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48–672 PDF 2009

PROMOTING BANK LIQUIDITY AND 

LENDING THROUGH DEPOSIT 

INSURANCE, HOPE FOR HOMEOWNERS, 

AND OTHER ENHANCEMENTS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

FEBRUARY 3, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–1 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

February 3, 2009 .............................................................................................. 1 

Appendix: 

February 3, 2009 .............................................................................................. 71 

WITNESSES 

TUESDAY, FEBRUARY 3, 2009 

Bovenzi, John F., Deputy to the Chairman and Chief Operating Officer, 

Federal Deposit Insurance Corporation ............................................................. 8 

Burns, Meg, Director, Office of Single Family Program Development, U.S. 

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

Calhoun, Michael, President and Chief Operating Officer, Center for Responsible Lending ........................................................................................................ 52 

Courson, John A., President and Chief Executive Officer, Mortgage Bankers 

Association (MBA) ................................................................................................ 50 

Menzies, R. Michael S., Sr., President and Chief Executive Officer, Easton 

Bank and Trust Company, on behalf of the Independent Community Bankers of America (ICBA) .......................................................................................... 47 

Morrison, Edward R., J.D., Ph.D., Professor of Law, Columbia Law School ...... 54 

Staudt, Mrs. Robin P. .............................................................................................. 53 

Taylor, John, President and Chief Executive Officer, National Community 

Reinvestment Coalition (NCRC) ......................................................................... 49 

Yingling, Edward L., President and Chief Executive Officer, American Bankers Association (ABA) .......................................................................................... 46 

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 72 

Peters, Hon. Gary C. ........................................................................................ 74 

Bovenzi, John F. ............................................................................................... 76 

Burns, Meg ........................................................................................................ 93 

Calhoun, Michael .............................................................................................. 98 

Courson, John A. .............................................................................................. 110 

Menzies, R. Michael S., Sr. .............................................................................. 120 

Morrison, Edward R. ........................................................................................ 127 

Staudt, Mrs. Robin P. ....................................................................................... 179 

Taylor, John ...................................................................................................... 181 

Yingling, Edward L. ......................................................................................... 191 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Neugebauer, Hon. Randy: 

Letter from Brian D. Montgomery, U.S. Department of Housing and 

Urban Development ...................................................................................... 201 

(1) 

PROMOTING BANK LIQUIDITY AND 

LENDING THROUGH DEPOSIT 

INSURANCE, HOPE FOR HOMEOWNERS, 

AND OTHER ENHANCEMENTS 

Tuesday, February 3, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 2:03 p.m., in room 

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

Members present: Representatives Frank, Maloney, Watt, Sherman, Meeks, Moore of Kansas, Capuano, Clay, McCarthy of New 

York, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Bean, 

Ellison, Perlmutter, Donnelly, Foster, Carson, Minnick, Adler, Kilroy, Driehaus, Grayson, Himes, Peters; Bachus, Castle, Royce, 

Manzullo, Biggert, Capito, Hensarling, Neugebauer, Marchant, 

Posey, Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. Let me just explain; procedurally, this is the first meeting of the committee as a 

committee because it is our first opportunity to meet since we were 

formally organized. I know there was some concern about what we 

were doing, but we did not get all the relevant decisions made by 

the leaderships until last Tuesday. We were a little bit handicapped by the fact that last week we had the Republican gathering, 

and this week we will have the Democratic gathering, so we are 

trying to begin the regular order of procedure and we will be following it from here on in now that we are so constituted. 

Just again, procedurally, my understanding from the Democratic 

leadership is that the subject matters we are dealing with today, 

and which I hope we will mark-up tomorrow, will come to the Floor 

not as part of the stimulus and not as part of the omnibus, but as 

a free standing bill, probably joined at the Rules Committee with 

the bankruptcy bill over which we have no jurisdiction. We are 

dealing with several things in our discretion. Members will have an 

opportunity to offer amendments with regard to that. My own view 

is—and I have been a supporter of the bankruptcy—but over and 

above that, there are things we need to do. 

Even the most ardent supporters of changing the bankruptcy law 

can’t think that bankruptcy is fun for everybody and it is something that very much ought to be avoided. What we are talking 

about today are ways to avoid that. HOPE for Homeowners came 

out of this committee and we passed it last year. We didn’t do it 

2 

well. I acknowledge that and it has to be corrected. We were, at 

the time, being told that we were being too lax and there would 

be too much spending and the Senate even tightened it up further. 

We tightened it up to the point where it does not function very 

well. 

Late last year, the HUD officials and the Bush Administration 

charged with administering it, Secretary Preston and FHA Commissioner Montgomery, made some criticisms of the program. This 

is largely in response to those criticisms which seem to us to have 

a great deal of validity, although they weren’t fun to read. We have 

asked the oversight board that we set up in the HOPE for Homeowners to make it better in some other ways. They have done so 

to the extent that they can, but there are some statutory changes 

that have to be made. 

Secondly, we have—even if that is available—the problem with 

the servicers. Over a year ago—I don’t remember when—the gentleman from Delaware first raised this with us, but he called attention to the fact that even where you had servicers willing to make 

these adjustments, the threat of lawsuits could deter them. We 

can’t totally wipe out vested rights. We can’t wipe them out at all. 

But you can clarify them. We passed this once before, but it didn’t 

pass the Senate. We have the language of the gentleman from 

Delaware—again, these are the same thing—making HOPE for 

Homeowners work better or work at all. Removing a disincentive 

from the servicers is very important. Those are two very important 

pieces. Whether or not you do bankruptcy, I think they ought to be 

done. It will be another committee’s decision and the Floor ultimately about bankruptcy. But it does seem to me we should be 

doing the most that we can to give alternatives. 

I do note and welcome the Federal Reserve’s decision recently to 

mandate foreclosure reduction pursuant to the legislative authority 

in the first TARP bill, which said that where the Federal Government owned mortgages, they should try to avoid foreclosures. The 

Federal Reserve has just announced they are going to do this with 

regard to all the mortgages they own, some of which they got 

through Bear Stearns and elsewhere. We know the FDIC has been 

working on this under the leadership of Sheila Bair, the Chair of 

the Committee. I try to avoid saying ‘‘Chair Bair’’ whenever possible. 

And the Secretary of the Treasury has informed me that pursuant to a number of members and the legislation we adopted, 

though it didn’t become law, that he is preparing what I hope will 

be a uniform Federal Government-wide approach to foreclosures. 

This is part of what is needed. There is also in this—one of the 

things that I think was fairly overwhelmingly supported by the 

members last year in the TARP bill was the extension of the deposit insurance limits. And this makes them permanent. It does 

seem to me and I think to others of us a bad idea to sort of do 

those on a yo-yo basis. We have people who, if we don’t change the 

law, bought a CD that was covered by deposit insurance when they 

bought it but which will be uncovered before it expired as deposit 

insurance goes back down. I don’t think any of us want to see that 

happen. 

3 

The FDIC has also asked for increased borrowing authority, not, 

I want to stress, because of any imminent need. We don’t want to 

add to any panic, but out of a kind of prudent decision to be ready 

for this. There is a further issue that may be coming up at some 

point. I want to warn members that there is nothing in the legislation now. One proposal that has been floating around is that there 

may be a requirement that if you want to make this work, you will 

have to pay the servicer something. 

Servicers were not set up originally to do this. We believe there 

is authority in the first TARP to do this. Some of the lawyers in 

the Federal Government have told people that there isn’t. That is 

being discussed. If there were to be a definitive decision that there 

wouldn’t be, I think if there is no such authority, than I think we 

should get to it. 

Now, I will recognize the gentleman from Texas for whatever 

time. How much? 4 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. Thank you for holding this hearing. And I certainly respect the chairman for admitting that there have been shortcomings in the HOPE for Homeowners Program and that frankly, it is not working as designed. 

Many of us have a fear, though, that HOPE for Homeowners may 

turn out to be hopelessness for taxpayers if we don’t make other 

changes to the legislation. Many of us are concerned, and I look forward to hearing the testimony from the FDIC of, frankly, the FDIC 

has run one of the few government insurance funds that has actually remained in the black. 

But another number of provisions in this legislation I am afraid 

could put increasing pressure on that deposit fund and I would not 

want to see that happen. Also undoubtedly, the legislation was designed to make HOPE for Homeowners more attractive to struggling homeowners, but as it does, I am afraid, again, it may ensure 

greater pain for struggling taxpayers, provisions to eliminate the 

mortgage debt to income ratio, raising the loan to value by doing 

away with the upfront 30 percent premium, are all provisions that 

again may bring more struggling homeowners to the table but may 

turn taxpayers into struggling taxpayers as it happens. 

I think it is important also to note that as we look at the effectiveness of the program, the Congressional Budget Office, which is 

headed by a Democrat, said at least 40 percent of the homeowners 

who refinance under such programs will still default. OCC has said 

that 50 percent of the mortgages that have been modified, at least 

the last data I have through the first quarter of 2008, they defaulted yet again. The Congressional Budget Office has opined— 

and I don’t necessarily agree with them on every opinion that they 

render, but this is an office that has a recently appointed Democrat 

as its head and has said even with the changes, the program would 

help about 25,000 homeowners at a cost of millions, $675 million 

according to the Congressional Budget Office. 

President Obama, in his inaugural address, promised to ‘‘eliminate government programs that were not performing.’’ I might suggest to the President that he has a good case example here that 

he may want to a take a hard look at. Again, I feel that unfortunately the legislation may rest on a shaky foundation, one of which 

4 

is an assumption that homeowners don’t have an opportunity to refinance. 

We know already through the HOPE NOW Program you have 

had about 21⁄2 million voluntary workouts. And again, we know it 

is quite costly to the lender to have to go through the foreclosure 

process. Most wish to avoid it wherever possible. If they view that 

a borrower has a financial pulse, they want to be able to do something to help keep them in that home. And like the chairman, I 

would like to add my voice to recognizing the gentleman from Delaware for his leadership in helping elucidate to the committee the 

principle that there was legislation necessary to help servicers get 

over legal hurdles to make sure that we didn’t have legal impediments to refinancings. 

There are other options. We believe in foreclosure mitigation, but 

the best foreclosure mitigation is preservation of a job, creation of 

more jobs, increasing take-home pay, and more investment 

throughout the economy. With that, Mr. Chairman, I yield back the 

balance of my time. 

The CHAIRMAN. The gentleman from Massachusetts is recognized 

for 3 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Chairman, I think 

that the legislation before us is very good. I have some concerns 

about a few aspects of it. And I would like to actually—I am looking forward to hearing from the FDIC as to why they think they 

might need unlimited access to capital. I understand the desire and 

I support the desire to increase the limit to $100 billion. It makes 

sense. Maybe some other number makes sense. But unlimited—I 

think I need a little bit more than just a request and say, well, just 

in case. 

I think we need a little bit more than that. I would also like to 

hear at some point what the FDIC thinks about its own liquidity. 

Right now everything seems fine. But honestly, with some of the 

problems we have read about with some of the major banks, particularly Citi, I for one am getting a little concerned that you may 

be called on and you may not be in the black in a matter of moments if something bad happens there. As far as whether this bill 

is the be-all and end-all, I don’t think anybody is putting it forward 

that way. 

I think this is one of the many bills we are trying to do to get 

the Federal Government into the business of helping individual 

homeowners. And we all recognize that this is not the silver bullet, 

but this is one more step in the right direction. And I find it hard 

to believe that anybody could criticize something that is saving 

even admittedly 60 percent of the homes it is trying to save. If I 

was one of those 60 percent, I would certainly be happy. And if I 

was one of those 60 percent that were being walked away on with 

no other proposal being put forward, I would certainly be unhappy. 

I think that the Federal Government has an obligation to society, 

not to individual homeowners, but to society to take some action 

to stem the tide of mortgage foreclosures. Because when our neighbors lose their homes—if it is one or two, it is one thing. But when 

it is tens of thousands and millions of people, it is bad for society, 

now matter how you look at it. There is probably not a silver bullet; I don’t think what is before us is one, but it is a step in the 

5 

right direction. I think that some action is better than no action. 

I look forward to being able to pass these bills and hopefully get 

them enacted. And I am looking forward to the new Administration 

actually getting it in place, some of the promises we have heard for 

real action as opposed to what we saw over the last 4 months 

which thus far has been virtually nothing. With that, I yield back 

the remainder of my time. 

The CHAIRMAN. The gentleman from California, Mr. Royce, for 3 

minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. Just looking at the au- thorization, $300 billion for the HOPE for Homeowners Program, 

a government-designed plan here that just has not worked out all 

that well. I think we have had an underwhelming 25 borrowers so 

far. We had hoped for 400,000. But I guess what bothers me most 

about combining this with a bill that passed out of the Judiciary 

Committee is this: There is increasing speculation that a big part 

of the problem is the flight of capital out of the banking industry. 

So it is somewhat ironic that we are discussing promotion of 

bank liquidity today, trying to get the idea that has to be addressed. While we are restricting the flow of capital, we are discouraging lenders in our beleaguered housing sector and we are 

doing that by the very measure that is going to be combined with 

this bill on the House Floor. I am just going to voice my objections 

to that bankruptcy cramdown provision that is moving through 

Congress because if the ultimate objective of this committee and 

this Chamber is to see a recovery in the housing industry, we have 

to do what we can do to encourage capital back into the system, 

not force it out of the system. The consequences of enacting a bill 

like this would fall hardest on those frankly who hope to buy a 

home in the future. Because if markets logically respond by setting 

mortgage interest rates closer to those, for example, that would be 

auto loans or credit cards which with this change would probably 

happen in the market according to the economists, you would have 

a bankruptcy judges changing the way they approach this. 

You know, bankruptcy judges now are free to reduce amounts 

owed on many types of consumer debt. But for mortgages, there is 

this ironclad requirement to pay off the loan and it is precisely as 

Justice John Paul Stevens said, because of the importance of this 

principle. And in Nobleman v. American Savings Bank, he explained that favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market. And that is what we are about to reverse by our interference 

in that process this week as we combine these 2 bills. Those that 

may see the recent reversal of Citigroup’s position on this provision 

is a sign that these arguments are no longer relevant, I think, 

should, as I said last week, remember that the significant steps 

over there taken by regulators, reaching into the day-to-day operation of Citigroup obviously are having an effect on setting policy 

over at Citigroup. It is exactly what happens when you have government intrusion into the economic system. You end up, frankly, 

with getting players in the economic system not making decisions 

on the basis of markets but on the basis of political pull and that 

is a problem for our system and it is going to be a problem for our 

recovery if we don’t recognize it. Thank you, Mr. Chairman. 

6 

The CHAIRMAN. The gentleman from Texas, Mr. Green, for 2 

minutes. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Chairman, I would 

like to compliment you on these pieces of legislation. I think they 

are exceedingly important. Obviously, we need to look at the deposit insurance, since H.R. 786 does so in terms of making what 

is now temporary a permanent circumstance and H.R. 787 deals 

with the HOPE for Homeowners Program. I would like to associate 

myself with the comments that you made with reference to this 

piece of legislation. But I would like to focus, if I may, on H.R. 788, 

which deals with the safe harbor provision for mortgage servicers 

who engage in loan modifications. I think that this piece of legislation has a lot of potential, I am interested in the way it has been 

fashioned because I can see that someone has put a lot of thought 

into it. It seems to deal with those loans wherein there is a default 

or wherein default is reasonably foreseeable. That makes a lot of 

sense. 

We not only will help those who are already in a crisis circumstance, but those who may be moving towards a crisis. And 

then, of course, the property has to be owner occupied for H.R. 788 

to apply. But the thing that I am exceedingly interested in is the 

notion that the modification, the anticipated recovery on that modification, when it exceeds the anticipated recovery on a foreclosure, 

then the modification becomes an acceptable remedy. I think that 

there are many loans and many circumstances wherein the modification will exceed—the value of the modification, the net present 

value, will exceed the value that we will acquire by way of foreclosure. 

And I do recall from our hearings that we have had servicers 

who have given us indications that they have some consternation 

about making these modifications. When they may not—based on 

the liability. I thank you and I yield back, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Illinois, for 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. And thank you for 

holding this hearing. I have been back in the district and had the 

opportunity to meet with a lot of different groups from builders to 

mortgage originators to home builders and actually citizens, and 

community bankers, and I am hearing a lot of frustration by all of 

these groups. If we look at what the Economic Stabilization Act of 

2008 was to create—to allow the Secretary of the Treasury to use— 

be used to restore liquidity and stability to the financial system, I 

think we are finding that—is there really stability and is there 

really liquidity. I have heard frustration from the community bankers saying that they sense a dual policy on the one hand, regulators are encouraging banks to lend, but during examinations, the 

bank examiners are cracking down, forcing writedowns on performing loans and discouraging increased lending from smaller institutions. Even though they have plenty of capital and liquidity, 

they aren’t going to lend for fear of aggressive examinations. 

From home builders we are hearing that they are able—they 

have homes and condos to sell, people arrive and the severe restrictions that have been put on the loan make it so that the buyers 

walk away, saying maybe they can find something better. It is too 

restrictive and the question of whether there is a secondary loan 

7 

or whatever. And the home builders can’t even build more houses. 

They have to have just a few there. The other thing I hear from 

mortgage professionals is that living in an area that really is above 

the loan limits in FHA, that there is not the loans there for people 

that have—need too high of a loan. So I hope we look at these 

issues in this hearing. 

The CHAIRMAN. The gentleman from Georgia, Mr. Scott, for 1 

minute. 

Mr. SCOTT. Thank you, Mr. Chairman. Thank you for this hearing. I think that bank liquidity and lending are certainly the major 

issue we are definitely faced with and I am certainly interested in 

the regulatory changes. I know they are necessary, but I am also 

interested to hear the opinions of the expansion of the FDIC program, as well as the progress that the HOPE NOW Alliance has 

made in helping American homeowners modify their payments and 

help with foreclosure. And while we have to address the loss of the 

investors, we have still have to be vigilant as to not forget the little 

guy in this and do what we can to help him, the little guy who is 

tied up in the housing crisis. So I am hoping to hear more detail 

about the risk of a prolonged housing slump, what the FDIC and 

HOPE for Homeowners Program will have in the foreclosure mitigation. And I yield back. Thank you, sir. 

The CHAIRMAN. The gentleman from Delaware for 2 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. Like everybody else 

here, I am very concerned about the mortgage foreclosure process 

that is going on in this country. And I, for one, feel that it is going 

to worsen as we see what has happened at Macy’s, Caterpillar, 

Pfizer, you name it, in recent weeks. I think we are moving into 

more of a middle-class America situation, away from just the 

subprime circumstances. For that reason, we have to be concerned 

about this. And I am also concerned that the programs haven’t 

worked very well and statistically that people who have been close 

to the foreclosure process, regardless of how they are bailed out of 

it, are most likely the ones to fall back into it at some later point 

too. There are a lot of concerns. 

I am very pleased and I appreciate Chairman Frank and Mr. 

Hensarling mentioning the provision in last year’s Housing and 

Economic Recovery Act to extend liability provisions for loan 

servicers to modify loans, which I sponsored. This was part of a bill 

introduced by Mr. Kanjorski and me, intended as a tool to assist 

borrowers facing foreclosure. Unfortunately, with this provision in 

the statute, I am not convinced the troubled loans have been modified at the rates we expected. For this reason, I am pleased to join 

Chairman Frank and Mr. Kanjorski to expand on the original proposal by offering this safe harbor liability protection to anyone who 

engages in loan modification regardless of the original service 

agreement as long as they act in a manner consistent with the 

homeowner emergency relief act. This expansion also requires 

servicers who engage in modification to report these activities to 

Treasury. 

It is my hope this expansion will encourage servicers to revisit 

the conditions of a problematic mortgage and encourage them to restructure the loans so more Americans may avoid foreclosure. And 

with that, I yield back my time, Mr. Chairman. 

8 

The CHAIRMAN. I thank the members. We will now begin with 

our witnesses. We have two witnesses, and I appreciate the two 

agencies providing them for us. We have represented here the FHA 

and the FDIC and we will begin with Mr. Bovenzi on behalf of the 

FDIC. 

STATEMENT OF JOHN F. BOVENZI, DEPUTY TO THE CHAIRMAN AND CHIEF OPERATING OFFICER, FEDERAL DEPOSIT 

INSURANCE CORPORATION 

Mr. BOVENZI. Chairman Frank, Ranking Member Bachus, and 

members of the committee, I appreciate the opportunity to testify 

today on behalf of the FDIC. As you know, asset quality deterioration, especially amongst residential mortgages, played a large role 

in triggering the current crisis. Declining asset values have reduced bank capital levels, which, in turn, has reduced their ability 

to lend. However, it is also true that a lack of liquidity among 

banks has also impacted their ability to lend. Liquidity is a key 

component in returning the economy to a condition where it can 

support normal economic activity and future economic growth. And 

deposits, significantly FDIC-insured deposits, are a key source of 

bank liquidity. 

As you know, the FDIC has implemented the Temporary Liquidity Guarantee Program to help stabilize the funding structure of financial institutions and expand their funding base to support the 

extension of new credit. The program has had a positive impact. 

There has been a high level of participation and we are seeing significantly reduced credit spreads for participants. The FDIC’s action to establish this program was authorized under the systemic 

risk exception of the FDIC Improvement Act of 1991. Participating 

institutions pay fees to offset the FDIC’s risk exposure. If losses 

should occur, the FDIC would cover those losses through a special 

systemic risk assessment. 

However, under current law, the FDIC’s authority to assess premiums extends only to insured depository institutions. Recent actions taken under the systemic risk authority have directly and indirectly benefited entities beyond insured depository institutions, 

such as large holding companies, nonbank affiliates, as well as 

shareholders and subordinated creditors of these organizations. 

We support amending current law to allow us to impose systemic 

risk special assessments on the range of entities that benefit from 

a systemic action, rather than just insure depository institutions. 

It seems only fair that those who receive the benefit should pay the 

cost. 

Another important way the FDIC can help foster greater liquidity is to ensure a strong and flexible deposit insurance system. 

Since the creation of the FDIC during the Great Depression, deposit insurance has played a crucial role in maintaining the stability of the banking system. By protecting deposits, the FDIC insures the security of the most important source of funding available to insured depository institutions, funds that can be lent to 

businesses and consumers to support and promote economic activity. As part of our contingency planning, the FDIC recommends 

that Congress provide additional support for our deposit insurance 

guarantee by increasing our existing $30 billion statutory line of 

9 

credit to $100 billion. Assets in the banking industry have tripled 

since 1991, the last time our borrowing authority was adjusted. We 

believe it would be appropriate to adjust the line of credit proportionately to ensure that the public has no confusion or doubt about 

the government’s continued commitment to protect their insured 

deposits. The FDIC is committed to maintaining liquidity and stability in the financial system in times of economic uncertainty. The 

deposit insurance guarantee plays a vital role in maintaining consumer confidence. The adjustments to the FDIC assessment in borrowing authority that I have described would ensure that the FDIC 

is fully prepared to meet any contingency. 

In closing, the FDIC will continue to work with Congress to ensure the banking system is able to support economic activity in 

these difficult times. Thank you. 

[The prepared statement of Mr. Bovenzi can be found on page 76 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Bovenzi. 

Next we will hear from Meg Burns, who is the Director of the 

Office of Single Family Program Development at HUD. Ms. Burns. 

STATEMENT OF MEG BURNS, DIRECTOR, OFFICE OF SINGLE 

FAMILY PROGRAM DEVELOPMENT, U.S. DEPARTMENT OF 

HOUSING AND URBAN DEVELOPMENT 

Ms. BURNS. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to speak 

today about your proposal to modify the HOPE for Homeowners 

Program. My name is Meg Burns, and I am the Director of Single 

Family Program Development for the Federal Housing Administration. I am here representing the Secretary of HUD, Shaun Donovan. This past August, I was appointed to serve as the Executive 

Director of the HOPE for Homeowners board. As you know, the 

board is composed of designees from HUD, Treasury, the FDIC, 

and the Federal Reserve. 

All of us at HUD welcome and applaud your decision to make 

modifications to the HOPE for Homeowners Program. As you are 

well aware, the initial program data clearly indicate that changes 

are not only appropriate but necessary. Furthermore, changes are 

needed as quickly as possible. To date, FHA has insured no loans 

under the program. Lenders have taken 451 applications and 25 

loans have closed. 

To put these figures in perspective, according to the Congressional Budget Office’s original projection, FHA should have insured 

approximately 40,000 loans by this point in time. That said, FHA 

supports program modifications such as those proposed in H.R. 

787. Your proposals cut to the heart of the problems with the program, overly restrictive eligibility standards and extremely high 

costs to consumers. We believe that elimination of a number of the 

eligibility criteria could result in significant program uptake. The 

program restrictions have proven to be more and more challenging 

as economic conditions have worsened. The March affordability 

test, in particular, prevents families who have suffered recent financial hardship from participating in the program. 

The proposals to reduce consumer costs are equally worthy. In 

particular, HUD agrees that the shared appreciation feature has 

10 

been very problematic. The way the existing law is written, borrowers are being asked to pay the Federal Government for the benefit of program participation in an amount that is likely to exceed 

the principal write down they received. Today there is no dollar cap 

or time limitation and the borrower can only pay off the shared appreciation mortgage by selling the home. 

FHA also appreciates and welcomes the proposed language requiring the HOPE for Homeowners Program to be run in accordance with existing FHA practices. Every minor deviation from 

FHA’s existing standards requires large lenders to train staff, modify systems, and establish new quality control measures. Any disparities within the loan operations of a large institution require a 

great deal of time and resources, both of which hinder program uptake and certainly slow lender implementation timeframes. 

While HUD generally supports all of the proposed legislative 

changes, there are a few that could benefit from some additional 

consideration, such as the proposal to eliminate the upfront mortgage insurance premium altogether. As an insurance company with 

a $300 billion insurance authorization to run this program, an upfront premium reduces the subsidy costs from potential foreclosures 

and claims. The upfront premium helps to defray the subsidy expenses in a way that stretches the insurance authority further, enabling FHA to help more families in need. HUD agrees that the upfront and annual fees are too high, but some amount of upfront 

premium income should be considered. 

Another area worthy of additional discussion is the effect of the 

mandatory principal write down on subordinate lienholders. While 

FHA supports the overarching congressional objective to reduce the 

borrower’s debt load to create sustainability, it may be possible to 

accomplish this objective with a stronger incentive for subordinate 

lienholders. 

Finally, the lending community has expressed tremendous concern that the shared appreciation and shared equity mortgages, 

which serve as contracts between HOPE for Homeowners, borrowers, and HUD may violate State laws. While elimination of the 

shared appreciation mortgage would certainly fix one part of the 

problem, other changes such as the provision that creates Federal 

preemption of State laws for the shared equity mortgages could be 

a simple way to address the problem. 

Again, I would like to thank you for the opportunity to participate in today’s hearing on the proposed legislation, H.R. 787, and 

commend the committee for your proposed changes. I would be 

happy to answer any questions you may have. 

[The prepared statement of Ms. Burns can be found on page 93 

of the appendix.] 

The CHAIRMAN. Thank you. 

First, Mr. Bovenzi, let me, I think, reassure your people, we are 

talking here about increasing the borrowing authority. Is there any 

imminent crisis? 

Mr. BOVENZI. No. We do not expect to use the money, but at the 

same time, we believe it is just prudent contingency planning. Nobody knows the future in its entirety and it has been many, many 

years since that borrowing authority has been increased. So just to 

keep pace— 

11 

The CHAIRMAN. I appreciate that. Maybe a certain amount is inevitable. You run into this dilemma that if you anticipate trouble 

that is not on the horizon, you may be making people think you 

see something bad coming. If you don’t, you are in trouble. So let 

us be very clear. We are going to increase the borrowing authority 

solely as a matter of general prudence. It is not that anybody has 

any bad news coming or that there is any expectation that it is 

going to be needed right away. And I hope that will diminish the 

alarmism that our journalistic friends will convey. I have no hope 

that it will entirely extinguish it. 

Ms. Burns, you talked about greater incentives for the second 

lienholders. Would you elaborate on that? 

Ms. BURNS. Sure. Today under the program, the subordinate 

lienholders are entitled to an immediate payment of 3 to 4 cents 

on the dollar to release their liens so that a borrower can participate in the program. Clearly, we have heard from some in the lending industry that perhaps 3 to 4 cents is not enough for them to 

make that decision. And frankly, the mechanism that we would use 

to make that payment is rather clumsy today. There is no direct 

way for FHA to pay off those— 

The CHAIRMAN. Is that something that can be corrected? Is it 

that you have some oversight board discretion and others have legislative? Take the second part, the clumsiness. Does that have to 

be corrected legislatively or could that be done through action? 

Ms. BURNS. The amount of the payment? 

The CHAIRMAN. Well, you said the second is the— 

Ms. BURNS. The clumsiness. No, unfortunately that would require a legislative fix. 

The CHAIRMAN. Part of it is, I do believe, some of the funding 

here could legitimately come from the TARP. There was always 

that intention, that the TARP would be used that way. When the 

Federal Reserve, in fact, announced its plans to reduce foreclosures, they cited authority that was given to them, in fact, the 

directive that was given to them and other Federal agencies in the 

original TARP. If we were able to carry out the new plan, what is 

the response that the high redefault rate is such that it doesn’t 

even pay to try? 

Ms. BURNS. Well, it is funny. I was listening to Mr. Hensarling 

cite some statistics on the redefault rates. And to be perfectly honest, while we did have to use some assumptions of claim rates and 

redefault rates with this particular program, we in FHA have 

never experienced such high redefault rates with our own loss mitigation program. Our redefault rate is about 30 percent, but our 

claim rate, our ultimate claim rate is substantially lower; about 90 

percent of borrowers who do go through our loss mitigation program do ultimately sustain homeownership. 

The CHAIRMAN. Is that partly because you think the FHA has 

greater experience with borrowers? I mean, that is what you do. 

The others— 

Ms. BURNS. I think it is twofold. One is that we do have very aggressive loss mitigation practices. But on the other hand, it is also 

the difference between a modification program and a refinance program. I mean, these are refinances that will require full underwriting. 

12 

The CHAIRMAN. A very important point; I am glad you made 

that. And, look, redefaults are going to happen. But to the extent 

that you are actually modifying the terms of the loan, you are less 

likely to get the redefault than if you are simply rearranging the 

finances in that way. 

I think that is very important, that we don’t neglect the possibility of redefault. We also have tried working with you to think 

of ways to reduce the redefault obviously to the extent that you are 

doing principal reduction and people may get greater equity, but 

that is also a factor. 

And let me just ask the last question, because we were concerned 

and some people have raised the issue that we don’t want the people who were getting subprime loans who shouldn’t have been 

granted elsewhere now will wind up at the FHA. Are you confident—is the FHA sufficiently staffed at this point? Do you have 

the technology to do the screening that is required? We want to be 

on the record that this is no automatic mandate to the FHA if this 

is still an independent decision by the FHA as to whether to give 

the guarantee to any individual or not. Can you handle it? 

Ms. BURNS. Absolutely. And the beauty of the HOPE for Homeowners Program is we actually have authority to hire. We actually 

have been hiring additional staff to support this particular program 

and we had the authority to use some of the HOPE bonds for technology changes, so we have spent money making technology upgrades. 

The CHAIRMAN. The last point I would just make is this, and we 

are worried about extra people being handled. To the extent that 

the program doesn’t attract a lot of borrowers, you wouldn’t hire a 

lot of people. I think the hiring would be demand driven. We have 

been joined by the ranking member, and I now recognize the ranking member of the full committee for 5 minutes. 

Mr. BACHUS. Thank you. Mr. Bovenzi, press reports are indicating that the Obama Administration is ready to announce the 

creation of a so-called bad bank or an aggregator bank to buy toxic 

or troubled assets. They also indicate the FDIC will be the operator 

of that facility or that entity. Are you aware of those discussions? 

Mr. BOVENZI. I am aware certainly of general discussions about 

what kind of program ought to be put in place and certainly that 

there would be an option for the FDIC to be involved dependent 

upon which approach the Administration took. 

Mr. BACHUS. Sure. Let me ask you this just from your knowledge 

and jury experience. One question that I have asked and I don’t 

have an answer to, would these be mortgage-related assets or 

would they include credit swap derivatives or junk bonds, the 

FDIC, do you have any insight on that as to what type assets or 

whether there be restrictions or do you have any suggestions in 

that regard? 

Mr. BOVENZI. Well, I can’t speak to what type of program the Administration may come out with when it is ready to announce a 

plan. I do know from the FDIC’s experience in handling failed 

banks that we have dealt certainly with residential mortgages and 

other types of assets as well. 

13 

Mr. BACHUS. Mainly mortgage banked securities and home mortgages and—how about with credit swap derivatives, do you have 

experience with those as an agency? 

Mr. BOVENZI. In some bank failures we have dealt with, there 

have been some derivative contracts. When I was out at IndyMac 

Federal bank, there were certainly contracts that had to be 

unwound. And, certainly in our supervisory authority in looking at 

banks, we see banks engaging in derivative activity as well. 

Mr. BACHUS. One major concern of mine is how do you price 

these assets? From the FDIC standpoint, if you give market value 

as opposed to holding maturity value or current distressed value, 

it doesn’t help the banks, does it? So what—can you give us any 

insight into what actually the price would be that would be paid? 

Mr. BOVENZI. Certainly the most difficult question to determine 

in setting up any kind of structure that would take assets off a 

bank’s balance sheet is what is the appropriate price to pay. In determining what is fair value in a market where there is very little 

liquidity and few buyers, market price may have a big liquidity discount. To determine what is fair—what an asset would pay if held 

to maturity—is the greatest challenge of such an operation. 

Mr. BACHUS. Have there been any serious discussions of what 

that price might be? 

Mr. BOVENZI. Certainly there have been discussions about how to 

determine price and it is a big issue to deal with. 

Mr. BACHUS. Did mark to market regulations come up during 

those discussions? 

Mr. BOVENZI. Well, I can’t speak to all the specifics of discussions, but in general, how one would determine an appropriate 

price would be an important consideration. 

Mr. BACHUS. I will just close by saying that obviously the higher 

the price that is paid, the more exposure to the taxpayers, and the 

FDIC would have to balance helping the banks with protecting the 

shareholders. Do you agree that would be a pretty complex procedure? 

Mr. BOVENZI. Yes. 

Mr. BACHUS. All right. Ms. Burns, HOPE for Homeowners, despite I think all of us our hoping that it would work, has not 

worked very well at all, and it hasn’t worked as it was intended. 

Do you have anything to offer on why that is the case and how it 

could be changed? 

Ms. BURNS. Well, actually I think the bill does go a long way towards moving us in the right direction—the eligibility criteria that 

were set out in the original law clearly were intended to serve the 

right purpose, but have served as barriers to participation. We 

have heard that again and again both from counseling organizations and lending institutions and secondarily the cost to the consumer, the cost of the product today is very, very high between the 

shared appreciation mortgage, the shared equity mortgage, the upfront mortgage insurance premium and the very high annual insurance premium. 

It is the kind of product that people need to think twice about 

before they just decide to take it on. So I think the bill addresses 

both of those concerns. 

The CHAIRMAN. The gentleman from North Carolina. 

14 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. Bovenzi, let me zero in for a minute or 2 on the Temporary 

Liquidity Guarantee Program and who is taking advantage of that 

program, who you do not have the authority to make pay for that 

advantage. Can you tell us who that is? 

Mr. BOVENZI. The Temporary Liquidity Guarantee Program was 

made available to banks, thrifts, bank holding companies, and 

thrift holding companies. Today, nearly 7,100 institutions have entered the part of the program that deals with guaranteeing senior 

unsecured debt issuance and probably close to 7,000 banks have 

entered the program that guarantees non-interest-bearing transaction accounts. 

Mr. WATT. So everybody in the program who is not an FDIC insured institution is taking advantage of it for free? 

Mr. BOVENZI. Well, no. We charge user fees for entrance into the 

program. So if you are a bank holding company or thrift holding 

company or bank or thrift, you pay a fee to get that guarantee. 

What the systemic risk authority does for us is if we end up with 

greater defaults than we have collected in revenue, under the law, 

we would have a systemic risk assessment to get the extra revenue 

from the industry to cover our cost. But right now we could only 

assess the banks and the thrifts. We could not assess the bank 

holding companies and the thrift holding companies. 

Mr. WATT. So how do you have the authority to set up a program 

without the companion authority to make that kind of assessment? 

Mr. BOVENZI. Because under the systemic risk authority, it requires 2⁄3 of the FDIC Board, 2⁄3 of the Federal Reserve Board, and 

the Secretary of the Treasury to agree. 

Mr. WATT. And that authority comes from where? 

Mr. BOVENZI. It comes from Congress. 

Mr. WATT. Why would that not—that authority not imply the authority to do whatever is necessary to— 

Mr. BOVENZI. The authority, as it stands right now, for making 

a systemic risk determination, is one part of legislation we have 

from Congress, but to assess additional premiums is a different 

part of legislation that focuses only on banks and thrifts, rather 

than the holding companies, and we think it would be fair and prudent to be able to assess the same group that is receiving the benefits from that. 

Mr. WATT. That is a contingent assessment. You say they paid 

for it as long as it works. But if it fails and you had to assess, you 

wouldn’t have the authority to assess more? 

Mr. BOVENZI. That is right. However, we are charging. 

Mr. WATT. So it is working as long as it works? How is it working? 

Mr. BOVENZI. Well, it is working very well at the moment. We 

don’t use the deposit insurance fund. We don’t use taxpayer funds. 

We charge those who benefit from the guarantee of issuing that 

debt or getting the noninterest bearing transaction accounts insured. We charge those fees now and we will guarantee debt 3 

years out into the future. So if by chance defaults in the future exceeded the revenue that we have generated from those user fees, 

we need a mechanism to charge additional money to those who 

benefited from that guarantee. 

15 

Mr. WATT. So is there sufficient value, in your opinion, for this 

authority to be made permanent as opposed to just 3 years out, or 

you haven’t made that kind of assessment yet? 

Mr. BOVENZI. This particular program is a temporary program. 

Mr. WATT. I understand that. I am trying to find out whether it 

is valuable enough— 

Mr. BOVENZI. It is a permanent authority. So having a permanent change that would match up the assessments with the authority would be appropriate, I think. 

Mr. WATT. And you think it would be a worthwhile program to 

extend beyond these emergency circumstances? 

Mr. BOVENZI. The systemic risk authority is only used in emergency situations, not used in a normal healthy economy or a stable 

situation. So any discussion about extending the program would 

depend upon an evaluation of whether we were still in a difficult 

financial period. 

Mr. WATT. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. Ms. Burns, on page 

3 of your testimony, you indicate that HUD agrees that the shared 

appreciation feature has been very problematic, though notes that 

any reduction to shared appreciation will increase the cost to the 

government. Has HUD estimated what those increased costs will 

be? 

Ms. BURNS. No. 

Mr. HENSARLING. In the previous paragraph in your testimony, 

you say that, ‘‘HOPE for Homeowners is a product that is intended 

to help as many families as possible.’’ I suppose that only subject 

to the $300 billion ceiling theoretically you could help every family 

in America that was having trouble paying their mortgage. But in 

this balance between how much more taxpayers will have to bear 

versus struggling homeowners who may receive taxpayer assistance, what is the balance that HUD is seeking? 

Ms. BURNS. Well, I mean, I guess I would answer the question 

by saying the beauty of the program is that those who would be 

eligible to participate are those who have sufficient income to repay 

on the HOPE for Homeowners mortgage. There are appropriate underwriting standards to make a determination about those who are 

appropriate to receive the benefit. So it certainly can’t help every 

single person in trouble, but it is a program that is available to 

help those who have sufficient income and whose debt obligations 

are not so great that they can’t qualify for this mortgage product. 

Mr. HENSARLING. But under the new amended legislation, aren’t 

you, by definition, decreasing the underwriting standards to hopefully have an uptick in participation rate, and one could argue that 

is what led us into the problem that we have in the first place? Are 

we not still trying to sustain people in homes that unfortunately 

they cannot afford? 

Ms. BURNS. I would say no. I would say that the eligibility criteria that are proposed for elimination in 787 are not underwriting 

criteria. They are factors that will restrict people from being eligible to even attempt to qualify for the program. So the qualifying 

standards would not change under the program. It simply opens 

the door to make sure that more people are eligible. So for examVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
16 

ple, the affordability measure that exists in the law today says as 

of March 1, 2008, a borrower must have a mortgage payment to income ratio of 31 percent. 

There are people who have sustained some type of loss to their 

income since March 1, 2008. As of March 1st, they were able to 

make their mortgage payments; since March 1st, they can’t. Those 

people aren’t eligible to participate in HOPE for Homeowners. I 

don’t think that was the original intent of Congress. So those are 

the kind of eligibility restrictions that to me appear to be the subject of the proposed changes. And I think that is appropriate. 

Mr. HENSARLING. It appears this legislation will be tied to other 

legislation coming out of the Judiciary Committee dealing with 

what is popularly known as ‘‘cramdown,’’ which gives bankruptcy 

judges the unilateral ability to, among other things, write down 

principal. What impact might that have on the FHA insurance 

fund and the ability to attract lenders to participate in the program? 

Ms. BURNS. Well, I am actually in the program development side 

of our business in FHA. That is really a servicing issue. And I understand that the Obama Administration is looking at that issue 

and they will be formulating a position on that issue. But I am not 

an expert on that subject. 

Mr. HENSARLING. Mr. Bovenzi, when the FDIC became the conservator for IndyMac and started a new streamlined loan modification program that some see as a template for other legislation, can 

you share with me how the universe of potential homeowners, 

struggling homeowners were chosen, why the particular universe, 

and what the redefault rate has been? 

Mr. BOVENZI. Sure. The program was set up to be of benefit to 

both the borrower and for IndyMac. As a condition, it has to be 

shown that modifying the mortgage would maximize the return for 

IndyMac compared to the cost of foreclosure, so we started by looking at loans that were 60 or more days past due. There would be 

a certain percentage of those that would go into foreclosure and a 

certain percentage that would ultimately be able to pay. So we 

would look at a formula to determine whether this person’s mortgage can be reduced enough to make it affordable and sustainable 

for them and still provide a greater present value than would be 

obtained through foreclosure. 

It is a fairly detailed model to run through. Not everybody is 

going to qualify. If you don’t have a job, and your income has 

dropped very low, then it is not going to be sustainable or affordable, and you won’t get the modification. The program is designed 

to do two things: maximize net present value for the institution; 

and be affordable and sustainable for the borrower. In terms of redefault rate, it is a little early, so we don’t have sufficient experience at this point. They are very low. 

Mr. WATT. [presiding] Mr. Meeks is recognized for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. Mr. Bovenzi, I just want 

to follow up briefly so that I make sure I understand about the 

TLPG program, that it works in emergency situations. It seems as 

though it is working currently, is what you are saying. Does that 

extend because one of the huge problems that we are having all 

across America right now with credit tightening up as it is, small 

17 

businesses who employ a large number of Americans throughout 

and I know just recently in my district, in talking to some small 

business people because they don’t have liquidity, they are beginning to lay off individuals, one or two, and it is having a real effect. 

I was wondering whether or not the use of the TLPG program is 

at all something that can help with liquidity for the small business 

man and woman in America? 

Mr. BOVENZI. Yes. And this is the primary purpose of the program. Banks in the current market, where the marketplace is very 

unsure of the value of their assets are unable to borrow money that 

they in turn could lend to businesses and consumers. So this program is to provide liquidity for banks to help them lend. And we 

think it has been working very well. Their borrowing spreads have 

come down significantly because of the FDIC guarantee. They are 

paying the fees for that guarantee. It is structured where they can 

continue to issue senior unsecured debt up through mid-year 2009 

for maturities of up to 3 years beyond that, so that they can borrow 

longer term funds to keep lending going for a longer period of time. 

So we think it has been a very helpful program and that is the purpose, to help businesses and consumers obtain loans. 

Mr. MEEKS. Now, I think Mr. Watt asked the question about 

making it permanent, but you said that it would be up to someone 

else. I thought that I did read somewhere that the 3-year temporary period would be extended, or was thought about being extended, to 10 years. Could you tell me something about that? 

Mr. BOVENZI. The authority to extend the program would have 

to be taken up by the FDIC Board of Directors directly. Yes, discussions have taken place about whether it should be extended for a 

longer period of time. And so we would see if indeed that will happen. It is being evaluated. 

Mr. MEEKS. Would you recommend it? 

Mr. BOVENZI. It depends on continued market conditions as to 

how long you have such a program in place. Ultimately we want 

to get back to the point where we don’t need these kind of government guarantees in place. So when the market is stabilizing, then 

we really do need to exit from this kind of business. 

Mr. MEEKS. Thank you. 

Ms. Burns, let me ask you this question in regards to HUD and 

dealing with some of these FHA loans. I understand that currently 

mortgage brokers can receive what we call yield spread premiums, 

which seems to be directing individuals or borrowers into higher interest rates than they may ordinarily qualify for. Do you believe 

that at least for FHA loans that we should eliminate these yield 

spread premiums so that we can drive the costs further down? 

Ms. BURNS. To me, that is an issue that is much broader than 

FHA. We don’t regulate the interest rates on our loans. But the 

question about yield spread premiums has certainly been discussed 

in a broader context, certainly in the context of RESPA reform. So 

in the context of FHA, I would say FHA shouldn’t be treated differently from any other type of loan-type product, and if somebody 

wanted to address that question in a broader context, that would 

not be a question for us. 

Mr. MEEKS. But you would be part of this conversation, wouldn’t 

you, surely? Because when we are talking about FHA, as to FedVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
18 

eral housing, you want to make sure people get the lowest loan or 

interest rate that they qualify for, they are not steered in another 

direction simply because someone else is making money. But definitely shouldn’t FHA be a part of that dialogue? 

Ms. BURNS. Oh, FHA could be part of that dialogue. And there 

are other regulatory bodies within the Department of Housing and 

Urban Development who would certainly be a part of that conversation. 

Mr. MEEKS. What about originators? Oftentimes I have found 

that you have had originators who—maybe you have an FHA loan 

that doesn’t, and they don’t comply with FHA requirements. In 

that regards, if someone or an originator has— 

Mr. WATT. [presiding] The gentleman’s time has expired. I am 

sorry, the chairman is following a pretty busy schedule, and there 

are a lot of people. 

Mr. MEEKS. Thank you. I understand, in order to be fair to everyone else. 

Mr. WATT. Mr. Castle for 5 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Let me ask you a question, Mr. Bovenzi. H.R. 786 gives the FDIC 

the authority to take out loans from the Treasury of up to $100 billion at any one time, and to go beyond that limit with the Treasury 

Secretary’s approval. What limits are there on the FDIC’s ability 

to use these funds, and could you fund the bad bank facility with 

this money? 

Mr. BOVENZI. The FDIC’s intent in asking for this greater authority is not to use it for a bad bank. The request came in before 

such discussion. The purpose is to cover losses. If the FDIC fund 

were to become insolvent for a temporary period, until it could assess the industry to replenish the fund, it would be a source of borrowing for the agency to cover that shortfall until such time as the 

industry paid the money to repay the U.S. Treasury and the taxpayer. 

Mr. CASTLE. Thank you. 

Ms. Burns, you are a very bright lady and appear to be a very 

nice lady. You are in charge of one of the most failed programs we 

have had in a long time, and I can’t quite figure out why. I am not 

blaming you when I say this, obviously. Maybe we should blame us 

as the ones who drafted it, I don’t know. But I am concerned about 

that and concerned about what the future is. 

If we make some of the changes with legislation, and you have 

already gone through some meetings and made some changes yourselves, and yet I think the total loans are 25 that have been revamped as a result of this program. I am concerned we are wasting 

money at this point. In other words, we would be better focusing 

on a different direction altogether. 

I saw some statistic here that even with these changes, CBO, the 

Congressional Budget Office, now predicts the program will help a 

mere 25,000 borrowers. Originally it was 400,000 borrowers. So 

this is clearly not doing what we hoped it would do. 

My question is, first of all, do you feel we can amp those numbers up somewhat? And perhaps, first or secondly, I would be interested to hear you restate—you stated in both answers to questions 

and in your original testimony exactly what the real blocks are as 

19 

far as you are concerned. I heard some of the cost issues or whatever. But if you could sort of give us a 1, 2, 3, 4, 5, I would appreciate that, as best you can. 

Ms. BURNS. Sure. There were a lot of questions embedded in your 

single question, so let me actually start with, do I think the program could be revamped and improved and made to work? Absolutely. And I also think it is critically important that we have a refinance product available; modifications are fine and good and certainly help some subset of the borrowers who are in trouble, but 

a refinance product has a different place in the toolkit. And today 

we have no refinance product available to borrowers who are delinquent on their existing mortgages. 

So I do think it is critically important that we either fix the 

HOPE for Homeowners program or provide the Federal Housing 

Administration with some other type of legislative authority to 

offer a product to borrowers who are in trouble. 

That said, as I mentioned previously, some of the eligibility criteria that are associated with the program today are very problematic. The affordability measure that I mentioned earlier, the March 

1, 2008, affordability measure, has proven to be very problematic. 

Mr. CASTLE. You are doing this in the order of how you see the 

importance? 

Ms. BURNS. Well, no, I was not doing it in quite that order, to 

tell you the truth. But there are other eligibility criteria that are 

barriers to participation. It is obvious when you actually read the 

original piece of legislation. There was a requirement that the borrower certify that they did not intentionally default on the previous 

mortgage. That is really problematic only in the sense that technically everybody intentionally defaults. You are making a very 

hard decision as a consumer when you are in trouble, do I pay my 

gas bill and keep the heat on so that my kids are warm, or do I 

make my mortgage payment? And there are a lot of people who feel 

very uncomfortable certifying that they did not intentionally default on their previous mortgage. 

There was a provision that said that borrowers must not have 

provided false or misleading information to qualify for the previous 

mortgage. There are certainly a number of people who have stated 

income loans who either knowingly or perhaps unintentionally provided false income information to qualify for that previous mortgage. These people aren’t eligible to participate. 

There is a provision in the law that says the borrower cannot default on the first payment on the HOPE for Homeowners loan. We 

believe the intent of Congress was good: You were all trying to protect FHA from lenders dumping nonperforming loans on the FHA 

insurance fund. Great intent, but it really scares away lenders. 

They say, gosh, if there is any chance that a consumer might miss 

that first payment, it is not somebody I want to serve. 

So there are all of these eligibility criteria listed in the law that 

are very specific and very narrow that have proven to be problematic; and perhaps an easier way to write a piece of legislation is 

more broadly, more generally to give authority to the Federal 

Housing Administration to design the program and then to— 

The CHAIRMAN. Time has expired. 

The gentleman from Massachusetts. 

20 

Mr. CAPUANO. Thank you. 

I realize all the difficulties we have, and we are trying to fix 

those, and I appreciate your efforts, but when I see a title that 

says, ‘‘Office of Single Family Program Development,’’ I always 

have to ask one question: the definition of single family. I live in, 

own, and occupy a two-family home. Am I covered? 

Ms. BURNS. Yes, you are. And we recognize that the original policy reflected a very narrow interpretation of the original legislation, 

and that has been fixed. I am sure that that is what you are referring to. 

Mr. CAPUANO. It is. I knew the answer, but I wanted to hear it 

anyway. 

Ms. BURNS. Very good. 

Mr. CAPUANO. Mr. Bovenzi, I wanted to talk a little bit more 

about the FDIC. As I said earlier, I generally support this proposal. 

I would like to ask two questions. Number one, why is it that you 

think there is any need for you to have unlimited access to capital? 

I understand the $100 billion and am not worried about a specific 

number, but why would you suggest that we should simply say 

that it should be unlimited? 

Number two, I would like to have a little discussion on potential 

concerns I have for the FDIC in the near future. 

Mr. BOVENZI. Going from the $30 billion to $100 billion; the $30 

billion came about in 1991. 

Mr. CAPUANO. I understand that and accept the $100 billion. 

Mr. BOVENZI. And to go beyond that would require agreement by 

the Secretary of the Treasury and could only be done in consultation with this committee. 

Mr. CAPUANO. I understand, but why would you think that, after 

having been through what we have been through, that I or anyone 

in their right mind would want to say, you don’t ever have to come 

back to us again; go ahead, all you people in the Administration, 

just go in a closet and make a determination of how much money 

you want to print? 

Mr. BOVENZI. I would just say two things. One, the full faith and 

credit of the United States Government does stand behind the 

FDIC, and the public is dependent upon that full faith and credit. 

Any borrowing that the FDIC did from the U.S. Treasury would be 

paid back from assessments from the banking industry. 

Mr. CAPUANO. I understand all that, but that does not give me 

an argument as to why you need it. That simply tells me what happens. I understand the full faith and credits behind the FDIC. I 

like the FDIC, I think you do a good job, but I, for one, will never 

vote to give anybody another blank check. It won’t happen, ever. 

So I appreciate it, but you did not answer the question. 

The next thing I want to talk about, because I only have a few 

minutes, I am getting more and more concerned particularly when 

it comes to some of the large banks. We have one in particular— 

there are several, but one in particular stands out in all the news 

accounts—a year ago was worth $225 billion, and today it is worth 

$19 billion. That is after taking into account $45 billion of taxpayer 

money that is there. It is effectively underwater by $26 billion. If 

it was any other bank, you would have taken it by now. 

21 

What is going on? Should I be concerned? Should America be 

concerned? I know it is not going to happen tomorrow, but I have 

to tell you, that is a little disconcerting to me as a person who 

might have to vote to increase your borrowing way more than $100 

billion if this bank were to go under. 

Mr. BOVENZI. Well, certainly I understand your concern. And 

without talking about any particular banks— 

Mr. CAPUANO. I think it would not be very difficult to know who 

I am talking about. 

Mr. BOVENZI. Clearly the financial system has had extreme difficulty for some time now, and the U.S. Government has been taking every measure to address that situation and help improve that 

situation. And a number of very positive steps have been taken to 

help the situation, but we are not fully in the clear yet. 

Mr. CAPUANO. Wouldn’t my taxpayers be better served—it is 

their $45 billion that is sitting in this bank, their $26 billion of 

money that has already been lost on paper. Wouldn’t we be better 

served by having somebody who might understand that maybe they 

shouldn’t be buying jets, or paying out huge bonuses, or maybe 

they shouldn’t be paying $400 million to name a stadium; that 

maybe somebody who understood those things should be running 

those banks, this bank in particular, as opposed to the people who 

have gotten us into the problem? 

Mr. BOVENZI. I agree, it is important for banks that receive taxpayer assistance, even if that assistance is earning interest and 

being paid back, to understand that money is being brought forward to help stabilize the financial system, improve lending, and 

improve the economy. 

Mr. CAPUANO. Mr. Bovenzi, I voted for the TARP. I am happy I 

did. I am not happy with everything that has happened with it, but 

I think it was the right thing to do. I voted for the stimulus. I fear 

that I may be voting for additional assistance or additional bailouts 

for banks as a necessary item for the economy, not for an individual bank, but it is necessary. 

I am deeply concerned that my taxpayers may be asked to put 

good money after bad because the FDIC might be afraid to take action in a dramatic fashion, and I would ask you to ask your superiors to make sure they consider that. 

My time is up. 

The CHAIRMAN. The gentleman from Florida, Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

Mr. Bovenzi, I am trying to connect the dots, and my question 

is not as sophisticated as some of the others that have been asked 

of you, but it will help me get a little bit better handle and enable 

me to better explain some of the things that have happened to 

some of my folks back home. 

I would just like your take on a situation, and it is a realistic 

situation. It would be indiscreet to name names, I guess, you know, 

Countrywide. People having a house that has a $400,000 mortgage. 

I like the term somebody used: It has become a devalued asset, and 

the value of the house is probably about $200,000. And in the 

rough times, the rough storms at the beginning of this tough economy, one of the breadwinners was out of work for a while, and they 

got behind a couple of payments on their house. They got another 

22 

job, and were ready to make the payment, and the mortgage company said, no, we are not going to accept your payment unless you 

get caught up and pay us up in full. 

Now, help me understand when you are upside down, 50 percent 

in a piece of property and you are supposed to be trying to mitigate 

your loss, how in the world that can happen? 

Mr. BOVENZI. Well, I certainly don’t understand why something 

like that would happen. If you have a property that is worth 

$200,000 with a $400,000 mortgage going into foreclosure, you are 

not even going to get $200,000 after you go through all your expenses, so accepting some reduction from a borrower in such a circumstance certainly makes sense to me. It is the kind of program 

that the FDIC has supported—to have more affordable mortgages 

in situations where it works to the institution’s and the borrower’s 

benefit. 

I think maybe, as some of these events were developing, there 

were situations that weren’t handled by some institutions the way 

they should be. And I think all of us are trying to be very public 

about appropriate types of loan modifications that can help everyone in this situation, stabilize housing prices, help improve the 

economy, and help such borrowers. 

Mr. POSEY. And this is not—may I, Mr. Chairman? 

This is not an historic perspective I am telling you about, this 

is current. It almost seems like a malfeasance on the part of the 

lender here. I mean, what would you as a highest-ranking expert 

recommend, or how would you recommend we approach things like 

this? What do I tell the people? Is there a cause of action they can 

have? How about the people who are holding this paper, that they 

are obviously, clearly, willfully and knowingly jeopardizing for who 

knows what reason—I mean, we are not talking about mortgage 

modification, we are talking about common sense, accepting more 

money to pay down a mortgage that is in default which far exceeds 

the value of the property. 

Mr. BOVENZI. I would suggest that if there is a particular institution, that the individual or people speak to someone at a high 

enough level in the organization and bring it to their attention. 

Then if the facts are such that the modification is better than foreclosure, most institutions are saying that it is their policy today to 

do loan modifications where that improves value compared to foreclosures. So it could probably be addressed by bringing it to the attention of that organization. 

Mr. POSEY. I would suggest they go higher up the ladder. I respect and I admire these kids. They have shown me clearly how it 

would make sense to let their home go back and buy one next door 

in a short sale, because that is the kind of neighborhood that it is 

in right now. But the company just seems to play this crazy 

hardball. I don’t see any upside to it, and I was hoping you could 

give me insight, but you are just as frustrated by it as I am. 

The CHAIRMAN. Would the gentleman yield? How recently is 

that? Is that current? 

Mr. POSEY. Mr. Chairman, within the past year. Currently, that 

situation exists. 

The CHAIRMAN. It does exist currently? 

Mr. POSEY. As we speak. 

23 

The CHAIRMAN. Thank you. 

Mr. POSEY. I yield back. 

The CHAIRMAN. The gentleman from Missouri, Mr. Clay. 

Mr. CLAY. Thank you, Mr. Chairman. 

Ms. Burns, in your statement you mentioned that to date, HUD 

has insured no loans under the HOPE for Homeowners program, 

and that FHA-approved lenders have taken 451 applications, and 

25 loans have closed. You further stated that the CBO had originally projected that the program would assist 400,000 families over 

3 years, and that FHA should have already and should approximately 40,000 for these figures to be achieved. 

You have concluded that programmatic restrictions and high 

costs have contributed to low participation rates. Can you be more 

detailed and specific in explaining this and other remedies to the 

low participation rates that you think will work? 

Ms. BURNS. Well, sure, since I already listed out the eligibility 

restrictions that are very problematic, I will turn to the other side 

and talk about some of the costs to the consumer. 

The shared-appreciation mortgage in particular is of tremendous 

concern. As I mentioned in my testimony, it is very costly to a consumer. Moreover, the shared-appreciation mortgage and shared-equity mortgage are two financial instruments that the lending community is not familiar with. That complicates the program, and 

they both represent new costs to a consumer that are not familiar. 

So those two costs in addition to the annual premium in particular 

on this product we have heard are problematic. 

The annual premium is 11⁄2 percent. That is 3 times the standard 

FHA premium. The way you can understand how significant that 

cost is, is to envision it added onto the interest rate of the mortgage. And because this is a product that has a likely higher default 

and claim rate, the interest rate will be slightly higher. 

So let us say this is a product that has a 61⁄2 percent interest 

rate. When you add the 11⁄2 percent to it, that is an 8 percent interest rate. When you try to qualify a borrower for this product, and 

you have an 8 percent interest rate, and you are trying to get them 

under some debt ratios, you are trying to get them into a mortgagepayment-to-income ratio of, say, 31 percent and an overall household-debt-to-income ratio of 43 percent, the higher the interest 

rate, the harder it is to get the consumer into the product. 

Mr. CLAY. Let me ask you, on that point, then, do all of these 

potential borrowers belong in that category; is it based on a credit 

rating? Or why are they being pushed into these high loans? 

Ms. BURNS. Why is the interest rate slightly higher on a product 

like this? It really has to do with what the secondary market’s appetite is for the type of mortgage product. These are mortgages 

that do go into special Ginnie Mae pools, and they are a product 

that is intended for a borrower who already has a riskier credit 

profile. So they are subject to analytics by people on Wall Street, 

and people would say, you know, we expect to see these loans go 

bad at a higher rate. 

Mr. CLAY. Which was part of the problem of the whole housing 

crisis and the meltdown of mortgages, correct? I mean, steering 

people who probably qualified for conventional or prime rates into 

24 

subprime mortgages so that others could make money. Wasn’t this 

part of the problem? 

Ms. BURNS. Well, we in FHA would certainly— 

Mr. CLAY. And we are continuing it? 

Ms. BURNS. Well, no, I would disagree with that. We in FHA 

would agree that there were a number of consumers who took out 

subprime loans who certainly could have benefited from an FHA 

loan where they would have gotten prime rate financing or close 

to prime. But this particular product, the pricing is slightly higher 

than the market rate, but it is not like your subprime products of 

the past 5 years. 

Mr. CLAY. Okay. What are some of the obstacles that will continue to make it difficult for servicers or securitized loans to participate in the HOPE for Homeowners program? What can be done 

to make the program more effective? 

Ms. BURNS. Well, in my opinion, elimination of a number of the 

restrictive eligibility criteria and some consideration of some of the 

costs to the consumer. Really, to me, if we want the lending community to do the right thing, if we want people to take a loss to 

put borrowers into the HOPE for Homeowners program or some 

other type of refinance vehicle, we actually need to make it as easy 

as possible for them to do that and not set up barriers to entry. 

That is what we have with this product; that in trying to protect 

the American taxpayer and create a program that is fair, we actually created a number of barriers to participation. 

Mr. CLAY. Sure. I thank you for your response. I appreciate the 

insight. 

I yield back. 

The CHAIRMAN. The gentleman from Minnesota. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

Mr. Bovenzi, one of the concerns last fall when the FDIC limits 

were being discussed was the ability of the Deposit Insurance Fund 

to withstand the strain of potentially any bank failures that came 

up. I certainly believe we must make sure that Americans have 

trust in the deposits that are going into the FDIC-insured accounts. 

Do you have any concerns at all with extending the restoration 

plan or the reserve period for when the reserve ratio would drop 

from 5 years to 8 years as proposed in the legislation? 

Mr. BOVENZI. I think if Congress were to go forward and make permanent the deposit insurance level at $250,000, it does add exposure to the FDIC funds, so we would need to be able to charge 

premiums to the industry to help restore a balance to the level of 

the Deposit Insurance Fund. And it would seem appropriate to 

have that kind of flexibility, in going from 5 to 8 years, to be able 

to balance how quickly to bring the revenue in with the demands 

being placed on the banking industry at that time. So that flexibility, to me, seems to go together with the $250,000; 

if one were to be put in, it would be appropriate to have the other. 

Mr. PAULSEN. And obviously if the assessments were going to go 

up or potentially double, as I think has been discussed at the 

FDIC, is there some concern about the liquidity, having the ability 

for liquidity in the market as well? 

Mr. BOVENZI. Yes. And those are very careful deliberations on 

what is the appropriate premium level to charge the banking inVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
25 

dustry and how quickly to replenish the Deposit Insurance Fund 

back to its normal level, given those competing objectives that we 

have at this time. 

Mr. PAULSEN. And, Ms. Burns, I know you mentioned you really 

believe that removing these barriers and making it much easier to 

participate in the HOPE for Homeowners program is going to make 

it successful. I guess my question is, do you have any sense of what 

the timeline might be to actually see some real numbers come in? 

Because when you see the forecast of 400,000 homes that are potentially users to actually use the program, and only 25 actually 

do—what sort of timeline do you think as Members we will actually 

be able to say it was successful and actually worked if we remove 

the barriers? 

Ms. BURNS. Well, it is a very interesting question. One of the 

questions back would be how quickly could the piece of legislation 

be passed, and how similar would the program look to an existing 

FHA product? The closer it is to an existing FHA program, the 

easier it is to implement for everyone; for FHA, obviously, but also 

for the lending community. 

One of things that makes the program so difficult today is that 

it has so many distinct requirements and these new financial instruments that require the lending community to set up new protocols and procedures. If we had a product that was similar to the 

existing FHA programs, the lending community could adopt it fairly quickly, easily modify systems in a minor sort of way, and we 

could get it up and running within, I would say, a matter of weeks. 

So I would certainly advise that we think along those lines, making 

the new product as similar to existing FHA programs as possible. 

Mr. PAULSEN. I yield back, Mr. Chairman. 

The CHAIRMAN. Let me just ask you, how close would the program be to an existing FHA project if we passed the bill as proposed? 

Ms. BURNS. It would certainly be closer, but there are still some 

components that are different. For example, the shared-equity 

mortgage is certainly still different. 

The CHAIRMAN. Would we get rid of it here? 

Ms. BURNS. You would get rid of the shared-appreciation mortgage. 

The CHAIRMAN. If there are further proposals that could help us, 

please feel free to let us know what they are. There will be a markup tomorrow, but there will be a bill going to the Floor, a separate 

bill. 

The gentlewoman from New York, Mrs. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. I just want to follow up on something my colleagues have already brought up. When you read the 

paper about all those losing their jobs, and obviously they go on to 

unemployment, and a lot of these areas are in distressed areas already, what do you see out there as far as helping someone, or is 

there not going to be any help for those who have lost their job, 

unemployment, and now they are not going to be able to make 

their mortgage payments? I mean, we are going to probably see a 

lot more of these foreclosures coming in. 

The curiosity they also have is being that you have certainly the 

larger financial institutions, you have the larger banks, but you 

26 

also have these small community banks. Are there any estimates 

on who is out there on really making the lending to some of these 

customers? Is it the smaller community banks or the larger institutions? Do you have any statistics on that? 

Mr. BOVENZI. Well, first, to respond to the first part of your question, there are going to be some situations where loan modifications 

aren’t going to work, and if somebody has lost their job and has no 

income, then it is not going to be possible to have the appropriate 

type of loan modification. So there you need some different kind of 

package to help stimulate job creation in the economy. So I think 

loan modifications are very positive, but they are one piece of a 

package that needs some form of economic stimulus as well to help 

in this kind of economy. 

In terms of institutions doing the lending, we have put out guidance to the banks stating that we expect them to track how they 

are using government money toward lending, and our examiners 

will be checking that when they do their examinations. And we encouraged institutions to put it in public reports, so we will be gathering that information. But at this point in time, institution-specific information, in terms of who is doing more lending than others, we don’t have that at this point. 

Mrs. MCCARTHY OF NEW YORK. The problem is—and one of my 

colleagues—in my opinion, it is pretty radical, but maybe, you 

know, we are talking about the possibility of having thousands and 

thousands of families homeless. One of our colleagues suggested 

they break the law and stay in their home. But what is the solution going to be? We don’t have enough shelters for homeless families now. What are we going to do? 

Hopefully, the stimulus package will work. Let us face it, that 

will take time also. I think everybody needs to rethink what we are 

going to be doing with an awful lot of families on how we are going 

to make sure—you know, they are all paying their mortgage up to 

a certain point. So the banks are going to lose out on that, because 

no one is going to buy their home, most likely; keep the families 

in there; the economy comes back hopefully within the next year 

or so; renegotiate and pay a little bit extra for the year that you 

are out there. Or is that too much common sense? 

Mr. BOVENZI. I would just say you are right. People need to be 

thinking as broadly as possible in this situation as to what are the 

appropriate solutions, and it is going to take more than one type 

of action. I don’t have a specific answer for you, but the government needs to be addressing this in a variety of ways to help get 

the economy back on track. 

Mrs. MCCARTHY OF NEW YORK. Ms. Burns, one of the things you 

and I had talked about just a while ago, we are still seeing these 

advertisements on TV on predatory lending. Are we taking any 

steps on those who are trying to get into the FHA program, that 

they are not predatory lenders and taking advantage again of the 

consumer? 

Ms. BURNS. Well, FHA does have approval standards for all lenders who want to come into our business. We certainly reject lenders 

who can’t meet those standards. We don’t have a standard that 

specifically says if you have been engaged in some type of predatory practice per se, but if an organization has been convicted of 

27 

some type of activities, they certainly wouldn’t be eligible to participate in the FHA program. 

Regarding marketing, one of the concerns we always had is misrepresentation by an organization that they are part of the government, that they are FHA, and we certainly do take action in any 

cases where we see that type of activity. 

Mrs. MCCARTHY OF NEW YORK. When you say a predatory lender 

was convicted, if it is in one State, and they go to another State 

and start their business all over again, are you tracking that? Do 

you have the computer that will say, okay, they were convicted in 

New York, but now they are going to New Jersey? 

Ms. BURNS. This is not my area of expertise. 

The CHAIRMAN. Time has expired. 

At the last hearing which we had on the FHA, the FHA representative did raise a question of what seemed to us to be unduly 

limited debarment powers. And I don’t remember who, but I know 

there were some Members here working with the staff on legislation to enhance the debarment powers of the FHA. So that is something that we did get out at the last hearing, and it is our intention 

to move a bill to that extent, and that one I do remember very 

clearly. So I expect that we will have—I think the gentlewoman 

from California, Ms. Speier, is the one who had raised the issue, 

and she is working on it, and we have a bill that I think will probably be broadly accepted to enhance the debarment proceedings of 

the powers of the FHA. 

The gentleman from Texas. 

Mr. NEUGEBAUER. I thank the chairman. 

Ms. Burns, during the hearing this committee held right after 

the 1st of January, I asked the Department about the impact on 

FHA should the law be changed to allow bankruptcy judges to modify the terms of mortgages. HUD responded to my question in writing. I ask unanimous consent that we enter this letter from the 

FHA Commissioner for the record. 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. NEUGEBAUER. They expressed numerous concerns about this 

provision of cramming down mortgages. And quite honestly, after 

I looked at those concerns they have, I believe if this ill-advised 

legislation is brought forward, I would think we should exempt 

FHA from the cramdown bills. 

One of the problems with that is that peels off a guaranteed instrument and provides some of that then remains a secured instrument, and part of it remains an unsecured instrument. And so the 

question of how much insurance—are you detaching the insurance 

from the secured portion or the unsecured portion? 

And I think I asked this question, and I am still waiting for this 

portion of the answer, but has anybody taken a look into the portfolio? You have had a substantial amount of losses in 2008, and the 

fund has been going in the wrong direction. It has been shrinking 

its percentage of assets. Has anybody taken a look at that and said, 

hey, if judges start cramming down these mortgages, our loss ratio 

will increase? Do you have some numbers for us on that? 

Ms. BURNS. No, I do not have numbers on that, but I would like 

to state for the record that while FHA has taken some funds from 

the reserve account to cover future potential losses, those do not 

28 

represent losses to the FHA today. So while there has been some 

mischaracterization in the press of the recent action by FHA to 

take, frankly, prudent action and move some funds from one account to another to cover future potential losses, that isn’t a loss 

to the fund. 

Mr. NEUGEBAUER. Well, now, correct me if I am wrong, but actuarially, I think a third party actuarially looks at that number, and 

they have raised the amount of potential loss that they think you 

are going to incur. And it has, in fact, reduced your number pretty 

close to the statutory level; is that correct? 

Ms. BURNS. Let me just clarify the way that works. At the beginning of a fiscal year, we calculate, we actually do a projection at 

the beginning of the fiscal year to determine what we think the 

composition for the book of business for that year will look like and 

what do we think the volume of business will look like. And we set 

some assumptions what do we think the economic conditions will 

look like, what will the home values be, what will the interest rates 

be. And we set the premiums so that we can generate adequate 

premium income to cover losses. 

We then, again, partway through the fiscal year, do another assessment of the composition and volume of the business coming in 

and the economic conditions. And what everybody saw just recently 

was that when we did that reassessment, some of the assumptions 

we set at the beginning of the year were different from what we 

were experiencing. So in other words, the book of business was 

much larger than we had originally projected, and the economic 

conditions were worse. 

So what we did was we said we may sustain greater losses than 

we projected at the beginning of the year, so we are going to take 

some funds from the reserve account and set them aside to cover 

those future potential losses. It really is a prudent management 

practice as opposed to any loss to the Federal Government. And we 

do that constantly; every single year we do that same kind of assessment again and again. 

Mr. NEUGEBAUER. I am going to stop you. 

Did you increase the premium to try to offset some of those assessments? 

Ms. BURNS. We had increased the premiums at the beginning of 

this past fiscal year, correct. 

Mr. NEUGEBAUER. And when do you think you are going to have 

to—and I think this is an important question, because we are all 

interested in how to get the right balance here. But are you going 

to have to increase premiums again, and would this cramdown provision change that risk model where you may even have to increase 

those premiums more? 

Ms. BURNS. I am not in our budget office, so I cannot say for sure 

whether we will or will not increase premiums, but I can say that 

if we were to do a projection and an estimate that demonstrated 

that we needed to increase premiums, yes, we absolutely would. 

And the policy assumptions that are used to make that determination include legislative changes that might affect the FHA fund. 

Mr. NEUGEBAUER. So doesn’t that then begin to affect the affordability issue and the competitiveness of the FHA program then? 

29 

Ms. BURNS. Well, the beauty of the FHA program is that the borrower still gets market-rate financing. So while the premium may 

increase slightly, it is relatively small in the scheme of things, and 

they still get market-rate financing. 

Mr. NEUGEBAUER. So could you furnish this committee the information? When will you do your next assessment? When will the 

model be? 

Ms. BURNS. I actually think we are in the process of doing that 

right now. 

The CHAIRMAN. The gentleman from Massachusetts is recognized 

for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the witnesses as well for their testimony today. 

Mr. Bovenzi, I want to go back to the earlier discussion that you 

had with the ranking member about the bad bank model that is 

under consideration right now. I am concerned, as a lot of my colleagues are, about the bad bank model and purchasing these assets. And it does hinge on the valuation problem about how much 

do we pay, does the so-called bad bank pay, for these assets. 

I think it is fair to assume that the banks will give us the worst 

of the worst, the most complex derivatives, exotic derivatives, nonperforming assets. That is why it is called the bad bank. But I get 

this sickening feeling that the taxpayer is going to be asked to 

overpay for this. Otherwise, you know, the banks will have to acknowledge the real losses that they have incurred, and they will either become illiquid or insolvent. 

So what I am asking you is that since it has been floated that 

the FDIC would be riding herd on this bad bank, do you feel right 

now that the FDIC would be capable of taking on that responsibility? I know you mentioned before in response to the ranking 

member’s question that you have sort of run into this situation 

with IndyMac, and that you have been confronted with some of the 

complex derivatives, but what the bad bank plan, if you want to 

call it that, envisions is that the FDIC will have a steady diet of 

this. You will be engaged in substantial price discovery or valuation of these assets. Do you think you have the personnel, expertise necessary to embrace something like this? 

Mr. BOVENZI. Well, first let me say with regard to the bad bank 

proposal, I am not in any position to speak to what ultimately may 

be the proposal from the Administration. 

Mr. LYNCH. I understand, and I am going to ask you about some 

other possibilities as well, but you go ahead. 

Mr. BOVENZI. In terms of the FDIC’s expertise, part of our responsibilities are handling troubled assets. Typically, we receive 

them from failed banks. That is where a great deal of the experience of the FDIC is—how to manage and sell such assets as appropriate from failed institutions. So without speaking to what kind 

of role the FDIC may or may not have, there would be some level 

of expertise to help in some way, in some process, if that were the 

kind of plan that were to go forward. 

Mr. LYNCH. You don’t think—and I know we are going down, because this is speculation—but do you think you are currently 

staffed and you have the people and the resources necessary to do 

this? 

30 

Mr. BOVENZI. We are in the process of hiring more staff now. As 

the current situation was developing, the FDIC started building up 

its staff to handle the level of workload. We are still in the process 

of doing that. 

The model that was used by the FDIC in the previous financial 

crisis during the 1980’s and early 1990’s. 

Mr. LYNCH. The RTC model? 

Mr. BOVENZI. Yes. Also it was a model where resources were 

added very quickly, and the expertise of the agency was used to 

help set up a process to deal with that kind of a situation. 

Mr. LYNCH. Okay. Since my time has run out, I just want to ask 

you in your testimony on page 7, you mentioned that the FDIC had 

done an estimate of expected losses for the 2008 through 2013 period. It says here that $40 billion was your estimate that you considered the most likely outcome. However, since that time you got 

another quarter of financial data, and now you feel that it is going 

to be greater than that. Can you give me a ballpark? Is this a matter of— 

Mr. BOVENZI. I don’t have a number at this point in time to give 

you. We feel that estimate is low, and our losses over an extended 

period will be higher, but I don’t have a number. 

Mr. LYNCH. By a magnitude of—all right. Thank you. 

I yield back. 

The CHAIRMAN. I also want to say, and Members understand 

this, we have two, I think, very good career people here, but there 

are obviously limits on the extent to which they can speak for the 

Administration on policy questions. I appreciate what they are 

doing with what they have here. 

The gentleman from Texas. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

My questions have to do mainly with the legal ability of the people that—most of the people that mortgage holders deal with are 

not the lenders, they are the servicers. And the servicers are governed in their servicing agreement—by a servicing agreement, and 

that is governed by the bond covenants, which most of the mortgages that you are wanting to have refinanced are in bonds. 

So in reading through the bill and looking at the attempts to 

change, structurally change, the mechanics of this program so that 

it would work, I still do not see anything in the bill that would enable the servicer to go back to the legal counsel for the bond holders who have drawn up the bond covenants to give them the ability 

to act. And in many instances, in Mr. Posey’s case, the servicer is 

limited in its servicing agreement as to what it can do. In many 

instances, it cannot accept partial payment. That is the servicing 

agreement. They didn’t make the loan, they are paid to service it, 

and they are paid by the legal counsel for the bond holders. 

So do you have any discussions as far as structurally how any 

program that Congress brings forward can legislate to the 

servicers? In FHA’s case, there are no lenders per se, because every 

FHA loan is originated by a broker but almost immediately sold, 

servicing released into a Ginnie Mae bond, and then you have a 

servicing agreement that is signed back. 

Now, to me, this is the structural problem in making any kind 

of a mortgage program work. And although I do not favor a 

31 

cramdown, and it is not the way I would go about it, other than 

a judge, how can we enable—any mortgage program that would 

come out of this Congress—the servicer to bypass the servicing 

agreement? 

We are having the same thing happen with short sales. One of 

the most popular things in America that is really working out there 

is—in the real estate community is that Realtors are—the country 

is very innovative, and so a lot of sales that are going on are short 

sales. But in a short sale now, the biggest impediment to a short 

sale is getting the servicer to get the bond holder to agree to taking 

less than the amount of money that is owed on it. 

And so now you have people buying houses, executing contracts, 

agreeing to short sales, and they are waiting 90, 120, 180 days to 

going through the system of it, getting that short sale agreed to. 

And it seems to me that this is the structural problem inside of 

this mortgage program and any mortgage program is that the 

servicers cannot get where they want to get. And FHA cannot mandate that a servicer take a short sale, because at that point the 

bond holders entered into the bond agreement feeling like they had 

a legal document that said, we are going to select a servicer based 

on the fact that they are going to follow these rules. So how does 

FHA suggest that this happens so that this program can work? To 

me, this is the number one impediment. 

Ms. BURNS. You put your finger on it. That is a complication, and 

it is a complication for modifications and a complication for refinance transactions in the sense that if a short payoff is required, 

there have to be parties who agree to that short payoff. 

Now, the beauty of a refinance transaction over modification is 

that the old loan disappears, and there will be times when an existing lien holder would say, you know what? I would prefer to just 

get this loan off my books. It is no longer my problem, it is not a 

modified loan. I am not likely to sustain the damages of redefaults 

and nonperformance in the future. It is a loan that is gone. 

In particular, we have heard from lenders who are willing— 

The CHAIRMAN. Time has expired. If you want to finish your sentence, go ahead. 

Ms. BURNS. I was just going to say willing to buy pools of loans 

at a discount, and then they very much want to refinance them, get 

them off their books, put them into Ginnie Mae pools, which are 

in tremendous demand right now, which is, of course, exactly what 

we want, create the cash flow, create the liquidity. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. My questions are also about 

the valuation of assets and proposed bad banks. We certainly have 

heard some grim reports recently. Goldman Sachs economists just 

a couple of weeks ago estimated that there were still $2.1 trillion 

in overvalued assets, that the real diminution of the value of assets 

was $2.1 trillion. Only about a trillion of that had been written 

down to this point. Nouriel Roubini, Dr. Doom, not surprisingly is 

more pessimistic; he says it is more like $3.6 trillion. About half 

of that is in U.S. banks and brokerage houses. And if that is the 

case, he says the entire United States banking system is insolvent. 

We have an insolvent system, he calls it. The system’s capitalization started at $1.4 trillion. 

32 

And then the New York Times, yesterday there was an article 

that made the obvious point that value in troubled assets was 

going to be thorny if we tried to buy them. It gave the example of 

a bond that was backed by 9,000 second mortgages, presumably 

second behind and 80 percent first, where the homeowners had 

very little equity in their home. Presumably these bonds—the 

mortgages were made 3 years ago. Property values have declined 

25 percent since then, and a quarter of the loans are delinquent. 

The financial institution that held that bond was carrying it at 97 

percent of its original value. They had written it down 3 percent. 

There had been an actual—somebody had actually bought one of 

those bonds recently and paid 38 cents on the dollar for it. Is that 

a typical valuation of a bond like that? 

Let me explain. I know you know this, but those second mortgages are now completely unsecured debt. They have no collateral. 

Is a 97 percent valuation typical of what our financial system is 

doing? 

Mr. BOVENZI. No, I don’t think so. I think many of those securities on a bank’s balance sheet are in a mark-to-market portfolio. 

Some are not, some are. But part of the problem is there is no clear 

market rate now, and to step back— 

Mr. MILLER OF NORTH CAROLINA. Is there any possible valuation 

that that is not just outright fraud? 

Mr. BOVENZI. I think the issue right now, what the hearing is 

about and what we have talked about, is providing liquidity for 

banks, and capital is needed for banks. We want to get to the point 

where the private sector is providing that liquidity. 

Mr. MILLER OF NORTH CAROLINA. I have a question about that. 

Mr. BOVENZI. I guess I would just say one of the reasons why 

that is not being provided to a sufficient degree by the private sector right now is because there is such uncertainty over the assets 

on the bank’s balance sheet. 

Mr. MILLER OF NORTH CAROLINA. Yes. In fact, there is $180 billion in new capital attraction the financial system in the first 6 

months of last year, is down to a billion dollars in December. And 

you kind of have to wonder what kind of special circumstances 

there were with that billion dollars. If that is the kind of valuation 

placed on assets, a private investor would be better served by giving their money to Bernie Madoff to manage it than they would in 

investing in the United States financial system. 

A bank whose solvency depends upon that kind of valuation is 

what was called a zombie in Japan in the 1990’s; isn’t that right? 

That is a yes or no question. 

Mr. BOVENZI. I think you were—I would not characterize the 

issue quite the way you have. Private investors in some sense right 

now not wanting to put monies in banks, or they are not sure of 

what the value ultimately will be of a lot of these assets, depending 

upon the future performance of the economy, so the only price that 

they are willing to pay is at a very steep discount protecting 

against the case that the economy may not improve. 

Mr. MILLER OF NORTH CAROLINA. This summer, the regulators 

for Fannie Mae and Freddie Mac went into Fannie and Freddie, 

and even though Fannie and Freddie’s checks weren’t bouncing, 

they were meeting current obligations, they said, your assets do 

33 

not—your liabilities exceed your assets, you are insolvent, and we 

are taking you over. 

Do we have the resources in our regulators to do that with a 

large number of our banks; do we have the capacity and expertise 

to go in and look hard at the assets, the valuations and determine 

which banks are really solvent and which ones aren’t? 

Mr. BOVENZI. That is what the bank examination process and supervisory process is designed to do. There are regular exams and 

supervisory reviews of institutions to determine their financial condition and determine what steps need to be taken to restore them 

to health if they are not there. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. 

You know, I keep getting more and more frustrated as we get 

through this home foreclosures situation. I just don’t believe that 

we have our hands around the enormity of the problem. I mean, 

we are losing 6,300 homes to foreclosure every day. That is 46,000 

every week. At the end of this year, it is estimated that we will 

lose 2.8 million homes to foreclosure. It is just staggering. And yet, 

there seems to be a double standard here. We will throw out a 

strong helping hand to the banks, to the automobiles, to industry, 

to others who have come before here, but to the poor, struggling 

homeowner, we give no kind of help. We didn’t give any help in the 

first TARP. 

We are doing all we can. There is a lot we say we are going to 

do here. Even in the economic recovery, it doesn’t seem we are 

doing enough with that. It is sort of like you have the poor homeowner out there flailing away in the water, can’t swim, he is out 

there drowning, just like the big banks and others, but the boat 

comes along and picks up the big banks, picks up the auto industry, but then he throws the poor, struggling homeowner out there 

a book that says, learn how to swim. 

We really have to change, I think, and really get big on this. Of 

those 2.8 million that we said will lose their homes this year, over 

1 million of those will be seniors who have lost their pensions because of this, their retirements and 401(k)s. What are they to do? 

When we look at the measure of 6,300 homes every day we are losing, that has almost been matched now by the number of jobs we 

are losing every day. That has gotten over 6,000 every day. 

So the question comes down to the fundamental question—we 

can dance around this all we want to—what are we going to do to 

keep folks in their homes that don’t have, by no fault of their 

own—this is not somebody here who overbent or is not fulfilling an 

obligation, they lost their job, they have lost their 401(k)s; what are 

we going to do and structure this recovery here to help people who 

don’t have a way of paying their mortgages beyond this business 

of we have to just do it to 4 percent? Maybe they can’t even handle 

that. 

Now, President Obama has said, and I agree—and many of us 

have tried to push for this early on, the chairman said we couldn’t 

do it at the very beginning—and that is, why not put forward a 

moratorium, a 90-day moratorium until we can get our hands 

around the size of the problem? Now, President Barack Obama 

says he favors that. 

34 

I would like to get your thoughts on that right quick as my first 

question. 

Mr. BOVENZI. Okay. Well, when we were at IndyMac Bank after 

the FDIC took it over, the first thing that we did was to put a moratorium on foreclosures while we evaluated whether loans were eligible and we could modify them to keep people in their homes. So 

it seems like having institutions stop and look at what can be 

modified is an appropriate step. And I know the State of California 

did a similar thing based upon that IndyMac model so it could be 

looked at. 

In some cases, at the end of the day, there will be a foreclosure, 

and so doing this across the board for extended periods may not be 

the answer. But certainly, if I were a servicer or owner of mortgages, I would want to stop and look and see which ones I could 

maintain value with by modifying rather than foreclosing. 

Mr. SCOTT. And don’t you believe that a good expenditure—we 

have just given, or we acquiesced to the President’s request to give 

him the second tranche of this $350 billion, and with a mandate 

entered to spend up to $100 billion of that to help folks stay in 

their homes. How would you suggest would be the best way for 

them to spend that? 

The CHAIRMAN. We are running out of time. Time has expired. 

I will just say this; we have two career professionals who represent 

agencies. They are not empowered to make resource decisions. We 

are, they are not. To some extent, frankly, we have been asking 

them questions we should ask ourselves. 

Now, I did ask them to be here because we have some legislation 

we’re going to mark up to talk about some of the technical aspects, 

but I do have to say that these are not people who could speak on 

behalf of the Obama Administration about these broader public policy questions. So the time has expired, but there are other witnesses in other contexts in which you could get to that. 

Mr. SCOTT. Well, Mr. Chairman, the only thing I was saying is 

that they are going to be the depositor, the FDIC, of what I think 

Ms. Bair is on the right track of doing. I certainly was not asking 

for them to speak on behalf of the Obama Administration, just 

their— 

The CHAIRMAN. Well, when you talk about what are you going 

to do about people who don’t have a job, I mean, that’s not within 

their competence. They are here to help us figure out how we are 

going to administer the existing things. But the broader questions, 

people who are unemployed, what you do about that, and even how 

much of the TARP money should be used for foreclosure—which 

you and I agree should be very substantial, but again, it’s beyond 

the competence of—they would be stepping, I think, outside of their 

mandate if they were to start making policy decisions. They are 

here as representatives of their agencies in this specific sense. 

Mr. SCOTT. Your point of view is well taken, Mr. Chairman, and 

I certainly will take your point of view. 

The CHAIRMAN. And we will have further hearings on the point 

in question. 

The gentleman from Alabama has asked unanimous consent to 

make a statement for 1 minute. 

35 

Mr. BACHUS. Mr. Chairman, the gentleman from Massachusetts a few minutes ago mentioned a $45 billion capital injection into one 

of our larger institutions, and I think that it ought to be clear to 

all Members on both sides of the aisle, as well as the audience, 

anybody reporting these procedures, that it was not a gift. That 

particular institution, on a $45 billion capital injection, is paying 

$3.5 billion a year in dividends, which is a pretty good return in 

today’s market. 

There seems to be a confusion that this money was just given to 

our banks; in fact, it was not in any way a gift. And in that regard, 

one of the things that I don’t think we appreciate is what it has 

allowed them to do. And taking that institution as an example, we 

are talking about troubled homeowners and loan modifications, 

they have modified 440,000 loans, and a great majority of those 

have not fallen back into default. So it is a very good thing. 

And finally, Mr. Chairman, I can tell you that all of us read an 

awful lot and we talk to regulators, and our banking system is solvent. The vast majority of our financial institutions are well capitalized, and are in no case in danger of insolvency. 

The CHAIRMAN. The gentleman’s time has expired, the additional 

time. We have another panel here, and in fairness to them, I want 

to be able to get to them. 

The gentleman from Texas. 

Mr. GREEN. Mr. Bovenzi, I would like for you to, if you would, 

help to provide some ocularity with reference to why we have some 

institutions that are not lending to the extent that it is perceived 

that they should be. 

Let’s start, if you will, with the TARP funds—approximately $300 billion—that went into something that we now call a CPP, 

that is, a Capital Purchase Program. And let us define the funds 

that went into the Capital Purchase Program that banks will receive and have received—we have 9 banks that received $125 billion of this money, and others have applied for an additional $125 

billion. But those monies will go into banks, and when these monies go into banks, they will go into the cash reserve. Is this true, 

generally speaking, Mr. Bovenzi? 

Mr. BOVENZI. These funds go in as capital into the bank, which 

would strengthen the bank’s— 

Mr. GREEN. Capital reserve. 

Mr. BOVENZI. Yes. 

Mr. GREEN. Hopefully to cause a bank to be considered well capitalized, true? 

Mr. BOVENZI. Yes. 

Mr. GREEN. Hopefully. These monies are not monies that are lent 

to the borrowing public, true? 

Mr. BOVENZI. Generally speaking. 

Mr. GREEN. Because they use deposits to lend, they use CPP 

monies to capitalize, true? 

Mr. BOVENZI. It is used to capitalize, which helps build a base 

that, yes, ultimately supports lending. 

Mr. GREEN. Right. And the banks can lend from accounts that 

they have or they can lend from monies that they can borrow. They 

like to borrow cheap and then they lend high. And I don’t mean 

to—well, let me put it this way; they like to borrow at a lower rate 

36 

and then they lend at a higher rate. I don’t mean to demean any 

of the banks, I just want to be factual. And in so doing, we have 

had a circumstance where the deposits were not sufficient so that 

they could make some loans, and there were banks that were 

afraid to lend to each other, so they couldn’t borrow money to make 

loans. We have opened a discount window, hopefully that will be 

used to borrow money to make loans. 

So my question, sir, is this; what percentage, if you can tell me, 

generally speaking, of the banks are not making loans because they 

don’t have the deposits such as they can make them? Notwithstanding being capitalized, they don’t have the deposits from which 

to make the loans? Is that a pervasive problem? 

Mr. BOVENZI. I wouldn’t characterize that as a pervasive problem. With deposit insurance, it gives stability to the customer so 

that they know that whatever institution they put their money in, 

it is safe. Certainly it is a competitive environment in trying to attract those deposits. So I think your point is right, that it is difficult to— 

Mr. GREEN. But let me just share this with you, sir, another 

thought. The capital cash reserve is something that is required to 

act as a cushion in the event there is something called a ‘‘run.’’ So 

they are not allowed, generally speaking, to lend that money; they 

have to lend the deposits and they have to lend money that they 

can borrow. 

So, again, how pervasive is this lack of liquidity in deposits such 

that loans can be made? I am really trying to get to the root of why 

loans aren’t being made. I have no desire to demean the banking 

industry. I want empirical evidence as to what is going on. 

Mr. BOVENZI. You are certainly on the right track. If an institution can’t get adequate deposits, it can’t lend. I think overall, in the 

banks themselves, they probably have the same rough amount of 

lending that they had on those deposits as before. One of the big 

problems is that the banks used to take these loans and might 

securitize them and sell them into the market. And where the 

securitization market is not what it used to be, there is not the 

same outlet. So it affects their capacity. 

Mr. GREEN. Quickly, before my time is up, let me ask you about 

the second part of this now, which has to do with the lack of a 

source to borrow. 

Have we pretty much taken care of that, the lack of a source 

from which to borrow money to lend? 

Mr. BOVENZI. I would say that certainly to the extent that deposits are insured, it provides a source of liquidity. The Temporary Liquidity Guarantee Program has, to some extent, helped provide additional liquidity as well. 

The CHAIRMAN. The gentleman doesn’t have time to ask another 

question. Do you want to finish that last answer quickly? 

Mr. BOVENZI. That’s it. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Mr. Chairman, I am very anxious to listen to and 

question the next panel, and so I will forego my questions at this 

time in anticipation of 30 minutes when we go to the next panel. 

The CHAIRMAN. Mr. Minnick. 

37 

Mr. MINNICK. Back to the issue of authorities of servicing agents 

in these collateralized loan situations where the indentured does 

not give the servicing agent the authority to modify loans. If we 

were to create that authority statutorily so that servicing agents 

could have that authority, would you agree that would lead to some 

subset of these loans being modified and more people staying in 

their homes and a higher percentage of return to the owners of 

these obligations as a general proposition, Mr. Bovenzi? 

Mr. BOVENZI. I think certainly if you gave protections to servicers 

and incentives to them, that would encourage them to do more loan 

modifications. 

Mr. MINNICK. Well, that was the second part of my question. If 

it would be beneficial, should we also create incentives to do that, 

including protections from—as long as the authorities were executed in good faith, standard fiduciary standards, should we give 

them statutory protection? 

Mr. BOVENZI. Certainly, protection is an incentive that would 

give them greater ability to modify mortgages and however that is 

structured, you just need to be sure of what other consequences you 

are putting in place. But certainly, financial incentives to servicers 

would be helpful in the loan modification process. 

Mr. MINNICK. Do you think there is a superior way, based on 

your professional experience, to unlock these loans than going 

down that course? 

Mr. BOVENZI. There may be complementary procedures. I know 

in the model we had with IndyMac, we have encouraged paying expenses for parties who help in the process. Also, there are complementary measures that can be done as well. 

The CHAIRMAN. Mr. Sherman. 

Mr. SHERMAN. As the Deputy to the Chairman of the FDIC, we 

are talking about increasing the limit to $250,000 permanently. My 

concern is about CDARS, broker deposits, where someone could, in 

an efficient way, get $25 million worth of FDIC insurance by participating with 100 different banks. Do you see a way of crafting 

the legislation so that someone would not be able to have interestbearing accounts of over $5 million in various banks that were subject to insurance? 

Mr. BOVENZI. That is a difficult question. The broker market exists now where somebody could have accounts separated and 

spread in different banks, and legislative fixes often are difficult. 

One of the things from a regulatory viewpoint we are looking at 

and have put out a proposal for comment is whether different types 

of liability structures should require higher premium charges for 

the Deposit Insurance Fund. We have put out such a proposal related to broker deposits for comment. And sometimes there may be 

ways to approach things more flexibly in a regulatory framework. 

But I don’t have an answer for you in terms of what specific you 

should— 

Mr. SHERMAN. Well, I hope you get us your ideas, because anything you can do we can also do. And if you have ideas along these 

lines, it would depend on the judgment of the committee, but increasing to $250,000 just means that somebody willing to deal with 

100 banks is able to get 2.5 times as much insurance, and our objectives are multi-faceted on this. 

38 

But one of them is to provide assurance to middle-class families 

and even upper-middle-class families when somebody starts getting 

Federal insurance in excess of millions of dollars, then we may be 

exceeding our purpose. Of course, even leaving things at $100,000 

simply means that they have to deal with 3 or 4 times as many 

banks—or 2.5 times as many banks, doing the math correctly. 

I would like to ask Ms. Burns about a question that came up at 

more than one of my town halls. They asked, why should I pay my 

mortgage? And one of the answers is that if you can afford to pay 

your mortgage, that is your legal and moral obligation; but also, I 

would like to be able to tell them, well, because you don’t want to 

give up the appreciation—everybody in my district thinks they are 

eventually going to sell their house at a profit. 

Could you comment on the shared appreciation being a way not 

only to get some money from the Federal Government, but to convince the people in my district who never benefit from any of these 

programs that they are not suckers, and that, in fact, those who 

are getting HOPE for Homeowners are also giving up something? 

Ms. BURNS. Well, I don’t know if I can talk about it specifically 

in the context of a shared appreciation mortgage, but certainly the 

HOPE for Homeowners program was intended for just that purpose, that these are borrows who are, in many cases, underwater, 

their existing loan balance or balances are greater than the value 

of their property. 

Mr. SHERMAN. If I can interrupt, we have $4 trillion of underwater mortgages. And we are not going to provide help for all those 

folks, we are only going to provide help to those who most need it. 

I have a lot of people who are underwater, but they are making the 

same mortgage payment they were making 5 years ago, and they 

can make that payment for the next 5 years and hopefully they will 

be above water. 

How do we convince the person who has a fixed rate mortgage 

and can continue to make payments on what, in many cases, is an 

underwater mortgage that they are not a sucker for not walking 

away from the mortgage, or more to the point for this hearing, for 

not getting government help to stay in their home? 

Ms. BURNS. Right. I mean, that is the kicker of the whole situation, that there are people who have played by the rules, have paid 

their mortgage, have done everything right, and who aren’t getting 

a government benefit. 

Mr. SHERMAN. With time being limited, I think the word ‘‘kicker’’ 

is right, we need an equity kicker for the Federal Government, because then I can go back to my constituents and say, you get the 

profit when you sell your home, and the guy who got the government benefit didn’t. I believe my time has expired. 

The CHAIRMAN. The gentlewoman from West Virginia. 

Mrs. CAPITO. Thank you, Mr. Chairman. I just have a comment. 

I know we want to get to the second panel. I appreciate both the 

folks who testified before us today. The HOPE for Homeowners program, a $300 billion program, 

helped 25 so far. The cost per person has to be extraneously huge. 

I guess what is coming through my commonsense mind here is, 

rather than patching, fixing, plugging the holes, can we just say 

‘‘uncle’’ and start over here and get a better program that actually 

39 

meets where our homeowners are, the ones who are in foreclosure, 

the ones who are in arrears, and start over like that? I mean, is 

that something that you would consider a wise way to go when you 

are considering the cost to the taxpayer? 

Ms. BURNS. Well, I speak for myself when I say this: Absolutely. 

Obviously, as Chairman Frank has pointed out, I am not part of 

the political team, I am not part of the Obama Administration, but 

I would envision that they would feel that way as well, that we 

want a program that works. And if it requires that we start from 

scratch and perhaps give FHA some new legislative authority for 

a different refinance product and that can happen more quickly, I 

would envision that they would embrace that approach. 

Mrs. CAPITO. Thank you. I think that was a really candid answer, I really appreciate it. And I think it is refreshing to know 

that you are willing to stand up and say if something is not working, then we ought to just scrap it and start over. 

The CHAIRMAN. If the gentlewoman would yield? 

Mrs. CAPITO. Yes, I will. 

The CHAIRMAN. I will apologize; we have misplaced her alternative proposal. So if she has such a proposal, we would be glad 

to entertain it. Somebody forgot to show it to me. 

Mrs. CAPITO. Well, I am just trying to say if it is not fixable, why 

go in and keep trying to fix something that we have issues with? 

It is $300 billion for 25 homeowners. I don’t think anybody could— 

I don’t have ownership in trying to find the solution, that is why 

I am here learning. 

The CHAIRMAN. Well, we all do, as Members, I think, have that. 

Secondly, the $300 billion is, of course, entirely bogus; that would 

only be if there were, in fact, guarantees issued. But finally, the 

gentlewoman didn’t just say it wasn’t working, she said why don’t 

we start over? And the answer is, I think we are perfectly willing 

if someone has something. 

Mrs. CAPITO. Thank you. 

The CHAIRMAN. The gentlewoman from Illinois. 

Ms. BEAN. My questions are for Ms. Burns. The first is: The proposed changes to the HOPE for Homeowners program include an 

elimination of the 5-year prohibition for a second mortgage for assisted borrowers. Of the applications that HUD has received for 

HOPE for Homeowners, how many have not been completed because the borrower had a problem with that? 

Ms. BURNS. To tell you the truth, we don’t know. So at the time 

of what is called a case number assignment, we collect the minimal 

information about the consumer and their previous mortgage, and 

I wouldn’t know exactly. 

Ms. BEAN. So it is possible that has not been a problem. 

Ms. BURNS. Yes. 

Ms. BEAN. Well, let me go to the broader question of some of the 

revisions that are being proposed. We are lowering the fees to 

servicers, decreasing the amount of principal right now, allowing 

HUD to compensate servicers for the administrative costs associated with allowing people to move into a new program. In your 

opinion, will these changes, given the parameters that you have 

seen from applications received or not even considered, will this 

make a significant difference in the number of those who are facing 

40 

foreclosure that we can assist? Can this be a significant part of a 

foreclosure mitigation strategy? And if not, what’s missing? 

Ms. BURNS. Again, I am not part of the political administration, 

so I can’t speak to exactly what they would propose. I definitely— 

Ms. BEAN. I am not asking for proposals. I am saying from what 

you have seen, having to look at various loans that might be given 

consideration, what are you hearing from servicers about, well, we 

would be giving you more if— 

Ms. BURNS. Well, I think the elimination of the eligibility criteria 

that we discussed earlier in the hearing would definitely go a long 

way towards increasing program uptake. I think reducing some of 

the cost of the program would help. I definitely think the shared 

appreciation feature is extremely complicated for people to administer and at very high cost to the consumer. I definitely think this 

bill goes in the right direction. 

Ms. BEAN. To go back to the shared appreciation, you also get to 

the issues that Congressman Sherman just raised, which suggests 

to those who are making their payments that somehow they are 

being underserved by doing so. And so keeping some degree of 

moral hazard in there and recouping some of the cost to taxpayers 

who are assisting homeowners who are already getting debt forgiveness does make a case for shared appreciation. 

But is anything missing from the changes we are making that 

you haven’t already spoken to? 

Ms. BURNS. I do think that something that we have referred to 

earlier in the hearing that is problematic has to do with the subordinate lienholders, that there needs to be a better mechanism to 

address getting those liens released so that consumers can participate in the program. And we haven’t quite captured a mechanism 

that is both efficient and effective at getting them to agree to release those leans. 

Ms. BEAN. And you mentioned the shared equity piece. How 

many applications couldn’t be completed because of that, or do you 

again not know? 

Ms. BURNS. Could not be completed because of the shared equity? 

Right, I wouldn’t know that. I mean, really what we could do is to 

go back and ask lenders, in how many cases were there eligibility 

criteria that the consumers couldn’t meet as opposed to the shared 

equity portion of it. I don’t think that would be a barrier to them 

actually getting the loan. 

Ms. BEAN. It seems to me that, while some are raising it, I don’t 

see how that would be a deal breaker. 

Ms. BURNS. I would agree with you on that. 

Ms. BEAN. I yield back. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. PERLMUTTER. A couple of questions for Mr. Bovenzi; I am 

looking at pages 12 and 13 of your testimony. One of the things, 

in Colorado, I guess things are improving where every place else 

in the country things are not improving, or they have been. Foreclosures are down 11 percent in 2008 compared to 2007. But what 

we see, and what I am worried about, really has to do with banking, and that is, we are seeing the banks tighten up on credit. And 

when I press the bankers about that, they say the regulators are 

tightening up on the regulatory side of this thing, demanding more 

41 

capital, looking at particular industries that in the minds of the 

regulators may be troubled industries like auto dealers. And so at 

one level, the Congress and the Treasury is saying to the lending 

community, lend money so small businesses and home buyers and 

farmers can keep staying in business, but the bankers are saying 

they are getting a different message from the regulators. How do 

you respond to that? 

Mr. BOVENZI. Well, I would say that whenever we encourage 

banks to lend—which we are doing—it always is to creditworthy 

borrowers. And the examiners have certain standards they apply. 

Mr. PERLMUTTER. Is the FDIC or the Comptroller demanding 

more capital from community banks? 

Mr. BOVENZI. It depends upon the situation. For the vast majority of community banks, the answer would be no. They are very 

well-capitalized for the most part, but there are going to be circumstances where there are going to be individual institutions that 

need more capital. So it does depend on the situation. 

Mr. PERLMUTTER. Let me jump in again. Has the FDIC or the 

Comptroller or any of the regulators, have they looked at certain 

borrower groups, whether it is automobile dealers or Realtors or retail establishment owners, you know, shopping center owners, and 

said these industries are kind of questionable right now, you better 

be harder on the loans that you make to them or the lines of credit 

that you have extended to them? 

Mr. BOVENZI. Well, the FDIC is not going to pick an area and 

say you can’t do any lending in that area. It is going to be a caseby-case review of, do you have a creditworthy borrower and do you 

have appropriate underwriting standards. That would be what an 

examiner would be looking at. 

Mr. PERLMUTTER. I guess what I am saying to you—I thought it 

might be anecdotal—and I said this to Ms. Bair a month ago— 

about the tightening of credit at the local level, at the examiner 

level. She said it is just anecdotal. She had written a letter to Senator Schumer about it. But I am hearing it from every single banker in my community, which I am worried that it is going to keep 

this spiral going. So now Colorado is starting to pick itself up and 

get out of this malaise, but at the same time, small businesses in 

my communities are finding credit harder and harder to come by. 

So that is just a statement to you. 

I would like to turn to you, Ms. Burns, and then I will be finished. 

You talked about the problems with the second mortgages or the 

second liens as an impediment to doing HOPE for Homeowners. I 

have been opposed to this cramdown concept in Chapter 13, but 

that is the one place where you can actually take out and eliminate 

that second mortgage. 

Do you have any other ideas as to how to deal with the second 

mortgages and stop them from being these impediments to the refinance? 

Ms. BURNS. Well, one idea would certainly be to permit the subordinate lienholder to resubordinate that mortgage and just sit 

there, just sit behind the HOPE for Homeowners loan, don’t permit 

them to collect payments on it, require that it sit as a silent second 

in the hopes that they recover some— 

42 

Mr. PERLMUTTER. But will they do that voluntarily? 

Ms. BURNS. I don’t know. You asked for ideas. 

Mr. PERLMUTTER. Well, that is a good idea, but I am just concerned that HOPE for Homeowners really has been a voluntary approach. Looking for assistance from the first and the borrower, the 

regulators, and now the second mortgage holders, and I am just 

worried, there is nothing in it for them to say we will sit quietly 

by. They are going to say, give us a hundred bucks at least to cover 

our transaction fee. I mean, are we paying them anything in this 

process? 

Ms. BURNS. Under the existing HOPE for Homeowners program, 

the subordinate lienholder could be paid off in an amount between 

3 and 4 cents on the dollar for the principal on that loan. So if it 

is a $20,000 loan, they get paid 4 cents on the dollar, they get $800 

to walk away. It sounds great. 

As I mentioned earlier to Chairman Frank, there is a somewhat 

clunky mechanism to make that happen. And it doesn’t seem all 

that enticing right now. 

The CHAIRMAN. If the gentleman would yield, there is also, I believe, as far as the oversight portion, to even up the dollar amount. 

We are going to look at that. 

One other announcement I would like to make quickly. The gentleman raised a very important issue. We do hear, all of us, from 

the banks and the regulators, that each one is blaming the other. 

They may both be right. I plan to have a hearing in the full committee on the question of whether or not and to what extent we are 

sending mixed messages. Now, to some extent that is inevitable. 

We have two goals here; we have the safety and soundness of 

banks, and we have increased lending; there is an inherent tension 

there. What I am concerned about is, if the same individual is 

aware of that, that is one thing. 

If you have two different groups operating with different initiatives, impulses, that can be a problem. We have it with mark to 

market, we have it with capital requirements. So we are going to 

have a hearing sometime in the next few weeks and we are going 

to ask some bankers and some regulators to get everybody in the 

same room at the same table and talk about the extent to which 

we are sending these mixed messages, both with regard to—well, 

it is three things—it is capital requirements, it is lending standards, and it is mark to market. And the problem is there are legitimate and conflicting objectives. We are going to address that. 

The gentleman from Ohio. 

Mr. WILSON. My question will be to Mr. Bovenzi. 

Let me make a couple of comments first and then get to my question. We are talking about ideas and ways to stimulate liquidity to 

get our economy again through the banking system. I like the idea 

that the FDIC now has expanded to $250,000. I think that is going 

to give a lot of people who may be moving out of the market or 

other investments a safe place to go and a place that would be 

hopefully encouraging for investment and provide liquidity. 

My question would be this, and after having some roundtables 

back in Ohio and listening to different bank people and also business people, one of the ideas that came up—and I just bounce this 

off of you—is to encourage deposits back to the old passbook, and 

43 

doing maybe a 4.5 percent tax free if we can find a place to pay 

for it to offset it. But what do you think of that kind of an idea, 

simplistic as it may be, to attract deposits to community banks 

throughout Ohio. For example, where I am from, and then having 

people be able to have a tax-free status on that earnings for a set 

amount of time? What do you think of that as an opportunity for 

liquidity? 

Mr. BOVENZI. Well, I am not going to be in a position to comment 

on how one ought to change the Tax Code. Certainly, there are 

going to be tradeoffs in any kind of fiscal package, determining 

what type of tax cuts or spending to have. Any tax break has a cost 

to the government, and any reduction that encourages a certain activity is going to have a benefit for that particular activity. But I 

am really not in a position to give a view of what kind of tax or 

government spending initiatives ought to be put in place. 

Mr. WILSON. Okay. Maybe I asked it to the wrong panel. I just 

feel that we need to come up with creativity, we need to start doing 

something. And as I said, as far as the tax part of it, we have a 

situation there where we have to find a way to offset it. But I am 

talking premise here. I am talking ideas of getting money into 

banks so that we can free up our economy and start moving. 

Mr. BOVENZI. And I would just comment more generally, to the 

extent things are within FDIC’s authority, we are certainly trying 

to think creatively and take steps, as appropriate, to help restimulate the economy. 

Mr. WILSON. We are hoping we can do that. 

There are a lot of people in society out there who feel that government and the regulators are not going outside the box for creativity and ideas, and how are we going to solve these problems if 

we keep doing the same old, same old? And that is where I am 

coming from. 

Thank you. 

The CHAIRMAN. Mr. Grayson. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

Mr. Bovenzi, nice to see you again. 

Mr. BOVENZI. Good to see you, too. 

Mr. GRAYSON. Thank you. 

I had a few questions for you about the banking system in general. The American Enterprise Institute says that 2⁄3 to 3⁄4 of all the 

bad assets in this country are actually held by only four banks— 

Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo. Is 

that correct? 

Mr. BOVENZI. I don’t have an answer for you offhand. Certainly, 

you take those four banks and they are going to comprise a large 

portion of the banking assets in the country and in general, so that 

even proportionally they would have a large portion. But offhand, 

I don’t know the answer to that question. 

Mr. GRAYSON. Well, when we pass laws and allocate money to 

help banks in trouble, are we basically just helping these four 

banks? 

Mr. BOVENZI. Any program that is put in place, certainly our 

view is it is to help all banks—and should be to help all banks. And 

granted, as some of the programs are being rolled out, it is getting 

to the larger banks before it is getting down to the smaller banks. 

44 

But I think it is an important principle that all banks are eligible 

for capital investments or programs that go forward with the government. 

Mr. GRAYSON. I am more interested in the practice than the principle. Why is it that it is taking more time for money to get to the 

small banks than it is for money to get these four giant national 

banks? 

Mr. BOVENZI. Well, with the Capital Purchase Program, as it was 

originally rolled out, the first group eligible were public corporations, and by their nature, that is more of the larger institutions. 

It was then rolled out to private C corporations. Only recently have 

we been able to get the term sheets and standards in place for Subchapter S corporations so they could start receiving capital injections. And we still don’t have the appropriate term sheets for how 

to invest in mutual organizations. 

So the roll out has been slower for the smaller institutions. And 

that has certainly been a cause for concern from the FDIC’s point 

of view. 

Mr. GRAYSON. By giving tens of billions—or even hundreds of billions of dollars—in aid to these four banks, aren’t we basically rewarding them for mistakes that they have made? 

Mr. BOVENZI. I think the intent of all of these programs is to try 

to stimulate the economy. An important part of that is stabilizing 

the banking system as a whole, so we do need to take steps. As we 

discussed, key components of doing that are providing capital and 

liquidity. Larger banks are going to be an important part of restimulating the economy, and by necessity are going to be an important part of any programs that come about. 

But at the same time, smaller banks lend in local communities, 

and that has an important effect too. And certainly with the program that the FDIC has, the Temporary Liquidity Guarantee program, we have 7,000 banks that are taking part in the non-interest-bearing transaction accounts guarantee, and about the same 

number of banks and thrifts and holding companies taking part in 

the unsecured senior debt guarantee. So it is a program that is 

very broadly based across the banking system. 

Mr. GRAYSON. We sometimes hear the phrase ‘‘moral hazard.’’ 

Isn’t it basically violating the moral hazard principle to offer so 

much aid to these four banks because of the mistakes that they 

made in accumulating $1 trillion or more in bad assets and not 

helping the smaller banks who could provide stimulus and helping 

local communities around America? 

Mr. BOVENZI. Well, certainly as a general principle, we want to 

avoid moral hazard. We want market discipline in the economy. I 

think as we have gone through this financial crisis, there have 

been a great many shareholders and senior debt holders who have 

lost a great deal of money. So I think they would certainly view the 

market as having provided some discipline. 

I think when you get into a situation as severe as the one we 

are in, then we need to look at systemically what needs to be done 

at least for that period of time to take care of the bigger issue, 

which is the financial stability of the country. 

Mr. GRAYSON. What discipline has there been for the managers 

of Citibank and Bank of America and JPMorgan and Wells Fargo? 

45 

Hasn’t it basically been business as usual even though they have 

lost a trillion dollars? 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. Bovenzi, you may respond. 

Mr. BOVENZI. I will just respond that there are a number of different situations. But there are certainly—I think, many people in 

charge of organizations who have lost their jobs. But I agree with 

your broader point that if the government is putting in money, we 

need to be looking at things like executive compensation, appropriate management and how the money— 

The CHAIRMAN. The time has expired. I do want to point out, in 

fairness to Mr. Bovenzi, that it is the Treasury Department. The 

FDIC made none of these decisions. As a matter of fact, by the end, 

the head of the FDIC and the Secretary of the Treasury were barely on speaking terms; I know that because I was taking the messages between them. 

So I think it is appropriate to note that the criticism inherent in 

the gentleman’s comments were really towards the Treasury Department, just in fairness to the FDIC. None of those were decisions they made. 

The last questioner will be the gentlewoman from Illinois. 

Mrs. BIGGERT. I mentioned earlier in my opening statement that 

I have heard from my community bankers that they are concerned 

about a dual policy that they are seeing. On the one hand, the regulators are cracking down—are urging banks to lend, and on the 

other hand, the bank examiners are cracking down, forcing writedowns on performing loans and discouraging increased lending 

from smaller institutions. Even though they say they have the capital and liquidity, they don’t want to go ahead with some of these 

loans because the regulators are being overly aggressive. And this 

seems to be contrary to the messages we in Washington are sending. 

Have you heard this? Or is there anything that can be done 

about this, Mr. Bovenzi? 

Mr. BOVENZI. Certainly, I am aware of the concern about whether examiners are given a mixed message. And I think, as has been 

said by the chairman and others, certainly it is going to be easy 

for people to look at others to say this is why something isn’t happening. I will only say from our point of view; we are going to do 

everything we can to ensure that the right messages are getting 

across and I believe they are. 

There are some appropriate underwriting standards in lending to 

creditworthy borrowers that have to be upheld. And yet we have 

to be careful that those standards aren’t so severe that we are discouraging otherwise good loans. We are working each day to try to 

get that balance. 

Mrs. BIGGERT. Thank you. 

The CHAIRMAN. Earlier I did say, because the gentleman from 

Colorado had similar questions, we planned a hearing on this 

whole question of the tension between those mandates. 

The panel is thanked very much for their excellent testimony. 

We ask the new panel to assemble very quickly. Please, let’s move 

quickly. We will convene. 

46 

Mr. Yingling has a prior commitment of some considerable importance, so we appreciate his staying around. We will begin with 

Edward Yingling of the American Bankers Association. 

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CEO, 

AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. YINGLING. Mr. Chairman, I appreciate the opportunity to testify on H.R. 703, which will promote bank lending through changes 

to deposit insurance coverage, make improvements in the HOPE 

for Homeowners program, and provide prompt availability of capital through the Capital Purchase Program for community banks. 

ABA supports this bill. Let me address each of the major elements. 

ABA supports making permanent the $250,000 deposit insurance 

limit that was set on a temporary basis in the Emergency Stabilization Act. This increased coverage from $100,000 helped 

heighten consumer and small business confidence. It also resulted 

in additional funds to support bank lending. However, this increase 

expires at the end of 2009. It is important that this issue be addressed by Congress as quickly as possible. 

As a practical matter, with each passing month it becomes more 

difficult for banks to effectively offer certificates of deposit over 

$100,000 because the expiration date on the insurance increase is 

moving closer. For example, by June, banks will only be able to 

offer 6-month CDs in the $100,000 to $250,000 range that are fully 

insured. Moreover, the expiration date and differing levels of insurance on CDs will be confusing to customers. It is important to note that if the $100,000 limit had been adjusted for inflation when it was created in 1980, the level today 

would be $261,000. 

We also believe that enlarging FDIC’s borrowing authority with 

the Treasury is a reasonable change, giving the FDIC more flexibility to manage cash flows related to bank failures. Cash flow 

issues occur as the FDIC acquires assets from failures that need 

to be sold off in an orderly fashion. We would emphasize that this 

is a line of credit, and that any draws on it by the FDIC constitute 

a borrowing that must be repaid by the banking industry. 

We reiterate our continued support for the HOPE for Homeowners program. We believe the changes to the program recently 

announced by the Department of Housing and Urban Development 

have the potential to attract many more borrowers and lenders. We 

are pleased to see that further changes are included in the bill. 

We also support the provisions relating to securitization. It is 

widely agreed that the legal liability issues relating to 

securitization are inhibiting foreclosures. 

We also support the provisions in the bill that direct the Treasury to take all necessary actions to provide capital under the Capital Purchase Program to community banks, and to do so on terms 

comparable to those offered to other CPP recipients. 

We strongly believe that the current commitment should be fulfilled in order to prevent competitive disparities from occurring, 

and to ensure that every community has the same opportunity for 

its banks to participate. For example, in many New England communities, mutual institutions predominate. Currently, those comVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
47 

munities do not have the same opportunity for their banks to participate in the CPP. 

Finally, I feel compelled to mention, once again, another issue relating to the subject of this bill, which is lending and liquidity. 

While this committee works tirelessly to aid the economy, mark-tomarket accounting continues to undermine any progress. As the 

Congress works to enhance bank capital, mark to market eats it up 

like a Pac Man. But it is not just banks. In the past 2 weeks, we 

have seen accounting rules undermine the ability of the Federal 

Home Loan Bank System to provide liquidity. And we have seen 

a financial emergency in the credit union industry because of the 

impact of mark to market on corporate credit unions, an emergency 

which appears to be offsetting, roughly, the entire earnings of the 

credit union industry in 2008 through deposit insurance premiums. 

ABA appreciates statements by members of this committee on 

mark to market and urges you to make accounting policy part of 

your reform agenda. 

And Mr. Chairman, I would just like to say that I agree completely with your comments about the conflicting signals that we 

have been receiving from different governing bodies, and I appreciate the fact that you are going to hold hearings. 

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

191 of the appendix.] 

The CHAIRMAN. And let me say, because I know you have to 

leave, this is not anybody’s fault. These are legitimate conflicts to 

be managed, and it has to do with capital requirements, stricter 

lending requirements and mark to market, and I don’t think the 

answer is 100 percent one way or the other with each of them. And 

I will be satisfied, to some extent, if I know that everybody has 

both of them right. What worries me, as I said, is that we have two 

different groups. But we will have that hearing very soon. 

Next, we will go to Mr. Michael Menzies, the president and CEO 

of the Easton Bank and Trust Company, on behalf of the ICBA. 

STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND 

CEO, EASTON BANK AND TRUST COMPANY, ON BEHALF OF 

THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

(ICBA) 

Mr. MENZIES. Mr. Chairman, thank you. I am chairman and 

CEO, as you said, of Easton Bank and Trust in Easton, Maryland, 

62 miles due east of this hearing, and it is my honor to be with 

you. 

The CHAIRMAN. I was hoping you weren’t from Easton, Massachusetts, because that would have been embarrassing. When you 

said Easton, I got a little worried. 

Mr. MENZIES. That is a beautiful community, too. 

Easton Bank and Trust is a $170 million community bank, and 

we are focused on our community. 

I am honored to be chairman of the Independent Community 

Bankers of America as we focus our representation exclusively on 

community banks. 

We applaud the efforts of this committee to promote bank liquidity, promote lending through deposit insurance, provide HOPE for 

Homeowners, and enhance the community banking model. These 

48 

efforts strengthen banks to expand ongoing lending activities and 

further support economic recovery. 

Community banks are the backbone of small business lending. 

Key provisions of your bill contribute directly to this mission, and 

as a result create jobs. Your improvement to HOPE for Homeowners expands the alternatives for community banks working 

with consumers who wish to avoid foreclosure. 

We understand that the committee will mark-up some of the provisions of H.R. 703 in separate bills tomorrow, and ICBA urges 

swift passage of those provisions. 

I want to concentrate my oral statement on community bank liquidity issues and deposit insurance. My written testimony addresses in detail all the issues covered in this hearing. 

Deposits are the primary source of community bank liquidity. 

Today, community banks face stiff competition for deposits. The increase in deposit insurance coverage to $250,000 has helped community banks be part of the solution to the credit crisis caused by 

the activity of a few large financial institutions. We are pleased 

that the chairman’s bill would make this increase permanent. 

ICBA applauds the chairman for including a provision to give the 

banking industry more time to recapitalize the FDIC Deposit Insurance Fund, an idea that ICBA has strongly advocated. 

Community banks are prepared to do their part to maintain a 

strong, well-capitalized deposit insurance system. However, a 

longer period for recapitalizing would allow the FDIC to reduce 

proposed assessment rates. Lower rates would keep additional 

funds from local communities for lending to small businesses and 

consumers at this critical time. 

Last fall, the FDIC established a voluntary additional guarantee of all amounts above the $250,000 level in transaction accounts 

under the FDIC Temporary Liquidity Guarantee Program. More 

than 7,000 banks, including thousands of community banks, have 

chosen to participate in the Transaction Account Guarantee Program. The program is an important measure to enhance confidence 

of commercial customers and community banks, and has been an 

important tool for enhancing community bank liquidity. 

This program allows Easton Bank and Trust the opportunity to 

compete with the too-big-to-fail banks while paying a 10 basis point 

fee to keep the FDIC fund whole. 

The program also frees up capital and resources otherwise used 

by community banks to purchase treasuries and other securities 

that are used for repurchase agreements that secure commercial 

and public deposits. Community banks can better use the freed-up 

resources to promote lending in their communities. Taxpayers have 

no liability for the program, and the program does not reduce the 

FDIC reserve ratio. Participants are assessed a 10 basis point fee 

for the guarantee, and any deficit in the program could be made 

up by a special industry assessment. 

Unfortunately, the program expires at the end of this year. ICBA 

urges the committee to include a 2-year extension of the current 

Transaction Account Guarantee Program with other deposit insurance provisions that the committee will consider tomorrow. 

Eliminating the program at the end of this year would have a 

negative impact on community bank liquidity, again at a critical 

49 

time. This important program should be extended by Congress to 

give the Nation’s deposit system more time to stabilize. 

Thank you so much for an opportunity to represent the community banks of America. I am happy to take any questions you may 

have. 

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

120 of the appendix.] 

Mrs. MALONEY. [presiding] Mr. Taylor is now recognized for 5 

minutes. 

STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL COMMUNITY REINVESTMENT 

COALITION (NCRC) 

Mr. TAYLOR. Thank you, Representative Maloney, Chairman 

Frank, and Ranking Member Bachus for the opportunity to testify 

before this distinguished committee. 

I am honored to testify on behalf of NCRC regarding promoting 

bank liquidity and lending through depositors insurance, HOPE for 

Homeowners—what we call H4H—and other enhancements. And I 

want to inform Chairman Frank and other members of the committee that NCRC does strongly support H.R. 703. 

The new and amended provisions in H.R. 703 are important 

measures towards stemming the foreclosure crisis, restoring bank 

liquidity, and rebuilding consumer confidence in the financial system in the U.S. economy. H.R. 703’s proposed increase in FDIC coverage from $100,000 to $250,000 will help stabilize banks by increasing deposits. This, and 

the increase in the FDIC’s borrowing authority from $30 billion to 

$100 billion, will provide liquidity for the banking system and reassure investors that expanded FDIC insurance provisions will protect consumer investments and help prop up the banks. 

I want to applaud the chairman for H.R. 703’s amendments to 

HOPE for Homeowners, which will improve upon an initiative that 

is really not reaching its intended goals. The proposed amendments 

in H.R. 703 will increase consumer demand for H4H. Eliminating 

the upfront premium and reducing the annual premium makes 

H4H a much more attractive program. Moreover, the amendments 

would allow FHA to eliminate H4H’s annual premium payments 

once the borrower’s equity reach levels consistent with standard 

FHA underwriting practices and products. 

Reduced equity-sharing with the Federal Government is another 

welcomed enhancement to H4H. And the new H4H would allow the 

Federal Government to recoup its investment at the same time, 

while preserving significant wealth-building opportunities for borrowers. 

Another major advancement offered by H.R. 703 is the safe harbor provisions for servicers which will increase the likelihood of 

meaningful loan modifications. This provision protects the servicers 

from investor lawsuits if the investor reasonably and in good faith 

believes that its loan modifications will exceed, on a net present 

value basis, the anticipated recovery of the loan principal that can 

be achieved through foreclosure. 

H.R. 703 is a major step in the right direction towards addressing the foreclosure crisis. However, in addition to that step, NCRC 

50 

urges the committee to consider a broad-scale loan purchasing program. 

H.R. 703 still requires voluntary participation from the industry 

while offering safeguards and incentives, but there will still be the 

need for the government to proactively purchase whole loans, 

whether it is using the HELP Now proposal that the National 

Community Reinvestment Coalition proposed now a year ago in 

January of 2008, or whether it is modifying the REMIC—the Real 

Estate Mortgage Investment Conduit—Tax Codes to allow for the 

taking of all co-loans, or other approaches like using the commerce 

clause and the spending clause of the Constitution, which allows 

the government to regulate interstate financial markets. Some 

proactive steps like this are necessary to wrestle a lot of these 

loans away from the market. 

In closing, H.R. 703 is an important and necessary measure to 

stem foreclosures and stabilize the financial markets. NCRC is 

pleased to endorse it, and I will take questions at the appropriate 

time. Thank you. 

[The prepared statement of Mr. Taylor can be found on page 181 

of the appendix.] 

Mrs. MALONEY. Mr. Courson is recognized for 5 minutes. 

STATEMENT OF JOHN A. COURSON, PRESIDENT AND CEO, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. COURSON. Thank you, Congresswoman Maloney, Chairman 

Frank, Ranking Member Bachus, and members of the committee. 

Thank you for the opportunity to testify this afternoon on H.R. 703, 

a new bill intended to promote bank liquidity in lending. 

Of particular interest to MBA and its members are the changes 

for the HOPE for Homeowners program, the focus on addressing 

service reliability, and the improvements to the Troubled Asset Relief Program, or TARP. 

Let me begin with the HOPE for Homeowners program, which 

was intended to be a tool to help delinquent homeowners avoid 

foreclosure, but has had trouble getting off the ground. H.R. 703 

would remove the obstacles that have prevented its optimal use. 

For instance, the bill drops the requirement that borrowers have 

a housing debt-to-income ratio greater than 31 percent for participation. It also increases the maximum loan-to-value permissible 

under the program for 90 percent of the appraised value to 93. 

These changes will allow more borrowers to qualify, and also make 

the program more attractive to lien holders who will be able to 

take smaller write-downs. 

MBA also supports the language in the bill that addresses HOPE 

for Homeowners exceedingly high annual premiums by granting 

FHA flexibility in setting annual premiums that are in line with 

other FHA products. This reduction will instantly make the HOPE 

for Homeowners program more affordable for troubled borrowers. 

MBA appreciates the committee’s efforts to provide servicers 

with greater legal protections for performing loss mitigation services. Although most pooling and servicing agreements allow for 

modifications and workouts, not all do. Some PSAs that allow 

modifications and workouts may contain conflicts, while others may 

be silent on modifications, thus increasing the risk of liability for 

51 

the servicer. These problems have limited servicers’ ability to help 

borrowers. 

MBA, however, is concerned that investors may challenge the validity of this safe harbor. If these challenges prove successful, 

servicers will be exposed to significant legal liability and lawsuits 

for breaching their contracts, despite their actions being within the 

spirit of this law. MBA would recommend that Congress include a 

provision that would indemnify servicers from liability if the safe 

harbor provision is deemed unlawful. 

Moving to the changes to TARP, MBA endorses this committee’s 

efforts to provide additional clarity and direction to the Department of the Treasury and how these funds are allocated. Above all 

else, it is important to return TARP to its original purpose, which 

was to purchase nonperforming assets off of bank balance sheets. 

And while the government’s focus to date has been on righting the 

residential mortgage market, we at MBA also recognize that the 

broader credit crisis has negatively impacted the commercial multifamily real estate sectors. 

Mr. Chairman, because this hearing is about bank liquidity, I 

want to take a minute to bring to your attention an issue that has 

been and is hamstringing many independent mortgage bankers, 

and that is the shortage of warehouse lines of credit from commercial banks. 

These lines of credit are used to finance loans held for sale from 

origination to delivery into the secondary market. Warehouse lending capacity has declined dramatically from over $200 billion in 

2007 to approximately $20- to $25 billion in 2008. For the originator that depends solely on warehouse lines of credit, the reduction could reduce liquidity, extinguish their lending business and 

adversely impact the consumers in their market, stifling the real 

estate recovery before it has a chance to really get off the ground. 

Congress and the Administration should take steps to maintain existing lines of warehouse credit and create new lines of warehouse 

lending by providing a short-term Federal guarantee of warehouse 

lines that are collateralized by FHA, VA, GSE, and rural housing 

eligible mortgages or one of several other alternatives that are also 

available. 

My written testimony discusses this issue at great length, as well 

as these other steps Congress and the Obama Administration can 

take to restore faith in the mortgage industry and avoid future 

foreclosures. 

First and foremost, Mr. Chairman, we need stronger regulation 

of mortgage bankers and mortgage brokers. By working together, 

we can build a better regulatory system, one that works for consumers and the industry alike. MBA and its members want to be 

your partners as we move forward in these efforts. We also need 

to continue to strengthen FHA by investing in new technology, allowing them to hire staff on par with other financial regulators, 

and we need to increase the loan limits for the FHA and the GSEs. 

And we need to remember Ginnie Mae, which now securitizes 40 

percent of the mortgage market and does that with less than 100 

employees. 

Mr. Chairman, thank you for this opportunity to share our views 

and ideas with the committee. 

52 

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

110 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Courson. Just a little note. The 

loan limit issue has been addressed in the House version of the recovery bill. So we will be looking to keep it in there. 

Next, Mr. Michael Calhoun, who is president and Chief Operating Officer for the Center for Responsible Lending. 

STATEMENT OF MICHAEL CALHOUN, PRESIDENT AND CHIEF 

OPERATING OFFICER, CENTER FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Mr. Chairman and members of the committee, 

thank you for— 

The CHAIRMAN. Which I do want to make clear, didn’t used to be 

an oxymoron. And we hope to get to a point in America where it 

once again isn’t. 

Please go ahead. 

Mr. CALHOUN. And I am happy to report that we had a small operating gain last year on our lending to subprime borrowers. 

Mr. Chairman and members of the committee, thank you for 

your continuing efforts to ameliorate this deepening financial crisis. 

We are running out of time. Two weeks ago, Goldman Sachs issued 

a report that projected that foreclosures could reach 13 million 

families, almost 1 out of 4 mortgages. This week Mark Zandi, the 

leading economist of Moodys.com, observed that if we do not gain 

control of the foreclosure crisis in the upcoming weeks, it may be 

too late to prevent our economy from falling into a depression. 

In this context, I will comment on the bills before the committee. 

It is appropriate that these bills address servicers, banks, and 

homeowners, since the fate of all three of these are tied together 

in addressing the housing crisis. All are currently suffering unnecessarily severe losses due to structural obstacles accidentally embedded in the structure of mortgage securities. Studies repeatedly 

find that loans not caught in the labyrinth of securities are modified more frequently, more forcefully, and more successfully to the 

benefit of all the participants. 

In reviewing these bills, it is important to note how dramatically 

the landscape of the financial crisis has changed over the past year. 

Originally, our primary concern was resetting subprime mortgages 

where interest rates and payments would increase. One of the few 

bright spots in this economy has been the decline in market interest rates and that problem has been less than expected. That interest rate improvement, though, has been more than offset by the 

dramatic decline in housing prices. Today more than one out of five 

homeowners with mortgages are underwater and owe more than 

their house is worth, and that number is rapidly increasing. That 

is what is driving the avalanche of foreclosures that continue to 

bury our economy. 

On top of this, banks are reluctant for regulatory accounting reasons to mark down the value of mortgage assets and loans. Ironically, by the banks overstating how well they are doing, we as a 

country are in fact doing far worse than we should be and could 

be. The failure to recognize these losses and modify mortgages is 

making this crisis much longer and deeper than it should be. Along 

53 

with that, we have the obstacles of pooling and servicing agreements. 

The bills before the committee today all address aspects of this 

challenge. Looking first at the HOPE for Homeowners, we applaud 

the changes to make this program more flexible and we urge that 

there be even more administrative flexibility so that this program 

can be adapted to meet the crisis. We also urge that lenders acknowledge the need to reduce loan levels to reflect current values 

and that judicial loan modifications be available to borrowers as a 

last resort as well. 

The next bill which provides a safe harbor for servicers provides 

an important benefit to help remove artificial obstacles to rational 

loan modifications. We further urge the continued advantageous 

tax status for mortgage securities be conditioned on meeting the 

safe harbor standards. The structures that loans are held in, 

REMICs, are tax advantage structures. They do not pay taxes. It 

is simply pass-through. The Congress has the authority to make it 

a condition of that tax authority continuing that they meet these 

safe harbor standards and in doing so also avoid any taking implications that either approaches may involve. 

Finally, the bill addressing the FDIC provides sensible tools to 

strengthen our banks. As we learned a generation ago, while it 

may be in the best interest of any individual depositor to withdraw 

money at the hint of bank weakness, collectively such actions destroy our financial system, and government intervention through 

deposit insurance was essential. 

Similarly, with today’s foreclosure crisis, individual actors are 

pursuing needless foreclosures that may appear to be in their best 

interest but are devastating homeowners and the overall economy. 

Intervention is again essential. 

In closing, we urge the committee to adopt these bills immediately as well as other needed reforms. Thank you. 

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

98 of the appendix.] 

The CHAIRMAN. Next, we have Ms. Robin Staudt. 

STATEMENT OF MRS. ROBIN P. STAUDT 

Mrs. STAUDT. Chairman Frank, Ranking Member Bachus, and 

members of the committee, I appreciate the opportunity to testify 

before you today. I am currently residing in Orange County, North 

Carolina. This region is farm country on the edge of what used to 

be small-town America, but now abuts the Raleigh/Durham/Chapel 

Hill triangle. I was raised near Pittsburgh, Pennsylvania, so I do 

have a bit of perspective of city life as well. As a private citizen, 

I am honored to have this opportunity to speak to you. 

Mr. Chairman and members of the committee, during the last 

number of months, my family has struggled to make ends meet because of the financial crisis. While I have been unemployed because 

of the housing construction downturn, my husband and I continue 

to change our activities, we cut back on unnecessary spending to 

make sure we can pay our mortgage on time and pay our bills. As 

my family and I continue to work and adjust our life, we cannot 

understand why we have to struggle while others are given a free 

pass on their mortgages. 

54 

Many of the bailouts that have been undertaken will penalize 

those who have been responsible. We are going to pay higher taxes, 

pay higher mortgage fees, and not benefit from any rate reduction. 

This is the wrong approach and punishes responsible behavior. 

Let me be clear, I am not here asking for assistance, but I feel 

that it is not right for many Americans living within their means 

to have to pay for the cost of those who lived outside their means. 

I have bills to pay, and I believe I should be allowed to keep more 

of my money. 

I am a second generation American whose grandmother taught 

her the marvels of freedom and all the opportunities it brings. My 

mother and father taught me the value of hard work, honesty, and 

integrity, with a reminder that pride does go before a fall. The constant lesson that was in America, you could map your success 

based on self-sufficiency and if you ever fell down the solution 

would not be found by depending on the government. You learned 

to get up, dust yourself off, and go for success again. 

To be in the august environment of this committee is overwhelming, but I would respectfully request that if the issue is to 

help the people of the United States, I have no problems with that. 

But at what cost to the taxpayers of America? 

Mr. Chairman, many Americans are angry that they are being 

asked to pay for the mistakes of a few. I believe that the solution 

is not found in bailing out a few homeowners, but in allowing individuals to keep more of their income and spend it how they see fit. 

This will help our economy. 

Thank you very much, gentlemen. 

[The prepared statement of Mrs. Staudt can be found on page 

179 of the appendix.] 

The CHAIRMAN. Next, Professor Edward Morrison of the Columbia Law School. 

STATEMENT OF EDWARD R. MORRISON, PROFESSOR OF LAW, 

COLUMBIA LAW SCHOOL 

Mr. MORRISON. Good afternoon, Chairman Frank, Ranking Member Bachus, and members of the committee. I am Ed Morrison, a 

professor at Columbia Law School. 

Last year saw 2.5 million foreclosures. Another 1.7 million are 

expected this year. Without prompt action, the foreclosure crisis 

will get much worse very soon. Over 4 million Americans are now 

at least 60 days late on their mortgages. Parts of H.R. 703 are a 

step in the right direction, but we can’t consider this bill in a vacuum. 

The House is now considering a bankruptcy cramdown bill that 

permits homeowners to enter bankruptcy and ask judges to reduce 

their outstanding mortgage balances to the current market values 

of their homes. If this bill is enacted, H.R. 703 will be much more 

expensive and much less effective than it appears now. 

First, demand for the HOPE for Homeowners Act and the cost 

to taxpayers could skyrocket. Homeowners will likely prefer the Act 

to bankruptcy cramdown because it offers a greater reduction in 

their mortgage balances. Lenders will also likely prefer the Act to 

bankruptcy cramdown because it offers immediate payment based 

on a manipulable appraisal value. 

55 

By contrast, bankruptcy cramdown offers only a risky promise of 

future payment, and because Chapter 13 plans fail 2⁄3 of the time, 

cramdown may only delay foreclosure for years. As demand for the 

Act spikes and the government takes on a massive number of risky 

mortgages, the cost to taxpayers could be enormous. 

Second, consider loans that are ineligible for HOPE for Homeowners, perhaps due to HUD’s qualifying standards. Among these, 

a cramdown will devalue the safe harbor in H.R. 703. Bankruptcy 

will be more attractive than mortgage modification outside of bankruptcy both to homeowners and to mortgage servicers. Homeowners 

will prefer cramdown because it yields a permanent writedown in 

the mortgage balance. Servicers will prefer it, too, because their 

costs are compensated in judicial proceedings, not in mortgage 

modifications. 

The cramdown bill undercuts H.R. 703, and it is bad policy for 

three reasons. First, it is unnecessary for the vast majority of mortgages. The government can freely modify 35 million of the 55 million outstanding mortgages it controls through Fannie, Freddie, 

and the FHA. Another 12 million mortgages are in the hands of 

private lenders such as community banks, which are taking appreciable efforts to modify loans. These entities have strong incentives 

to do the right thing. They don’t need interference from bankruptcy 

judges. 

Second, cramdown would yield a flood of bankruptcy cases, overwhelm the courts, and delay the crisis potentially for years. Every 

bankruptcy judge handles about 2,600 cases each per year currently. The courts would have difficulty handling a dramatically increased caseload with the care necessary to successfully modify 

loans. And even under the current caseload, 2⁄3 of Chapter 13 plans 

ultimately fail. 

Third, cramdown is expensive. Proponents argue that cramdowns 

will not cost taxpayers any money. That claim is simply not true. 

Taxpayers are on the hook for $5.6 trillion in mortgage guarantees 

from Fannie, Freddie, and the FHA. Other guarantees or loans 

have been extended to private lenders. Cramdown exposes taxpayers to the risk of losing billions of dollars as financial institutions suffer losses and need further capital injections from the government. 

Cramdown is the wrong approach and so is actually HOPE for 

Homeowners because its guarantees impose high costs on taxpayers and because it applies a one-size-fits-all approach to mortgage modification. Columbia professors Christopher Mayer, Tomasz 

Piskorski and I, offer a more effective, lower-cost approach. Unlike 

cramdown, our proposal doesn’t interfere with mortgages that are 

already under the control of Fannie, Freddie, and the FHA. And 

unlike HOPE for Homeowners, our proposal requires no government guarantees. We zero in on privately securitized mortgages. 

They lie at the core of the housing crisis. Although they represent 

only 15 percent of outstanding loans, they account for half of foreclosure starts. 

Servicers of these mortgages should be paid an incentive fee 

equaling 10 percent of mortgage payments, not to exceed $60 per 

month. This fee would align incentives between servicers and investors and make modification, not foreclosure, the preferred soluVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
56 

tion. If a mortgage is ongoing, the servicer receives a monthly fee. 

If it goes to foreclosure, the servicer receives nothing. 

In addition, the government should insulate servicers from legal 

liability when they have a reasonable, good faith belief that modification makes economic sense. This is precisely what the safe harbor in H.R. 703 does, but the bill should do more. It should require 

investors to compensate the legal cost of servicers who are sued but 

successfully invoke the safe harbor. 

Our proposal would avoid up to one million foreclosures, but the 

government can do more. Even among mortgages controlled by the 

GSEs, modification can be inhibited by the presence of second liens. 

The government should therefore offer second lien holders up to 

$1,500 to drop their claims when a primary mortgage is being 

modified. This plan could facilitate 1.4 million new modifications. 

Together, our proposals would address the current crisis at a cost of $12.8 billion payable by TARP funds. This approach is less costly 

and more effective than both cramdowns and HOPE for Homeowners. 

I thank you for the opportunity to speak here. 

[The prepared statement of Professor Morrison can be found on 

page 127 of the appendix.] 

The CHAIRMAN. Let me begin briefly. Mr. Morrison, I appreciate 

particularly your legal analysis because we do have the problem of 

interfering with existing contracts. And the legal analysis—I understand you have some modifications you would make in the Castle proposal. But the legal analysis is the same and I welcome it. 

I think that it is very helpful and you have—the only other thing 

I would say to Mr. Calhoun is that I am pretty confident now, and 

I just spoke to Senator Dodd and spoke to Secretary Geithner, I 

think a very significant mortgage foreclosure reduction program 

with tens of billions of dollars being made available and all of the 

federally held mortgages involved, Fannie Mae and Freddie Mac 

and FDIC and the Fed, I believe, yes, at times—it is long overdue 

and that will be happening very soon, I believe. Obviously, it won’t 

solve everything. 

With that, I am going to yield now to Mr. Cleaver, who set a very 

good example that was only intermittently followed by waiving his 

first round of questioning. He gets to go now. 

Mr. CLEAVER. Thank you, Mr. Chairman. Mr. Stewart, I am assuming you don’t support the HOPE for Homeowners bill as it is 

currently—I am sorry, Mr.— 

Mr. MORRISON. Mr. Morrison. 

Mr. CLEAVER. Mr. Morrison. 

Mr. MORRISON. I do not support the HOPE for Homeowners Act 

largely because, though it can be effective, it is much more costly 

than alternatives. So relative to alternatives, it costs taxpayers 

more money. 

Mr. CLEAVER. All right. Yes. And you don’t support the 

cramdown either? 

Mr. MORRISON. Again, for the same reason. 

Mr. CLEAVER. Most of your opening comments spoke to the 

cramdown, probably 2⁄3, which is not in this but it is in Judiciary. 

Mr. MORRISON. Right. As it began, I think that in considering 

H.R. 703 and its benefits and costs, you have to consider it in conVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
57 

text. The cramdown legislation seems to have a lot of momentum. 

And if the cramdown bill becomes law, it changes the way we need 

to think. 

Mr. CLEAVER. Well, it has to be introduced first. The point is, I 

mean, you spoke about something that is not and you spoke, 2⁄3 of 

your talk, to something that is not. And I was wondering whether 

or not you had anything to say about what is. 

Mr. MORRISON. Right. As I said, I think—H.R. 703 is the first 

step towards a low-cost, comprehensive solution to the foreclosure 

crisis. And this first step would be undermined by cramdown legislation. The first step— 

Mr. CLEAVER. Sir, excuse me. I am sorry. You are a nice person 

and I am sorry to interrupt you. But you keep— 

Mr. MORRISON. No. But I am getting to the safe harbor. Section 

6 of H.R. 703 is the first step towards a comprehensive solution. 

We need the safe harbor because modifications—our foreclosure crisis is in large part driven by privately securitized mortgages. 

Servicers would like to modify these loans but can’t. They face legal 

obstacles which the safe harbor would clear away. They also face 

economic obstacles because it is just not profitable to pursue modifications. Modifications can cost $750 to $1,000 per loan. These 

costs are uncompensated. Whereas if a servicer takes a loan in 

foreclosure, all of its out-of-pocket costs are compensated. 

So my proposal, put together with my Columbia colleagues, is 

one that would take section 6 of H.R. 703 and use it as a foundation. What needs to be layered on top of it is at the very least a 

set of economic incentives that encourages servicers to modify even 

when they have the legal right to do so as section 6 permits. 

Mr. CLEAVER. Non-judicial encouragement hasn’t worked so far 

in this program, unless you have some evidence otherwise. I mean, 

that is one of the things we have talked about. And so for me, living in a community with almost 4,000 foreclosures and a whole 

chunk of others en route, I am concerned about what options we 

have available to make sure that these loan modifications occur. 

And what has happened—I think you would agree, wouldn’t you, 

that it hasn’t worked? 

Mr. MORRISON. We have done a canvassing of the industry and 

discovered that what is stopping—we still have a mass of lenders 

who hold bonds who can’t coordinate and homeowners who can’t 

get the ear of servicers because the servicers are so overwhelmed 

and there is not much profit in the business of servicing. So we 

want to convert that into a profitable enterprise. 

I am not aware of any evidence that would suggest that our proposal is flawed. What we are doing is that we are unlocking the 

servicing box and freeing servicers to modify when it makes economic sense. Keep in mind, a lot of servicers are failing, going 

bankrupt. We are offering a strong carrot that would allow these 

servicers to thrive, make it a profitable business for a change. 

Mr. CLEAVER. Yes. I am trying to get the homeowners to survive. 

Mr. MORRISON. Remember that the only way servicers get aid is 

by avoiding foreclosure. 

The CHAIRMAN. The gentleman from Missouri— 

Mr. CLEAVER. Mr. Yingling, do you support—I know the answer. 

But do you support some kind of judicial loan modification? 

58 

Mr. YINGLING. We support the provisions in this bill for the 

HOPE for Homeowners and we also support the aggressive use of 

TARP funds to help with foreclosure. Housing is at the root of this 

problem and we must address the foreclosure crisis. 

Mr. CLEAVER. I was juxtaposing your position with Mr. Morrison. 

I guess maybe there is some kind of symbolism with the two of you 

on the ends. But I am wondering whether or not— 

The CHAIRMAN. If the gentleman can finish the question, I will 

give him extra time. 

Mr. CLEAVER. We have to try something. I am not going to be 

a part of the do-nothing crowd, to let things go. And it is your opinion that this legislation is the best thing we are considering right 

now or that is on the table that you have heard discussed? 

Mr. YINGLING. This, but also the aggressive use of the TARP 

funds that the chairman referred to. 

The CHAIRMAN. The gentleman from Texas, Mr. Marchant. 

Mr. MARCHANT. Thank you, Mr. Chairman. I think one of the 

parts of this discussion that just took place—and if I could ask for 

a clarification. Has the chairman stated that the cramdown legislation will be merged with this before the Floor? Because if that is 

not the case, then maybe a lot of this discussion— 

The CHAIRMAN. It is up to the Rules Committee and the leadership and it is, I think, still unclear. There was some talk about trying to put it into the omnibus. There are people talking about that. 

The one thing we can control is to do this by regular order. So we 

are going to have our hearing, we are going to have a markup tomorrow, and at that point obviously leaderships decide whether it 

goes to the Floor freestanding or it is packaged or whatever. There 

are a lot of people who talk about packaging it with bankruptcy either as a freestanding package or as part of some other package. 

Mr. MARCHANT. Thank you. My question is to the two bankers 

and I would like for you to expand just a little bit about the markto-market aspect of the pressure that is on the banks with your 

mark-to-market—the mark-to-market influences that makes you be 

so reactive and how it would restrain you from pursuing modifications? 

Mr. MENZIES. Congressman, speaking as a community banker, 

we have not had a challenge with mark-to-market on our balance 

sheet as of this point in time. But there are community banks 

throughout the country that are struggling with mark-to-market. If 

you make a legitimate performing 30-year mortgage loan and it is 

pending as agreed and you have to follow the current mark-to-market standards, it hurts your capital and it hurts your ability to leverage your bank and it hurts your ability to lend in the community. So mark-to-market has to be revisited holistically. 

Mr. MARCHANT. When you say mark-to-market, you are saying a 

stand-alone 30-year mortgage, the regulators would come in and 

say what could you sell that mortgage for today and thus mark it 

to market? 

Mr. MENZIES. We have not had that experience, no. And I don’t 

believe the regulators are going and looking at an Easton Bank and 

Trust 3-year maturity, 30-year amortization loan and saying mark 

it to market. It is the portfolios that are making it mark-to-market. 

In particular, if you are into the private portfolios. We are not. We 

59 

are strictly into Fannie, Freddie, short-term conforming paper, and 

we have not yet had a mark-to-market issue. 

Mr. MARCHANT. So the community bankers are not experiencing 

the pressure of mark-to-market like the big bankers? 

Mr. MENZIES. I would recharacterize that as the community 

bankers are not experiencing as much pressure as the largest 

banks of the Nation with mark-to-market. We are experiencing 

pressure on mark-to-market. 

Mr. YINGLING. I would just say that I have talked to a number 

of community bankers where this is a huge problem, and I will give 

you two quick examples about how it can affect lending outside the 

traditional bank industry. The Federal Home Loan Banks just in 

the last few weeks, because the accountants came in and said we 

are going to take your private mortgage security portfolio and we 

are going to make you mark it to the market, have experienced a 

contraction of their capital. And yet when Moody’s looked at that 

number—and I am doing this from memory and I will correct it if 

it is wrong for the record—they said it is a $13 billion writedown 

on capital. When they looked at the individual securities, they said 

we project the actual loss at $1 billion. So here you have had a $13 

billion hit to capital at the Home Loan Banks, and that is cascading back down into community banks and hurting their liquidity. 

The credit unions just in the last couple of weeks took a massive 

hit, relatively speaking, to the corporate credit unions where they 

had to have a huge, in effect, guarantee from the Credit Union Insurance Fund, and most of that was mark-to-market. 

And I understand the committee may be looking at the way that 

insurance premiums for credit unions are currently paid. But right 

now, under our analysis, they would have to pay basically all the 

earnings from 2008 to their insurance fund because of this guarantee caused by mark-to-market. So that is going to have a cascading effect down to the availability of mortgages, for example, 

from credit unions. 

Mr. MARCHANT. Mr. Chairman, I look forward to the hearing 

that you have announced that we will have where you are going 

to put the regulators and the bankers and make sure that there 

are not cross purposes going on here because I would contend that 

as hard as we push to solve these problems out in the banks during 

the examinations and with every aspect of banking now, there is 

this pressure that is preventing them from making loans, preventing them from doing business as usual. That is the biggest example here. If you buy a security and intend to hold it to maturity, 

then that is one— 

The CHAIRMAN. Yes, we will be pursuing that. I just want to say 

to Mr. Yingling—and I know you had a commitment. But I especially appreciate you stayed long enough for that expression of solicitude for the credit unions. It is duly noted and appreciated. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. I would like to ask 

Mr. Yingling and Mr. Menzies, the HOPE for Homeowners Program has clearly not refinanced as many mortgages as we would 

have liked at this point, and one of the criticisms of the program 

has been that lender participation is voluntary. With the bill you 

60 

are supporting and the changes you are supporting today, what assurances can you give us, if any, that the—with these changes we 

will see a greater degree of lender participation? 

Mr. YINGLING. Well, I think you will see a greater degree of participation. I think also one of the important things here is that 

with this program and with the program that will be developed 

under the TARP, which we presume will look something like the 

FDIC program and providing flexibility in those programs to adjust 

to whatever problems we find going forward, we are creating a 

flexible system that can adjust. I think one of the problems has 

been that we have had to write in hard-wire requirements here and 

there with no ability to adjust to what has clearly been very rapidly changing circumstances. 

And then again, the part about securitization is very important. 

A number of the members have commented on how the threat of 

litigation in the case of securitized loans has been maybe the biggest impediment that we have faced, and this bill deals with that. 

Mrs. MALONEY. Mr. Menzies. 

Mr. MENZIES. Congresswoman, I think that we absolutely will 

see more volume at FHA. There is no question that we need to deal 

with the technology side, which has been an encumbrance on this 

whole process. The FHA would benefit from an upgrade of its technology, but I believe we will see more and I think it does give us 

some hope. 

Mrs. MALONEY. And, Mr. Taylor and Mr. Calhoun, would you 

like to comment on your belief whether or not this will increase 

participation by the lenders or any other incentives or proposals 

that might help us stem this loss of homes in our economy? I must 

say that throughout this process from the very beginning, the 

economists have said that the number one deal we should focus on 

is helping people stay in their homes and, if we don’t do that, then 

the value of homes are going to fall and it is going to be a downward spiral of our economy, and yet it seems to be not getting the 

proper attention that it deserves, given the fact that people say this 

is the number one issue in order to try to stabilize our housing 

market and our economy. So I would like Mr. Taylor and Mr. Calhoun to comment on it if you could. 

Mr. TAYLOR. Thank you, Representative Maloney. And I think 

there is great misperception out there that there is in fact a lot of 

help being offered and a lot being done to help homeowners. And 

when you sit here and you listen to—the HOPE for Homeowners 

has done 25 loans of 400,000, which even then when that number 

came up we were all critical that that is just a drop in the bucket. 

Well, they have done 25. It is almost a bad joke. But at least now 

with the terms and conditions that this committee and the chairman has offered, I think there is a real potential here putting the 

new terms and conditions which I think treat the consumer better 

in this process, but also create the safe harbor for servicers, put 

that together with some of the top funds. I think there is a real 

opportunity to make a dent in this. But I still think we are going 

to be challenged down the road. And I hope I am wrong about this, 

but I think unless there is a proactive step in which we step into 

the market and pull these loans away and direct those services, 

whether they are working with the FHA or whether they are workVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
61 

ing with the market because pulling these loans down, you know, 

at a discount, using the various methodologies that we have been 

proposing for a year now will reduce those mortgages in and of 

themselves when they are purchased so that the market itself, the 

mainstream banks, the community banks would be able to refinance these using the savings that occurred from purchasing these 

loans at a discount. 

Mr. CALHOUN. If I could add, originally there was talk going way 

back of pairing it with the bankruptcy reform, that it would provide, if you will, a carrot and a stick, and we have had no stick 

here. And I note we had 300,000 foreclosure filings in December. 

The crisis is still going at full bore. 

I would commend to everyone the Credit Suisse report on bankruptcy that they performed, a detailed analysis issued a week ago. 

They found that it would reduce foreclosures by 20 percent, that it 

would encourage more voluntary modifications by providing some 

pressure for those, that it would provide a good return to lenders 

and it would not hurt the cost or availability of future mortgages. 

And I would note for Mr. Morrison’s proposal, there are some 

things we agree with there, but it doesn’t address the fundamental 

problem that a large percentage of these troubled mortgages are 

underwater and you can’t refinance them easily. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Lance. 

Mr. LANCE. Thank you, Mr. Chairman. To Professor Morrison, as 

I understand it, you propose a litigation safe harbor based upon a 

servicer’s reasonable good faith belief that it was acting in the best 

interest of investors. Do you have a concern, Professor, that there 

might be conflicting interpretations across the various Federal circuits if we were to use that standard? 

Mr. MORRISON. I have as much concern about that legal standard 

as I would be concerned about any legislation being interpreted differently by different courts. So I think this standard is as clear as 

any legal standard could be, other than one that absolves servicers 

of any liability, which we definitely do not want to do. We want to 

have some sort of incentivizing of servicers, not just the incentive 

fees that I propose, but also legal liability as a spur to act in their 

fiduciary capacities. 

Differently, the safe harbor that we propose, and which is identical to the one in H.R. 703, uses a net present value test, which 

is very similar to the ones that—very similar to the test that is 

routinely applied in Chapter 11 reorganizations. The judge is asked 

to decide whether the recovery to creditors will be higher in a reorganization than in a Chapter 7 liquidation. 

So this is a formula that is applied routinely, and I don’t expect 

it to be applied in a fundamentally different way across the Nation. 

And moreover, the way it is structured, it is a differential test. It 

is based on the belief of the servicer, not on some evidence that 

after the fact the modification wasn’t successful. 

Mr. LANCE. Thank you. Regarding cramdown, I am of mixed 

emotion about it. Certainly, there were many who were victimized, 

and I think Congress in a bipartisan basis wishes to address that 

issue. But you do raise the point that this might create moral hazard. I think many that favor it believe that losses will occur between the lenders and the borrowers. And yet as I understand your 

62 

testimony—and I have read your testimony, Professor Morrison— 

you believe that the taxpayers will end up bearing a substantial 

portion of the costs. I think you indicated in your testimony to the 

committee that—did I hear you correctly—$5.6 trillion involved in 

mortgages? 

Mr. MORRISON. At least, in terms of our commitments to the 

GSEs. I don’t think that even counts—I don’t think my calculation 

counted the various commitments to the banks and other institutions that are exposed to the mortgage cramdowns. 

Mr. LANCE. And you also indicate that you think eventually that 

this will lead to higher borrowing costs for everyone, that is in your 

written testimony. Could you explain that in a little more detail, 

Professor? 

Mr. MORRISON. Right. So the current legislation, or at least H.R. 

200, has a time limit that would apply only to mortgages originated— 

Mr. LANCE. But you indicate in your testimony—and I read it— 

that you think Congress would be under enormous pressure in the 

future to modify that? 

Mr. MORRISON. Right. I mean, this provision, the cramdown has 

been long advocated regardless of the economic environment. And 

it seems likely that based on our—my analysis, that bankruptcy 

cramdown could just defer the crisis and as the crisis lasts longer 

there is going to be pressure to apply mortgage cramdown laws to 

mortgages originated after the effective date. And if bankruptcy 

cramdown becomes a permanent feature of the code, there is no 

doubt that it will affect credit markets. 

The Credit Suisse report that was just cited by Mr. Calhoun is 

riddled with errors, one of which is its reliance upon a study claiming no effect on credit markets from mortgage cramdown. That 

very study—and I can point you to the exact tables—finds just the 

opposite effect with respect to disadvantaged borrowers, meaning 

borrowers who do have imperfect credit records. And the study was 

not of the subprime era. It was of the early 1990’s. So we are not 

talking about a subprime kind of borrower. We are talking about 

someone with marginal FICO scores. And for these people, that 

very study—which the Credit Suisse seems to misreport—that very 

study finds a reduction in loan-to-value ratios and an increase in 

interest rates for these disadvantaged borrowers. 

Mr. LANCE. Thank you very much. I look forward to pursuing 

this further with you as we analyze this issue further. Thank you 

very much, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. I want to get three questions in. Mr. Yingling and Mr. Courson, I would like your reaction 

to whether the concept of a bad bank creates a moral hazard. I 

would like the two of your reactions to the Credit Suisse study that 

Mr. Calhoun has made reference to, and if there is time I would 

like anybody’s reaction to how this Senate proposal, the proposal 

that is floating around on the Senate side, for a 4.5 percent interest 

rate on mortgages plays into this whole situation. 

Mr. Yingling. 

Mr. YINGLING. First on the good bank, bad bank, it has been 

touched on. And I think the real problem with it, not an insurVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
63 

mountable problem, is valuation and I don’t know how you value 

those assets in a way that works, given some of it is mark-to-market, given the fact that if you value them at the current mark-tomarket it is way too low and if you value them higher I think some 

of you are going to say, well, are the taxpayers being disadvantaged. 

So I believe the Administration is looking at a dual model where 

people could use that if they wanted. If they had already marked 

them down— 

Mr. WATT. So your opinion is that it is a moral hazard if you 

don’t get the valuation right? 

Mr. YINGLING. I think it is almost impossible to get the valuation 

right. But it may be that if they combine it with people who—if the 

bank want to says I have marked it to market, that is what I will 

offer it for. And on the other hand, they could go for a guarantee 

where the valuation— 

Mr. WATT. Mr. Courson, respond to the Credit Suisse study. 

Mr. COURSON. Congressman, I am not familiar with it. I have not 

read that study. 

Mr. WATT. Have you, Mr. Yingling? 

Mr. YINGLING. I have read a summary of it. 

Mr. WATT. What is your reaction to it? 

Mr. YINGLING. I think it does have some problems. I think that 

in many ways this is a cost-benefit analysis. There is a way to 

reach a compromise on this because if you look at the benefits that 

people talk about, we can argue about how big they are, but the 

idea is that it will help some people stay out of foreclosure. And 

on the cost side, I do think that the study is wrong to the degree 

it may imply that there is not a cost. There will be a cost going 

forward in terms of higher interest rates and in terms of— 

Mr. WATT. Even if you limit it to this short duration in time that 

the Senate proposal is— 

Mr. YINGLING. That helps. One of the problems is they keep 

using date of enactment. So I have bankers asking me, what should 

I be doing right now? But I do think that most of the benefits 

would be on the side of looking at the kinds of mortgages that probably shouldn’t have been made, and those are where the real problems are, and if you limit it to those, then you don’t have as much 

of a cost because going forward presumably lenders aren’t going to 

be making those kind of loans. 

So I think there is a way to finesse this and get some kind of 

compromise in that sense. 

Mr. WATT. I am glad to know you all are moving toward a compromise. That is music to my ears. 

Mr. Calhoun, address this 41⁄2 percent interest rate proposal and 

what impact that has in this whole equation. 

Mr. CALHOUN. I think they are related. We have seen tremendous interest rate relief already, and that has been helpful but not 

enough to stem the foreclosure crisis. Again, I think there is agreement here. A huge part of the troubled mortgages are underwater 

mortgages held in private label securities. The problem there is the 

interest rate in terms of refinancing. You can’t refinance underwater mortgages, even at favorable rates. You need some other asVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
64 

sistance. That is why eventually there has to be some sort of 

writedown or subsidy involved. 

And the cramdown—I think it is important—people talk of this 

cramdown like it is a drive-by cramdown. You go into your local 

Sonic and say I want a cramdown, pay for it, and drive away. It 

is a tough row to hoe. You have to be in a bankruptcy plan for 5 

years, give up your right to any new credit, apply all of your disposable income to pay off your secured and unsecured debts. And 

under the compromise that came out of the Judiciary Committee, 

there is a so-called claw-back provision. If your home appreciates 

over the 5 years of the plan, you have to share a large part of that 

appreciation with your lender. 

So people talk about this like it is an easy walk-in thing. There 

are a lot of safeguards there, so that it loses the potential for any 

moral hazard. 

Mr. WATT. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. Ms. Staudt, let me just 

say this quickly. I thank you for coming. Your story is personal in 

a sense and we appreciate very much your sharing it with us. 

Thank you very much, and I thank all of you for coming of course. 

But, Mr. Morrison, may I ask, have you written any white papers 

comparable to the one that I have or some body of knowledge that 

deals with cramdowns for business? 

Mr. MORRISON. Cramdowns for business? 

Mr. GREEN. Yes, sir. You agree that we have cramdowns for businesses, don’t you? 

Mr. MORRISON. Yes, we have them in Chapter 11 plans. 

Mr. GREEN. Right. I would call that a cramdown. You wouldn’t 

call that a cramdown? 

Mr. MORRISON. There is a version of the cramdown— 

Mr. GREEN. Have you written any papers in opposition to that? 

Mr. MORRISON. No, I have not. 

Mr. GREEN. Anything on cramdowns that—have you written anything opposing cramdowns for my 2nd, 3rd, 4th, or 5th home? 

Mr. MORRISON. No, I have not. 

Mr. GREEN. You do agree that we have cramdowns for 2nd, 3rd, 

4th, and 5th homes beyond the first? 

Mr. MORRISON. Yes. And we expect that the credit markets are 

very different for those kinds of homes. 

Mr. GREEN. I understand. Well, let us just examine— 

Mr. MORRISON. I can make a mention—in Chapter 11, for example— 

Mr. GREEN. Before you do that, I think I am going to have to 

take control of the time because I have so little. Permit me to ask 

this. With reference to the businesses having the opportunity to 

cramdown, what is it about the residential homeowner that is so 

greatly different from that of the business having the opportunity 

to cramdown? And I want to talk about now for a specific window. 

Let us just talk about the subprime mortgages only. Let us take 

a 4-year window, none before, none to come after. What is it about 

that class of people that would make them unacceptable for a 

cramdown when businesses can get it? 

65 

Mr. MORRISON. I think the relevant comparison is what is—as 

one of your colleagues, I think it was Representative Sherman, 

said—is we want a solution that costs taxpayers the least amount 

of money. And I agree, cramdown would reduce foreclosures. HOPE 

for Homeowners would reduce foreclosures. But we have to ask 

how much do taxpayers get charged for these policies. 

And I think the relevant question for policymakers is to ask what 

alternatives are available. And my colleagues, Christopher Mayer 

and Tomasz Piskorski, and I put forth a proposal that does as 

much work, more we think than cramdown or HOPE for Homeowners at a fraction of the cost. That for us is a strong reason not 

to go down the cramdown route, which we fear could delay a crisis 

that is of a different order of magnitude. We may talk about 

cramdown for businesses, but we are not talking about— 

Mr. GREEN. If I may reclaim my time. The essence of your contention is that this is much more cost effective to avoid the 

cramdown and to go solely with the HOPE for Homeowners modification program; is this correct? 

Mr. MORRISON. No. My proposal is not for HOPE for Homeowners. I think HOPE for Homeowners is relatively costly compared to the proposal I outline in the white paper I submitted. 

Mr. GREEN. You are talking about 788, the safe harbor program? 

Mr. MORRISON. The safe harbor tied to economic incentives for 

servicers to help homeowners. 

Mr. GREEN. But it is your position that would be a more cost effective way to approach this? 

Mr. MORRISON. Yes. 

Mr. GREEN. Okay. Now, let us examine that for just a moment. 

I tend to like the program myself, but I do want to ask this. Do 

you agree that people who can win lawsuits generally speaking 

don’t enjoy being sued or would prefer not to be sued? 

Mr. MORRISON. People who—I am sorry. What do you mean— 

Mr. GREEN. Who can win lawsuits, who have the law on their 

side, who have the long arm of the Congress having provided them 

a safe harbor, do you agree that they, generally speaking, don’t 

enjoy being sued? 

Mr. MORRISON. That is correct. 

Mr. GREEN. Do you agree that there will be litigation with reference to persons who participate in this program, which is why 

someone mentioned indemnification earlier? 

Mr. MORRISON. That is exactly why in my testimony I had suggested we—I agree with, I think, Mr. Courson with respect to that 

indemnification. I think that is a good idea. Also, we need to have 

a cost shifting provision such that if lawsuits are brought, the losing party pays the fees—that the losing party pays the fees of the 

winning party. 

The CHAIRMAN. Could I—if the gentleman would yield. When you 

talked about your $12 billion cost, though, you didn’t have indemnification in there, did you? Would that add to the cost significantly? 

Mr. MORRISON. These would not be costs of the government. 

These would be costs— 

The CHAIRMAN. Who would indemnify them? I thought indemnification was by the government. 

66 

Mr. MORRISON. We are mixing up two kinds of indemnification, 

one, which is not my proposal, which is Mr. Courson’s, which would 

cost the government. 

The CHAIRMAN. You said you would agree with Mr. Courson— 

Mr. MORRISON. I think. 

The CHAIRMAN. Stop, please. And I will give you some extra time 

here, but— 

Mr. GREEN. That is the way I am going, Mr. Chairman. 

The CHAIRMAN. You said you agree with Mr. Courson. I had understood Mr. Courson to be talking about taxpayer-funded indemnification. And if that were the case, it would be an added cost to 

your idea. 

Mr. MORRISON. I never thought of it, but I think it is a good idea. 

The CHAIRMAN. But it does add to the cost. 

Mr. MORRISON. Yes. I can do the calculations. 

The CHAIRMAN. I thank the gentleman. 

Mr. GREEN. Thank you, Mr. Chairman. And I would yield back 

in the interest of time. 

The CHAIRMAN. More time needed? 

Mr. GREEN. I yield back. Thank you. 

The CHAIRMAN. I thank the panel—oh, the gentleman from Florida, I did not realize you came back. The gentleman from Florida. 

I am not used to looking on the other side for— 

Mr. GRAYSON. We are all struggling here with ways to try to get 

the economy moving again, and we are all looking to the credit 

markets to make that happen, to stop the declining credit, to accelerate the expansion of credit, to make the economy come alive 

again. We all do that with limited resources. We can help and only 

help to a certain extent. There are banks that have made terrible 

mistakes over the past few years that have led to hundreds of billions of dollars in lawsuits, and there are banks that do their jobs 

well. There are banks that do the jobs of banks every day, smart 

lending, smart borrowing, nothing goes wrong. 

So I am going to ask you all individually for as much time as we 

have. I would like to go from left to right. You tell me, should we 

be helping the good banks or should we be helping the bad banks? 

I start with Mr. Yingling. 

Mr. YINGLING. Well, I think you to some degree have to do both. 

I think maybe those in the middle are the ones that aren’t getting 

the help now, and that may be correct. I think if you look at the 

way the capital purchase program was designed it was designed to 

help only healthy banks on the theory that you put capital in them, 

you built a strong capital base and they could go out and lend to 

their customers and pick up the customers of others where credit 

may not be available. I think there are going to be some institutions if they are systemically important that are going to have to 

be taken care of. And those in the middle I think under the current 

program are left to go to the private markets and raise capital 

when they can. 

Mr. MENZIES. Congressman, community banks stick to their knitting. They are well-capitalized, we are well-managed, we are wellregulated, we lend into our communities and community banks can 

make a difference in this recovery. I can’t tell you whether we 

should save the systemic risk banks or not. That is a big heavy deVerDate Nov 24 2008 18:32 Jun 04, 2009 Jkt 048672 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 K:\DOCS\48672.TXT TERRIE
67 

cision that is up to all of you. But I do believe that community 

banks with greater access to deposit funds and greater access to 

capital can significantly improve the rate of recovery in communities throughout America. We have stuck to our knitting. We are 

not too big to fail. We are not too big to regulate. We are not too 

big to supervise. We are not too big to govern, and we are not too 

big to punish if we misbehave. 

Mr. TAYLOR. I have trouble with answering the question because 

I am not sure what is in your head as to what is a good bank or 

a bad bank. But I think in some ways we are so beyond that discussion because, as Mike said earlier, to paraphrase him, I think 

the servicers, the banks, the communities, this Congress, we are all 

in this together. If we don’t find a way to stabilize our financial 

services sector and to deal with these problems, it isn’t going to be 

a matter of who was the good guy and who was the bad guy. But 

it is going to be a matter of how far we go into this recession and 

whether we go into what Zandi is calling a potential depression. 

And I think what we need to do is create as much liquidity as possible and do something we haven’t done yet, and that is help the 

homeowners, help the source of what was the original impetus for 

this recession and stop the foreclosures and go right after the people who are still working, who are able to pay on their mortgages 

and would gladly continue paying on their mortgages if they could 

get on the one that wasn’t predatory. 

Mr. COURSON. Congressman, the mortgage markets and the credit markets are just seized up and we have to have liquidity. So I 

am not putting labels on anyone. We have to create liquidity. We 

have to, using the TARP funds, figure out a way that we can liquefy these balance sheets, we can get these bad loans either corralled or off the balance sheets to create liquidity and, having done 

that, then take control, as the chairman talks about, find a way, 

as we have talked about here, of dramatically and aggressively 

dealing with those loans once we get our arms around it. But we 

have to have liquidity in the marketplace regardless of whether it 

is a large national bank, community bank, small regional bank. 

Mr. CALHOUN. I think you help both when you do that primarily 

through stabilizing housing market. As a lender, and I think all the 

lenders here will say, it is almost impossible to lend in a market 

with declining values. You have to charge such huge premiums. 

In the Credit Suisse report, they estimate that every foreclosure imposes an externality of $300,000 in reduction in housing values 

on other properties. And if we allow these foreclosures to keep rolling on, there is no floor, you can’t have liquidity. And I want to emphasize that while we think the cramdown isn’t an essential part 

of that strategy, it is a part. 

The CHAIRMAN. We will stop with that question. Do the other 

two witnesses want to add anything? 

Mrs. STAUDT. I would like to say something as a homeowner and 

a taxpayer who is caught in the squeeze. I understand that these 

problems are way bigger than I can even begin to speak to. What 

my concern is, is that many of the moves that have been done by 

the government has kept an artificially inflated market going. The 

values of homes are staying higher than they really are. That is 

why we have all these underwater mortgages everywhere. 

68 

To give you a quick example— 

The CHAIRMAN. We don’t have a lot of time. 

Mrs. STAUDT. Very, very quick. I just got a 20 percent increase 

on the value of my home during revaluation in our area. There are 

‘‘for sale’’ signs everywhere. But we were all reevaluated 20 percent 

higher because they need to generate revenue. I just want us to— 

The CHAIRMAN. I am sorry. We really are kind of pressed for 

time. 

Mrs. STAUDT. I just want us to be careful of what we choose to 

do. If the government chooses to help anybody, not just the banks, 

please consider the taxpayers because we are overburdened. Thank 

you. 

The CHAIRMAN. Mr. Morrison. 

Mr. MORRISON. We may need regulation to prevent banks from 

going bad, but right now we need to stabilize our financial sector. 

If we don’t stabilize the financial system, both good and bad banks, 

we will see unemployment on Main Street. Academic studies have 

shown this. When Worldcom defaulted on bonds held by banks, 

those banks suffered distress and reduced lending at local branches 

throughout the country. It is as simple as that. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

The CHAIRMAN. The final questioner is the gentleman from Minnesota. 

Mr. PAULSEN. Thank you, Mr. Chairman. And I just had a question for Mr. Menzies. Some of this may have already been covered 

before, but I know there has been a great deal of focus given to 

TARP obviously in a lot of the questioning that has gone on today 

as well as in the Congress. It has really been a means of getting 

capital into the hands of the lenders obviously, but I know the community banks which are obviously organized across the full range 

of charter types have had a variety of concerns and problems relating—about just gaining access to the program itself in general. And 

I am just wondering if there are other ways that Congress can specifically help get capital into the hands of the small lenders who 

really feed the small business community? 

Mr. MENZIES. Thank you for your question, Congressman. On a 

very personal note as a Subchapter S bank, if Congress would authorize IRA accounts and 401(k)s to invest in Subchapter S companies, that would dramatically increase our access to capital. And 

there are over 2,500 Subchapter S banks of the 8,380 banks in this 

Nation. And if Congress would continue to encourage the Treasury 

to direct CPP monies to communities in the Nation, that would be 

great as well. 

You note that most of the community banks in the Nation have 

not yet taken advantage of TARP. We think it is important that 

those banks who can take advantage of the CPP program do so and 

use that money to lend to their local communities. We have a local 

bank that took advantage of TARP and from all of our perspectives 

they are using it very responsibly and they are leveraging it. They 

are lending it out 10 to 1. They are doing a great job for the community. As a Subchapter S bank, we have yet to go through the 

process of interpreting the term sheet so we don’t yet know if we 

are going to take advantage of CPP. But those would be my 

thoughts for community banks. 

69 

The CHAIRMAN. Do you have a term sheet yet? 

Mr. MENZIES. Yes, sir, we do. We have submitted our application. 

The CHAIRMAN. The mutuals don’t have them, but you have 

them. 

Mr. MENZIES. Mutuals don’t have them. That is an important 

point, Mr. Chairman. 

The CHAIRMAN. I understand, but we are not going to repeat it. 

Mr. PAULSEN. I yield back, Mr. Chairman. 

The CHAIRMAN. I thank the panel. Sometimes when we are running late, people’s attention is more focused. Thank you all for your 

contributions. 

[Whereupon, at 6:00 p.m., the hearing was adjourned.] 

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