgage Foreclosure 

Prevention’’, (1995) available at http://www.fhfund.org/ldnld/reports/MFPl1995.pdf. 27 HUD, ‘‘Economic Impact Analysis of the FHA Refinance Program for Borrowers in Negative 

Equity Positions’’. 28Massachusetts Institute of Technology, ‘‘How Foreclosures Hurt Everyone’s Home Values’’, 

Press release, July 20, 2010, available at http://newsoffice.mit.edu/2010/housing-prices-0720. 29William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey, ‘‘The Municipal Cost of Foreclosures: A Chicago Case Study’’, (Minneapolis: Homeownership Preservation Foundation, 2005), 

available at http://www.nw.org/network/neighborworksProgs/foreclosuresolutionsOLD/documents/2005Apgar-DudaStudy-FullVersion.pdf. 30Dina ElBoghdady, ‘‘Foreclosures May Raise Neighbors’ Blood Pressure, Study Finds’’, Washington Post, May 12, 2014, available at http://www.washingtonpost.com/business/economy/ 

study-foreclosures-may-raise-neighbors-blood-pressure/2014/05/12/5f519952-da03-11e3-bda1- 

9b46b2066796lstory.html; Mariana Arcaya, M. Maria Glymour, Prabal Chakrabarti, Nicholas 

A. Christakis, Ichiro Kawachi, and S.V. Subramanian, ‘‘Effects of Proximate Foreclosed Properties on Individuals’ Systolic Blood Pressure in Massachusetts’’, 1987–2008. Circulation, May 

2014. 31Karen Dynan, ‘‘Is a Household Debt Overhang Holding Back Consumption?’’ (Washington: 

Brookings Institution, 2012), available at http://www.brookings.edu//media/projects/bpea/ 

spring%202012/2012aldynan.pdf; Atif Mian and Amir Sufi, ‘‘House of Debt’’, University of Chicago Press, 2014. 32 U.S. Census Bureau, ‘‘Business Dynamics Statistics’’. 33Mark E. Schweitzer and Scott A. Shane, ‘‘The Effect of Falling Home Prices on Small Business Borrowing’’, (Federal Reserve Bank of Cleveland, 2010), available at http:// 

www.clevelandfed.org/research/commentary/2010/2010-18.cfm. 

color, who find themselves relegated to the more expensive Government-backed 

channels or locked out of the mortgage market altogether. 

At the same time, while home prices nationally have rebounded from the lows 

reached during the Great Recession, price recovery has been remarkably uneven, 

with some geographies still deeply underwater. Not only are 8.7 million (17 percent) 

of homeowners underwater nationally, 23 but in the 395 hardest-hit zip codes, between 43 percent and 76 percent of homeowners are underwater. 24 More than 70 

percent of these zip codes have incomes below the national median, and in twothirds of them, African Americans and Latinos account for at least half the population. 

The combination of tremendous home price declines, widespread negative equity, 

and the impact of the recession on unemployment resulted in the worst foreclosure 

crisis since the Great Depression. Since the start of the crisis, there have been 5 

million completed foreclosures. Even today, with foreclosure rates much lower, about 

630,000 homes are currently in some stage of the foreclosure process while more 

than 1.6 million borrowers are seriously delinquent. 25 Foreclosures have cost homeowners, neighborhoods, and investors dearly. A typical foreclosure costs borrowers 

up to $7,000 in administrative costs alone, 26 costs investors more than $75,000, 27

reduces the value of neighboring homes, 28 and burdens local governments through 

reduced property taxes and increased anti-blight expenditures. 29 A recent study 

even linked foreclosures to declines in neighbors’ health. 30 Weakness in the housing 

market deprives our economy of the economic multiplier effects of a strong housing 

market, including additional construction jobs, consumer demand for household-related items, and local and State tax revenue. The stubborn persistence of negative 

equity also continues to depress aggregate consumer demand for all goods and services, with significant macroeconomic consequences; homeowners with high levels of 

debt relative to the value of their assets have experienced larger declines in consumption than less highly leveraged homeowners, even after taking into account declines in net worth. 31 Additionally, fewer small businesses are being founded in the 

aftermath of the Great Recession, 32 which is not surprising given that roughly one 

in four small-business owners uses home equity as a source of capital or collateral. 33

Finally, the decline in home ownership has led to an increase in renters, placing 

significant upward pressure on rent prices. As of 2012, more than half of all renters 

spend more than 30 percent of their income on housing, which is the historical 

57 

34 Center for American Progress analysis of Minnesota Population Center, ‘‘Integrated Public 

Use Microdata Series’’, available at https://usa.ipums.org/usa/ (last accessed June 2014). 35Doug Rice, ‘‘Better Federal Policy Needed To Address Rental Affordability Crisis’’, Off the 

Charts Blog, July 2, 2014, available at http://www.offthechartsblog.org/better-federal-policyneeded-to-address-rental-affordability-crisis/. 36Testimony of Julia Gordon before the Senate Committee on Banking, Housing, and Urban 

Affairs, ‘‘Essential Elements of Housing Finance Reform’’, (2013) available at https:// 

Continued 

upper limit of rent affordability. More than a quarter of all renters spend more than 

half of their gross income on rent, significantly reducing their ability to pay for food, 

child care, health care, and other necessities. 34 While the number of households experiencing ‘‘worst case’’ housing needs—either because they live in severely inadequate housing or spend more than half of their income on rent—has increased, 

Congress has repeatedly cut rental assistance programs, and the share of households eligible for these benefits that actually receive them has continued to fall. 35

Policy Recommendations 

Increase Access to Safe and Affordable Credit 

Ironically, even as home prices experienced historic declines over the past 6 years, 

the tightness in the credit market meant that far too many households—especially 

families of color and lower-wealth families—missed what could otherwise have been 

an ideal opportunity to access affordable and sustainable home ownership, build 

family wealth and security, and provide better opportunities for their children. Too 

many communities that lost significant wealth due to foreclosures are now failing 

to rebuild it through home ownership; as more people rent, and especially as more 

formerly owner-occupied homes transition to long-term rental, payments that could 

be contributing to rebuilding residents’ wealth continue to flow to investors, many 

of whom live outside the community. 

It is not too late to turn this situation around, but we must focus our efforts on 

enabling more families to join the ranks of home ownership. While there is no one 

silver bullet, there are many dials and levers that can help increase access without 

opening the door to predatory or unsafe lending. 

At the same time, it is critical to ensure that any expansion of access not lead 

to the same predatory and abusive market practices that led to the crisis. While the 

Dodd-Frank Act created strong protections for mortgages, and while the Consumer 

Financial Protection Board (CFPB) has tried to set a sensible, moderate course in 

implementing those protections, some industry participants continue to fight for 

broader and more exemptions from Dodd-Frank’s mandate for creditors to assess a 

borrower’s ability to repay a mortgage loan. An exemption for an entire class of assets, such as portfolio loans, is overly broad and would undermine existing incentives that deter creditors from ignoring the damage caused by making unaffordable 

loans. 

Moreover, we do not believe the Dodd-Frank rules will adequately protect consumers unless all market participants, including brokers, appraisers, lenders, 

securitizers, and investors, bear liability for noncompliance. Additionally, while we 

commend regulators involved in the so-called QRM rulemaking for choosing not to 

impose a downpayment requirement, which we believe would have unfairly excluded 

lower-wealth households from home ownership, we support the overall risk retention rule as an important tool to provide securitizers with skin in the game. 

A. Congress should complete comprehensive reform of the housing finance system. 

One thread that runs throughout most policy recommendations about easing tight 

credit is the need to provide as much certainty as possible to market participants 

and stakeholders. Perhaps the largest of such uncertainties is the fate of mortgage 

giants Fannie Mae and Freddie Mac, which have now been under conservatorship 

for more than 6 years. 

Some advocate for simply returning to the system we had before the crisis, where 

Fannie and Freddie’s private shareholders profited from an implicit Government 

guarantee with minimal capital requirements. While we agree the conservatorship 

should not last forever, it is critical that in the process of ending it, we fix the misaligned incentives that resulted in the GSE’s financial crisis and that we create an 

explicit, priced, and paid-for Government guarantee to protect the taxpayer. 

In our view, S. 1217 provided a very useful framework for this conversation. However, the legislation as passed by the Senate Banking Committee lacked a number 

of essential elements that we have recommended, particularly with respect to access 

to and affordability of credit. 36 Placing the goal of access to affordable, sustainable 

58 

www.americanprogress.org/issues/housing/report/2013/09/12/74041/essential-elements-ofhousing-finance-reform/. 37Public Law 110-289, Sec 1129. 38 Center for American Progress analysis of 2012 Home Mortgage Disclosure Act Data for applications for conforming loans for the purchase of 1–4 family owner-occupied units. 39For more detail, see Center for American Progress and Consumer Federation of America, 

‘‘Comments on the Proposed Rule on the Enterprises’ Housing Goals 2015–2017’’, (2014) available at http://www.consumerfed.org/pdfs/CAP-CFA-Comments-on-the-Enterprises-HousingGoals-2015-2017.pdf. 40For a fuller set of recommendations, see Center for American Progress and others, ‘‘Re: Enterprise Duty to Serve’’, (2014), available at http://www.consumerfed.org/pdfs/CAP-letterFHFA-on-Fannie-and-Freddie.pdf. 41 Consumer Financial Protection Bureau, ‘‘Manufactured-Housing Consumer Finance in the 

U.S.’’, (2014), available at http://www.consumerfinance.gov/reports/manufactured-housing-consumer-finance-in-the-u-s/. 

credit at the center of the new system’s purpose will provide the greatest benefit 

in the long run not only to families but also to lenders and investors, and will also 

protect taxpayers from future bailouts. 

We look forward to working with the 114th Congress to craft a housing finance 

system that can take this country into the future smoothly and successfully. 

B. The Federal Housing Finance Agency can play a powerful role in increasing 

access to credit. 

While comprehensive housing finance reform proceeds through the legislative 

process, we urge the Federal Housing Finance Agency (FHFA) to use its extraordinary powers of conservatorship to promote a robust, inclusive mortgage market 

that provides liquidity for the broadest possible range of credit needs. 

1. FHFA should use its housing goals and duty to serve rulemakings to expand 

access to populations that are being left out of the housing recovery. 

Given the GSE’s dominance in the secondary market, their appetite for mortgages 

essentially determines whether the mortgages will be made at all by the primary 

market. Understanding this dynamic, Congress has charged FHFA with advancing 

access to credit by setting specific goals for the GSEs to meet in supporting underserved borrowers and communities and by asking the GSEs to provide ‘‘leadership 

to the market in developing loan products and flexible underwriting guidelines to 

facilitate a secondary market,’’ supporting very low- to moderate-income families in 

the areas of manufactured housing, affordable housing preservation, and rural markets. 37

Housing Goals: In recent years, FHFA has failed to set strong goals that push 

the Enterprises to responsibly innovate and serve broadly, instead setting singlefamily goals that allow the Enterprises to lag the primary market’s performance. 

During this time, whole segments of the market have moved to FHA or have not 

been served at all. In 2012, for example, the Enterprises financed only 16 percent 

of home purchase loans originated in low-income and minority census tracts, a quarter of home purchase loans to African Americans, and under one-third of home purchase loans to Hispanics or Latinos. 38

This year’s goals rulemaking is an important opportunity to push the Enterprises 

to support low- and moderate-income communities. We recommend that FHFA set 

strong single- and multifamily benchmarks for GSE performance, including a 27 

percent goal for low-income home purchase lending; take strong and predictable enforcement action that considers the performance of the overall market when the Enterprises fail to meet the housing goals; and establish subgoals for small multifamily 

properties and reporting requirements for single-family rental. 39

Duty To Serve: Although more than 6 years have passed since Congress asked 

FHFA to create this requirement for the GSEs, the rule proposed in 2010 has not 

been finalized or implemented. Because the housing market and the financial status 

of the Enterprises has evolved significantly in the intervening years, we urge FHFA 

to re-propose the rule and once again take public comment. The proposal should encourage responsible innovation and give the Enterprises strong incentives to serve 

broadly and lead the market. 40

FHFA can make a significant contribution to greater affordability in the manufactured housing area by using the duty to serve rule to push the market toward more 

responsible practices in the area of chattel lending (the majority of manufactured 

housing is titled as chattel rather than real property, meaning that buyers often 

lack basic consumer protections). 41 In the affordable housing preservation and rural 

markets, we similarly believe that the Enterprises can actively support these markets through new products, flexible underwriting, affirmative outreach, and other 

59 

42See, e.g., joint comment letter from 23 industry and consumer groups, available at https:// 

www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=164; Laurie Goodman, Jim Parrott, Ellen Seidman, and Jun Zhu, ‘‘Guarantee Fees—An Art, Not a Science’’, 

(Washington: Urban Institute, 2014) available at http://www.urban.org/publications/ 

413202.html. 43 Center for American Progress, Consumer Federation of America, and the Mortgage Finance 

Working Group, ‘‘Re: Request for Input on Guarantee Fees’’, (2014), available at http:// 

www.consumerfed.org/pdfs/CAP-CFA-g-fee-comment-final-9-8-14.pdf. 44For specific recommendations, see Center for American Progress and others, ‘‘Re: Private 

Mortgage Insurance Eligibility Requirements’’, (2014), available at http:// 

www.consumerfed.org/pdfs/CAP-PMIER-sign-on-letter-9-8-14.pdf. 

activities, including grants to and partnerships with high-performing nonprofits devoted to this work. 

2. FHFA should adjust its pricing to pool risk and to charge only for its actual 

risk, thereby making loans more affordable, and should align pricing policies with 

private mortgage insurer counterparty requirements. 

We consider it critical that FHFA return to a pricing structure that is transparent, countercyclical (or, at the very least, not procyclical), and takes full advantage of the Enterprises’ unique ability to pool risk. 

After the inception of the conservatorship, Fannie and Freddie instituted acrossthe-board risk based pricing through a system of loan level price adjustments, or 

LLPAs. The LLPAs charge different prices for different loans depending on the profile of both the loan and the borrower. This change from more of a risk pooling approach occurred at a time when housing prices were dropping, foreclosure rates 

were rising, and the Enterprises were in dire straits financially. FHFA also was concerned about the financial woes of private mortgage insurer counterparties, many 

of which struggled or even went under financially during the crisis and could not 

pay all their claims. 

Today, the Enterprises are in a very different financial condition, having returned 

to profitability due to a very strong book of new loans, a decline in foreclosure rates, 

an increase in home prices, and numerous big-dollar settlements with financial institutions. These profits also have enabled them to use deferred tax assets, further 

improving their financial position. At the same time, the private mortgage insurers 

also have returned to financial health, and FHFA is now instituting a set of capital 

and management requirements for those companies that will significantly reduce 

the Enterprises’ exposure to counterparty risk. 

Yet the LLPAs remain in force, where they play a significant role in driving less 

wealthy borrowers out of the conventional market and making loans for those borrowers more expensive—which in and of itself increases the risk of the loans. We 

recommend that FHFA immediately discontinue use of the LLPAs and return to the 

historical norm. 

Additionally, we do not believe additional increases to the base g-fee are required 

at this time. FHFA has justified these increases by claiming they are needed to encourage the return of private label securitization. Yet, analysts believe current fees 

more than cover outstanding risk, 42 and even the dramatic increase in g-fee over 

the past several years has not succeeded in ‘‘crowding in’’ private capital, although 

it has undoubtedly driven business to FHA, which carries a 100 percent explicit 

Government guarantee. 

As we recommended in our comment letter to FHFA, 43 we think FHFA should 

price based on what is needed to cover expected losses and costs—including a justifiable level of capital and revenue to support its cost—and protect the taxpayer in 

the event of stress scenarios, rather than on pursuing particular market shares for 

non-GSE entities or sectors. 

Similarly, while we support the overall effort to impose meaningful requirements 

on private mortgage insurer counterparties, we have serious concerns about the financial requirements as proposed. 44 Because the cost of private mortgage insurance 

by definition falls on lower-wealth borrowers, first time homebuyers, and borrowers 

of color, the PMIERs are as important, if not more important, than guarantee fees 

when it comes to affordable credit. In our view, the proposed requirements will unnecessarily raise the cost of credit for the very borrowers for whom the GSE mission 

is most important, and we suggest that significant adjustments be made before finalizing these requirements. It is also critical to coordinate g-fees and LLPAs with 

the private mortgage insurance requirements. 

3. Providing a 97 LTV product is a good start, and FHFA also should provide public, loan-level data on past efforts to promote access to credit. 

We support the recently announced policy change permitting Fannie and Freddie 

to buy mortgages with as little as 3 percent down under certain circumstances. 

Properly underwritten, low-downpayment mortgages with long-term, fixed-interest 

60 

45Federal Housing Finance Agency, ‘‘FHFA Strategic Plan for FY2015–2019’’, (2014) available 

at http://www.fhfa.gov/AboutUs/Reports/Pages/FHFA-Strategic-Plan-for-FY-2015-2019.aspx. 

46See Freddie Mac’s Single Family Loan-Level Dataset at http://www.freddiemac.com/news/ 

finance/sflloanlevelldataset.html and Fannie Mae’s Single-Family Loan Performance data at 

http://www.fanniemae.com/portal/funding-the-market/data/loan-performance-data.html. 47See Fannie Mae Selling Guide, B3-5.1-01, General Requirements for Credit Scores, available at https://www.fanniemae.com/content/guide/selling/b3/5.1/01.html (last accessed December 2014). 48 Consumer Financial Protection Bureau, ‘‘Data Point: Medica Debt and Credit Scores’’, 

(2014) available at http://files.consumerfinance.gov/f/201405lcfpblreportldatapointlmedical-debt-credit-scores.pdf. 49 Caroline Ratcliff and others, ‘‘Delinquent Debt in America’’, (Washington: Urban Institute, 

2014) available at http://www.urban.org/publications/413191.html. 50 Robert Avery, Paul Calem, Glenn Canner, and Raphael Bostic, ‘‘An Overview of Consumer 

Data and Credit Reporting’’, Fed. Reserve Bulletin 89(2)(2003); Ernst & Young, The Impact of 

Third-Party Debt Collection on the National and State Economies (2012), available at 

www.acainternational.org/files.aspx?p=/images/21594/2011acaeconomicimpactreport.pdf. 51 VantageScore, ‘‘VantageScore 3.0: Better Predictive Ability Among Sought-After Borrowers’’, (2013), available at http://www.vantagescore.com/images/resources/VantageScore3- 

0lWhitePaper.pdf. 

rates have performed well even throughout the Great Recession. The predatory 

mortgages that brought down Wall Street’s house of cards sometimes included low 

downpayments, but also layered multiple risks—such as exploding interest rates, 

exorbitant fees, and steep prepayment penalties—with little or no underwriting. 

Most of these practices are now prohibited by the Dodd-Frank mortgage rules. 

We also generally support FHFA’s intention in its strategic plan to ask the Enterprises to ‘‘assess whether there are additional opportunities to reach underserved 

creditworthy borrowers.’’ 45 Prior to conservatorship, the Enterprises undertook diverse efforts to promote access to affordable mortgage credit, with flexible underwriting standards for core affordability products such as MyCommunityMortgage as 

well as specialized products that met the particular needs of borrowers, such as 

SmartCommute and Construction-to-Permanent mortgages. They also worked to 

serve harder-to-serve markets, such as community land trusts, tribal lands, and 

small multifamily properties, and partnered with diverse entities in support of their 

affordable housing mission, including nonprofits, housing counseling agencies, Housing Finance Agencies and Community Development Financial Institutions. 

However, in considering how Fannie and Freddie should proceed, FHFA should 

instruct the Enterprises to conduct detailed analyses of their past efforts to promote 

access to affordable mortgage credit to use in designing effective programs for the 

future. In addition to analyzing previous efforts, we encourage FHFA to make release to the public performance data on affordable lending efforts so that external 

stakeholders working in the housing finance field can understand better how to 

reach underserved borrowers and communities. We commend the Enterprises for releasing loan characteristic and performance data on a large number of their acquisitions in recent years, 46 but data released so far is limited to single-family, 30-year, 

fixed-rate, full documentation, fully amortizing mortgages. 

4. FHFA should require Fannie Mae and Freddie Mac to update the credit score 

model used by their automated underwriting systems. 

Currently, the Enterprises require the use of a ‘‘classic’’ FICO credit score—i.e., 

FICO 04—in their automated underwriting systems. 47 However, newer scoring models, including both FICO 09 and VantageScore, have made some critical changes 

that will improve the reliability of scores and/or allow the scoring of tens of millions 

of consumers. 

These newer models no longer consider paid collection items, including medical 

debt collections, and give less weight to unpaid medical debts. Given that the CFPB 

has found that the presence of medical debt on a credit report results in a credit 

score that is typically lower by ten points than it should be, and for paid medical 

debt, up to 22 points lower than it should be, 48 and given that about 35 percent 

of Americans—or 77 million—have debt collection items on their credit reports, 49

about half of which are for medical debt, 50 this is a critical issue. 

In addition, these newer models are better able to deal with consumers with limited credit history, or ‘‘thin file’’ consumers. For example, FICO 09 has enhancements to better assess thin file consumers, and VantageScore claims to be able to 

score an additional 30 to 35 million thin file consumers. 51

While Fannie Mae and Freddie Mac have already agreed to study the issue, we 

do not believe more research is necessary to demonstrate the advantages of alternative models. Instead, FHFA should instruct them to modernize their systems 

forthwith. 

61 

52 Bhutta and Ringo, ‘‘The 2013 Home Mortgage Disclosure Act Data’’. 

C. As a provider of credit to so many underserved populations, FHA should 

continue to improve access to and affordability of credit. 

The Federal Housing Administration (FHA) has played a crucial role in supporting our economic recovery, preventing not only even more catastrophic home 

price declines but also a double-dip recession. While this support came at a cost to 

the agency’s capital ratio, a combination of strong management and improvement 

in the economy has put the agency on track to fully replenish its reserves by 2016. 

FHA has particularly supported first-time homebuyers and buyers of color, who are 

all currently poorly served by the conventional market. The following are three suggestions for FHA to help expand affordable credit further. 

1. FHA should reassess its insurance premium structure to see if it is possible to 

reduce premiums. 

As noted above, FHA has of necessity focused very heavily in recent years on 

making programmatic changes to help replenish its insurance fund. While such a 

focus is important, we believe the fund is strong enough at this point for FHA to 

reconsider the pricing of mortgage insurance premiums. Forty percent of the agency’s home purchase loans made in the second half of 2013 qualified as high cost, 

which—despite otherwise providing fixed rate, long-term credit—can in and of itself 

make a loan more risky. 52 If FHA’s fees are not set correctly, its customers, who 

are more likely to be minority and first time homebuyers, will be saddled with additional unnecessary expenses, perpetuating an unequal mortgage market. Additionally, the dramatic increases in premiums appears to be driving borrowers away from 

FHA, reducing its volume significantly, and with FHA operating as the only program available for many lower-wealth borrowers and borrowers of color, we fear 

those borrowers will not find other alternative credit sources. 

While we do not believe we have sufficient information at this time to recommend 

a specific change to the premium structure, we strongly encourage FHA to examine 

the impact its premiums are having on access to credit and to consider whether 

some reductions could provide sufficient additional volume to offset any harm to the 

fund. 

2. FHA should complete its work to provide clarity to lenders and reduce overlays. 

To address lender concerns about indemnification, FHA has proposed a new system for detecting defects in loan quality and holding lenders accountable for such 

defects. In this proposal, FHA more clearly identifies and classifies defects in loan 

applications, establishes severity levels of such defects and provides a more objective 

approach to analyzing appropriate cures for defects. We support this effort and believe it is extremely important, although we believe more work is required to clarify 

and align definitions and to further reduce subjectivity in defect and cure classifications. Additionally, we believe it would be sensible for FHA to work closely with 

FHFA to align its policies protecting lenders, such as providing a 3-year window of 

clean payment history for indemnification with exceptions for fraud, data inaccuracies, and compliance with responsible lending practices. 

D. Congress and regulators should support alternative mortgage channels, innovative products to reach underserved borrowers, and effective housing 

counseling. 

Many communities hardest hit by the housing crisis and the economic downturn 

have long been either underserved or not served by traditional financial institutions 

that could provide safe and affordable credit. Similarly, for many borrowers, the 

most popular mainstream products will always be difficult to access. For this reason, we recommend taking steps to strengthen alternative mortgage channels and 

experiment with safe but innovative products to reach more borrowers. 

The strong need for alternative lenders in underserved communities can be attributed to years of discrimination, redlining, and market failures in which mainstream 

financial institutions lacked incentives to lend to projects where the aggregate social 

return was positive. Community Development Financial Institutions (CDFIs) and 

Housing Finance Agencies (HFAs), which combine deep knowledge of local communities’ needs with safe, targeted products, can identify and assist potential homeowners, and CDFIs can also provide business and consumer loans, investments, and 

retail banking services to neighborhoods that need critical economic catalysts to 

overcome years of disinvestment. 

Congress and regulators should consider whether there are changes to regulations 

such as the Community Reinvestment Act (CRA) that can be used to strengthen 

these institutions. For example, changing the way that financial institutions subject 

to CRA receive credit for investing in CDFIs could provide a win-win solution for 

62 

53 Atif Mian and Amir Sufi, ‘‘House of Debt’’. 54 Neil S. Mayer and Kenneth Temkin, ‘‘Pre-Purchase Counseling Impacts on Mortgage Performance: Empirical Analysis of NeighborWorks America’s Experience’’ (Washington: 

Neighborworks America, 2013); Marvin M. Smith et al., ‘‘The Effectiveness of Pre-Purchase 

Homeownership Counseling and Financial Management Skills’’, (Philadelphia: Federal Reserve 

Bank of Philadelphia, 2014); Kenneth M. Temkin et al., ‘‘National Foreclosure Mitigation Counseling Program Evaluation: Final Report, Rounds 3 Through 5’’, (Washington: Neighborworks 

and the Urban Institute, 2014). 55See Mark Goldhaber and Julia Gordon, ‘‘Extend and Broaden the Mortgage Debt Relief Act 

Now’’, American Banker, September 5th, 2012, available at http://www.americanbanker.com/ 

bankthink/extend-and-broaden-mortgage-debt-relief-act-now-1052364-1.html; see also Laurie 

Goodman and Ellen Seidman, ‘‘The Mortgage Forgiveness Debt Relief Act Has Expired—Rebanks unwilling to take risks on certain populations, especially since CDFIs and 

nonprofits receive special treatment in the Dodd-Frank mortgage rules to enable 

them to better serve lower-income families. Similarly, sources of funding such as recent settlements between Government agencies and large banks could be directed 

to helping alternative mortgage channels scale their operations. 

Similarly, a typical mortgage product is not always accessible to some households 

due to the downpayment requirements or fear of placing assets in a first loss position. Shared equity/shared appreciation approaches can provide a middle ground between renting and traditional home ownership. In general, these products share certain common features: owner occupancy of residential properties, initial affordability, and sharing of risk and equity/appreciation. These strategies can potentially 

support modest individual asset accumulation while protecting consumers against 

home price declines while also providing more stability to the macroeconomy in 

times of market disruption. 53 Congress and regulators should consider how to encourage safe experimentation with alternative products. 

Finally, it is critical to support housing and credit counseling to help more people 

achieve sustainable home ownership. Whether counseling a first-time homebuyer to 

avoid predatory loans, negotiating a modification that will allow a distressed homeowner to stay in their home, helping a low-income family find affordable rental 

housing, or helping a homeless person find emergency shelter, nonprofit housing 

counselors are advocates for housing consumers, especially those from traditionally 

underserved communities such as communities of color, low- and moderate-income 

communities, and the elderly. A growing body of research demonstrates that those 

who receive housing counseling realize better outcomes than similarly situated people who do not. 54

Recently, FHA proposed a program entitled ‘‘Homeowners Armed With Knowledge’’ (HAWK) that would offer reductions on the upfront and annual mortgage insurance premiums (MIPs) to FHA borrowers who participate in a specified housing 

counseling curriculum. Other Government agencies such as VA and USDA could 

create the same type of program, and FHFA could work with Fannie and Freddie 

to create a similar incentive structure in the secondary market through preferential 

pricing for counseled mortgages. Borrowers could yield additional incentives if they 

committed to post-purchase counseling, as well. Bonus points could be awarded 

under the goals that would incent this kind of proven, safe and sustainable lending. 

Additionally, Congress should grant HUD’s Office of Housing Counseling the authority to accept funds from private entities to be distributed and used for housing 

counseling activities. 

E. Congress should extend the Mortgage Forgiveness Debt Relief Act, and it 

should convert the mortgage interest deduction to a tax credit. 

Mortgage Forgiveness Debt Relief Act: When a lender forgives mortgage debt 

through a short sale, a principal reduction modification, or even after a foreclosure, 

the amount that the borrower no longer owes counts as taxable income to the borrower unless it fits into an exemption in the tax code. Given the deep inappropriateness of this result for those losing their homes, Congress created a tax code exemption in 2007 entitled the Mortgage Forgiveness Debt Relief Act. For the past several 

years, the MDRA has been extended on a year-to-year basis. 

The MDRA has been crucial to virtually every effort to assist troubled homeowners and restore the housing market to health. However, this past year, the 

MDRA was not extended. Consequently, the number of short sales dropped, adding 

to the continued woes of the housing market. What’s more, principal reduction is 

less valuable to homeowners if they must pay tax on the forgiven debt, which hampers loss mitigation efforts. Congress must extend the MDRA not just until the end 

of 2014, but at least until the end of 2015. Ideally, this exemption would become 

permanent. 55

63 

newal Could Benefit Millions’’, (Washington: The Urban Institute, 2014), available at http:// 

www.urban.org/UploadedPDF/413025-Mortgage-Forgiveness-Debt-Relief-Act-Has-Expired.pdf. 56See http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/ 

hist04z1.xls; http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/ 

teb2015.xls. 57 Benjamin H. Harris and Daniel Baneman, ‘‘Who Itemizes Deductions?’’ (Washington: Tax 

Policy Center, 2011), available at http://www.taxpolicycenter.org/UploadedPDF/1001486-WhoItemizes-Deductions.pdf. 58 Roger Altman and others, ‘‘Reforming Our Tax System, Reducing Our Deficit’’, (Washington: Center for American Progress, 2012) available at https://www.americanprogress.org/ 

issues/tax-reform/report/2012/12/04/46689/reforming-our-tax-system-reducing-our-deficit/. 59For more information, see Center for American Progress, Center for Responsible Lending, 

and others, ‘‘Re: Consumer Financial Protection Bureau’s Amendments to Regulation C’’, (2014) 

available at http://www.responsiblelending.org/mortgage-lending/research-analysis/HMDAComment-Final-10-29-14.pdf. 

Mortgage Interest Deduction: The Federal Government spends $70 billion a year 

on the mortgage interest deduction—more than a trillion dollars over a 10-year period and more than the entire HUD budget. 56 Yet, the benefit of the mortgage interest deduction is heavily skewed to households in upper-income tax brackets. As a 

taxpayer’s income increases, their tax rate increases and so does the value of the 

deduction. In addition, the mortgage interest deduction is only available to those 

who are able to itemize deductions, rather than taking the standard deduction. According to the Tax Policy Center’s analysis of 2010 data, less than a third of taxpayers itemize their deductions, and the majority of those who itemize fall in the 

top income tax brackets. 57

As part of comprehensive tax reform, we recommend replacing the current mortgage interest deduction with a tax credit. Our proposal would gradually phase out 

the current deduction and replace it with an 18 percent nonrefundable tax credit. 58

The effect of this change would be to provide the same benefit to all taxpayers, rather than a much larger benefit to those with higher incomes. Increasing the value 

of the credit to low- and moderate-income taxpayers not only increases fairness and 

access to home ownership, but also contributes to economic growth, since it puts 

more money in the hands of a large number of families who typically need to spend 

every dollar they earn just to get by. 

F. Regulators should collect better mortgage data to help identify problems 

and potential solutions in the market. 

As a free and public database, the Home Mortgage Disclosure Act (HMDA) provides critical data to housing market participants and stakeholders, especially to 

nonprofits and other entities without access to expensive proprietary databases. 

However, the HMDA database has long suffered from some key omissions, both in 

terms of who is reporting data and what data are reported. 

Recently, the CFPB issued a set of proposed changes to HMDA, including changes 

to definitions of covered institutions and transactions as well as the addition of the 

proposed new fields would improve the usefulness and quality of the HMDA data. 

We strongly support the CFPB’s efforts. In addition to their proposals, we recommend additional data enhancements that would be of great benefit to researchers 

and community groups in the efforts to promote fair access to credit, while also 

helping equip regulatory and enforcement agencies with fair lending compliance. 

For example, we think the CFPB should take further steps to simplify the reporting requirement to one eligibility standard, should add further fields on various topics such as denials and language/race, and collect information on loan modifications 

and housing counseling. 59

Assist Struggling Families and Neighborhoods 

A. FHA should improve its Distressed Asset Sale Program to better promote 

home retention and neighborhood stability. 

Since 2012, the FHA has been selling distressed loans in bulk prior to foreclosure 

in order to save money and potentially provide these borrowers with a last chance 

to save their homes. The Distressed Asset Stabilization Program has auctioned 

about 100,000 loans over the past 2 years, and the FHA still insures about a half 

million seriously delinquent loans that could be eligible for the program. The FHA’s 

program sells some loan pools with almost no strings attached, while others are sold 

through a special ‘‘neighborhood stabilization’’ channel that requires the buyers to 

help families and neighborhoods. The loans sold through neighborhood stabilization 

auctions tend to be geographically concentrated, while the loans sold through the 

national auctions are dispersed among many States. 

64 

60Federal Housing Administration, ‘‘Quarterly Report on FHA Single Family Loan Sales: 

Data as of May 30, 2014’’, (2014) available at http://portal.hud.gov/hudportal/documents/ 

huddoc?id=report082814.pdf. 61 Heather Perlberg and John Gittelsohn, ‘‘Hedge Funds Boost Bad-Loan Prices as U.S. Sales 

Increase’’, Bloomberg News, August 11, 2014. 

This summer, the FHA released outcome data about these pools for the first time 

since the program’s inception. 60 Nearly one quarter of loans sold through the neighborhood stabilization outcome auctions and resolved have resulted in the homeowners staying in their homes, at least for the time being. Another 35 percent of 

families have avoided foreclosure through a short sale or similar outcome. Loans 

that were sold in pools without requirements and later resolved, on the other hand, 

had a markedly different outcome. Less than 9 percent of those families remained 

in their homes, and 21 percent avoided foreclosure. In short, the data demonstrate 

that imposing even relatively modest and flexible requirements on auctioned loan 

pools can lead to much better outcomes for households and neighborhoods. The geographic concentration of the loans sold through the neighborhood stabilization auctions may also make it easier for note buyers to service the portfolio. 

Distressed mortgage sale programs, if designed responsibly, can limit the damage 

of the foreclosure crisis by helping homeowners to access foreclosure alternatives, 

supporting neighborhood home prices, and limiting losses to taxpayers. However, if 

loans are simply passed off to the highest bidder without any built-in protections 

for homeowners and neighborhoods, we will have missed an extraordinary opportunity to support the housing recovery. 

Thus, as the FHA moves forward with more auctions, we suggest the following 

four overarching recommendations to promote home retention and neighborhood stability while still helping the agencies save taxpayer dollars. 

• FHA should impose a set of basic requirements on all buyers in all pools. First, 

the agency should require all buyers to work with existing homeowners to keep 

them in their homes if possible through a sustainable, permanent loan modification (perhaps using the HAMP program). When a loan modification is not possible, buyers should be required to pursue short sales or deeds in lieu of foreclosure before foreclosing on a property. For properties that go to REO, FHA 

should require that the investor provide an opportunity for owner-occupant purchase before either selling to another investor or transforming into long-term 

rental. Reasonable requirements of this nature may have less of an impact on 

price than FHA may fear, both because the loans with requirements have sold 

for similar prices to those with no requirements and because demand for all of 

these pools is only growing with time. 61

• FHA should help nonprofits participate effectively in the bidding process because neighborhood-based nonprofits often produce the best outcomes for families and neighborhoods. To the extent that nonprofits lack either capital or capacity, we believe the best option is for FHA to provide a preference to private 

investors that partner with nonprofits and have a track record of serving homeowners effectively. 

• Before placing loans in a sale pool, FHA should ensure that mortgage servicers 

have fully complied with the agency’s requirements for attempting to assist borrowers and that the home is still occupied before placing a loan into distressed 

mortgage sale programs. Reports from buyers and from consumer representatives indicate that some loans are moving into the program before servicers 

have completed their work with homeowners, and that many homes are vacant 

when the buyer takes possession of them. The Government should be careful 

that servicers are prevented from using the program to evade their contractual 

responsibilities. 

• FHA should collect and share more detailed performance data about the programs so the public can fully understand their effectiveness. The agency took 

roughly 2 years to publish its first set of outcomes, and that information is very 

limited. These agencies have an obligation to track in detail what happens to 

the loans after they are sold and to share this information with the taxpayers, 

neighborhoods, and local governments. 

B. FHFA should take additional steps to aid struggling homeowners and communities. 

As with respect to access to credit, FHFA’s singular role in the housing market 

provides them with many opportunities to support struggling families and communities. Over the past several years, the agency has made improvements to the 

HARP refinancing program and to their own Servicing Alignment Initiative that 

65 

62The Responsible Homeowner Refinancing Act of 2013 (S. 249), available at https:// 

www.congress.gov/bill/113th-congress/senate-bill/249/text. 63See, e.g., Standard and Poor’s, ‘‘The Best Way To Limit U.S. Mortgage Redefaults May Be 

Principal Forgiveness’’, (2012) available at http://www.standardandpoors.com/ratings/articles/ 

en/us/?articleType=HTML&assetID=1245335672295; Andrew Haughwout, Ebiere Okah, and Joseph Tracy, ‘‘Second Chances: Subprime Mortgage Modification and Re-Default’’, Federal Reserve Bank of New York Staff Reports (2010) available at http://www.newyorkfed.org/research/ 

stafflreports/sr417.pdf; Roberto G. Quercia and Lei Ding, ‘‘Loan Modifications and Redefault 

Risk: An Examination of Short-Term Impacts’’, CityScape (2009) available at http:// 

ccc.unc.edu/contentitems/loan-modifications-and-redefault-risk-an-examination-of-short-term-impacts/. 64 Congressional Budget Office, ‘‘Modifying Mortgages Involving Fannie Mae and Freddie 

Mac: Options for Principal Forgiveness’’, (2013) available at http://www.cbo.gov/publication/ 

44115. 65https://www.congress.gov/bill/113th-congress/senate-bill/ 

2854?q=%7B%22search%22%3A%5B%22Preserving+American+Homeownership+Act%22%5D%7D 

have provided assistance to many borrowers, but there are many additional steps 

they can take to ensure that both homeowners and neighborhoods are better protected. 

1. To assist performing borrowers, improve the HARP program to reach more people. 

The Obama administration’s HARP program has already helped over 2.7 million 

households refinance their mortgages and could reach many more with a few targeted improvements. The Responsible Homeowner Refinancing Act of 2013 would 

require that Fannie Mae and Freddie Mac eliminate all upfront participation fees 

to borrowers; that the same benefits be available to all eligible lenders, including 

waivers of certain representations and warrantees; and that all borrowers with 

Fannie- and Freddie-backed mortgages will be notified about the program, its eligibility requirements, and participating lenders. 62 These changes could help more 

homeowners take advantage of low interest rates, lower their monthly mortgage 

payment, and reduce the risk that they will default on their mortgage. 

2. FHFA should join Treasury and FHA in extending the GSE Home Affordable 

Modification Program (HAMP) at least to 2016. 

Some months ago, Treasury announced it would extend its HAMP modification 

program at least through 2016. We urge FHFA to ensure that HAMP will continue 

to be available to Fannie and Freddie borrowers as long as HAMP is available to 

private label borrowers. Moreover, when HAMP expires (and especially if FHFA 

does not require the GSEs to extend HAMP to 2016), FHFA should require Fannie 

and Freddie to implement a new proprietary modification that includes measures 

to ensure affordability, which the current Standard Modification does not do. 

3. To assist troubled borrowers, participate in the HAMP principal reduction alternative and enable borrowers who lose their homes through a short sale or foreclosure 

to buy back their homes at fair market value. 

We are encouraged that FHFA’s strategic plan expresses a commitment to ‘‘develop and actively promote home retention and loss mitigation programs.’’ Unfortunately, FHFA still prohibits the Enterprises from engaging in one of the most effective forms of loss mitigation: principal reduction. Numerous studies have demonstrated that principal reductions help keep troubled borrowers in their homes 

more effectively than loan modifications alone. 63 Additionally, the Congressional 

Budget Office has estimated that allowing principal reductions through HAMP on 

loans guaranteed by the Enterprises would result in savings for the taxpayer. 64

Lifting this prohibition should be an FHFA priority. FHFA could either design its 

own principal reduction modification or use the HAMP Principal Reduction Alternative (HAMP–PRA). If FHFA is worried about strategic default, HAMP–PRA requires a borrower to be delinquent or in imminent default, to demonstrate a hardship, and to meet various other criteria related to the size of the loan, owner-occupancy, etc. The modification must be both net-present-value positive and affordable 

by the borrower. Working through HAMP also would provide access to Treasury incentive payments and related Treasury programs such as the second-lien modification program (2MP). HAMP–PRA also allows an investor to create a shared appreciation modification, where any gains upon sale would be shared by the investor and 

homeowner, as some Senators have recommended. 65

FHFA has previously raised concerns about the operational burdens associated 

with implementing principal reduction. While these concerns are valid and real, 

Treasury has offered to pay the additional administrative costs required to implement HAMP–PRA and to free up human and technical resources that would accelerate implementation of this program. 

66 

66Federal Housing Finance Agency, ‘‘Foreclosure Prevention Report: May 2014’’, (2014) available at http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/ 

ForeclosurePreventionReportMay2014FINAL.pdf. 67 Nick Timiraos, ‘‘Freddie Mac To Sell $659 Million in Defaulted Home Loans Sale Is a First 

for the Mortgage Finance Giant Under Government Control’’, The Wall Street Journal, August 

1, 2014. 68To view CAP’s full recommendations on how FHA should improve the DASP program, see 

Sarah Edelman, Julia Gordon, and Aashna Desai, ‘‘Is the FHA Distressed Asset Stabilization 

Program Meeting Its Goals?’’ (Center for American Progress: 2014), available at http:// 

www.americanprogress.org/issues/housing/report/2014/09/05/96531/is-the-fha-distressedasset-stabilization-program-meeting-its-goals/. 69FHFA Office of Inspector General, ‘‘FHFA’s Oversight of Enterprises Lender-Placed Insurance Costs’’, (2014) available at http://fhfaoig.gov/Content/Files/EVL-2014-009.pdf. 

If FHFA will not provide principal reduction, or for homeowners for whom a new 

principal reduction program would not come in time, we encourage FHFA to continue to explore additional ways to enable former homeowners to buy back their 

homes at fair market value. Recently, FHFA announced that it will permit former 

homeowners who have gone through a foreclosure or deed-in-lieu to buy back their 

house at fair market value if they are able to obtain financing through a channel 

other than the GSEs. However, most homeowners whose homes are already in the 

REO portfolio are not likely to be in a position to return to their home or to obtain 

financing to do so, given the damage to their credit score and the need to have already moved out. 

Instead, FHFA should focus on enabling mission-based organizations to assist 

troubled underwater borrowers in a short sale transaction whereby homeowner can 

repurchase their own home if they can afford the mortgage at the fair market value. 

Sometimes called a ‘‘structured short sale,’’ this transaction provides a way for borrowers to right-size their mortgage without forcing them through a foreclosure or 

risking an eviction. Borrowers should still be required to meet the GSE’s existing 

hardship requirements for obtaining a short sale. 

4. If and when Fannie Mae or Freddie Mac sell nonperforming loans in bulk, 

FHFA should require that these sales actively promote home retention and neighborhood stability. 

Between them, Fannie Mae and Freddie Mac hold close to 700,000 seriously delinquent loans. 66 Many of these loans have languished for years, with foreclosures in 

process or imminent. Observers had long speculated that Fannie and Freddie would 

sell these loans to investors at a discounted rate to minimize Enterprise losses, as 

the Federal Housing Administration, or FHA, has been doing. Confirming this speculation, this past August, Freddie Mac auctioned its first pool of nonperforming 

loans. 67

We encourage FHFA to follow the recommendations we outlined above for FHA 

in making home retention and neighborhood stability an explicit goal for any further 

Enterprise note sales. In particular, we recommend that FHFA impose on purchasers meaningful post-sale requirements aimed at home retention and neighborhood stabilization, including an explicit loss-mitigation waterfall; encourage sales to 

nonprofit or other entities who will prioritize these goals; and collect and regularly 

share data on outcomes. 68 Especially given strong investor demand for nonperforming loans, we do not think such requirements would unduly impact investor 

bids for the loans. 

5. FHFA should instruct Fannie and Freddie to reform their approach to lenderplaced (force-placed) insurance. 

FHFA has recognized that abuses within the lender-placed insurance market—the 

insurance a lender must obtain on behalf of a homeowner if a homeowner’s property 

insurance lapses—are burdensome not only for consumers but also for Fannie Mae 

and Freddie Mac. The GSEs spent $360 million on lender-placed insurance premiums in 2012 alone, according to the FHFA Office of Inspector General. 69 The 

costs of forced-placed insurance are exorbitant because mortgage servicers often receive kickbacks—in the form of free or below-cost services, commissions or bonuses—from insurance companies. Homeowners, and the GSEs when a homeowner 

loses their home to foreclosure, are responsible for paying the FPI bill. 

FHFA took an important step last year to lower FPI costs by prohibiting mortgage 

servicers from collecting commission from insurance companies for buying FPI. 

FHFA also included lowering FPI costs as an objective in the GSEs 2014 performance scorecard. However, these steps alone will not bring down the costs of FPI 

since insurance companies, and mortgage servicers are likely to find new ways to 

exchange kickbacks. FHFA must consider a more comprehensive approach to prevent the kickbacks between insurance companies and mortgage servicers, and we 

recommend they consider allowing the GSEs to purchase insurance directly, instead 

67 

70LISC, ‘‘The Low Income Housing Tax Credit’’, (2013), available at http://www.lisc.org/ 

docs/resources/policy/PolicylBrieflLIHTC.pdf. 71 Ibid. 

of reimbursing mortgage servicers. Cutting out the middle man could help protect 

consumers and taxpayers from inflated costs. 

C. The Consumer Financial Protection Bureau should continue to improve 

CFPB servicing rules. 

The CFPB’s servicing rules provide essential procedural protections that promote 

better servicing outcomes for homeowners, investors, and communities. The recent 

proposed amendments to that rule make substantial improvements in crucial areas 

including transfers of servicing, bankruptcy, and access to the loss mitigation system for subsequent hardships. They also make important strides in protecting 

homeowners who seek assistance following death or divorce of a cohomeowner. 

However, there are still some basic building blocks to servicing reform that are 

not yet in place. First, servicer compensation reform has been sidetracked and must 

be revived. As long as servicers profit at the expense of homeowners and investors, 

the system will not reliably produce healthy outcomes for the housing market and 

communities regardless of the rules or enforcement thereof. Regulators must come 

together to develop a framework to modernize and rationalize servicer compensation. 

Second, with the eventual sunset of the Home Affordable Modification Program 

(HAMP), policymakers need to find a way to require loss mitigation and to require 

sustainable modifications to homeowners that also benefit investors. Loss mitigation 

before HAMP did not always happen, and when it did, it did not always promote 

long-term home retention. Without rules in place, it is possible—perhaps even likely—that the system will soon forget the lessons of the crisis. To the extent that 

CFPB does not or cannot mandate loss mitigation and a substantive requirement 

for loan modifications, Congress and other regulators should step in to ensure that 

such a requirement is developed. 

Third, we encourage CFPB to continue to address issues that remain outstanding 

in other follow-up actions to their servicing rules. For example, current rules do not 

yet clarify what homeowners need to submit to have their request for assistance reviewed. In addition, borrowers who do not speak English as their native language 

continue to face significant problems communicating orally and in writing with 

mortgage servicing companies. 

D. Policymakers should take steps to help renters, particularly very low-income 

renters. 

1. FHFA should capitalize the Housing Trust Fund and Capital Magnet Fund. 

In the Housing and Economic Recovery Act of 2008 that created FHFA, Congress 

created a mechanism by which Fannie and Freddie would capitalize the Housing 

Trust Fund and Capital Magnet Fund, both sources of subsidy to produce affordable 

housing for very low-income families. After FHFA put Fannie and Freddie into conservatorship, however, it prohibited the companies from contributing these funds at 

all. 

While this prohibition may have been justified when the Enterprises were drawing on taxpayer funds to stay afloat, now that they have returned to profitability, 

there is no justification for continuing the prohibition. We believe that FHFA has 

both the right and the responsibility to direct the Enterprises to begin contributing 

to these funds right away. 

2. Congress should extend the Low-Income Housing Tax Credit. 

Since its creation in 1986, the Low-Income Housing Tax Credit, or LIHTC, has 

leveraged more than $100 billion in private investment capital through a dollar-fordollar reduction in a developer’s tax liability, providing critical financing for the development of more than 2.5 million affordable rental homes. 70 The program annually supports 95,000 jobs and finances approximately 90 percent of all affordable 

rental housing. Moreover, it is a critical resource to transform communities suffering from blight. 71

Ever since the minimum Housing Credit rate expired at the end of 2013, Housing 

Credit developments have been underwritten using a floating rate, which has hovered near 7.5 percent. The tax extenders package from the House would provide a 

minimum 9 percent credit rate through January 1, meaning there are essentially 

no housing deals that will benefit from this provision. Congress should extend the 

Housing Credit’s 9 percent minimum credit rate floor for 2 years until the end of 

2015 so at least 1 year would have the full benefit. 

68 

72Douglas Rice, ‘‘Sequestration’s Rising Toll: 100,000 Fewer Low-Income Families Have Housing Vouchers’’, (Washington: Center on Budget and Policy Priorities, 2014), available at http:// 

www.cbpp.org/cms/index.cfm?fa=view&id=4229. 73 Rice, ‘‘Better Federal Policy Needed To Address Rental Affordability Crisis’’. 74 Joint Center for Housing Studies, ‘‘The State of the Nation’s Housing 2013: Appendixes’’, 

(2013) Table A-6, available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ 

son2013lchap7lappendixltables.pdf. 75 Joint Center for Housing Studies, ‘‘America’s Rental Housing: Evolving Markets and 

Needs’’, (2013), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ 

jchslamericaslrentallhousingl2013l1l0.pdf. 76 Hannah Emple, ‘‘Asset-Oriented Rental Assistance: Next Generation Reforms for HUD’s 

Family Self-Sufficiency Program’’ (Washington: New America Foundation, 2013); Planmatics, 

Inc. and Abt Associates Inc., ‘‘Evaluation of the Family Self-Sufficiency Program: Prospective 

Study’’ (U.S. Department of Housing and Urban Development, Office of Policy Development and 

Research, 2011). 77See the Family Self-Sufficiency Act (S. 454), introduced by Sens. Reed and Blunt. 78This research is summarized in David Abromowitz and Sarah Edelman, ‘‘As More Households Rent, How Can We Encourage Them to Save?’’ (Washington: Center for American 

Progress, 2014), available at https://www.americanprogress.org/issues/housing/report/2014/ 

09/10/96706/as-more-households-rent-how-can-we-encourage-them-to-save/. 

3. Congress should protect important programs for affordable housing from budget 

cuts. 

In 2012, 75 percent of extremely poor households paid more than half of their 

meager incomes for housing. This results in little left over for groceries, medication, 

transportation, and other of life’s necessities. It also is a strong determinant of 

homelessness, which is much more expensive than rental assistance to mitigate. 

HUD’s rental assistance programs (public housing, project-based Section 8, and 

housing choice vouchers), which serve about 5 million extremely low income households, are facing a big threat next year: sequestration. HUD programs, although 

they serve the poorest households, are not exempt from sequestration’s impacts. Sequestration has already led to 100,000 fewer low-income families receiving housing 

vouchers. 72 As a result of sequestration and other austerity measures enacted since 

2011, nondefense discretionary funding in FY14 was about 15 percent below 2010 

levels, adjusted for inflation. Without action to stop sequestration, in FY16 nondefense discretionary programs will decline to 3.1 percent of GDP—equal to the lowest level in at least 50 years. These programs already serve only one quarter of 

those eligible, and it is critical not to cut these budgets further. 73 Congress must 

protect these most vulnerable residents from losing one of the few forms of housing 

assistance currently available. 

Additionally, we recommend a renewed commitment of funding to the HOME Investment Partnerships program. This program creates affordable housing for people 

in need nationwide—since 1992 over one million homes. It does so by giving States 

and localities the flexibility to deploy scarce resources to the affordable housing 

challenges particular to their communities. HOME leverages other resources almost 

four to one, and frequently is critical gap financing for Low Income Housing Tax 

Credit properties. 

4. Congress and agencies should act to encourage renters to increase their savings. 

Another opportunity for addressing inequality in our housing market lies in developing programs that effectively encourage renters to build assets. Renter households 

in the United States have a median net worth of about $5,100, while households 

that own homes have a median net worth of more than $170,000. 74 This inequality 

remains true when comparing renters with incomes comparable to their homeowner 

counterparts. 75 A significant cause of this phenomenon is the fact that mortgage 

payments typically represent a form of ‘‘forced savings,’’ while renting lacks a similar mechanism to encourage households to save. The proportion of the population 

who rents is expected to grow in the coming years, portending an increase in our 

Nation’s already large wealth inequality. 

Addressing this issue will not be easy, but research and experience suggest there 

are ways we can encourage more renters to save. HUD’s Family Self-Sufficient Program, which escrows into a separate account the increased portion of rent a public 

housing tenant would be expected to pay if their income increases, has proven to 

be a powerful savings vehicle for many participating households. 76 We support legislative efforts to enhance and extend this program to more groups of renters receiving some kind of Government assistance. 77

Programs implemented by nonprofits and for-profit landlords alike likewise show 

promise in promoting savings among renting households. And behavioral economics 

research suggests that an effective renter savings program would make savings 

automatic, make participation easy, give short-term rewards for saving and, if possible, provide a match for savings. 78 As more families rent rather than own homes, 

69 

1See ‘‘Quarterly Homeownership Rates by Race and Ethnicity of Householder: 1994 to 

Present’’, available at http://www.census.gov/housing/hvs/data/histtabs.html. 

it is critical to ramp up the policy discussion about how to make it easier for renters 

to build wealth. 

Conclusion 

In the aftermath of the Great Recession, policymakers face some important 

choices. We can tolerate a weaker housing market in which fewer families build 

wealth through home ownership, more lower-income renters must choose between 

decent housing and other necessities, and too many communities lack access to safe 

and affordable mortgage credit. Alternatively, we can work to create a healthier and 

more equitable housing market by promoting sustainable home ownership, affordable rental housing, and stronger neighborhoods. Choosing the latter will require action by a wide array of policymakers and market participants, which is challenging. 

Ultimately, however, by working together, we can create a more robust, fairer housing market that drives economic growth and promotes opportunity for America’s 

families. 

Thank you again for inviting me to testify today. I look forward to continuing to 

engage with you on these and other issues. 

PREPARED STATEMENT OF DEBORAH GOLDBERG 

SPECIAL PROJECT DIRECTOR, NATIONAL FAIR HOUSING ALLIANCE

DECEMBER 9, 2014 

Good morning, Mr. Chairman and Members of the Subcommittee. Thank you for 

the opportunity to testify here today on ‘‘Inequality, Opportunity, and the Housing 

Market’’. My name is Debby Goldberg, and I am a Special Project Director at the 

National Fair Housing Alliance (NFHA). Founded in 1988, and headquartered in the 

District of Columbia, the National Fair Housing Alliance is a consortium of more 

than 220 private, nonprofit fair housing organizations, State and local civil rights 

groups, and individuals from 37 States and the District of Columbia. Through comprehensive education, advocacy, and enforcement programs, NFHA seeks to provide 

equal access to housing for millions of people. 

The title for this hearing is one that resonates with NFHA and its members. We 

work at the intersection of housing and opportunity, and we are very mindful of the 

impact that where people live has on so many aspects of their lives. It determines 

whether they have access to good schools, good jobs, quality health care, good transportation, a healthy environment, and so much more—the kinds of resources and 

opportunities that we all need to flourish. As Americans, we believe strongly that 

everyone should have access to opportunity, regardless of the color of their skin, 

their gender, their ancestry, the language they speak, where they worship, or 

whether they have children. Unfortunately, the reality often differs from this ideal, 

as we can see clearly in the housing market. 

My testimony today will focus on widespread problems in the maintenance and 

marketing of foreclosed properties, particularly in communities of color, and the 

long-term impact of those problems. It is based on a 5 year investigation conducted 

by the National Fair Housing Alliance. I will also describe some of the patterns and 

practices that, over many decades, created the conditions in which these problems 

could take root. Finally, I will draw some lessons for future policies and programs 

that are suggested by the conclusions of our investigation. 

Why Homeownership Matters 

Home ownership has long been the key to opportunity in this country—a path 

into the middle class. Home ownership has provided millions of families the means 

to create economic stability and build wealth. Families have used the equity in their 

homes to send their kids to college, start or expand small businesses, weather economic hardships, fund retirement, and pass along wealth to the next generation. 

But home ownership rates in the U.S. vary tremendously by race and national 

origin, and have done so for many decades. According to the Census Bureau, 1 in 

1994, some 70 percent of White households were homeowners, while for both Black 

and Hispanic households the rate was closer to 42 percent. In 2004, the White home 

ownership rate hit a high of 76 percent, while the rates for Black and Hispanic 

households rose to 49 percent. At the end of the third quarter of this year, the White 

home ownership rate had fallen to 72.6 percent, and the rates for Blacks and Hispanics were 42.9 percent and 45.6 percent, respectively. As these figures illustrate, 

while home ownership rates have risen and fallen for all homeowners, the gap beVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00073 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
70 

2For a more detailed description of the racially exclusionary policies of the FHA and other 

Government agencies, see Richard Rothstein, ‘‘The Making of Ferguson: Public Policies at the 

Root of Its Troubles’’, Economic Policy Institute, October 15, 2014, available at http:// 

www.epi.org/publication/making-fguson/. 3 Avery, Robert B., Kenneth P. Brevoort, and Glenn B. Canner, ‘‘Higher-Priced Home Lending 

and the 2005 HMDA Data’’, Federal Reserve Bulletin, available at http:// 

www.federalreserve.gov/pubs/Bulletin/2006/hmda/default.htm; and ‘‘The 2006 HMDA Data’’, 

Federal Reserve Bulletin vol. 93, December 21, 2007, available at http:// 

www.federalreserve.gov/pubs/bulletin/2007/07index.htm. 4 Brooks, Rick and Ruth Simon, ‘‘Subprime Debacle Traps Even Very Creditworthy’’, Wall St. 

Journal, December 3, 2007. 5See, for example, the cases brought by DOJ against Bank of America’s Countrywide unit 

and Wells Fargo. Details available at http://www.justice.gov/crt/about/hce/whatnew.php. 6 Amromin, Gene, and Anna L. Paulson, ‘‘Default Rates on Prime and Subprime Mortgages: 

Differences and Similarities’’, Profitwise News and Views, Federal Reserve Bank of San Francisco, September, 2010. 

tween home ownership rates for White households and others has remained remarkably constant. Households of color have not experienced the benefits of home ownership to the same degree as their White counterparts. 

There are many factors that explain these differences. They include policies of the 

Federal Government, enacted many decades ago, that provided access to affordable 

home ownership for White families while denying it to their Black counterparts. 

Foremost among these were the early policies of the Federal Housing Administration (FHA). FHA fueled the expansion of the suburbs in the post-World War II era, 

insuring construction loans for companies building new subdivisions, as long as they 

agreed not to sell any of the houses to Black families. Similarly, FHA’s insurance 

for individual mortgages made long term, fixed rate, low downpayment loans available to White families of modest means, but excluded Black families from obtaining 

similar mortgages. 2 This practice came to be known as ‘‘redlining.’’ FHA has long 

since changed its policies, and has become an important source of mortgage financing for many families, including families of color. But the policies it adopted in its 

early years laid the foundation for the differences in home ownership rates that we 

see today. And the policy changes alone have not eliminated the gap. 

These Federal Government policies were adopted by those in the private sector, 

and for decades, inner city communities, communities of color, and low- and moderate-income communities were redlined—denied access to affordable, sustainable 

mortgages from mainstream financial institutions. 

During this past decade, communities of color that had previously been starved 

for credit were flooded with subprime and other unsustainable mortgages, a phenomenon that some have called ‘‘reverse redlining.’’ According to the Federal Reserve Board, in 2005–2006—the peak subprime lending years—more than 53 percent of the home purchase loans made to African Americans nationwide were 

subprime loans, as were more than 49 percent of the refinance loans made to these 

borrowers. African American borrowers were 3 times more likely to get a subprime 

home purchase loan and 2 times more likely to get a subprime refinance loan than 

White borrowers. During those same years, more than 46 percent of the home purchase loans made to Latino borrowers were subprime, as were more than 34 percent 

of the refinance loans made to Latinos. They were 2.5 times more likely to get a 

subprime home purchase loan and more than 1.5 times more likely to get a 

subprime refinance loan than White borrowers. 3

These differences cannot be explained by the creditworthiness of the borrowers. 

A Wall Street Journal analysis of subprime loans made in 2005–2006 found that 

more than half of the borrowers (55 percent in 2005, 61 percent in 2006) would have 

qualified for a prime mortgage. 4 Evidence from several fair lending cases brought 

by the Department of Justice found that some lenders steered thousands of African 

American and Latino borrowers into subprime loans even though they were qualified for prime mortgages. 5

These subprime loans, and other exotic mortgage products offered during the 

early and mid-2000s proved to be expensive and unsustainable. They contained 

many risky features, such as high upfront costs, negative amortization and adjustable payments that caused monthly payments to rise rapidly. They were targeted 

and heavily marketed to borrowers for whom they were not a suitable product, particularly borrowers of color. And they defaulted at historic rates. Research from the 

Federal Reserve Bank of San Francisco found that more than 35 percent of the 

subprime first lien mortgages originated in 2006 defaulted within the first 24 

months, compared to just over 10 percent of prime first lien mortgages originated 

in the same year. 6

71 

7 CoreLogic estimates that 4.4 million foreclosures were completed between 2008 and May, 

2013. It estimates another 594,000 foreclosures were completed between June, 2013, and May, 

2014. See CoreLogic National Foreclosure Report, May, 2013, available at http:// 

www.corelogic.com/research/foreclosure-report/national-foreclosure-report-may-2013.pdf, and 

CoreLogic National Foreclosure Report, May, 2014, available at http://www.corelogic.com/research/foreclosure-report/national-foreclosure-report-may-2014.pdf. 8 Bocian, Debbie Gruenstein, Wei Li, Carolina Reed, and Roberto G. Quercia, ‘‘Lost Ground, 

2011: Disparities in Mortgage Lending and Foreclosures’’, Center for Responsible Lending, November 2011. 

The result has been a deluge of foreclosures—an estimated 5 million since 2008. 7

Just as subprime lending was concentrated in communities of color, so have foreclosures been concentrated in these communities. Neighborhoods that were targeted 

for subprime lending have become neighborhoods with high rates of foreclosure. In 

2011, the Center for Responsible Lending (CRL) found that, ‘‘Nearly 25 percent of 

loans in low-income neighborhoods and 20 percent of loans in high-minority neighborhoods have been foreclosed upon or are at high risk of default.’’ 8 CRL’s research 

also found that, ‘‘Approximately one quarter of all Latino and African American borrowers have lost their home to foreclosure or are seriously delinquent, compared to 

just under 12 percent for White borrowers.’’ As these statistics suggest, in many 

communities of color, there are now large numbers of vacant, foreclosed properties, 

also known as REOs (Real Estate Owned properties). 

NFHA’s REO Investigations 

Several years into the foreclosure crisis, NFHA began to hear complaints about 

the neglect of REO properties and the negative impact of those properties on the 

surrounding neighborhoods. This prompted us to begin investigating the REO maintenance and marketing practices of major lenders and the Government Sponsored 

Enterprises (GSEs). Since April, 2009, in partnership with 17 of our members, 

NFHA has inspected 3,726 foreclosed properties in 29 metropolitan areas and 22 

States. Some of these properties are located in predominantly White neighborhoods. 

Others are located in predominantly Black and/or Hispanic neighborhoods. Many of 

these neighborhoods are stable communities where the rate of home ownership is 

high. At each house, our investigators evaluate more than 30 aspects of maintenance and marketing, including curb appeal, structural integrity, signage, indications of water damage and the condition of the paint, siding, gutters, and downspouts. 

Our Findings 

The findings of our investigation are detailed in the report, ‘‘Zip Code Inequality: 

Discrimination by Banks in the Maintenance of Homes in Neighborhoods of Color’’, 

a copy of which is attached to my testimony. This is the third report NFHA has 

issued since our investigations began in 2009, and unfortunately, the findings described in this report are as troubling as our earlier ones. What we found in many 

cases was that the system for managing REO properties in communities of color was 

broken. The companies that were hired to do the on-the-ground work of maintaining 

and marketing foreclosed properties failed to do their jobs properly. The banks, owners and investors who hired those on-the-ground companies failed to manage and 

oversee their work. And, for the most part, the Federal agencies with supervisory 

responsibility in this area failed to provide the guidance and oversight needed. The 

problem was particularly acute in communities of color, with a negative impact on 

the families who lost their homes to foreclosure, the families in the surrounding 

homes, and the cities in which those homes were located. In all of these ways, these 

neglected properties are a drag on our broader economic recovery. Because the problems are most acute in communities of color, they constitute a violation of the Federal Fair Housing Act, which prohibits discrimination in all aspects of housing, including marketing and maintenance, on the basis of race, color, religion, sex, national origin, family status, or disability. The Fair Housing Act also requires Federal 

agencies with housing and community development programs and activities to administer those programs and activities in a manner ‘‘affirmatively to further’’ the 

purposes of the Act. That is, in a manner to combat the problems associated with 

segregation and take steps to overcome them. The Fair Housing Act provides both 

a mandate and a tool for dealing with the kinds of problems we found with foreclosed homes in communities of color across the country. 

Some of the highlights of our findings are described below. 

We found that REO properties in White neighborhoods were well-cared for and 

well-marketed. They were more likely to have neatly manicured lawns, securely 

locked doors, and attractive, professional ‘‘For Sale’’ signs out front. These properties 

tended to be maintained to the standards of other homes in the neighborhood and 

72 

attractive to real estate agents and potential homebuyers. Someone driving down 

the street would likely never know that the property was for sale because of a foreclosure. 

In contrast, REO properties in communities of color were more likely to have overgrown yards, trash on the premises, unsecured doors, and broken or boarded windows. These properties were not maintained to the standards of nearby homes. They 

appeared abandoned, blighted, and unappealing to potential homebuyers, even 

though they were located in stable neighborhoods where the surrounding homes 

were well maintained. 

Overall, our investigation found that, compared to REO properties in White communities, REOs in communities of color were: 

• 2.2 times more likely to have significant amounts of trash and debris on the 

premises; 

• 2.3 times more likely to have unsecure, broken, or damaged doors; 

• 2.0 times more likely to have damaged, broken, or boarded windows; 

• 2.1 times more likely to have holes in the structure; and 

• 1.3 times more likely to lack a professional ‘‘for sale’’ sign. 

In some cities, the disparities were much starker. For example: 

• In Memphis, TN, REOs in communities of color were 8.8 times more likely to 

have significant amounts of trash and debris littered throughout the property 

than REOs in White communities. 

• In Hampton Roads, VA, REOs in communities of color were 6 times more likely 

to have unsecured, damaged, or boarded doors than REOs in White communities. 

• In Miami, FL, REOs in communities of color were 3.7 times more likely to have 

overgrown grass or dead leaves on the property than REOs in White communities. 

• In Kansas City, MO/KS, REOs in communities of color were 3.6 times more 

likely to have damaged, broken or boarded windows than REOs in White communities. 

Further, these maintenance deficiencies were cumulative. That is, REOs in communities of communities of color were more likely to have a greater number of deficiencies than those in White communities. In our investigation, 43.2 percent of 

REOs in White communities had fewer than 5 deficiencies, compared to only 21.7 

percent of those in communities of color. Conversely, 32 percent of the REOs we inspected in communities of color had 10 or more deficiencies, compared to only 12.4 

percent of those in White communities. 

In other words, REOs in communities of color were much more likely to have a 

great many deficiencies—such as large quantities of trash, broken or unsecured 

doors and/or windows, holes in the roof, missing or damaged gutters and downspouts, overgrown lawns and invasive plants, graffiti, damaged siding, and exposed 

or damaged utilities—than those in White communities. 

Poor Maintenance Causes Many Problems 

These cumulative deficiencies lead to a host of problems. For example, they can 

cause health problems, both physical and mental. REOs with unsecured doors and 

windows invite trespassers and vandals, as well as rodents, insects, cats, dogs, and 

wildlife. These, in turn, can increase the risk of disease, and may also be triggers 

for asthma for nearby residents. There are other health consequences, as well. Recent research published by the American Heart Association found that living near 

a foreclosed home that remains vacant for some period of time increases a person’s 

chance of developing high blood pressure. People who live near vacant properties 

may feel an increased sense of social isolation, affecting their psychological wellbeing. They are also less likely to walk, run, and play outside, with further health 

consequences. 

Poorly maintained REOs may also cause safety problems. They attract vagrants 

and criminal activity, and may be fire and safety hazards. Some of the REOs visited 

in NFHA’s investigation have become the houses where people party on the weekends or engage in illicit activities, or where squatters take over. They also contribute to violent crime in a community. Research shows that for every 1 percent 

73 

9 Immergluck, Dan, ‘‘The Impact of Single-Family Mortgage Foreclosures on Neighborhood 

Crime’’, Vol. 21, No. 6 in Housing Studies, 851–866, http://www.prism.gatech.edu/di17/ 

HousingStudies,pdf. 

increase in the foreclosure rate in a census tract, violent crimes increase by 2.33 

percent. 9

All of these problems place an increased burden on municipal fire, police, health 

care, and other resources. At the same time, their poor condition depresses the 

value not only of these properties, but also the surrounding homes, even those that 

are occupied and well-maintained. This results in lower tax revenues for municipalities, even as they must expend more resources to cope with the problems created 

by the REOs. It is not surprising that a number of cities have taken legal action 

in an effort to recoup the increased costs they experience in dealing with vacant, 

poorly maintained REOs. One example is the City of Los Angeles, which has sued 

both Deutsche Bank and U.S. Bancorp over their failure to comply with municipal 

building codes in their maintenance of foreclosed homes in that city. 

Investor Purchases of REOs 

The poor maintenance and ineffective marketing of REO properties in communities of color also have an impact on who ultimately purchases these properties. 

In order to understand this relationship better, NFHA tracked the sales of REOs 

that were part of its earlier investigations in two Maryland Counties, Montgomery 

and Prince George’s, and in Memphis, TN. In Maryland, we found that investors 

purchased 59 percent of REO properties that were poorly maintained (had 10 or 

more deficiencies), compared to 36 percent of those that were well maintained. 

Owner-occupants purchased 46 percent of the well maintained REOs, compared to 

only 12 percent of those that were poorly maintained. Because of the higher incidence of poor maintenance in communities of color, 52 percent of the REO properties 

whose sales we tracked in those communities were purchased by investors, compared to 33 percent of those in White communities. 

We found similar outcomes in Memphis. There, 70 percent of the REOs with 10 

or more deficiencies were sold to investors, compared to 46 percent of those that 

were well-maintained. Fifty-one percent of the well maintained properties were sold 

to owner-occupants, compared to only 20 percent of the poorly maintained REOs. In 

communities of color, 70 percent of the REOs were sold to investors, compared to 

18 percent in White communities. Twenty-four percent of REOs in communities of 

color were sold to owner-occupants, compared to 78 percent in White communities. 

The Role of the Fair Housing Act 

The Federal Fair Housing Act requires banks, trustees, investors, servicers, and 

any other responsible party to maintain and market properties that are for sale or 

rent without regard to the race or national origin of the residents of a neighborhood. 

It is illegal to treat a neighborhood differently because of the race or national origin 

of the residents. Moreover, the law obligates banks, trustees, investors, and 

servicers to monitor the actions of vendors engaged in performing housing-related 

transactions to ensure that those third party entities comply with fair housing laws 

and obligations. Banks, trustees, investors and servicers who fail to ensure that the 

REOs they own and for which they are responsible are maintained and marketed 

without regard to the race or national origin of the residents of the neighborhood 

may be violating the Act. 

The Fair Housing Act also requires Federal agencies (including those with regulatory or supervisory responsibility over financial institutions) with programs or activities related to housing and community development to conduct those programs 

and activities in a manner that affirmatively furthers the purposes of the Act. Those 

purposes are two-fold: to eliminate discrimination from the housing market, and to 

overcome the negative effects of entrenched segregation. The subprime lending that 

was targeted to communities of color and the subsequent surge in foreclosures in 

those communities has exacerbated the problems related to segregation. Failure to 

maintain and market these properties properly makes the problems even worse. 

The Federal agencies responsible for overseeing the activities of banks, other investors and the GSEs have both the authority and obligation to ensure that they 

do not violate the Fair Housing Act in their maintenance and marketing of REO 

properties. Effective oversight can help stem this problem. To date, only the Federal 

Reserve Board has taken action in this area. It has provided guidance to the institutions it supervises about the liability to which they may be exposed for failure to 

74 

10See Federal Reserve Board Supervision and Regulation Letter SR 12-10 / CA 12-9, Questions and Answers for Federal Reserve-Regulated Institutions Related to the Management of 

Other Real Estate Owned (OREO) June 28, 2012, available at http://www.federalreserve.gov/ 

bankinforeg/srletters/sr1210a1.pdf. 

ensure effective management of their REOs in communities of color. 10 Further, the 

Board is incorporating this issue into the risk assessments it conducts for institutions in advance of an on-site examination. To NFHA’s knowledge, none of the other 

Federal agencies with fair housing responsibilities have taken similar action. 

Recommendations 

Based on the results of our investigations into the management, maintenance, 

and marketing of REO properties, NFHA recommends that a number of steps be 

taken to prevent the kinds of problems we identified. These are detailed in our report, and I provide some highlights below. 

• Better Oversight From Federal Regulators and Congress—Many of the entities 

that have engaged in discriminatory practices in the REO market are federally 

regulated. Federal regulators, including the Federal Housing Finance Agency, 

Federal Reserve and others must be vigilant in their supervision to ensure that 

banks and the GSEs do not implement practices that harm neighborhoods of 

color or homeowners from protected classes under the Fair Housing Act. The 

CFPB also has a role to play as the key regulator of mortgage servicing. It does 

not have authority under the Fair Housing Act, but does have authority under 

the Equal Credit Opportunity Act. Congress must hold hearings to investigate 

discrimination in the REO arena so that neighborhoods of color and the businesses that support these neighborhoods are not left behind in the economic recovery. 

• Sales Practices Should Help Stabilize Communities—banks and other owners of 

REOs should not allow the homes to sell at auction for prices significantly below 

the market value of other homes in the neighborhood. 

• Selection and Management of REO Vendors—all of the vendors selected to work 

on the disposition of REOs should receive high-quality fair housing training, 

should not be the subject of pending discrimination complaints, and should have 

resolved any past complaints of discrimination successfully. 

• Marketing and Disposition Practices—brokers selected to list REO properties for 

sale should have an office in close proximity to the property, have the capacity 

to closely manage and oversee the treatment of the REO, and should not have 

any discrimination actions pending or any past complaints that were not resolved satisfactorily. Further, banks and other REO owners should implement 

better incentives for their brokers to sell to owner-occupants rather than investors and should severely restrict bulk sales. They should also make sure that 

some of these homes are made available to nonprofit community development 

organizations, community land trusts, and other community-based and community-minded institutions that have a vision for rebuilding healthy and vibrant 

neighborhoods. 

• Quality Control Measures—Banks and other owners must implement better 

quality control measures across the board, with swift and severe penalties for 

vendors who fail to do their work in a professional manor. Special attention 

must be directed to neighborhoods that have been found to be vulnerable to 

poor work by vendors, including neighborhoods that are predominantly African 

American, Latino, or Asian American, as well as low- and moderate-income 

neighborhoods. 

• Transparent, Accurate, and Accessible Information About REO Ownership— 

Every bank or REO owner should maintain a public database containing all of 

its REO listings, including the name and contact information of those responsible for the maintenance or sale of the property. Neighbors and local advocates 

must have access to clear ownership records that are updated in an accurate 

and timely manner. Local governments should continue to implement Vacant 

Property Registries, monitor these registries, and routinely address any violations. 

• Create a Path Back to Home Ownership—Five million families have lost their 

homes to foreclosure since September, 2008. Evidence from Federal enforcement 

actions tells us that many of these families were steered into loans that were 

more risky and more costly than their financial qualifications should have dictated. Others have been caught between record high levels of sustained unemployment and falling home prices that have made it impossible for them to sell 

75 

11 ‘‘2013 Update: The Spillover Effects of Foreclosures’’, Center for Responsible Lending, August 19, 2013, available at http://www.responsiblelending.org/mortgage-lending/research-analysis/2013-crl-research-update-foreclosure-spillover-effects-final-aug-19-docx.pdf. 12Kochhar, Rakesh, Richard Fry, and Paul Taylor, ‘‘Twenty to One: Wealth Gaps Rise to 

Record Highs Between Whites, Blacks, and Hispanics’’, Pew Research Center, July 26, 2011, 

available at http://www.pewsocialtrends.org/files/2011/07/SDT-Wealth-Reportl7-26- 

11lFINAL.pdf. 13See The Joint Center for Housing Studies of Harvard University, ‘‘The State of the Nation’s 

Housing: 2013’’, available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ 

son2013.pdf. 14See The Joint Center for Housing Studies of Harvard University, ‘‘The State of the Nation’s 

Housing: 2014’’, available at http://www.jchs.harvard.edu/research/statelnationslhousing. 

or refinance their homes. Offering these families a path back to home ownership 

is an important component of rebuilding stable, vibrant communities. Because 

so many of these families have been families of color, it is also a fair housing 

issue. 

Loss of Wealth Due to Foreclosures and Implications for the Future 

The foreclosure crisis has drained enormous wealth from communities across the 

country—an estimated $2.2 trillion, according to CRL. Half of that amount, $1.1 trillion, has been lost by communities of color. 11 To be clear, this is not the direct cost 

to families who have lost their homes to foreclosure, but rather the loss to families 

in nearby homes due to the decline in the value of their homes. The Pew Research 

Center reached similar findings. Between 2005 and 2009, according to Pew, Blacks 

and Hispanics lost 53 percent and 66 percent of their household wealth, respectively, due to declining property values. In contrast, White households experienced 

a 16 percent loss in median household wealth. Thus, while the typical White household had $113,149 in wealth in 2009, the typical Black household had only $5,677. 

For the typical Hispanic household, that figure was $6,325. 12

This loss of wealth has tremendous implications for the future. It limits the ability of families of color to tap the equity in their homes in the way that so many 

others have done: to send their kids to college, to start or expand a small business, 

to weather financial difficulties, to fund retirement, and to pass along wealth to the 

next generation. In other words, it limits their options and opportunities. 

This, in turn, has tremendous implications for the housing market and the economy as a whole. Seven out of ten new households formed over the next decade will 

be households of color. 13 By 2025, people of color will make up nearly half of the 

typical first-time homebuyer population. 14 If this group cannot afford to buy homes, 

the housing market may stall. Current homeowners may have difficulty selling their 

existing homes, whether to downsize as they age or to meet other needs. In order 

to maintain a robust housing market and a thriving economy, we must ensure that 

we address the lingering problems in communities hard hit by foreclosures and provide access to affordable, sustainable credit for borrowers of color. 

Lessons for Other Policies and Programs 

NFHA’s investigations into the management of REOs provide a window into the 

devastation caused by the foreclosure crisis, to the housing market, the overall economy, and especially to communities of color. It is a reminder of the importance of 

taking effective action to prevent abusive lending practices from causing this kind 

of devastation in the future. Full recovery will also require us to take affirmative 

steps to help people affected by foreclosure get back on their feet and to revitalize 

the hardest hit communities. Congress has an important role to play in this effort, 

as it shines a light on housing problems in hearings like this and as it oversees the 

work of relevant Federal agencies. 

Reforming the Mortgage Market 

One way to prevent a recurrence of the foreclosure crisis is to ensure that the 

risky mortgage products and lending practices that characterized the subprime 

boom do not creep back into the mortgage market, either in the forms we saw during the 2000s or in new and different forms. By enacting the Dodd-Frank Wall 

Street Reform and Consumer Protection Act of 2010, with its prohibitions against 

the riskiest features of the types of mortgages and lending practices that caused the 

crash, Congress took an important step toward eliminating abusive mortgage lending practices. The regulations that the Consumer Financial Protection Bureau has 

issued to implement those statutory provisions will help ensure that Congressional 

intent is carried out. However, abusive practices can only be fully eliminated when 

strong regulations are accompanied by strong oversight and effective enforcement. 

In this, all of the Federal agencies with responsibilities for oversight of the mortgage 

76 

15 Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage 

Insurance Fund Fiscal Year 2014, U.S. Department of Housing and Urban Development, Federal Housing Administration, November 17, 2014. 16 Chrisman, Rob, ‘‘Non-Performing Loan Market on Fire; Rates Back to June 2013 Levels but 

Production May Drag’’, Mortgage News Daily, August 18, 2014. 

market have important roles to play in policing the marketplace, as does Congress 

in its role as overseer. 

While it is important to shore up the regulatory system to prevent risky and abusive products and practices, it is critical to balance this risk reduction effort with 

the need to preserve access to affordable, sustainable credit for creditworthy borrowers. This means we should eliminate the features that, when layered together, 

made loans unsustainable—such as high points and fees, negative amortization, 

rapidly rising monthly payments, and the like. At the same time, we must be careful not to impose requirements, such as large downpayments, that bear little relationship to risk but have the effect of eliminating a great many creditworthy potential borrowers, particularly borrowers of color, from eligibility for a mortgage. Similarly, we must ensure that the pricing policies adopted by the GSEs and FHA do 

not unfairly and unnecessarily shut these borrowers out of the market. 

Another way to ensure that borrowers and communities are not further harmed 

by widespread foreclosures is to prevent those foreclosures that can be avoided, both 

now and in the future. This requires reforms to mortgage servicing. The CFPB has 

issued regulations to begin this process, and has further regulations in this area out 

for public comment now. The testimony of Julia Gordon, from the Center for American Progress, addresses these regulations and NFHA endorses her comments on 

this subject. 

Sale of Nonperforming Loans 

There are a great many borrowers currently at risk of foreclosure, whose loans 

are in default. Many of these loans are owned or backed by entities under Federal 

control. The Federal Housing Administration has more than 311,000 mortgages that 

are 90 days delinquent, 15 and the two GSEs have another $100 billion of seriously 

delinquent loans. 16 Both are taking steps to minimize their losses by selling pools 

of these nonperforming loans to investors rather than putting them through the 

foreclosure process. FHA has created the Distressed Asset Stabilization Program 

(DASP), and this past summer, FHFA authorized a bulk sale of nonperforming loans 

by Freddie Mac, which is expected to be the first in a number of such sales by both 

GSEs. In theory, selling these loans for an amount below the unpaid principal balance creates the opportunity for a win-win-win situation. The agencies that own or 

back these loans get an immediate return on the sales and eliminate their exposure 

to future risk. The investors who purchase these loans get a bargain and the opportunity to restructure the loan and create a stream of income for the future. The 

homeowner gets a shot at a restructured loan, which may include a reduced loan 

balance, which is affordable and sustainable and allows them to stay in the home. 

This avoids a foreclosure, which is costly to all parties. It avoids the potential problems that NFHA’s investigation into REO maintenance and marketing identified, 

and it helps to stabilize the community, preserving the value of other loans in the 

same area that are owned or backed by the agency. 

In order to achieve this triple bottom line, however, the sales of loan pools must 

be structured to accomplish all of these goals. To the extent possible, pools should 

be sold to mission-driven nonprofits or mission-minded for-profits that are committed to preserving home ownership for the largest possible number of borrowers. 

The desired outcomes and program parameters should be explicit, and purchasers 

should be required to report on the outcomes they achieve. The programs should be 

transparent, with information about outcomes made available to the public. And 

steps must be taken to ensure that borrowers of color are treated fairly and have 

the same opportunity to save their homes as other borrowers. 

In addition, before any loan is sold, it is critical to ensure that all of the required 

loss mitigation steps have been taken. Servicers should document the steps they 

have taken, and the responsible agency should verify the accuracy of that documentation. Borrowers should be notified in advance that their loan may be sold, and 

should be informed of the loss mitigation steps their servicer says it has taken. In 

this way, the borrower can help with the verification process. 

HUD is moving in the right direction with its DASP program, but that program 

can and should be strengthened. Provisions like these were not built into the nonperforming loan sales that Freddie Mac conducted last summer, and to date, it is 

not clear whether or how FHFA will structure future sales by the GSEs to accomVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00080 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
77 

plish these goals. This is another area where Congressional oversight would be useful. 

Conclusion 

We have made substantial progress in dealing with the foreclosure crisis, but 

there is more work to do to restore a robust housing market and ensure that all 

communities have an opportunity to share in the recovery. NFHA’s investigation 

into the management of REO properties shines a spotlight on some of the persistent 

problems that remain to be solved. It also underscores the importance of using all 

of the Government’s tools to their best effect to eliminate inequality and restore opportunity in our Nation’s housing market. 

Thank you for the opportunity to testify here today. I will be happy to answer 

your questions, and look forward to working with you in the months ahead. 

78 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN MENENDEZ FROM WAYNE T. MEYER 

Q.1. For communities that are still struggling to recover from the 

downturn—for example, with high concentrations of distressed 

mortgage borrowers or homeowners with underwater mortgages— 

in your experience in the market, are there strategies to break the 

cycle of home price decline? What more can be done? 

A.1. At New Jersey Community Capital (NJCC), we believe early 

intervention and meaningful mortgage modification through principal reduction are the keys to stabilizing neighborhoods and halting the downward spiral of home prices. Gaining control of the 

properties is the first step. NJCC acquires nonperforming mortgages in bulk and works with homeowners to modify their mortgages to affordable levels through meaningful principal reduction. 

Other loans in the pools provide an opportunity to create affordable 

for-sale and rental housing units. NJCC also takes positions in 

properties through the acquisition of tax liens and looks to aggressively assume first position in an effort to gain the property 

through tax foreclosure and return it to productive reuse. NJCC 

also acquires real estate owned (REO) properties in an effort to rehabilitate abandoned and vacant properties and create accurate 

comparable real estate listings and pricing. Together these efforts 

create a healthy, stable local real estate market with rational home 

prices. 

Additionally, we have been advocating with the FHFA to allow 

principal reduction as a modification strategy for FHA loans. We 

have also advocated with HUD to allow for changes to the Distressed Asset Stabilization Program (DASP), which we believe 

would bring about more positive neighborhood stabilization effects. 

Q.2. As many of you noted in your testimony, the share of homeowners with negative or low equity on their homes has been improving, but it’s still elevated and the rebound has not been uniform. In cities like Newark, Paterson, and Elizabeth in my State 

of New Jersey, for example, the underwater rates are much higher 

than the national average—and many in my State who were already struggling from the financial crisis then had to deal with an 

additional major hit from Superstorm Sandy. 

Can you please explain the impact on the housing market of 

homeowners who are still struggling with high debt burdens, particularly at the entry-level segment of the market? 

A.2. Homeowners struggling with high debt burdens will typically 

forgo paying mortgage payments after reducing other nonessential 

household expenses. However, certain expenses are simply necessary to daily life. After falling behind and becoming delinquent, 

it is near-impossible for most homeowners in at-risk communities 

to cure default. Instead, these homeowners are served a notice of 

foreclosure. First-time homebuyers, who do not receive counseling, 

often struggle with budgeting when household finances decrease or 

cease and in many cases do not know where to turn for help. 

Q.3. Are there particular populations or communities that were especially hard hit and continue to face challenges? 

79 

A.3. Firstly, this problem impacts minority populations and communities both disproportionately and more severely. A home often 

represents a large portion of the generational wealth for these families, making the threat of foreclosure that much more devastating. 

In New Jersey, the major urban corridors of Newark, Jersey City, 

Paterson, Passaic, Trenton, Camden, Plainfield, Asbury Park, and 

Atlantic City continue to experience the compounding negative effects of increased foreclosures and neighborhood disinvestment and 

decline. However, more and more communities along the shore and 

elsewhere face mounting challenges and realize the hard-hitting effects of foreclosure, including Toms River, Bridgeton, Vineland, 

Brick, and Egg Harbor. 

Q.4. What is the impact for the broader economy of the continuing 

number of homeowners with distressed mortgages? To what extent 

are consumers still holding back spending because of outsized debt 

burdens? 

A.4. NJCC works in at-risk communities throughout the State, 

which share a disproportionate burden of homeowners in default. 

Several of these households are faced with the impossible choice to 

forgo proper nutrition and wellness in an effort to save their 

homes. These budgeting tactics risk more than just their financial 

ruin. In Newark, for example, Dr. Hanaa Hamdi, Director of 

Health and Human Services for the City, while completing research for her dissertation, found that price gouging by corner 

stores and bodegas in certain communities takes place at the beginning of each month when at-risk families receive public assistance, 

SNAP and WIC benefits. Even if these struggling families had the 

means to stimulate the broader economy with retail purchases, 

some still fall victim to the malice of others. These homeowners 

simply lack the necessary disposable income to boost the broader 

economy. 

Q.5. As our witnesses know, the Federal Housing Finance Agency 

currently prohibits Fannie Mae and Freddie Mac from engaging in 

mortgage modifications that involve principal reductions for homeowners—even when it would result in a positive net present value 

compared to the alternative of a foreclosure. Mr. Meyer, you testified that principal reductions can be one of the most effective forms 

of modification—a win for the mortgage investor, the homeowner, 

and the community. Can you please elaborate? 

A.5. When NJCC purchases delinquent loans, we are now the mortgage holder. We have the ability to modify our investment as we 

see fit. Everyone’s home in the mortgage pool is eligible for a mortgage modification and principal reduction. We do not face moral 

hazard issues. However, after a thorough analysis of the household’s finances by a ReStart Specialist—our specially trained, local 

housing counseling agency partners—many homeowners will not 

qualify for a modification. Those families are provided transitional 

assistance and the counseling agencies assist them with finding a 

new, sustainable living situation. For those homeowners, who do 

qualify, their mortgage is right-sized, meaning it is resized to the 

current market value or as close as possible to the current market 

value of the home. The homeowner then enters into a trial modification period for a period of 3–18 months. Once the trial is conVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
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cluded, the modification becomes permanent. By offloading distressed assets, the mortgage issuer or current investor receives fair 

value for the mortgages, removes liabilities from their ledger, and 

can use the sale proceeds to make further investments. NJCC, as 

the new mortgage holder, helps anchor residents remain in their 

homes, decreasing neighborhood delinquency, and stabilizing the 

local markets through continued home ownership or the rehabilitation and sale or rental of the underlying homes at rational prices 

and affordable levels. Struggling neighborhoods profit the most, followed by our organization, and then the seller of the mortgages. 

However, stabilizing a neighborhood then protects the other investments NJCC or the seller of the mortgages has in that neighborhood. The seller can then realize gains on these stable investments 

and perhaps profit more on future home sales. 

Q.6. Mr. Meyer, you testified about New Jersey Community Capital’s ReStart initiative, under which you raise funding to purchase 

distressed mortgages and, where possible, modify them to find a 

sustainable mortgage for the homeowner or convert the property to 

affordable rental housing. 

What impact do Hardest Hit Funds have on your ability to bid 

for, manage, and modify mortgages in these pools? 

A.6. Senator Menendez, in Florida our ReStart program has benefited greatly from a set aside of Hardest Hit Funds. Not only do 

the Hardest Hit Funds allow us to write down mortgages to the 

current market value of the underlying property, but they are integral to amassing and leverage the large amounts of private capital 

needed to purchase these pools of delinquent notes. In New Jersey, 

for example, our economic model for purchasing the pools relies 

heavily on a blend of debt and equity, while in Florida our model 

can leverage a transaction comprised of almost all equity investment. The Hardest Hit Funds are this powerful in attracting private investment and giving private capital investors comfort. So 

much so, that as a nonprofit organization, which is able to access 

the Hardest Hit Funds for mortgage modifications, purchasers of 

delinquent pools eligible for Hardest Hit Funds, have come to us 

to be their loss mitigation manager for these pools. We use our ReStart model and the Hardest Hit Funding to write down the loans. 

We keep qualified homeowners in their homes and provide the 

mortgage holders with a right-sized, reperforming investment. 

Without a commitment of Hardest Hit Funds, our model is more 

difficult to administer, and our ability to manage pools for other investors is very limited. 

Q.7. Your testimony discusses your work with loans sold by the 

Federal Housing Administration. Are you looking at ways to expand or pursue similar efforts, whether with FHA or other Government or private sector entities? 

A.7. Yes, Senator. In fact, we are advocating and talking to Government-sponsored entities (GSEs), in an effort for them to allow 

the sale of delinquent loans via a program similar to the HUD 

DASP. We also continue to advocate for changes to DASP as well. 

While our ReStart model has shown the power of principal reduction and large-scale creation of affordable housing, we have had difficulty making headway with financial institutions in regards to diVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
81 

rect purchases of pools of delinquent loans in their inventory. However, we hope to enter into due diligence for a mortgage pool transaction with one of the five major financial institutions in the country shortly. 

Q.8. What lessons or recommendations would you make based on 

your experience with ReStart, whether for the FHA or other organizations like yours that might be interested in pursuing similar 

initiatives? For example, FHA and Freddie Mac have offered distressed asset sales. How could the terms and timelines for these offerings be improved to encourage more nonprofit and community 

lending organizations to participate? 

A.8. This is perhaps the most important question and issue to address, Senator. It is very difficult for nonprofit organizations to participate in the loan sale programs. First, the size of the loan pools 

require a considerable amount of capital, which is difficult for nonprofits to raise in the time afforded. The size of the pools makes 

careful due diligence difficult to complete for nonprofits, and the 

period of time is also too short. Setting aside specific, smaller pools 

designated for nonprofits would help solve these two challenges. 

The other major challenge for nonprofits is the bid process itself. 

Bidding is highly competitive, and nonprofits are easily outbid by 

bigger capital players. Direct sales to nonprofits of these smaller, 

targeted pools are a simple and viable remedy. If the impetus for 

these loan sales is to stabilize neighborhoods, then nonprofit or 

proven, for-profit, mission-driven community builders are more 

likely to achieve the desired neighborhood stabilization outcomes. 

Private investors will continue to have a difficult time satisfying 

those neighborhood stabilization requirements. Other strategies 

could include giving nonprofit organizations and community lenders priority in winning bids. For example, if a qualified nonprofit 

does not win the bid, it could be given another, final opportunity 

to outbid the winning bidder, even if by one dollar, in an effort to 

effect more stabilization outcomes. More nonprofits and community 

lenders would be willing to participate in these transactions if the 

scale was not as large, the risk not as great, and the financial investment not as substantial. Although many nonprofits with substantial balance sheets exist, most community lenders do not belong to that category. 

Q.9. Freddie Mac recently engaged in a bulk sale of nonperforming 

loans. How would you compare it with the FHA’s program, in 

terms of neighborhood stabilization and avoiding unnecessary foreclosures? 

A.9. We are aware of this pilot program in Detroit and Chicago, 

and we are very encouraged by it. In fact, we are advocating for 

the pilot program to be expanded to New Jersey. However, it would 

be premature to evaluate the outcomes and compare the pilot program to DASP. 

Q.10. For the FHA’s Distressed Asset Stabilization Program and 

similar initiatives, do you think neighborhood stabilization goals 

are in tension with the desire to maximize returns for taxpayers? 

A.10. No, Senator, not at all. Preventing further delinquency and 

foreclosures is critical to halting falling home prices and greater 

82 

disinvestment. Under DASP, FHA receives fair value for the delinquent assets. With additional changes to DASP, FHA could realize 

more neighborhood stabilization outcomes, which in turn stem further financial losses and prevent more delinquent assets from accumulating for the Government, financial institutions, and real estate 

investors. 

Q.11. How can Federal programs like the Neighborhood Stabilization Program, borrower assistance programs like HAMP, HARP, 

and the Hardest Hit Fund be improved to spur the recovery in 

communities that are still struggling? 

A.11. Senator, this is a great question. However, it requires a 

lengthy, detailed response. 

NSP did not achieve its intended outcomes due to many factors. 

One of the major challenges is the significant home repair requirements for NSP, which in turn necessitate the need for a large 

amount of NSP subsidy dollars to realize a rehabilitation project. 

These requirements drive up the total development costs of the 

project, usually well beyond the fair market sales price for the 

newly renovated home. Therefore, a project only becomes viable, if 

the total development budget gap is filled with even more NSP subsidy dollars. This makes the program extremely inefficient and unable to achieve the scale necessary to adequately spur the economic 

recovery. The only reason why our organization, NJCC, has been 

able to efficiently use lower amounts of NSP monies is that we are 

able to purchase properties in bulk at a severe discount, lowering 

the total development costs for each project. The scale we are able 

to generate is not typical for other nonprofit community builders. 

HAMP was structured to protect Fannie Mae and Freddie Mac 

loan assets. The program does not allow mortgages to be written 

down to the current appraised value of the home. Instead a balloon 

payment will become due at the end of 40 years, when homeowners 

will be looking to retire. So while HAMP loans can significantly reduce current monthly payments for the homeowner, in reality, the 

amount of the mortgage which remains underwater is exacerbated, 

since the ‘‘amount due on sale or refinance’’ will be substantially 

greater than the future worth of the home. Homeowners will simply be stuck, unable to sell or move to a new living situation, and 

can, in fact, be pursued by the GSEs for ‘‘nonpayment of amounts 

due.’’ Future generations will be the ones to actually realize the 

losses on these past investments. 

Q.12. Several of you discussed the importance of extending tax relief for mortgage debt forgiveness. This is an issue about which I’ve 

heard a great deal from people in my State, where many homeowners are struggling not only from the financial crisis, but also 

from damage inflicted by Superstorm Sandy. And when they finally 

receive a lifeline to address mortgage debt they are unable to pay, 

they risk being hit with a tax bill on phantom income that may be 

many times in excess of the salary they make as, say, a teacher 

or other profession. 

Can you please describe why this tax relief is so important for 

families, communities, and the economy? 

A.12. It is vitally important, Senator. As you say, the debt relief 

is not relief if taxes are assessed. If these struggling homeowners 

83 

are taxed, the slight gain in disposable monthly income derived 

from the mortgage debt forgiveness cannot pay for the tax bill on 

this phantom income. In fact, we have had homeowners in our ReStart program refuse a modification, because of the uncertainty 

around the tax extender bill. And since our trial modification plans 

can last longer than 12 months, we can inadvertently saddle these 

homeowners with a tax bill, should the relief not be reauthorized 

for another year. It is important that the extender bill be authorized for multiple years to provide reassurance to those homeowners 

lucky enough to receive mortgage debt forgiveness. Lastly, the gain 

or boon from the mortgage debt forgiveness should not be viewed 

as income for the individual, instead, I would argue, it is a boon 

to the local and regional economies. These homeowners can become 

consumers again, can address health concerns, and can provide 

quality food options to their children and family members. Their 

neighborhoods will be spared further disinvestment and decline, 

and the removal of the specter and fear of being forced out of your 

home by the sheriff eliminates a huge stress from these homeowners’ lives, allowing them to regain a healthier quality of life. 

These are all things that should not be discounted, as they are 

interconnected and influence the economic recovery. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN MENENDEZ FROM MABE ́ L GUZMA ́ N 

Q.1. For communities that are still struggling to recover from the 

downturn—for example, with high concentrations of distressed 

mortgage borrowers or homeowners with underwater mortgages— 

in your experience in the market, are there strategies to break the 

cycle of home price decline? What more can be done? 

A.1. Only a few markets across the country are currently experiencing declining prices, but tepid price growth has been an issue 

in more places. Price growth has been the defining difference between markets that were underwater, but have since restored equity and those that have not. Price growth is driven by demand relative to supply. This demand is driven by economic growth and job 

creation. In recent years, single family investors have also played 

an important role in supplementing demand, but have also removed affordable inventory for first time buyers in many areas of 

the country. 

Q.2. As many of you noted in your testimony, the share of homeowners with negative or low equity on their homes has been improving, but it’s still elevated and the rebound has not been uniform. In cities like Newark, Paterson, and Elizabeth in my State 

of New Jersey, for example, the underwater rates are much higher 

than the national average—and many in my State who were already struggling from the financial crisis then had to deal with an 

additional major hit from Superstorm Sandy. 

Can you please explain the impact on the housing market of 

homeowners who are still struggling with high debt burdens, particularly at the entry-level segment of the market? 

A.2. Negative equity puts homeowners in a precarious situation, as 

it makes refinancing difficult, weakens owners’ incentives, and 

84 

makes owners more susceptible to events like an illness or loss of 

income/job that could push them into foreclosure. 

In addition, owners in negative equity are less likely to trade-up, 

which in turn constrains the supply of available homes for the next 

generation of first-time or trade-up buyers. This trend has exacerbated inventory shortages in some local markets. 

Q.3. What is the impact for the broader economy of the continuing 

number of homeowners with distressed mortgages? To what extent 

are consumers still holding back spending because of outsized debt 

burdens? 

A.3. Rising home values can boost consumer spending through a 

‘‘housing wealth effect.’’ It stands to reason that falling values or 

negative equity can weigh on homeowners’ spending decisions. 

Thus, negative equity can impact regional economic performance 

through constrained consumer spending. 

Furthermore, the general negative equity environment creates 

uncertainty that weighs on consumers’ demand for housing, builders’ plans for construction, and lenders’ willingness to originate. In 

turn, this can retard spending and hiring decisions. 

Q.4. How can Federal programs like the Neighborhood Stabilization Program, borrower assistance programs like HAMP, HARP, 

and the Hardest Hit Fund be improved to spur the recovery in 

communities that are still struggling? 

A.4. While the Neighborhood Stabilization Program and Hardest 

Hit Funds have largely played out in the States and localities, the 

principles of neighborhood stabilization are valid as we pursue 

other initiatives such as the Neighborhood Stabilization Initiative 

(NSI) now underway in Detroit and Chicago through the Federal 

Housing Finance Agency. The Chicago Association of Realtors, for 

example, has demonstrated a strong record of achievement in helping Chicago meet its NSP goals through helping to design strategies that make maximum use of limited resources to bring neighborhoods back. 

Q.5. Several of you discussed the importance of extending tax relief 

for mortgage debt forgiveness. This is an issue about which I’ve 

heard a great deal from people in my State, where many homeowners are struggling not only from the financial crisis, but also 

from damage inflicted by Superstorm Sandy. And when they finally 

receive a lifeline to address mortgage debt they are unable to pay, 

they risk being hit with a tax bill on phantom income that may be 

many times in excess of the salary they make as, say, a teacher 

or other profession. 

Can you please describe why this tax relief is so important for 

families, communities, and the economy? 

A.5. Today, more than 5 million families remain in a home with 

a mortgage that is ‘‘underwater.’’ If they hit a hardship and cannot 

pay their mortgage, or have to move due to a new job and sell their 

home, it is quite a trial to go through some kind of workout or 

short sale process. And even if they are successful with this process, they learn they can be subject to paying income tax on ‘‘phantom income’’ from their forgiven mortgage debt. This can come 

85 

1Details of the Department of Justice lawsuit against Countrywide are available at http:// 

www.justice.gov/usao/cac/countrywide.html; details of the lawsuit against Wells Fargo are 

available at http://www.justice.gov/opa/pr/justice-department-reaches-settlement-wells-fargo-resulting-more-175-million-relief. 

along at the very worst time possible, as families in this situation 

are very often struggling financially. 

Unfortunately, the expiration of the tax provision that exempts 

this income from taxation encourages families to simply walk away 

and accept a foreclosure on their home. This harms families, neighborhoods and entire communities, and is contrary to every policy 

designed to keep people in their homes and prevent foreclosures. 

Extending the income tax exemption on mortgage debt forgiven 

in a short sale or a workout for principal residences provides homeowners with certainty, allows them to make reasoned decisions 

about their mortgage, and provides stability to our housing markets and communities. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN MENENDEZ FROM DEBORAH GOLDBERG 

Q.1. During the housing boom, some originators steered prime borrowers into subprime, exotic products. Can you please explain how 

the concentration of certain types of mortgage products or 

securitizations has affected a community’s recovery rate? 

A.1. The extent and nature of the steering that occurred during the 

boom is illustrated by several fair lending lawsuits brought by the 

U.S. Department of Justice against major mortgage lenders. Evidence presented in the lawsuits against Wells Fargo and Bank of 

America’s Countrywide unit, in particular, shows that these institutions placed thousands of African American and Latino borrowers 

who were qualified for prime loans into more expensive, riskier 

subprime mortgages. 1 These subprime products had multiple risky 

features that made the loans unsustainable. Among these were 

high interest rates, high fees, frequent adjustments to the interest 

rate after an initial 2 or 3 year period which created rapidly escalating monthly payments, and negative amortization. As interest 

rates increased, many of the borrowers with such loans were faced 

with mortgage payments that had grown to a level they could no 

longer afford. Negative amortization resulted in an increase in the 

unpaid principal balance, despite making timely payments, and left 

many borrowers owing more than their homes were worth. This 

was exacerbated by declining home values. Selling the home, a traditional exit strategy for troubled borrowers, was not possible for 

those who were underwater because the sale would not bring 

enough money to enable them to pay off the outstanding mortgage. 

Some borrowers sought loan modifications, but for a variety of reasons many were unable to obtain affordable modifications and 

wound up in foreclosure. Five million families have lost their 

homes to foreclosure since 2008. 

Residential segregation by race and ethnicity is widespread in 

this country. Thus, when African American and Latino borrowers 

were targeted for subprime and other exotic loans, the result was 

a concentration of such loans in communities of color, including 

high income communities of color such as Prince George’s County, 

86 

2 Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, ‘‘Higher-Priced Home Lending 

and the 2005 HMDA Data’’, Federal Reserve Bulletin, 2006, available at http:// 

www.federalreserve.gov/pubs/Bulletin/2006/hmda/bull06hmda.pdf, and ‘‘The 2006 HMDA 

data’’, Federal Reserve Bulletin, 2007, available at http://www.federalreserve.gov/pubs/bulletin/2007/pdf/hmda06final.pdf. 3Shantal Parris Riley, ‘‘The Housing Market Fallout Continues’’, Mid-Hudson Times, January 

13, 2015. Available at http://timesadmin.startlogic.com/wp/2015/01/the-housing-market-fallout-continues/. 4Federal Reserve Board, ‘‘The U.S. Housing Market: Current Conditions and Policy Considerations’’, January 4, 2012. 5Kochhar, Rakesh, Richard Fry, and Paul Taylor, ‘‘Twenty-to-One: Wealth Gaps Rise to 

Record Highs Between Whites, Blacks, Hispanics’’, Pew Research Center, July 26, 2011. Available at http://www.pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-betweenwhites-blacks-hispanics//. 6 Center for Responsible Lending, ‘‘2013 Update: The Spillover Effects of Foreclosures’’, August 19, 2013. Available at http://www.responsiblelending.org/mortgage-lending/research-analysis/2013-crl-research-update-foreclosure-spillover-effects-final-aug-19-docx.pdf. 7 ‘‘Dashed Dreams’’ a three-part series by Washington Post reporters Michael A. Fletcher, 

Kimbriell Kelly, John Sullivan, and Steven Rich, appeared on January 24–26, 2015. It is availMD. According to the Federal Reserve Board, in 2005–2006, African American borrowers were three times more likely and Latino 

borrowers were 2.5 times more likely to receive a subprime home 

purchase loan than similarly qualified white borrowers. Borrowers 

of color were also much more likely to receive subprime refinance 

loans. 2

Thus, while many neighborhoods have been affected by foreclosures, communities of color have been particularly hard hit due 

to the concentration in those communities of mortgage loans that 

were unsustainable from the outset. These foreclosures clearly have 

an enormous impact on the families who have lost their homes. 

They suffer significant financial losses, disruption to their lives and 

social networks, their children’s performance in school may be affected, and a host of other problems may ensue. 

However, the foreclosures also have a tremendous negative impact on the families who remain in the neighborhood. Perhaps most 

significant in terms of the implications for recovery is the financial 

impact they suffer as the result of a decline in the value of their 

homes. Research shows that foreclosures depress the value of nearby homes, and the effect is amplified when there are multiple nearby foreclosures. In Newburgh, NY, which has an estimated 600 vacant and abandoned properties, officials have estimated that each 

vacant and abandoned building reduces the value of surrounding 

properties by $7,000. According to their estimate, a group of 13 

such properties has reduced surrounding property values by 

$500,000. 3 Collectively, across the many communities hit hard by 

the crisis, this loss of wealth is enormous. At the height of the crisis, the Federal Reserve Board estimated that declining property 

values had cost Americans $7 trillion in lost wealth. 4 African 

American and Latino households, whose wealth is disproportionately tied up in home equity, suffered the greatest loss of wealth: 

53 percent and 66 percent respectively, according to research from 

the Pew Research Center. This compared to a 16 percent loss for 

white households. 5 The Center for Responsible Lending has esti- mated that the nearby foreclosures have drained $2.2 trillion in 

wealth from American homeowners, with half of that loss—$1.1 

trillion—lost by homeowners in communities of color. 6

This loss of wealth places both individual households and communities in a precarious position. As illustrated in the recent series 

in the Washington Post, ‘‘Dashed Dreams’’, 7 families whose mortVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
87 

able at http://www.washingtonpost.com/sf/investigative/2015/01/24/the-american-dreamshatters-in-prince-georges-county/. 

gages are underwater as the result of foreclosure-related drops in 

property values are stuck. Unless the loans are owned by Fannie 

Mae or Freddie Mac and therefore eligible for a refinance under the 

Federal Home Affordable Refinance Program (HARP), the homeowners are unable to refinance their mortgages to take advantage 

of lower interest rates because their homes are worth less than the 

amount of the mortgage. They are unable to move to take advantage of job opportunities elsewhere because they cannot sell their 

homes. They no longer have home equity that they can tap to pay 

for unexpected medical expenses, their children’s educations, or 

their own retirement. They are extremely vulnerable to any disruption of income or unanticipated expense, and if such events occur, 

these homeowners may find themselves facing foreclosure. The tremendous loss of wealth also means they are less likely to be able 

to pass wealth along to the next generation, leaving their children 

a step behind rather than being able to offer them a leg up. This 

loss of intergenerational wealth means that the foreclosure crisis 

will have very long-lasting effects in communities of color. 

At the community level, the effects of concentrated foreclosures 

are also felt in many ways. One is the increased burden on municipal resources to deal with the problems associated with vacant, 

abandoned homes. The Mid-Hudson Times story on Newburgh, NY, 

cited above, provides ample illustration of this problem. In Newburgh and many other places, city officials have been called on to 

perform a variety of duties on a more frequent basis than usual. 

These include cleaning out trash that is dumped on the premises 

of vacant homes, responding to criminal activity that takes place 

at those homes, putting out fires, boarding up or demolishing damaged and deteriorated properties that have become safety hazards, 

monitoring vacant properties on an ongoing basis, tracking down 

the parties responsible for upkeep, assessing fines for violations of 

city ordinances, and trying to collect those fines. All of these activities are expensive. At the same time, the concentrated foreclosures 

have brought down property values and reduced the in-flow of tax 

revenues that pay for these and other municipal services. This creates a drag on the community’s recovery. 

Q.2. As many of you noted in your testimony, the share of homeowners with negative or low equity on their homes has been improving, but it’s still elevated and the rebound has not been uniform. In cities like Newark, Paterson, and Elizabeth in my State 

of New Jersey, for example, the underwater rates are much higher 

than the national average—and many in my state who were already struggling from the financial crisis then had to deal with an 

additional major hit from Superstorm Sandy. 

Can you please explain the impact on the housing market of 

homeowners who are still struggling with high debt burdens, particularly at the entry-level segment of the market? 

A.2. As the Washington Post series cited above describes so clearly, 

homeowners who are burdened with high debt—whether they are 

underwater on their mortgages and struggling to make those payments; have high levels of student, medical or other debt; or both— 

88 

8Garrison, Trey, ‘‘Black Knight: Affordable Homes Lagging Behind in Price Recovery’’, 

HousingWire, January 12, 2015. 9See ‘‘Labor Force Statistics From the Current Population Survey, Table E-16, ‘Unemployment Rates by Age, Sex, Race, and Hispanic or Latino Ethnicity’ ’’, available at http:// 

www.bls.gov/web/empsit/cpseele16.htm. 

are vulnerable to foreclosure, unable to sell their homes, and unable to purchase other homes. Rather than contributing to a wellfunctioning housing market, they are kept on the sidelines and 

their exposure to foreclosure risk can contribute to the destabilization of the housing market. In many cases, they have had their 

home equity stripped away by abusive mortgage practices and declines in home values. This makes it difficult for them to sell their 

homes because they cannot sell for a high enough price to enable 

them to pay off the existing mortgage. The inability to sell their 

home means they cannot purchase another home, either to gain 

more space, relocate to pursue job opportunities, or for any other 

reason. Their high level of debt and lack of home equity also means 

that they may not be able to make major repairs to their homes, 

potentially undermining the home’s long term value. Nor can they 

make improvements to their homes, dampening the home improvement segment of the housing market with the jobs that it creates 

and its positive impact on housing values. 

Q.3. You testified that minority communities were especially hard 

hit and continue to face challenges in this regard. Can you please 

elaborate? 

A.3. As I stated in my testimony, communities of color were targeted for subprime and other unsustainable mortgage loans. These 

loans contributed to inflated housing prices in many of these neighborhoods, followed by a particularly large drop in housing prices 

when the bubble burst. According to Black Knight’s November 

Mortgage Monitor, in States that have been the slowest to recover 

from the housing crisis, price recovery for homes in the bottom 20 

percent in terms of value is lagging well behind that of homes in 

the top 20 percent. The report notes that, in California, properties 

in the top 20 percent price bracket are currently a little more than 

3 percent below their precrisis peak, compared to a 32 percent lag 

for homes in the bottom 20 percent price bracket. Similar patterns 

exist in other States, as well. 8

In NFHA’s work, we have observed that homes in communities 

of color tend to be priced lower than comparable homes in white 

communities. Based on the numbers above, it appears that the recovery is slowest is communities of color, and many homeowners of 

color may still be underwater on their mortgages, keeping them on 

precarious financial footing. This is likely exacerbated by the continuing high unemployment rates for people of color. According to 

the Bureau of Labor Statistics, at the end of 2014 the unemployment rate for whites 16 years of age and older was 4.6 percent. For 

Hispanics in the same age bracket, the rate was 6.5 percent and 

for African Americans it was 10.5 percent. 9 The combination of loss 

of income due to sustained unemployment and the fall-out from 

abusive mortgage practices creates particularly difficult challenges 

for these families. 

89 

Q.4. What is the impact for the broader economy of the continuing 

number of homeowners with distressed mortgages? To what extent 

are consumers still holding back spending because of outsized debt 

burdens? 

A.4. This excerpt from the Washington Post series cited above, 

‘‘Dashed Dreams’’, captures clearly the dilemma of homeowners 

who are underwater and struggling to keep up with their mortgage 

payments. It describes a family in Prince George’s County, MD, the 

Bryants. They bought a house in 2001 and later refinanced into a 

loan with terms that would no longer be permissible under the new 

Qualified Mortgage (QM) regulations. While the initial loan payments were affordable, the payments have more than doubled and 

the Bryants are struggling to keep up. Here is how the article described the impact of these unaffordable payments: 

The problem is not their income but their home. Once a 

source of wealth, it is now their biggest financial burden. 

The Bryants owe just over $560,000 on their house, which 

they estimate is worth about $80,000 less than that. Since 

they moved in 2001, their monthly payment has more than 

doubled to nearly $3,900 a month—a predicament that 

arose because of an ill-advised refinancing into a loan 

whose terms the Federal Government now deems predatory. 

The couple have never missed a mortgage payment. But 

now they are struggling to hold on. They have pulled their 

two preteen daughters out of private school. They bought 

inexpensive used cars. Instead of going on vacation last 

summer, they took the girls to Six Flags America, a nearby 

amusement park. They have little saved for college or retirement. 

Multiply this by thousands of homeowners who are in the same 

situation and it is clear that this ongoing fall-out from 

unsustainable mortgage lending continues to undermine the broader economic recovery. It underscores the need for continuing assistance to borrowers who are at risk of default and foreclosure, and 

the importance of making principal reduction available to those 

whose mortgages are both unsustainable and underwater. Freeing 

these families from the burden of outsized, unaffordable debt would 

not only restore their economic security, it would speed the country’s overall economic recovery and help ensure that it reaches 

those communities that were hardest hit by the crisis, including 

communities of color. 

Q.5. As you know, the Federal Housing Administration and GSEs, 

like many private sector entities, are responsible for managing inventories and have engaged in sales of nonperforming loans and 

foreclosed properties. What policies or practices should be applied 

to these assets to ensure that their disposition best helps families, 

neighborhoods, and the overall recovery? 

A.5. My testimony described the problems indentified through 

NFHA’s investigation into the management and marketing of foreclosed properties in communities of color as compared to other communities. That investigation focused on bank-controlled foreVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
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10 Chrisman, Rob, ‘‘Non-Performing Loan Market on Fire; Rates Back to June 2013 Levels but 

Production May Drag’’, Aug. 18, 2014, available at http://www.mortgagenewsdaily.com/channels/pipelinepress/08182014-interest-rates-mortgages.aspx. 11See U.S. Department of Housing and Urban Development, Office of Risk Management and 

Regulatory Affairs, Office of Evaluation, Reporting and Analysis Division, ‘‘FHA Single Family 

Loan Performance Trends: Credit Risk Report’’, December, 2014. Available at http://portal.hud.gov/hudportal/documents/huddoc?id=FHALPTlDec2014.pdf. 

closures. Some of these are managed by various banks for Fannie 

Mae, Freddie Mac, or FHA, and some for other investors. In some 

cases the bank is the trustee, and is not directly involved in the 

day to day management of the properties, but is ultimately responsible to ensure that they are properly maintained and marketed on 

behalf of the investors. NFHA’s investigation found that foreclosed 

properties in communities of color were much more likely to have 

multiple deficiencies, including unsecured doors and windows, 

holes in the structure, damaged or missing gutters and downspouts, accumulated trash and overgrown yards, and the like. 

These conditions depress the value of the individual home and the 

surrounding homes. They lower the municipalities’ revenues from 

property taxes at the same time as they increase the demand for 

municipal services such as police, fire, health care, and others. 

They create a host of health and safety problems for the community. 

NFHA’s report, which was attached to my testimony, outlines a 

series of policy recommendations to improve the maintenance and 

marketing of these properties and minimize their negative impact 

on the communities in which they are located. Freddie Mac has 

adopted many of these recommendations, and the benefits can be 

seen in the good condition of the foreclosed properties it owns. 

Some banks also have effective systems for managing their foreclosed properties, but many do not. FHA’s protocols require their 

asset managers to maintain the yards of FHA’s foreclosed properties, but prohibit them from making repairs to the structures 

themselves, which can result in deterioration of those properties. 

The lack of industrywide standards and strong oversight by the 

Federal regulators means that, in too many cases, foreclosed properties in communities of color are blighted, linger on the market too 

long, and end up in the hands of investors rather than owner-occupants. The Federal Housing Finance Agency, Fannie Mae, FHA, 

and many banks have not yet taken the necessary steps to institute 

the kind of REO management policies that will help ensure that 

communities of color are not left behind in the recovery from the 

foreclosure crisis. 

Similarly, Fannie Mae, Freddie Mac, and FHA all control sizeable portfolios of nonperforming loans. These are loans that are seriously delinquent but have not yet gone through foreclosure. The 

GSEs have some $100 billion of such loans between them, 10 and 

as of year-end 2014, FHA had more than 500,000 such loans. 11

From one perspective, these nonperforming loans are a drag on the 

balance sheets of FHA and the GSEs, and they have an interest 

in disposing of these loans in order to shore up their financial condition and protect American taxpayers. Experience to date suggests 

that there is considerable investor interest in the bulk purchase of 

these loans, which are being offered below par. 

91 

12 U.S. Department of Housing and Urban Development, Federal Housing Administration, 

‘‘Quarterly Report on FHA Single Family Loan Sales’’, available at http://portal.hud.gov/ 

hudportal/documents/huddoc?id=report082814.pdf. 

The disposition of these nonperforming loans has a broader impact, however. In addition to affecting the bottom line for FHA and 

the GSEs, the way they are handled also affects the homeowners 

who have been struggling to make their mortgage payments, the 

value of the surrounding homes, and the likelihood of default of 

other loans in those communities, some of which are also guaranteed or insured by FHA and the GSEs. Given these larger impacts, 

it makes sense to approach the disposition of these nonperforming 

loans with two goals: reducing potential losses and stabilizing communities. Both of these are of equal importance, and in order to accomplish both goals, both must be built into the design of the asset 

disposition programs. 

To date, FHA has taken modest steps toward this second goal in 

a small subset of the sales conducted through its Distressed Asset 

Stabilization Program, or DASP, launched in 2010. As FHA notes 

in the May 30, 2014, quarterly report on the program, its single 

family loan sales program, ‘‘maximizes recoveries to the MMI 

funds, reduces claims costs, minimizes the time that the assets are 

held by FHA, and helps keep borrowers—otherwise headed to foreclosure—in the home. The program also serves as part of FHA’s effort to target relief to areas experiencing high foreclosure activities. 

For purchasers, the program is an opportunity to acquire assets at 

competitive prices with the flexibility to service the assets while 

providing borrowers an opportunity to avoid costly foreclosures.’’ 12

In other words, FHA expects that the purchasers of the distressed 

loans, who have purchased the loans at a significant discount, have 

the financial incentive and opportunity to offer affordable loan 

modifications under terms not otherwise permitted by FHA regulations, such as principal reduction. The reports from the field mentioned below indicate that this objective is not being met. 

As of May 30, 2014, FHA had sold 71,231 loans through the 

DASP program, with an approximate aggregate unpaid principal 

balance of $12,263,325,938. Many of these loans are still unresolved. Of those where an outcome has been reached, 31 percent 

have gone through foreclosure, 35 percent have been sold to other 

investors and no information about their current status is available, and the remaining 34 percent have been resolved in a manner 

that avoided foreclosure. Eleven percent of the loans in this last 

category are reperforming, the rest have had short sales, deeds-inlieu or similar outcomes. In other words, this part of the program 

has had minimal success in helping homeowners save their homes. 

Beginning in 2012, FHA instituted the sale of so-called Neighborhood Stabilization Outcome (NSO) pools of loans. In these pools, 

the terms of the sale specify that, for at least 50 percent of the 

loans in each NSO pool, the investor must resolve the delinquency 

through one of a series of allowable nonforeclosure outcomes. 

Among these are reperformance, rental to a borrower, gift to a land 

bank, or payoff of the loan. As of May 30, 2014, FHA had sold 

17,828 loans with an approximate aggregate unpaid principal balance of $3,164,052,483 in NSO pools. The experience with these 

loans is more limited than with the national pools, both because of 

92 

their fewer numbers and the shorter time since the launch of the 

program. So far, however, the outcomes appear significantly more 

promising than those of the other sales. FHA has reported results 

on three of the NSO pools, and for those three, of the loans that 

have been resolved, 27.7 percent, 20.6 percent, and 17 percent respectively are reperforming, meaning that the borrower is once 

again making mortgage payments. These are substantially better 

outcomes than those achieved by the national pools. 

FHA should build on the early successes of the NSO pools to ensure that more of the borrowers in its defaulted loans are able to 

save their homes or otherwise avoid foreclosure. To accomplish 

this, it should adopt the following measures: 

• Ensure that loans are not sold through the DASP program before all required loss mitigation steps have been completed. 

There have been reports from housing counselors and borrowers’ attorneys in the field about clients who were in the 

middle of loss mitigation only to be told that their loans had 

been sold, were no longer FHA insured, and that their pending 

loan modification could not move forward. FHA should expand 

its oversight on this issue to confirm, prior to including a loan 

in the DASP pool, the accuracy of the servicers’ certification 

that they have complied with all loss mitigation requirements. 

In addition, FHA should conduct more extensive quality assurance on loans that will be included in DASP pools to ensure 

that servicers have completed the waterfall analysis required 

under FHA’s loss mitigation rules. Further, to aid FHA in its 

quality assurance protocol, before any loans are sold through 

the DASP program, the homeowners should receive a notice of 

the impending sale. The notice should inform them of the 

servicer’s determination that all FHA loss mitigation options 

have been exhausted and give them an opportunity to rebut 

the servicer’s certification, provide information about the process and the obligations of the servicer, and include an explanation of their rights. 

• Apply neighborhood stabilization requirements to all pools. The 

early experience with the NSO pools suggests that many more 

homeowners are able to save their homes when this program 

goal is made explicit. This outcome benefits benefit of the 

homeowner, the community and the investor. It is important to 

note that incorporating neighborhood stabilization outcome requirements into the program has not resulted in any negative 

impact on the price for which the loans were sold. In other 

words, there is no conflict between stabilizing neighborhoods 

and shoring up the FHA insurance fund. It makes sense, therefore, to adopt neighborhood stabilization requirements for all of 

the DASP pools. 

• Strengthen the requirements for neighborhood stabilization outcomes for loans sold through DASP. This should include setting 

out standards for what constitutes an affordable loan modification—including the use of principal reduction, and increasing 

the percentage of loans in any pool that should receive sustainable modifications. In cases where no modification is possible, 

the priorities should be selling the home to another owner-ocVerDate Nov 24 2008 11:48 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00096 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\12-09 INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET\HE
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cupant or making it available as affordable rental housing for 

low- and moderate-income households. 

• Take steps to make it possible for mission-driven communitybased organizations to purchase more loans through DASP. 

This may mean creating smaller pools that are more affordable 

for organizations with limited access to capital, including in 

the bidder qualifications a requirement that the bidder demonstrate capacity and commitment to meeting neighborhood 

stabilization objectives, and helping to develop additional 

sources of capital available to qualified community-based organizations for the purchase of nonperforming loans. 

• Increase program transparency. To facilitate oversight and accountability, FHA should collect and publish information on 

program outcomes on a regular basis. This should include loanlevel data on borrower demographics, the geographic location 

of the loans, and more detail on post-sale resolutions. In particular, it is important to capture information on the current 

status of the loans and any changes to the loan terms, including interest rate reductions, principal forgiveness or forbearance and term extensions, along with post-modification debt-toincome ratios. There have been reports from the field of DASP 

borrowers being required to become current before being eligible for a loan modification, being required to make an upfront 

payment of thousands of dollars, and being offered modifications that do not result in affordable monthly payments. Such 

modifications are not affordable or sustainable, and having 

more detailed information about the terms that borrowers are 

being offered will help to weed out such practices. In addition, 

it is important to track any differences in the modifications offered or outcomes achieved based on borrower characteristics 

or geographic location in order to ensure that the program is 

operating in a fair and nondiscriminatory fashion. 

As noted in my testimony, Freddie Mac conducted one sale of 

nonperforming loans this past summer. To date, Fannie Mae has 

not followed suit, but between them, the GSEs have some $100 billion of nonperforming loans on their books and indications are that 

they are likely to conduct more sales in the future. Little information is available publicly about the details of the Freddie Mac sale, 

but it does not appear that the terms of the sale incorporated any 

of the principals described above. If there are further sales of nonperforming loans by either GSE, they should adopt the kinds of 

neighborhood stabilization goals outlined here. 

Q.6. Several of you discussed the importance of extending tax relief 

for mortgage debt forgiveness. This is an issue about which I’ve 

heard a great deal from people in my State, where many homeowners are struggling not only from the financial crisis, but also 

from damage inflicted by Superstorm Sandy. And when they finally 

receive a lifeline to address mortgage debt they are unable to pay, 

they risk being hit with a tax bill on phantom income that may be 

many times in excess of the salary they make as, say, a teacher 

or other profession. 

Can you please describe why this tax relief is so important for 

families, communities, and the economy? 

94 

A.6. Mortgage debt forgiveness is particularly important for creating sustainable mortgages for families who are not only delinquent on their mortgages or at imminent risk of default, but who 

are also underwater (that is, they owe more on their mortgages 

than their homes are worth). These families are highly vulnerable 

financially. A loan modification that reduces their interest rate 

and/or mortgage payment may not be enough to restore their financial stability. As long as they remain underwater, they remain at 

risk of default and foreclosure if they face future financial difficulties, such as the loss of a job, reduction in hours or income, or medical or other unexpected expenses. A family in this situation cannot 

sell its home to move for a job opportunity, to get a bigger house 

as the family grows or for any other reason. Nor can it sell its 

home to get out from under the debt burden, because the home 

cannot be sold at a price high enough to pay off the existing mortgage. Such families face extremely limited geographic and economic 

mobility. For them, a loan modification that includes principal forgiveness is a lifeline that can secure their financial stability and 

economic mobility. However, if they incur significant tax liability 

on that principal forgiveness, it may be impossible for them to afford to accept the loan modification. They remain vulnerable and 

financially stressed. 

Communities with significant numbers of families in this situation may have a harder time recovering from the recession. The 

economy also suffers when such families and communities are economically constrained. 

Congress has an important role to play in solving this problem. 

To date, it has only provided limited and temporary relief from tax 

liability associated with principal forgiveness obtained through 

2014. More families would be able to take advantage of loan modification offers that include principal forgiveness, and thereby regain their financial footing, if the relief were made permanent, and 

if it applied to all mortgage debt rather than only debt that was 

incurred to ‘‘buy, build, or substantially improve’’ the borrower’s 

principal residence. This limited definition of debt in the Mortgage 

Forgiveness Debt Relief Act does not include loan modifications on 

investment properties, such as those offered in the Home Affordable Modification Program (HAMP Tier 2). Nor does it cover all refinance debt for a primary residence—debt that was often incurred 

in predatory loan transactions. In addition, most homeowners are 

not aware that debt forgiven in a short sale, deed in lieu of foreclosure, or an uncollected deficiency after foreclosure can also give 

rise to potential taxable income. Thus, the foreclosure prevention 

options that can help stabilize communities, such as modifications, 

short sales and deeds in lieu of foreclosure that involve principal 

forgiveness, can ultimately harm borrowers who believe they have 

made a fresh start but later learn that they face a significant income tax liability despite having resolved the mortgage matter. 

Congress should move quickly to pass the Act on a permanent 

basis, expanding the range of loans to which it applies, as described above.