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IS TREASURY USING BAILOUT FUNDS TO INCREASE FORECLOSURE PREVENTION, AS CONGRESS INTENDED?

HEARING

BEFORE THE

SUBCOMMITTEE ON DOMESTIC POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

NOVEMBER 14, 2008

Serial No. 110–170

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

JACKIE SPEIER, California

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON DOMESTIC POLICY

DENNIS J. KUCINICH, Ohio, Chairman

ELIJAH E. CUMMINGS, Maryland

DIANE E. WATSON, California

CHRISTOPHER S. MURPHY, Connecticut

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

BRIAN HIGGINS, New York

BRUCE L. BRALEY, Iowa

JACKIE SPEIER, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

CHRIS CANNON, Utah

BRIAN P. BILBRAY, California

JARON R. BOURKE, Staff Director

(III)

C O N T E N T S

Page

Hearing held on November 14, 2008 ...................................................................... 1

Statement of:

Barr, Professor Michael, former Deputy Assistant Secretary for Community Development, Department of Treasury, University of Michigan

Law School & Center for American Progress; Professor Anthony B.

Sanders, W.P. Carey School of Business, Arizona State University;

Alys Cohen, staff attorney, National Consumer Law Center; Larry Litton, Jr., president and CEO, Litton Loan Servicing LP; Stephen S.

Kudenholdt, chairman, Thacher Proffitt & Wood; and Thomas Deutsch,

deputy assistant director, American Securitization Forum ....................... 52

Barr, Professor Michael ............................................................................ 52

Cohen, Alys ................................................................................................ 77

Deutsch, Thomas ....................................................................................... 124

Kudenholdt, Stephen S. ............................................................................ 107

Litton, Larry .............................................................................................. 99

Sanders, Professor Anthony B. ................................................................. 70

Kashkari, Neel, Interim Assistant Secretary of the Treasury for Financial

Stability and Assistant Secretary of the Treasury for International

Economics and Development ........................................................................ 13

Letters, statements, etc., submitted for the record by:

Barr, Professor Michael, former Deputy Assistant Secretary for Community Development, Department of Treasury, University of Michigan

Law School & Center for American Progress, prepared statement of ...... 55

Cohen, Alys, staff attorney, National Consumer Law Center, prepared

statement of ................................................................................................... 79

Deutsch, Thomas, deputy assistant director, American Securitization

Forum, prepared statement of ..................................................................... 126

Kashkari, Neel, Interim Assistant Secretary of the Treasury for Financial

Stability and Assistant Secretary of the Treasury for International

Economics and Development, prepared statement of ................................ 15

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 4

Kudenholdt, Stephen S., chairman, Thacher Proffitt & Wood, prepared

statement of ................................................................................................... 109

Litton, Larry, Jr., president and CEO, Litton Loan Servicing LP, prepared statement of ........................................................................................ 101

Sanders, Professor Anthony B., W.P. Carey School of Business, Arizona

State University, prepared statement of ..................................................... 72

(1)

IS TREASURY USING BAILOUT FUNDS TO INCREASE FORECLOSURE PREVENTION, AS

CONGRESS INTENDED?

FRIDAY, NOVEMBER 14, 2008

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON DOMESTIC POLICY,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

2154, Rayburn House Office Building, Hon. Dennis J. Kucinich

(chairman of the subcommittee) presiding.

Present: Representatives Kucinich, Cummings, Issa, and Bilbray.

Staff present: Jaron R. Bourke, staff director; Charles Honig and

Noura Erakat, counsels; Jean Gosa, clerk; Charisma Williams, staff

assistant; Leneal Scott, information systems manager; Charles

Phillips, minority senior counsel; Jason Scism, minority counsel;

Molly Boyl, minority professional staff member; and Larry Brady

and John Cuaderes, minority senior investigators and policy advisors.

Mr. KUCINICH. The subcommittee will come to order.

The Subcommittee on Domestic Policy of the Committee on Oversight and Government Reform is now in order. Today’s hearing will

examine the foreclosure crisis and its solutions.

Without objection, the Chair and the ranking minority member

will have 5 minutes to make opening statements, followed by opening statements not to exceed 3 minutes by any other Member who

seeks recognition. Without objection, Members and witnesses may

have 5 legislative days to submit a written statement or extraneous

materials for the record.

The title of this hearing is ‘‘Is Treasury Using Bailout Funds to

Increase Foreclosure Prevention, as Congress Intended?’’ Two days

ago, Secretary Paulson gave his answer: ‘‘No.’’

Secretary Paulson’s policy reversal breaks with congressional intent, contradicts public assurances previously made by Treasury,

and leaves the Federal Government without an adequate mechanism to stem a tide of home foreclosures. Congress’ intent in enacting the Emergency Economic Stabilization Act of 2008, the statute

that created the Troubled Asset Relief Program, was in part to buy

troubled mortgage assets and implement a plan to minimize risk

for foreclosures.

Only 3 weeks ago, Mr. Kashkari testified before the Senate that

he was preparing to purchase troubled mortgage assets. Two weeks

ago, Mr. Kashkari’s top staff, including an individual with the posiVerDate 11-MAY-2000 15:38 Jul 06, 2009 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 U:\DOCS\50097.TXT KATIE PsN: KATIE
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tion entitled ‘‘Interim Chief for Home Preservation’’ and another in

charge of whole mortgage loan acquisition, spoke with my staff

about the Troubled Asset Relief Program’s plans to purchase troubled mortgage assets. Last week the Treasury filed an interim

tranche report required by the Emergency Economic Stabilization

Act stating that Treasury’s policy teams were still committed to

preserving homeownership.

Rather than prevent foreclosures by acquiring troubled mortgage

assets as the Emergency Economic Stabilization Act authorized,

Secretary Paulson announced on Wednesday that the Troubled

Asset Relief Program would not buy mortgage assets. Instead,

Treasury would exclusively continue along the path of providing

preferred equity injections to handpicked companies. Thus, the only

significant use by Treasury of the funds Congress authorized to address the mortgage crisis underlying the financial crisis includes,

among other things, propping up a Beverly Hills banker; subsidizing the evisceration of National City Bank and the laying off of

thousands of Clevelanders who worked there; and indirectly funding the payment of bonuses, compensation, and dividends by financial firms that could not have afforded to make them without the

TARP capital infusion. I think it is fairly obvious that Congress

would have never passed the Emergency Economic Stabilization

Act had it known how Treasury would marshal the resources it

was given.

There is a consensus among the business community, academics

and policymakers that the financial crisis will not be resolved until

the mortgage crisis is resolved. There is a further consensus from

experts, some of whom you will hear from today, that resolution of

the mortgage crisis demands stronger action by the Federal Government than private industry so far has been willing to undertake.

The Emergency Economic Stabilization Act enables Treasury to

purchase and thereby control the mortgage servicing of potentially

millions of mortgages that will soon go into default. That control,

if exercised, would make a qualitative difference in the kind of loan

modifications that would be performed because the Federal Government would not and should not have followed the same restricted

loan modification policies so far pursued by private investors.

To accomplish the social policy of protecting neighborhoods and

preserving the financial system as a whole, once TARP owned

whole mortgage loans, acquired from the bank portfolios and

securitized mortgage pools, TARP could direct mortgage servicers

to make loan modifications in the principal balance of troubled

mortgages. We are going to hear today from industry and academic

experts alike about how critical this step is to fix our current mortgage crisis.

While there is some disagreement among experts whether Treasury currently possesses sufficient authority to purchase mortgages

and effect loan modifications over the full range of mortgage and

mortgage-related assets, and there remains an issue whether

Treasury should pursue a mortgage guarantee program to replace

or complement an asset-purchase and modification program, these

technical questions, while important, should not obscure a fundamental fact: Treasury was uniquely empowered by Congress and

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positioned to embark on a range of foreclosure-prevention efforts

that could not be undertaken by the private sector. Treasury had

the money, and the technical challenges had solutions.

Rather than undertake this difficult but crucial work, the Treasury Department has abdicated its responsibility to stem the tide of

mortgage foreclosures. They have passed the responsibility back to

the private sector and additional inadequate government efforts.

While there are many hard-working and well-intentioned people in

the industry striving to do loan modifications, the hard truth is

they are not keeping up with the number of borrowers needing

modifications to prevent foreclosures and default.

As a predictable result, foreclosures have continued to mount,

and millions more are forecast. Furthermore, experience is showing

that there is a significant problem of redefault where borrowers

who are among the lucky few to receive a loan modification at all

are not receiving loan modifications that cure the dual problems of

affordability and negative equity. Foreclosure is delayed, but not

prevented. Treasury’s action to abandon acquiring troubled mortgage assets unfortunately, maybe tragically, leaves the problem of

negative equity unresolved.

I hope that today’s hearing will permit us to have a thorough examination of the basis for the Treasury Department’s decision to

ignore the foreclosure prevention objective of the Troubled Asset

Relief Program. As Congress may soon receive a request for a second installment of $350 billion toward the Troubled Asset Relief

Program, and as we are on the eve of a new administration which

will have the opportunity to reconsider Secretary Paulson’s decision, it would be helpful to Members of Congress and to the next

administration to understand the viewpoints and assess the judgment of the current Troubled Asset Relief Program leadership before deciding to entrust to them the remainder of the bailout funds

and continue their policies.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. KUCINICH. At this time I am pleased to recognize the distinguished Congressmember from the State of California, Mr. Darrell

Issa, who has been not just a ranking member of this subcommittee, but a partner in expressing concern over so many of these

issues that are reflected not only in this $700 billion bailout, but

in Treasury’s management of it.

Mr. Issa, I just want to thank you personally for the efforts that

you have made. They have been outstanding. I am pleased to be

with you today, having you join Mr. Cummings and I.

Thank you.

Mr. ISSA. Thank you, Mr. Chairman. In that this may be the last

hearing that you and I do together in our present capacities, I want

to thank you for 2 solid years of bipartisan, cooperative work,

which from a field hearing standpoint began with going to Cleveland and looking at this problem approximately 18 months before

the Treasury came and said they had a crisis that needed to immediately be handled.

Mr. Chairman, today I appreciate your holding this hearing, and

I appreciate the joint effort that brought our witness to us today.

The focus of today’s hearing is stated to be to determine whether

or not the administration is following the intent of Congress embodied in the $700 billion financial bailout package related to mortgage foreclosure prevention.

My interpretation of Mr. Kashkari’s testimony and the remarks

by Secretary Paulson on Wednesday demonstrate to me that the

administration is ignoring congressional intent and reversing

course of their original request. I don’t know whether to call this

fire-ready-aim, or something more pejorative.

I approach this issue with somewhat of an interesting perspective because I, like the chairman, voted against the bailout not

once, but twice. Chairman Kucinich and I sometimes disagree on

the proper role of the Federal Government. In fact, when it comes

to some of the solutions that could be used under the TARP, we

may, in fact, reach opposite conclusions. But I think we stand here

today or sit here today united in two parts of the problem: One, it

was disingenuous in the way that the administration came to us

with a crisis which ultimately could not have been a crisis as described because the money has not in any way, shape or form been

used as it was asked for; and, two, that, in fact, Treasury’s request

for authority appears to be a request for a blank check of $700 billion, rather than any definable use of the money other than vaguely saying the money would be used.

Today I find myself in an odd situation. I am asking whether I

agree with the chairman or not as to exactly what we are supposed

to do with the money. I am asking should we, in fact, instead of

authorizing the second $350 billion pursuant to the TARP, look at

reallocating those funds to HUD, or actually to the VA and the

FHA, because, in fact, if we need to have people be able to remain

in their homes, it is very clear that Treasury cannot and will not

make the effort to keep people in their homes.

As I said more than 18 months ago, the chairman and I went to

Cleveland. Mr. Chairman, I will be going to Cleveland after this

hearing today because it happens to be both of our homes and the

chairman’s district, or historic home in my case. We saw that peoVerDate 11-MAY-2000 15:38 Jul 06, 2009 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 U:\DOCS\50097.TXT KATIE PsN: KATIE
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ple in Cleveland were unable to keep their homes because the

unwinding of the subprime began in those neighborhoods and those

communities first. But it spread throughout the country. It wasn’t

until it spread to Wall Street that the administration came to us

with the need for emergency funds.

I think Congress should have known, and the chairman and I,

I think, did know, that there was something fairly disingenuous

when it was a crisis related to home mortgage, but, in fact, was a

crisis in Wall Street that prompted the action by Treasury.

I appreciate the witness being here today. I look forward to your

testimony, although, quite frankly, knowing what your testimony is

going to be, I look forward more to the questions we are going to

ask and, in fact, shedding some light on the real question of should

Congress trust this administration to spend one more penny, and,

if we do, what will we get for that $350 billion that could well be

spent, and the remaining few dollars that is destined to go to AIG

and other programs and individuals and companies not envisioned

in the original legislation.

Last, but not least, I will be asking two tough questions: Who

have you sought to understand the complexity of the market that

you clearly don’t understand; and what are you going to do when

you leave this hearing room today to live up to the expectation of

Congress?

With that, Mr. Chairman, I thank you again for holding this

hearing, and I yield back.

Mr. KUCINICH. I thank the gentleman.

The Chair recognizes the distinguished gentleman from Maryland, who has been very active on this subcommittee in pursuing

the answers to the questions that Members of Congress perhaps

should have been asking in the places like the Democratic Caucus.

Mr. Cummings.

Mr. CUMMINGS. I want to thank you very much, Mr. Chairman,

for holding this hearing this morning. I want to take just a moment, Mr. Chairman, to thank you for your leadership. I join with

others in saying that you have done a phenomenal job taking on

some issues that have not been the most popular, but I thank you.

I know, as Mr. Issa has said, that you have consistently stood up

for the American people, and I want to thank you.

I also, Mr. Chairman, I only have 3 minutes, but I——

Mr. KUCINICH. You have 5 minutes.

Mr. CUMMINGS. Thank you.

Mr. Chairman, I also want to just say, I cannot help, when I read

this morning this statement, this article in the Washington Post,

which says, ‘‘AIG to pay millions to top workers,’’ I have to tell you,

it made my heart ache.

Mr. Chairman, I just have to comment on this, and I hope you

will hear me, Mr. Kashkari. I don’t think AIG gets it. I really don’t

think they get it. They don’t get that Americans are suffering. They

don’t get that Citicorp laid off 10,000 people; U.S. Steel, 675; Morgan Stanley, 10 percent of its workers, approximately 44,000 people

are employed. That is quite a number. GM, 3,500; DHL, 12,000;

Circuit City, 6,800; National City, 4,000. I could go on and on and

on. These are announcements that have been made in the last

month or so.

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My point is simply this, that I think AIG has gotten to the point,

and I have to believe that they just don’t get what is happening

in the rest of the country. AIG has come to this Congress—and I

did vote for the bailout, by the way, and I voted for it because my

people were suffering in my district. I voted against it when it was

in the House. I voted for it when it came from the Senate. But the

fact is that the people in my district are losing their houses, too.

The people in my district are also losing their jobs. And we have

an AIG that will go on these lavish junkets, and, as you probably

know, because of this Congress, they canceled 160 junkets, and

they averaged $200,000 to $250,000 apiece. That is a lot of money

for a corporation that is supposed to be dying and would not be in

existence. Then we open the paper today to hear they are going to

pay millions, as if everything is just the same as it was, to their

employees in bonuses.

Well, the problem is that a lot of the people that we represent

won’t even have a job at Christmastime and damn sure won’t have

a bonus. So, in some kind of way, I hope that we can get through

to AIG and other companies, because it is bigger than AIG. I don’t

want these companies coming to the Congress with their hand out

thinking that they can take the money, do whatever they want to

do, and then have their little parties and have a good time, get

their manicures, pedicures, massages, pay $1,600 a room, and then

come dancing back to us and say, ‘‘give me more,’’ when the American people’s tax dollars are being wasted. It is very upsetting.

So, Mr. Chairman, this is an important addition to the full committee’s investigation into what went wrong with the financial

markets. We knew years ago that our economy was headed for

trouble when the housing bubble began to burst. The first victims

were everyday Americans who had been sold loans they could not

afford from dishonest brokers.

We did all in our power to keep people in their homes and to

keep the economy afloat, but we were fought at every turn by this

administration. We asked the administration what authority they

needed to keep the market from going bust, and their response was

a nonresponse. They said, ‘‘We should let the markets be free. Let

the invisible hand work it out.’’

Well, we know now that the invisible hand has failed. Wall

Street has come to us, cashmere hat in hand, to ask us for a $700

billion bailout to recover funds lost from risky deals it made. When

times are good, those risks resulted in windfall profits, and people

got rich; but now that the tables have turned, the U.S. banking

system is turning to the American taxpayer to bail them out, and

the administration is fully behind them.

This administration wants to privatize Wall Street’s gains and

socialize Wall Street’s losses. Sadly, the situation is at such a fever

pitch that we simply cannot afford to ignore it. The risky bets made

on Wall Street were so complex that every single segment of our

economy could fail if we do not bail them out. Further, we are seeing, with the news of the rippling effect in the European and Asian

markets, the global economy is also on the brink of failure.

It is for these reasons that I held my breath and voted for this

bailout measure.

I am almost finished, Mr. Chairman.

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I initially voted against it, because I thought the bill did not include sufficient oversight and did too little for Main Street and a

lot of the people we are going to talk about today.

But as with Katrina, the war in Iraq and any number of smaller

issues this administration has been charged with addressing, Congress has come along to clean up the mess. Unfortunately, we were

not given sufficient time to fully examine what went wrong on Wall

Street before we had to pass legislation.

But I appreciate the opportunity, Mr. Chairman, to take a look

at these extremely complex issues. I know that with these hearings, we and the American people will gain a greater understanding of what went wrong, and as a result we will arm ourselves with

the information necessary to fully address the economic crisis. I anticipate that the $700 billion Band-Aid that we placed on this

crisis will stunt the blow of Wall Street failures, but it will not be

enough to insulate us from the failing markets.

With that, Mr. Chairman, I yield back. I want to thank you for

your courtesy.

Mr. KUCINICH. The Chair would like to remind people in the audience that you are here as guests, and this committee is going to

enforce proper decorum, and if we don’t have it, you will be removed.

The committee and myself would like to greet you, Mr. Kashkari.

Thank you for being here today. We are grateful for your presence.

I want to introduce Mr. Kashkari to the members of the committee and to the public. Mr. Neel Kashkari was designated as the Interim Assistant Secretary of the Treasury for Financial Stability on

October 6, 2008.

The Chair is going to pause for a second. Mr. Bilbray, did you

have an opening statement?

Mr. BILBRAY. No, I did not, Mr. Chairman.

Mr. KUCINICH. OK. Fine. I just wanted to show our colleague the

courtesy.

So in this capacity, Mr. Kashkari, as the Secretary of the Treasury for Financial Stability, oversees the Office of Financial Stability, including the Troubled Asset Relief Program. Mr. Kashkari is

also the Assistant Secretary of the Treasury for International Economics and Development.

He joined the Treasury Department in July 2006 as senior adviser to U.S. Treasury Secretary Henry Paulson. In that role Mr.

Kashkari was responsible for developing and executing the Department’s response to the housing crisis, including the formation of

the Hope Now Alliance, the development of the Subprime Fast

Track Loan Modification Plan, and Treasury’s initiative to kickstart a covered bond market in the United States.

Prior to joining the Treasury Department, Mr. Kashkari was a

vice president at Goldman Sachs & Co. in San Francisco.

Mr. Kashkari, thank you very much for appearing before this

subcommittee today. It is the policy of the Committee on Oversight

and Government Reform to swear in all witnesses before they testify. I would ask that you please rise and raise your right hand.

[Witness sworn.]

Mr. KUCINICH. Thank you, sir. Let the record reflect that the witness answered in the affirmative.

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Mr. Kashkari, I ask, if you can, if you can keep your opening remarks to 5 minutes in length. Your entire written statement will

be included in the record of this proceeding. We are very grateful

for your presence. Please begin.

STATEMENT OF NEEL KASHKARI, INTERIM ASSISTANT SECRETARY OF THE TREASURY FOR FINANCIAL STABILITY AND

ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL ECONOMICS AND DEVELOPMENT

Mr. KASHKARI. Thank you, Chairman Kucinich.

Mr. KUCINICH. Please pull that mic a little bit closer.

Mr. KASHKARI. Thank you, Chairman Kucinich, Ranking Member

Issa, and members of the committee. Good morning, and thank you

for the opportunity to appear before you today.

I would like to provide you with an update on the Treasury Department’s actions to stabilize our financial markets and restore

the flow of credit to our economy.

We have taken actions with the following three critical objectives: No. 1, stabilizing the financial markets; No. 2, supporting the

housing market by avoiding preventable foreclosures and increasing mortgage finance; and, No. 3, to protect the taxpayers.

We have acted quickly and in coordination with the Federal Reserve, the FDIC and our colleagues around the world to help stabilize the global financial system, and it is clear that our coordinated actions are having an impact.

Before we acted, we were at a tipping point. Credit markets were

largely frozen, denying businesses and consumers access to vital

funding and credit. Financial institutions were under extreme pressure, and investor confidence in our system was dangerously low.

We recognize that a program as large and as important as this

demands appropriate oversight. We are committed to transparency

and oversight in all aspects of this program and continue to take

strong action to make sure that we comply with both the letter and

the spirit of the requirements established by the Congress, including regular briefings with the Government Accountability Office,

the Financial Stability Oversight Board and the inspector general,

and we are committed to continuing to meet all of the reporting requirements established by the Congress.

As the markets rapidly deteriorated in October, it was clear to

Secretary Paulson that the most timely, effective step to improve

credit market conditions was to strengthen banks’ balance sheets

quickly through direct purchases of equity. Working with our banking regulators, we have now approved literally dozens of applications from banks across the country, and we will very soon post the

term sheet so private banks can participate. We feel very strongly

that healthy banks of all sizes, both public and private, should use

this program to increase lending in their communities. With a

stronger capital base, our banks will be more confident and be better positioned to play their necessary role to support economic activity.

Further in support of this goal, just 2 days ago our banking regulators issued a statement underscoring the responsibility that

banks across our country have in the areas of lending, dividend

and compensation policies, and foreclosure mitigation. Treasury

14

commends this action taken by the banking regulators and believes

it is critical to focus on the importance of prudent bank lending to

restore our economic growth so that we do not repeat the mistakes,

the poor lending practices that are a major cause of our current

economic problems.

On housing we have worked aggressively to avoid preventable

foreclosures, to keep mortgage financing available, and to develop

new tools to help homeowners. Here I will briefly highlight three

key accomplishments.

No. 1, in October 2007, Treasury helped establish the Hope Now

Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. Through coordinated industrywide action, Hope Now has

significantly increased the outreach and assistance provided to

homeowners. Hope Now estimates that nearly 2.5 million, 2.5 million homeowners have been helped since July 2007, and industry

is now helping about 200,000 per month avoid foreclosure.

No. 2, we acted earlier this year to prevent the failure of Fannie

Mae and Freddie Mac, the housing GSEs that touch over 70 percent of mortgage originations. These institutions are systemically

critical to financial and housing markets, and their failure would

have materially exacerbated the recent market turmoil and profoundly impacted household wealth. We have stabilized the GSEs

and limited systemic risk.

And No. 3, just 3 days ago, Hope Now, FHFA and the GSEs

achieved a major industry breakthrough with the announcement of

a streamlined loan modification program that builds on the mortgage modification protocol developed by the FDIC and IndyMac.

The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable

foreclosures, and potentially hundreds of thousands of struggling

borrowers will be helped to stay in their homes.

On Wednesday, Secretary Paulson outlined three critical priorities and related strategies for the most effective deployment of remaining TARP funds: No. 1, further strengthening the capital base

of our financial system; No. 2, supporting the asset-backed

securitization market that is critical to consumer finance; and, No.

3, increasing foreclosure mitigation efforts.

These priorities are necessary to reinforce the stability of the financial system so that banks and other institutions critical to the

provision of credit are able to support the economic recovery and

growth and to help homeowners avoid foreclosure.

In conclusion, our system is stronger and more stable than it was

just a few weeks ago. Although a lot has been accomplished, we

have many challenges ahead of us. We will focus on the goals outlined by Secretary Paulson and develop the right strategies to meet

those objectives. Foremost among these will be to ensure that the

financial system has sufficient capital to get credit flowing to businesses and consumers.

Thank you for this opportunity. I would be happy to answer your

questions.

Mr. KUCINICH. I thank the gentleman for his testimony.

[The prepared statement of Mr. Kashkari follows:]

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Mr. KUCINICH. Without objection, members of the committee will

be given 10 minutes each to ask questions in the first round, and

5 minutes each to ask questions in the second round of questioning.

Without objection.

I also want to state for the purposes of your staff, Mr. Kashkari,

that they might be prepared in the second round of questions to be

ready to answer questions about the decision of Treasury with respect to National City Bank and PNC. So if you could be ready for

that, that specific matter. We are going to have some broad questions now that relate to the overall economy, but in round two

please be ready, because I am going to have some questions about

that.

Mr. KASHKARI. I am ready.

Mr. KUCINICH. Thank you. I am glad you are.

Now, I heard your testimony, and I have to say that I am a little

bit surprised, because it appears that testimony was prepared before Mr. Paulson’s statement about the purposes of the Troubled

Asset Relief Program and the Secretary’s decision not to purchase

mortgage assets through his decision.

Hasn’t Treasury rendered obsolete entire sections of the Emergency Economic Stabilization Act, because there was no question

about congressional intention, that Treasury use an asset purchase

program to mitigate foreclosures. Do you have a response to that?

Mr. KASHKARI. Congressman, thank you for asking that. It is a

very important topic.

We worked very hard with both Houses of Congress to design the

legislation to provide a lot of flexibility, and we and the other regulators are using every tool at our disposal to get at this problem,

stabilizing the financial system as well as helping homeowners.

And Secretary Paulson and Chairman Bernanke and Treasury, we

have been looking at how do we deploy these resources to first stabilize the system so we can get credit flowing to the entire economy, to our communities.

So Secretary Paulson made the determination that the best way

to get at this problem, given how rapidly markets were deteriorating, was to lead with capital. But that doesn’t mean that we don’t

care about other aspects that are very, very important. We are trying to use the right tool to solve the right problem.

Mr. KUCINICH. Well, it would appear, Mr. Kashkari, that Secretary Paulson has gutted section 109 of the act, which requires

Treasury to undertake specified steps to mitigate foreclosures with

respect to the mortgages it acquires, including working with other

Federal regulators to identify troubled assets required for the loan

modification efforts.

How do you reconcile this policy reversal with Congress’ expectations laid out in the statute?

Mr. KASHKARI. Congressman, is a very good question, and I appreciate you raising it. There are the other sections of the act, as

an example, that direct other government agencies, whether it is

FHFA in its conservatorship of the GSEs, FHA, the Federal Reserve, to the extent that they own or control mortgages, to take action. So let me give you an example, Congressman, because this

point is very important.

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If we had spent all $700 billion buying loans, that would be

around 3 million loans or so, depending on the value of the loan,

but around 3 million, 31⁄2 million. Instead, if you look at the actions

that we took on Tuesday, by using the GSEs to now set a new industry standard for loan servicing, when the GSEs set a standard,

other servicers around the country use that standard, whether it

is for GSE loans or for other loans. Those actions and that protocol

has the ability to influence servicing for almost every loan in America. There are 55 million residential mortgages in America, so we

can touch 3 million, or 55 million.

Mr. KUCINICH. Sir, it has the ability. But the problem is that

Treasury, by taking this action that deemphasizes loan modification, has essentially sent a signal to all the banks that this isn’t

particularly what you are concerned about. Even though you may

maintain, oh, this is in there, look, I have the act. Here is the purposes. I want to spell them out. The purposes of the act are, ‘‘And

No. 2, to ensure that such authority and facilities are used in a

manner that protects home values.’’ Then it goes on to section B,

preserves homeownership.

Now, the Treasury just basically cut that out of the bill. What

we have here is a situation where banks are hoarding the money

that they are getting from the TARP. They are using the money

to purchase other banks. We still have a credit freeze. I am looking

at your testimony. You are saying credit markets were largely frozen, denying financial institutions, businesses, consumers access to

vital funding and credit. Financial institutions were under extreme

pressure. Investor confidence in our system was dangerously low.

Hello. Are we in a different universe here? The same situation

prevails today, and yet your testimony acts as though, well, you

know, we are just merrily skipping along our way here. We have

millions of people threatened with losing their homes, and the underlying problem is that banks are now increasing their interest

rates in order to get more customers.

Think about this now. It is counterintuitive to your Troubled

Asset Relief Program. You are now saying we are going to put the

money into the banks, into these financial institutions, shore up finance capital. Well, finance capital now is seeing that the only way

they can survive is to start to raise their interest rates and give

away some of the money that the government is giving to them. At

the same time, you are picking winners and losers.

How do you reconcile these policy reversals? And why won’t

Treasury act swiftly and forcefully to maximize assistance to homeowners under TARP and play a significant role in modification of

home loans at risk of imminent default? Why not?

Mr. KASHKARI. Congressman, I am glad you are raising this, because I personally have spent most of the past year and a half focused on ways to try to reach and help homeowners. That has been

my primary focus within Treasury.

Mr. KUCINICH. Well, hasn’t the Secretary listened to you? Do you

feel frustrated that your position isn’t being vindicated?

Mr. KASHKARI. Congressman, the Secretary is passionate about

this as well.

Mr. KUCINICH. Passionate about what?

Mr. KASHKARI. Helping homeowners, Congressman.

20

Mr. KUCINICH. He is? Where? What country?

Mr. KASHKARI. Congressman, we are using all the tools available

to the Federal Government to get at the credit crisis and try to

help homeowners. Let me give you an example, please. We have

different tools——

Mr. KUCINICH. Mr. Kashkari, I really respect your being here,

but I am looking at a bill, section 109, that spells all this out. The

Secretary just essentially took some scissors and cut it out and

threw it away. Now, maybe this is just some kind of a game to

some people in the administration. They are on their way out of office, and they just feel they can do whatever they want, pick winners and losers in the market. We have millions of people losing

their homes.

Mr. Issa came to my district and saw some of our old neighborhoods, how they are just falling apart. And we have people that are

holding on, hoping against hope that somebody is going to help

them. We have millions of people in foreclosure, and if I read it

right, Mr. Issa, in California there are millions more at risk of foreclosure with these jumbo mortgages and the Alt-A mortgages in

2009 and 2010, and all of a sudden the Treasury sent a signal to

the banks, forget about it. We are going to give you the money that

you want, and you do what you want with it.

Unless you direct it specifically, it is not going to happen. So tell

me again, why isn’t it happening? Not how passionate the Treasury

Secretary is.

Mr. KASHKARI. Congressman, I believe it is happening. If you

will permit me, I will walk you through it.

Mr. KUCINICH. Please, go ahead.

Mr. KASHKARI. The four banking regulators—the Treasury is not

a regulatory agent—the banking regulators supervise the banks

that are getting this capital. The four banking regulators put out

a joint statement that is going to govern how they supervise these

banks. One of the things that they are going to be looking very

closely at and watching, not just executive compensation, not just

dividend policies, is making sure lending is getting out there in our

communities and foreclosure mitigation efforts.

The banking regulators are the supervisors of these institutions,

and they have now put out a joint statement saying exactly what

they are going to be looking at in their supervisory capacity. There

is no one better positioned in the country than the banking regulators to do that. Treasury is not in a position to do that, but the

banking regulators absolutely are. No. 1.

No. 2, Congressman, again, if you look at all the tools available

to us, Housing and Urban Development has a very important role

to play. This Congress. The President signed the Hope for Homeowners legislation, a $300 billion program to help housing, just in

July, and, Congressman, that program is just getting up and running now. Treasury is involved in overseeing that program. That is

making progress. The actions we are taking to get the industry to

move, more loan modifications, a systematic approach, that just got

announced on Tuesday. We have had numerous initiatives to try to

get to the root of this problem.

But the most important benefit, Congressman, for homeowners is

that we didn’t allow the financial system to collapse. Imagine how

21

many foreclosures we would have if the banking system had collapsed and mortgage finance was not available to our homeowners.

That is the biggest benefit we have been able to achieve.

And, Chairman, we are not out of the woods yet, and I didn’t

mean to suggest that in my testimony, but I can walk through numerous statistics looking at the beginning of a healing credit market, which is the first step to getting through this problem.

Mr. KUCINICH. Again, there might be some philosophical divide

here, because on one hand the Bush administration and Treasury

seems to indicate that the trickle-down effect—give the money to

the banks, and they are going to loosen up money and credit, and

it is going to start to flow, and people are going to be protected.

On the other hand, there is another model which says create a system where you get pools of mortgage-backed securities the government takes control over, and you direct loan modification, you

know, lowering interest, lowering principal, extending the terms of

payments to keep people in their homes. One model may keep several big banks afloat, but risks millions of people losing their home

anyway, and the other model keeps people in their home.

See, you are talking about an if-come model that is based on the

charitable sentiments, seemingly, of major Wall Street banks. But

the truth of the matter is if you don’t get the money into the grassroots and help on loan modification, the banks aren’t going to get

their money at the end anyhow, because one model percolates up;

money goes to the banks and helps move money on Wall Street.

The other one, you have this idea of trickle down, and the trickle

never gets down. Everybody understands that. And yet Treasury

seems to cling to this notion that only the regulators now are going

to do their job.

Are you kidding me? Regulators? Look, Treasury has been given

almost omnipotent power here, and you have, unfortunately, not

exercised in the interest of homeowners.

Do you believe that Congress would have passed the EESA if it

understood that none of the TARP funds would have been earmarked for asset purchase and subsequent mortgage loan modifications? This looks like classic bait-and-switch.

Do you want to respond to that?

Mr. KASHKARI. Congressman, I really appreciate and respect

your perspective. We worked very hard, in the middle of a crisis,

with the Congress to design the legislation to have broad flexibility

so that we could adapt our strategies and our approaches based on

what is happening in the markets and what we are seeing. And as

we went to the Congress to ask for this authority and we negotiated the legislation, and I was very involved in all-night sessions

with both Houses to do that, our credit markets were deteriorating

much more quickly than we had expected. So Secretary Paulson

had to take very aggressive action to stabilize the system. Again, with deep respect, sir, if we had spent all $700 billion on

loans, that would be around 3 million loans. There are 55 million

mortgages in America; 25 million other Americans own their homes

outright, so there are 80 million homeowners in America. We can

benefit 3 million directly by buying all their loans, or we could benefit every American by not allowing the financial system to collapse. That was our highest priority, Congressman.

22

Mr. KUCINICH. Well, just a brief response, and then we go to Mr.

Issa, and that is that we have foreclosures in the city of Cleveland.

Are you aware that when you have a lot of foreclosures in a neighborhood, the value of everybody’s property drops?

Mr. KASHKARI. Yes, sir.

Mr. KUCINICH. OK. Thank you.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

Mr. Kashkari, I appreciate that you were in on those negotiations with leadership. The majority of Republicans voted against it,

once and twice. Mr. Kucinich wasn’t in the meeting where Secretary Paulson came in with the Vice President and Fed Chairman

Bernanke and made all these assurances that there was absolutely

a critical immediate need to get rid of the corrosive derivative products, all the different names for this ubiquitous Sub-S retraded

credit default swap, blah, blah, blah, blah. OK. But they talked

about them as though they knew what the hell they were. You got

the money, and you immediately said, what items, what auction?

Would you please respond, under oath, when did you go from

what you told Members of Congress in open and closed sessions

was the absolute reason to have this money immediately, to buy a

specific group of assets, about $350 billion in the United States,

about $350 billion held by other countries and other funds outside

the United States, those assets were what you said was locking up

and destroying the market—when did you first hear that money

was not going to be spent that way?

Mr. KASHKARI. Congressman, the day—on October 3rd, the day

that the Congress passed and the President signed the legislation,

we immediately created several policy teams developing asset-purchase programs, all of the details, both mortgage-backed

securities——

Mr. ISSA. That wasn’t the question. I want to know the time and

date, because I want to know whether Congress was lied to, or

whether there was a team all along that had an alternate—one or

more people that had an alternate idea of how this money would

be spent?

Mr. KASHKARI. Congressman, forgive me. On October 3rd we created a team——

Mr. ISSA. No, that is not answering the question. And here is the

reason I am asking a very directed question. You can create the

team. You can put together all that.

Look, Circuit City, and I sold them for 20-plus years, so I am

very sensitive to the trouble they are in, Circuit City announced

that they were closing 155 stores and began that process. They

never announced they were filing Chapter 11. But all of us looked

and said, look, they are not going to renegotiate walking away from

155 leases without a bankruptcy. So in our minds we knew it is

a question of time. Well, they don’t tell you one thing, they do tell

you another.

You never in any good faith explained why you formed these organizations, and now you say it is hopeless and impossible to buy

these products that were the entire reason. You can’t have the success for doing something different than you said without explaining

why you didn’t buy one of those assets. And when did somebody

23

figure out—by date, when did you first learn that we were not

going to buy these assets because we couldn’t value them properly?

Mr. KASHKARI. First of all, Congressman, it is not a question of

our ability to value them. The decision was made by Secretary

Paulson very recently, earlier this week, late last week, when we

had finished a lot of our work. It is not just a question of valuing

the assets.

For asset purchases to work, it has to be done in scale, and when

credit markets deteriorated that quickly, much faster than we

thought in late September and early October, he made the decision

with Chairman Bernanke to lead with equity. So now the $700 billion is no longer $700 billion of asset purchases. We have allocated

$250 billion, so that is $450 billion, and we made the decision, as

we have watched how this has worked and how the markets have

responded, the markets may need more capital, and now you are

left with an asset-purchase program that much smaller than the

original $700 billion.

So we can do it. We have done all the work. We know how to

do the asset-purchase program. But we want to use the capital to

its maximum benefit for the financial system.

Mr. ISSA. Let me followup on what you now want to do, because

I want to be respectful of the time of every Member up here.

First of all, let me ask you a question which is a fact-finding

question. Organizations like the Professional Services Council, the

Information Technology Association of America and others would

like to help and have been reaching out to Treasury on helping you

understand and model what you want to do with this. They believe

they can, in fact, help you.

Have you met with any of these organizations?

Mr. KASHKARI. I don’t know the organizations you named personally. We have teams of people who have met with dozens or hundreds of organizations, soliciting the best ideas and looking at the

services they can provide, and we welcome ideas, and we get a lot

of ideas every day and look at them very seriously.

Mr. ISSA. Would you commit to meet with these organizations to

at least see what help they could give you to model the problem

and perhaps find better solutions than you presently have?

Mr. KASHKARI. Absolutely. The only hesitation I offer is we have

a very formal procurement process, and I don’t want to do anything

that would advantage or disadvantage anybody.

Mr. ISSA. The Information Association of America is a 501(c).

They are not selling a product.

Mr. KASHKARI. Wonderful. Then I would be happy to.

Mr. ISSA. OK. Second, it has been said that your purchases of

$250 billion-plus of preferred stock is at a price that would not be

market competitive, meaning you paid too much. Tell me why I am

to believe for a minute that those preferred stocks that you bought

you could resell today for anything close? Remember, the market

has improved. You have said that. Tell me what the profit would

be on those preferred stocks if you began to even put $1 of them

into the market today?

Mr. KASHKARI. Congressman, I don’t know what the price would

be.

Mr. ISSA. OK. You are from Goldman Sachs.

24

Mr. KASHKARI. I used to work there.

Mr. ISSA. Well, I am from Directed Electronics. You are from

your last job. If you tell me that you have improved the market,

then by definition those assets, if bought at par, have appreciated.

Isn’t that true?

Mr. KASHKARI. Well, again, with deep respect, Congressman,

there are many different markets. There is the equity market,

there is the credit market. I think there are strong signs, I can

walk you through data showing the credit markets are improving.

The equity markets, we purchased equity.

Mr. ISSA. You purchased a debt instrument.

Mr. KASHKARI. Well, it is tier one capital, Congressman.

Mr. ISSA. You know, we can go ring-around-the-rosy here, but

you are here today because Congress is feeling that you played a

bait-and-switch game, and you are not convincing anyone that you

haven’t. But let us just try to go to the fundamentals. You bought

preferred stock.

Mr. KASHKARI. Yes, sir.

Mr. ISSA. Preferred stock is a debt instrument. You are capitalizing the company, but you are capitalizing with a debt instrument.

Those instruments trade. I have BB&T, I have—well, I have a

number of debt instruments of that sort. They have, in fact, appreciated from the time you bought until today in various portfolios.

So I am looking at those, and I am following a lot more of those

kinds of instruments. They have appreciated.

So my question to you today, under oath, as someone who should

know about this, is are your purchases above par today, in your

opinion?

Mr. KASHKARI. Congressman, I don’t know. We have independent

valuation firms that are going to provide regular reporting on the

current valuation.

Mr. ISSA. Regular reporting starting when? You are here today.

Do you have any regular reporting from the day you bought them

until today?

Mr. KASHKARI. We have published the reports to the Treasury

Web site within 48 hours of completing the transactions on the

terms. Right now we are in the process. Just yesterday the equity

asset managers’ solicitations concluded, and we received, I think,

hundreds of proposals. We will be engaging the equity asset managers, who will be providing us the valuation services and the reporting to the Congress on a go-forward basis.

Mr. ISSA. Wouldn’t it be reasonable for us to believe here today

that if, in fact, you have improved the market, that those assets

that you purchased—we will call them equity since they are a hybrid—have appreciated?

Mr. KASHKARI. I think it would be reasonable relative to the day

we bought them.

Mr. ISSA. OK. So if we find out on the next report, which I hope

is forthcoming and we will be looking for it, that they are below

par, then, in fact, you paid too much, right?

Mr. KASHKARI. Well, again, it depends, Congressman, what our

objective was. Our objective was to create a program that would encourage thousands of banks across our country to voluntarily apply

25

and to use the capital. So we intentionally made it attractive for

them to want to apply.

Mr. ISSA. So you believe here today that you had authority to

subsidize banks, including providing them this capital at a below

par, a below fair market, of a market that should have existed but

didn’t exist?

Mr. KASHKARI. Well, Congressman, as you know, the market,

when we did this, there was no market. Most banks couldn’t raise

private capital.

Mr. ISSA. But, no, we are in a better market today. Understand,

one of the reasons for the question is you have thrown $350 billion,

including AIG and so on, out there. You are coming back for another $350 billion. If, in fact, what we discover, and I believe here

today, is that your $350 billion—and let us just look at $250 billion, we will leave AIG, which is a whole other can of worms, aside.

If that money, in fact, is a subsidy arriving at a price below the

fair market price, thus causing banks to choose you—including

banks in my district—choose you instead of other capital, all you

have really done is give them discount capital.

Now, the reason I ask that is how large is the capital base necessary for the banking industry in America? Do you have any idea?

Isn’t it about $55 trillion, plus or minus?

Mr. KASHKARI. In terms of assets or capital?

Mr. ISSA. The size of the market, if you will.

Mr. KASHKARI. That sounds about right. I don’t have those numbers at my fingertips.

Mr. ISSA. So you would have to put several trillion dollars in to

be the owner of that base, even with the multiple.

So the reason I am asking all of this—and I know I have extended my time, but just to followup one last time—if all you are

doing is moving your money in at a discount to banks and entities

like American Express and GMAC and everybody else who is rushing to become a bank holding company today as a result of this

deal, then at the end of the day we would have bought stock at too

high a price or debt at too low an interest rate, however you want

to look at these preferred instruments, and we will have moved

people to other capital where they can to get the returns they want

because you are competing at a price that the market wouldn’t accept the loans. You are giving them a deal that distorts the market.

Isn’t that true, based on your background at Goldman?

Mr. KASHKARI. When you have a market that is dysfunctional,

any deal that we would put in, because we would be then the only

provider of capital, would—by definition, would be better than the

nonavailable capital in the middle of a crisis.

So, yes, we did offer attractive terms to stabilize the market.

Mr. ISSA. Mr. Chairman, I would note that Warren Buffet

weighed into this with billions of dollars. Wells did a deal. There

have been dollars done. But those dollars, I believe, are not coming

in until the United States quits subsidizing, in competition to private-sector dollars, that would ask for a better return and undoubtedly would say that dividends and excess compensation would have

to be curtailed until they were getting their returns.

I yield back the balance of my time.

26

Mr. KUCINICH. I thank the gentleman. There was a reason why

I voted with the gentleman twice on this same question, the bailout.

We now recognize, for a period of 10 minutes, Mr. Cummings of

Maryland. You may proceed with your questions.

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

Mr. Kashkari, I must say as I have sat here listening to your answers, I have been disappointed. I think that you have kind of

skipped around the issues here. I say that because when I saw pictures of you, I said this looks like a guy who will be a straight

shooter.

So I am going to ask you some questions, sir. I don’t say that trying to embarrass you; I say it because life is short, and I don’t have

time to hear ring-around-the-rosy answers.

Let me go back to something that the chairman said. He asked

about whether you understood that when foreclosures take place,

did you realize that it also affects the housing in the communities?

In other words, you sell a foreclosed house at a lower price, the

price-values go down.

Let me ask you a followup question to that. You also understand

that when price-value goes down, local government is affected because it is based upon—the tax dollars are based upon that. So—

this goes on and on and on, so it is a very serious problem that

we are dealing with here.

Every time I sit in these hearings I always try to put myself in

the position of my constituents who are watching this, because

when I come home—hopefully, I will get home about 3 today. I live

in the inner city of Baltimore, and believe me, when I go to the supermarket tonight, when I take my daughter to the movies this

evening, I promise you people are going to ask me about you. And

what they are going to say is, ‘‘Cummings, we watched the hearing.

We heard that guy Kashkari, but I’m losing my house today.’’

And they are going to ask the question. They are going to say,

‘‘We heard about the Citigroup thing where I have to be 3 months

behind before I can get help. And we heard that guy Kashkari; we

know that he is in charge of the $700 billion. What can he tell me

today? I don’t want a handout; I just want a hand. I want to pay

my mortgage. I just need a little help because this Bush administration and its policies have put me in a position where I don’t

have a job or I’m now working a part-time job. Help me. Did I miss

something, Cummings? What can Mr. Kashkari—did he say something to help me know how I can help my family?’’

That’s what they are asking. They are in pain.

You are on TV. You are the man. I don’t know how much we are

paying you, but you’re our employee; and I’m asking you to look in

the camera somewhere back here and tell those people what you

are doing.

They hear about the bailouts of Wall Street. They hear that their

tax dollars are being paid to AIG, and these people are going on

junkets. They hear all of that. They feel like it is ring-around-therosy. They hear a lot of nice talk, but they are still being put out

of their houses.

They hear Paulson talk about wonderful stuff, but they are worried whether they are going to come home and their stuff is going

27

to be on the street. Those are the people that I represent. So I am

begging you to please tell me exactly what is being done.

And then I want you to please do something else. With Fannie Mae announcing Monday that it lost $29 billion—and you talked

about all of the wonderful things that Fannie Mae is going to do,

I know that we have $100 billion that can go into their coffers—

how does that affect them, helping that guy that I just talked

about?

I hear you guys talk about the urgency of the market and all of

that. But something tells me that you need—and I think this is

where the chairman is coming from—you know, we can fix Wall

Street. But it seems like there is a bucket down there at the bottom, these people who have been and are being thrown out of their

houses, it is like a bucket with a hole in it.

So whatever you do for Wall Street, if you are not saving these

mortgages and helping people stay afloat and saving some pain, it

makes no sense.

Help me with that, because my people don’t believe that you all

care about them. I hate to tell you that, but they don’t. And they

are angry.

Mr. KASHKARI. Thank you, Congressman. I appreciate and share

your perspective.

Let me say two things, please.

One, the legislation that we asked for, we asked for it to try to

stabilize and prevent a complete financial collapse of our financial

system. That was not to help Wall Street; that was to help every

American.

Please, sir.

Mr. CUMMINGS. Let me tell you something. I understand that.

That’s why I voted for it. But let me tell you, when we gave the

banks money, they still weren’t loaning any money.

Mr. KASHKARI. Let’s talk about that because we are passionate

about getting the banks to loan money in our communities to help

our small businesses and to help our homeowners. First of all, we allocated $250 billion for banks of all sizes across

the country, and just about half the money is out the door today.

I think we are going to approve another 20 banks today, large and

small, across the country.

Potentially thousands of banks are applying and it is going to

take a few months to process the thousands of transactions to get

the money out the door. So we are working as fast as we can. We

are working around the clock to process and get the money in our

community banks, first of all.

No. 2, our banks are still—we are still at a period of very low

confidence in the system. It has gotten better in the last few weeks,

but we have a long way to go. And as we see confidence begin to

be restored in our system, we are going to see our banks feeling

more confident in themselves and more willing to extend credit,

and our businesses and consumers more willing to take on their

own loans. Unfortunately, it is not going to happen overnight; but

we are working very hard to get credit in our communities.

One other comment, respectfully: This legislation was focused on

stabilizing the system for every American, but it is different than

a plan. It is not a stimulus. It is not an economic growth plan. It

28

is an economic stabilization plan to stabilize the financial system.

I want to respectfully set expectations that we are trying to use

these resources to stabilize the system for every American. But we

also have real economic challenges that we all need to work

through. And this, by itself, is not going to solve all of our economic

challenges.

Mr. CUMMINGS. I got that. Let me ask you this.

I had a conversation yesterday with a fellow named Joe Haskins,

who is head of the Harbor Bank, which is a small bank in Baltimore, an African American-owned bank in Baltimore. He was telling me yesterday that one of the problems is that you all are financing these big banks. And the little banks, the little community

banks that did it right—in other words, they kept the loans, they

didn’t sell them, so you know how that works, they make sure that

they make good loans. This stuff with all of these foreclosures, it

doesn’t affect them so much except for people who may have lost

their jobs. But as far as not properly vetting people for these loans,

they didn’t have a problem with that.

But one of his problems is that while he did it right, you all are

financing all of these other banks, these big banks, and he is worried that they then are going to try to acquire, using our taxpayer

dollars, the guys who did it right. They will try to acquire the little

banks. The guys who did it wrong will try to acquire the little guys

who did it right.

Mr. KASHKARI. Let’s talk about that because that is a very important point.

We have created a program for all banks of all sizes, big and

small, the same terms. So the first nine banks that we funded have

the same terms as No. 10, No. 100, No. 1,000. So the gentleman

in your community, Harbor Bank in Baltimore, can apply, can

download the application off the Treasury Web site or their regulated Web site, submit it to their primary regulator, and it will

come into our process.

And we welcome it. We want banks of all sizes to use this program. They are the ones lending in our communities. We need

them. We need the good banks to take the capital because they are

in the best position to make new loans. That is exactly who we

want in the program.

Mr. CUMMINGS. Yesterday we had Mr. Paulson right where you are sitting, the guy who made $3 billion last year on hedge funds.

Mr. KASHKARI. Mr. John Paulson?

Mr. CUMMINGS. Yes.

And we had George Soros and James Simmons and Philip

Falcone and a fellow named Kenneth Griffin. You probably know

those guys. One of things that they said yesterday when they were

talking about what you all are doing, they said they need to be

doing more and doing more and urgently getting—helping those

folks who are losing their houses. They said, it just makes sense.

I am sitting here and saying, these are the billionaires, and they

have figured it out. They showed tremendous sensitivity with regard to the folks at the bottom, the people who are losing their

houses.

And then Mr. Issa asked you a great question; he apparently

mentioned several organizations.

29

I am just wondering, who are you all seeking advice from? In

other words, we want—as I close, Mr. Chairman, we want the rubber to meet the road, but I am wondering if the rubber ever really

meets it.

In other words, going back to my initial statement, if people see

their tax dollars being spent on everything else—and I get it, that’s

why I voted for it, the bailout. But they are not so much worried

about themselves, because 95 percent of the people are fine with

regard to their mortgages. They are worried about their neighbors.

They are worried about the tax base.

I plead with you, we have to find a way to more rapidly help the

little guy and lady who are trying so desperately to deal with their

mortgages.

Mr. KASHKARI. Congressman, again, I share your perspective.

I have spent the last year and a half working with nonprofit

counselors. When we first started working on this problem, we

found that counselors had a lot of great ideas. The banks had their

own ideas, and the two weren’t talking to each other. One of the

first things that I personally did, I said, look, we are all in this together. Let’s get the best ideas on the table and let’s not point fingers at who is at fault. Let’s get the best ideas to try to reach and

help homeowners. I personally feel passionately about that.

If you look at some of the statistics on the rate of loan modifications over the past year, we have more than tripled the rate from

where it was when we started this a year ago. We have made a

lot of progress, and people now are embracing loan modifications.

We shouldn’t underestimate how powerful the action on Tuesday is.

We have now established an industry standard using Fannie and

Freddie to push it out to the whole industry on a fast-track loan

modification process to get homeowners into long-term, affordable

mortgages.

It is not going to be perfect, but we are taking very aggressive

action and trying to use the right tool for the right job.

Mr. KUCINICH. The gentleman’s time has expired.

Mr. Bilbray.

Mr. BILBRAY. Thank you.

Mr. Kashkari, I guess you sort of get a taste of how Mel Gibson

felt in the last scenes of Braveheart, huh?

Look, you’re probably the best spokesman the administration

has, and I want to compliment you on that. You come across with

more credibility than anybody else that I have heard across this

dais.

But let me tell you something, when you sit there and make a

statement like the administration trying to communicate with the

banking institutions, let me tell you, my constituents in northern

San Diego County remember great communication between the administration and the bankers in 2005 and 2006 when they were

given the OK to give loans to people who didn’t have legal documentation or viable IDs, in violation of the RICO provisions. It was

just, don’t worry about it, you can open the bank account, give the

loan, you don’t have to check viable identification if they fall into

a certain category.

I don’t know when the law ever created a gap in the RICO provision for the administration to tell banks that they give out loans

30

to people who did not have viable identification. Do you know of

any time that there was?

Mr. KASHKARI. I do not, sir.

Mr. BILBRAY. OK, but you do know that was going on?

Mr. KASHKARI. I am as outraged as you are about the practices

that were allowed to go on earlier in this decade. That’s why we

are here.

Mr. BILBRAY. Let me tell you, it was a hot issue in my district.

And the administration itself said, no, this is OK for these guys to

do it. They actually locked on and approved of a program that was

identified as a violation of a RICO provision, breaking Federal law.

And they basically said, this really isn’t a breaking, we don’t require viable identification for this segment of the population. And

I didn’t know there was any exemption there.

Mr. KASHKARI. Forgive me, but I’m not familiar with it. But I

take your word, sir.

Mr. BILBRAY. The FDIC just announced that they want to come

in with some kind of program to focus on homeowners on this. The

feedback I have gotten is that the Treasury Department has some

real problems with that.

What’s your problem with that strategy?

Mr. KASHKARI. Sure. I will make a couple of points. We have

worked closely and have a lot of respect for Chairman Bair and her

ideas. Candidly, it was really her ideas that led to the development

of the program that was rolled out on Tuesday.

Set that aside. The FDIC proposal, at the end of the day, is a

spending proposal. When Secretary Paulson came to the Congress

to ask for the authority for $700 billion, that was $700 billion to

make investments. Whether it be buying assets or buying equity,

it was buying a financial instrument that would offer a return that

we could offer to sell over time, to hopefully make back the taxpayers’ money.

That is fundamentally different than just having a government

spending program; however well intentioned and designed it is, it

is just very different. And this is something that Secretary Paulson

thinks is a very interesting idea and that Congress should consider

it.

But to take the $700 billion, when we told the taxpayers that we

would be buying assets that we could then sell, it is just different

than saying we are going to take $20 or $50 or $100 billion and

spend it with no chance of ever getting that into the program.

So it is just very different than what the program was structured

to be—investing versus spending—No. 1.

No. 2, Congressman, in all of these programs we have to look

very carefully at who is helped by them. There are programs out

there, when you actually scratch beneath the surface, that help

homeowners. But maybe it ends up helping the banks a lot more

than actually helping homeowners.

Sometimes Wall Street firms will bring us proposals. They couch

them as homeowner preservation. They are helping the banks and

helping mortgage-backed securities investors.

So we have to look at all of these very carefully to be sure who

they are helping. But the biggest challenge is, it is fundamentally

31

spending. You are not going to get the money back, versus investing. That is the difference——

Mr. BILBRAY. The TARP is not in isolation. We set the precedence with Freddie and Fannie. Now we are not bailing out

Freddie and Fannie. Or are we doing an umbrella package there?

Mr. KASHKARI. On the institutions or the mortgages?

Mr. BILBRAY. The institutions.

Mr. KASHKARI. The institutions. Again, we are buying preferred

stock in the institutions to stabilize the institutions. And the taxpayers have warrants on 79.9 percent.

Mr. BILBRAY. Is there a reason why we should be surprised that

when we got to the TARP, you didn’t take the same strategy?

Mr. KASHKARI. Our strategy evolved as conditions changed. And

so when Fannie and Freddie deteriorated very quickly through July

and August, and the Secretary came to the Congress to ask for that

authority, the Congress provided it, and he took very bold action

with Chairman Bernanke and Mr. Lockhart to stabilize them.

Similarly, we led with an asset purchase program because, in our

judgment at that time, that was the best way to help the financial

system. But market conditions deteriorated so quickly, we had to

move with equity first.

Mr. BILBRAY. When we talk financial system, are we talking now

that we are not going to pick and choose, we are going to get into

Bank of America and credit card companies?

Mr. KASHKARI. Forgive me. With respect to what Secretary

Paulson talked about on Wednesday in terms of consumer credit

and making it available?

Mr. BILBRAY. Correct.

Mr. KASHKARI. That is a program that we are developing to get

credit flowing directly to consumers, whether it is credit cards or

auto loans or student loans—potentially, mortgages as well.

Mr. BILBRAY. So we are talking about moving into that field.

Mr. KASHKARI. We are looking at it. Right now the markets have

frozen. Credit card rates are going through the roof, auto loan rates

are going through the roof. And it is impacting families directly,

and that is impacting our economy as a whole. So we are looking

at a program that could unfreeze that market to get credit flowing

again.

Mr. BILBRAY. So are we talking about the possibility of a 2 percent Federal loan to American Express?

Mr. KASHKARI. No. That program would be structured where,

much like the Federal Reserve has set up a facility to get the commercial paper market going again, it is not directly going to the

banks or the lenders of the commercial paper, the issuers. It is getting the market working again. We do something similar here to

get the liquidity going in the asset-backed market.

So the credit card market, the auto loan market, this would help

all of our auto dealers and it would help the auto companies and

help all of the retail industry that relies on the credit card business

to work. Right now—as the chairman said, credit card rates are

being increased right now in large part because these markets are

broken.

Mr. BILBRAY. Twenty-two percent.

Mr. KASHKARI. It is a big number.

32

We have the banking financial sector and the nonbanking sector.

The banking sector provides about 60 percent of credit in our economy, the nonbanking, about 40 percent. Our initial actions have

now stabilized the banking sector. We feel good about that.

There is more work to be done. But the nonbanking sector is now

frozen, so we are looking at what actions we can take to get that

working again.

Mr. BILBRAY. We are always going after the taxpayers’ money as

the only way we can interject and save the economy and whatever.

There was a whole discussion about half a trillion dollars of American assets overseas that could come back if we held it harmless,

the repatriation issue.

Have you been following what the IRS did with the grace period

for repatriated funds?

Mr. KASHKARI. Forgive me. Not closely.

Mr. BILBRAY. They increased it from 6 months to 10 months. Do

you have any idea why they would do that?

Mr. KASHKARI. I have not focused on those issues. I am spending

100 percent of my time executing the TARP.

Mr. BILBRAY. Mr. Chairman, we need to take a look at—and I

think the IRS was on to something. It is always quick to use taxpayers’ money to be able to go in there. And we are actually taking

money coming out of our general fund to go after this. But we

wouldn’t hold harmless private money coming in from out of the

country and investing back here, because we want our pound of

flesh. And now the IRS has recognized that by at least extending

the grace period, because there is a huge amount of assets.

To be blunt with you, as somebody who has worked with the Federal Government since 1976—the chairman and I were elected on

the council and the mayors together back in 1978—the Federal

Government does not manage assets very efficiently at all. That is

one of our biggest frustrations that those of us in local government

have: the fact that this is going to come back to bite us when we

could allow private-sector funds to get in there and try to get involved if we just didn’t want to take our pound of flesh and drag

it into Washington, DC.

Mr. KASHKARI. I completely agree with you. Some of our plans

are designed specifically to attract private capital to come in, because we don’t think that the taxpayers should do all of this themselves. The private sector should be encouraged to do that.

One of the things that the Secretary talked about on Wednesday

was a potential capital program that involved a matching component: if a firm went and raised a dollar of equity, that the government would provide some kind of matching as a carrot to go back

and get the private capital coming back in our system.

So we agree 100 percent with the spirit of that.

Mr. BILBRAY. Let me tell you, as one Member, I saw the bailout

of Freddie and Fannie come up, and said, oh, this will take care

of it; then we take care of that. And all I have seen, Washington,

including the administration talk about, is how we are going to

spend taxpayer money, not how we are reforming the process.

We did the guarantees on the deposit insurance—that was a

step. But that is a very small step compared to a whole lot of stuff

that we have not touched base on. We haven’t redefined mark to

33

market yet. We are not even talking about that anymore. That is

sort of left behind and don’t worry about it.

There are some major issues that we need to talk about, and the

administration is only talking about how we are going to spend the

taxpayers’ money, not about how we are going to avoid it. And that

is one of those things that, as a father, if one of my children came

in and said, Dad, I am deep in debt, I need you to bail me out, the

first thing I’d do would not be to write a check, it would be to ask

for the credit cards. And we are not asking for the credit cards, we

are not asking for the reforms; we are basically just writing a lot

of checks.

Mr. KASHKARI. Congressman, I share your frustration. Our energy is focused on stabilizing the financial system.

But there are profound regulatory and structural questions that

we as a country have to ask and answer in the near future: what

to do with Fannie and Freddie; what role the government should

play in mortgage finance going forward.

What we have done in the case of Fannie and Freddie, which

were on the verge of collapse, is to stabilize them, to buy us all

time, so we as a country and the Congress and the next administration can have that debate and make a thoughtful decision.

But we need to stabilize the system. That is what our actions

have been focused on.

We are all frustrated by the kinds of actions we need to take. We

don’t want to do these kinds of actions, but we have needed to stabilize the system. But we need to have that thoughtful discussion

so we are not here again in the future.

Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. Chairman, somewhere down the line we are going to have

to talk about who has actually been subsidized on this. You have

foreign nationals. You have people who are not legally present in

the United States. I have a constituent who cries about a home

being lost when it is their seventh home, that has two or three

homes. You have people who have leveraged this. And then you

have the innocent people who are basically just trying to play by

the rules.

Somewhere down the line, I think the American people are going

to ask us to separate these groups and make sure that our resources are going to those who deserve to be helped on this.

Mr. KUCINICH. I thank the gentleman.

We will move on to our second round of questioning. This will be

a 5-minute round.

I indicated I will have some questions about the National City

transaction. PNC took over National City with the help of the

Treasury Department. When you look at the money that you are

giving to banks and you are picking winners and losers, you picked

a winner, PNC, and you picked a loser, National City Bank.

Now, were you aware at the time that National City Bank had

a relative history prior to the transaction involving PNC of being

under attack by short sellers? Did you know that?

Mr. KASHKARI. Congressman, with deep respect, it is not appropriate for me to speak about any individual institution, but I can

talk generally.

34

Mr. KUCINICH. With deep respect, you put 4,000 people out of

work in the city of Cleveland. Are you taking the fifth amendment

here?

Mr. KASHKARI. No, sir. First of all, Congressman, I was born and

raised in northeastern Ohio.

Mr. KUCINICH. I am the representative of northeastern Ohio, and

I’m asking you a question. Can you answer the question: Did you

know that National City was a target of short sellers?

Mr. KASHKARI. I think many financial institutions, including National City, were the target of short sellers.

Mr. KUCINICH. Did you know that National City stock had been

undervalued, according to Oppenheimer?

Mr. KASHKARI. I did not know that.

Mr. KUCINICH. Did you know that National City’s debt had been

overstated, according to many analysts?

Mr. KASHKARI. I did not know that.

Mr. KUCINICH. Did you know that credit-rating agencies were

given credit, literally, with pushing National city off a cliff? Did

you know that?

Mr. KASHKARI. No, sir.

Mr. KUCINICH. Do you look at the role of credit-rating agencies

in terms of determining who gets troubled asset relief and who

does not?

Mr. KASHKARI. If you permit me to walk you through that

process——

Mr. KUCINICH. I want to be careful about where you are walking

me.

Can you answer the question about credit-rating agencies?

Mr. KASHKARI. We do not look at credit-rating agencies when deciding who to make an investment into.

May I, please, sir, walk you through the process?

Mr. KUCINICH. I am going to keep asking you questions.

On October 24th, National City Bank was bought out by PNC for $5.2 billion; and they used $7.7 billion of TARP funds. Did Treasury give PNC $7.7 billion of TARP funds.

Mr. KASHKARI. PNC has not yet received any money from the

Treasury Department.

Mr. KUCINICH. Did they agree to give them $7.7 billion?

Mr. KASHKARI. We have not—PNC has publicly stated that they

received preliminary approval.

Congressman, the reason I am speaking this way——

Mr. KUCINICH. Isn’t there a yes or no answer?

Mr. KASHKARI. We have a very strict process about the way we

disclose information about individual institutions, and I want to respect those institutions.

Mr. KUCINICH. You are testifying before a congressional committee here. If you can’t answer the question, you have a constitutional right not to answer. I can inform you of that.

Mr. KASHKARI. I do not want to put an institution at risk by revealing supervisory confidential information.

Mr. KUCINICH. Are you invoking your constitutional privilege?

Mr. KASHKARI. No, sir.

Mr. KUCINICH. Since you’re not, you are saying you cannot tell

this committee what actually went on?

35

Mr. KASHKARI. First of all, when a bank submits an application

to apply for TARP funds in the Capital Purchase Program, that application is reviewed by its primary Federal regulator and then

that regulator makes recommendation to Treasury.

I can tell you that we have never received an application from

National City Bank to the Treasury to apply for TARP funds, and

when we do receive recommendations from the regulators, we look

very closely at those recommendations.

Mr. KUCINICH. You were saying National City never asked the

Treasury for help?

Mr. KASHKARI. I have never seen an application from National

City.

Mr. KUCINICH. You have no knowledge that regulators denied a

request, saying the firm was too weak to save?

Mr. KASHKARI. Again, the regulators do go to some banks that

they think are not solvent institutions and discourage them from

applying to the program.

Mr. KUCINICH. Did you put any conditions on PNC with respect to the $7.7 billion?

Mr. KASHKARI. If a bank comes to us and wants to apply for

funds as part of an acquisition, they will only get—if it is recommended by the regulator, they will only get the target share

upon closing of the transaction. There are conditions.

Mr. KUCINICH. Can you tell this committee why you thought National City was too weak to save? Do you consider the negative effects on local employment and ripple effects of more layoffs in an

economically depressed region?

You know, you think about it: Congress in its wisdom—and Mr.

Issa and I talked about this; we fought for some provisions that

would help inner cities that were suffering from the most foreclosures. Cleveland certainly qualified for that.

Don’t you look at the impact of your decisions on regional economies? Do you give it any consideration at all?

Mr. KASHKARI. We review applications that the regulators submit to us with their recommendations. If a regulator does not submit an application to Treasury because a regulator deems a financial institution is going to fail, we can’t review it. And I don’t think

it is a good use of taxpayer money to put taxpayer capital into a

financial institution that is going to fail.

Mr. KUCINICH. Well, you know what, that statement that you

just made, you will hear about for the rest of your career.

My time has expired. I am going to come back to this question.

We are going to go to Mr. Issa.

Mr. ISSA. We won’t just come back to it, I think we will stay with

it for a moment. PNC has announced a price, and they are going

to buy National City Bank. If they don’t have your implicit money,

then they must be doing it with their own money.

Now, if they do have your implicit support, then that means that,

in fact, a little bit like a Goldman Sachs deal, they have the assurances that they have the money to go do a deal; they go do a deal,

and then they get the money at closing.

Now you are sitting here today saying you can’t reveal, but in

fact, if there is an announced deal, either you are going to provide

the money or you’re not. It’s that simple.

36

Now, I appreciate all of the confidentiality and all of those other

statements, but we have a right to know whether or not there is

an acquisition that is going to be done with other funds or the U.S.

Government’s funds. So I am going to ask you once again, in light

of that, is that acquisition going to be done with the pledge that

at closing they will be provided the funds they need? Or are they

going somewhere else for the funds, as far as you know?

Mr. KASHKARI. Congressman, generically—please permit me to

speak generically. I can be more candid if you’ll allow me to speak

generically.

Mr. ISSA. I don’t want to speak generically because we have certain acquisitions—Wachovia, obviously, and National City Bank.

These are banks where both of us are shaking our heads.

And by the way, I have nothing against the acquiring banks at

all, but we are looking at the banks being bought and saying, if

they got—in the case of National City Bank, if we bought $5.5 billion worth of preferred stock in that company, would they be viable? Do you have any knowledge to answer that question?

Mr. KASHKARI. The regulators, Congressman, are making judgments on which banks they deem to be healthy banks, viable

banks, and making recommendations to us.

If a regulator determines that one of its regulated banks is not

viable, and they do not submit their application to us, we can’t invest in them. It wouldn’t be prudent.

Mr. ISSA. You are basically following the FDIC’s lead; is that

right?

Mr. KASHKARI. All four banking regulators—the Fed, the FDIC,

the OCC and the OTS—are the ones who review the initial applications and make the recommendation to Treasury. We then look at

those recommendations and either go back for more information or

make our own decision.

Mr. ISSA. You said ‘‘or make your own decision.’’ So you could

make an independent decision?

Mr. KASHKARI. Absolutely. Ultimately, it is Treasury’s decision

who to invest in and under what terms.

Mr. ISSA. So at the end of the day, Hank Paulson gets to decide

who lives and who dies? Who buys whom?

He could potentially have looked and allowed the opposite, the

regulators to go in and say to PNC, we don’t think that you are

going to make it, and therefore National City Bank is going to buy

you out; and $7 billion could have gone the other way? That could

have happened?

Mr. KASHKARI. In theory, yes. Ultimately, the regulators are the

ones who have been supervising the institutions. They have people

onsite, and they are in a much better place to make recommendations to Treasury about who is a healthy bank and who is not.

Mr. ISSA. Let’s ask the question I have been wanting to ask.

During the bailout debate, we had Bill Isaac, a former FDIC

chairman, who described to all of us—both sides of the aisle, a very

bipartisan series of meetings; as a matter of fact, Mr. Kucinich and

I—I had never been to a Progressive Caucus meeting, but I got to

go to one because immediately following we had a series of questions and answers with Chairman Bill Isaac.

37

In his time in the Reagan administration, he was granted and

used a system of buying subordinated debentures essentially in an

exchange program that put zero dollars—zero dollars of the Federal

Government’s Treasury money in play because it was a credit default swap, if you will, in its own way, and that authority still exists today. It requires that the Secretary of Treasury make a finding, which we have effectively made, we have said there is an

emergency, and then that tool is directly the responsibility of the

agency, in this case the FDIC.

You said you are using all of the tools. Why are you not using

that tool? Because that tool uniquely says you have to pay back all

of the money. To get this increase in your capital base, you are putting your money at risk; essentially, you are putting your existing

stockholders behind these because this is a better stock, if you will,

a better debt stock.

Why are we not using that tool, and isn’t that the tool that

should be used in this case?

Mr. KASHKARI. Well, Congressman, let me say a few things. It is

an important point.

First, the preferred stock that we are buying is senior to the common stock. So we get paid back before the equity owners of these

institutions. So we are in a better position than their shareholders;

and that is very important, No. 1.

No. 2, and I don’t have all of the details on the gentleman’s proposal, but I know that some of those proposals which didn’t require

any cash going into these institutions were basically a form of forbearance, pretending that the banks had more capital than they

had. We need our banks raising real capital from the private sector, and also from the public sector; and recognizing their losses,

not pretending that they have more capital than they do. We have

to be very careful.

There were a lot of ideas tried in the 1980’s that pretended we

had more capital than we did, and it didn’t work out very well.

Mr. ISSA. First of all, we are pretending that we have more capital than we have because simply moving negative net worth from

a bank to the American people is, in fact, causing the American

people to lose real capital. The wealth of our country is, in fact, in

this case, being moved onto the taxpayers’ rolls and off the banks’

rolls. So let’s not kid ourselves.

So if you overpay, you invest in somebody who otherwise would

not be solvent, particularly if they are going to buy other banks

that you’ve determined are not solvent, you have determined that

you are going to spend the American people’s money, indebt the

American people in return for that.

So when you chose one instrument over another, as far as I can

see here today, what you have done is, you’ve made a determination that you are going to put real money of the American taxpayers’ dollars into these banks forever, because if you buy too

cheap, you are giving them real money forever, instead of the alternative authority that already existed that we argued should have

been used first, where you at least made sure that 100 cents on the

dollar, real 100 cents on the dollar, would be fully repaid without

any risk to the American people except an ultimate liquidation of

that entity at a loss.

38

So I appreciate the fact that during the Reagan administration

we may have invested in banks that, at the time, were—although

viable going forward—in our opinion, were not viable at that moment. The difference was that those banks either became viable

and paid back 100 cents on the dollar, or everyone lost everything,

except we got paid first whatever was left. I appreciate that.

But when I asked you the questions earlier about par and where

we were and whether we overpaid when we invested, you couldn’t

answer those questions because, in fact, your system puts us at a

greater risk, as the American taxpayers, than the system that we

suggested you could do without any authority under the TARP.

Mr. KASHKARI. There are very important taxpayer protections,

not just the dividend rate that we are going to be earning on the

preferred stock. The warrants, we are getting 15 percent of the

value of the investment in the form of warrants in these institutions. So there are important taxpayer protections that we have designed in, so that this ends up being hopefully a good investment

for the taxpayers.

This is not something that we wanted to do. Our first choice is

not investing in banks. We felt like we had to stabilize the financial system, and so we have taken bold action to do that.

Mr. KUCINICH. Thank you.

Mr. Cummings, you may proceed.

Mr. CUMMINGS. Mr. Kashkari, I am still listening carefully.

One of the reasons I voted for the bailout very reluctantly—I

held my nose, closed my eyes and prayed—is because PresidentElect Obama at that time had assured me that if he were elected

President he would work on making sure that the people that

might be losing their houses through foreclosure would be helped.

If President Obama came to you—and I don’t know how long you

will be around, and I assume somebody is going to ask Secretary

Paulson this question, but if President-Elect Obama came to you

and said, give me your best advice as to how I can help people who

are facing foreclosure, what would you tell him?

Mr. KASHKARI. Congressman, that is a very important question

that I have spent a lot of time thinking about. The best thing I

think we can do as a country to help the housing market and avoid

foreclosures is to bring mortgage rates down for borrowers so they

can refinance into long-term, sustainable mortgages that they can

afford.

The way to do that partly was stabilizing Fannie and Freddie,

was to stabilize mortgage finance; and some of the actions we are

looking at, trying to get credit flowing again, is to bring rates down

for our consumers. If we can bring mortgage rates down—and as

you know, the Federal Reserve has been cutting interest rates, but

that hasn’t led to lower borrowing rates for consumers and borrowers because the markets are stuck.

So by trying to fix the markets, we are trying to get that directly

to the consumers so they can get into mortgages that they can afford, and that will also support home values, to stop this falling

knife that we have right now.

My judgment—I’m being very candid with you—is that bringing

mortgage rates down for borrowers is the best thing we can do to

39

try to help homeowners avoid foreclosures and stabilizing our housing sector.

Mr. CUMMINGS. Now, if President-Elect Obama asked you to stay

on, would you stay on?

Mr. KASHKARI. Congressman, I would be honored if the President-Elect wanted me to be part of his team. I would have to talk

to my wife, ultimately; this has been a hard 21⁄2 years for her.

Mr. CUMMINGS. Let me go back to Fannie Mae and Freddie.

I asked you earlier about how this loss, this announcement on Monday, the $29 billion loss, affects, if at all, what you are trying

to do to help the homeowner through Fannie Mae? Does it affect

it?

Mr. KASHKARI. Not directly. When we took our actions in July

and August to stabilize Fannie and Freddie, we expected big losses

to come, and so we sized these $100 billion contracts to be big

enough to deal with these losses. We were not surprised by it. We

knew they were coming, and we don’t think that directly affects

what we can do with Fannie and Freddie.

Mr. CUMMINGS. Now, I was intrigued by Mr. Issa’s questions,

and I want to give you a broader question sort of hooked up with

his.

You all had to made some tough decisions as to where this $700

billion is going; and the American people—and this is what I hear

at the supermarket and at the gas station when I run into my

neighbors—they think that there are a whole lot of people lined up

with their hands out. They are looking at GM and they are looking

at all of these other folks who are saying, government, bail us out.

I want to know two things. One, what goes into the decisionmaking with regard to, you know, the bailing out? I know you have

certain structures you have to go by, but how do you all try to

make sure that whatever the objective is, it happens? In other

words, do you need more authority from us?

I have to tell you, one of the most disappointing things for me

was when you all gave the banks money and then I read the next

day that a lot of the banks were not going to be loaning money and

that they were going to use the money to acquire other banks and

they were going to use the money to not make the cuts that they

needed to make and that kind of stuff.

So now we face a situation with GM, and a lot of us are saying,

you know what, one out of every 10 jobs is connected with the automobile industry. We want to make sure that we don’t lose a GM

or lose any of our automobile companies because they are so important to our economy. But at the same time the American people are

saying, and we want to make sure that if they got the money, that

they move toward energy-efficient cars and they are competitive

and all of that.

So how do you all say, we are going to give—like Mr. Issa, you

are going to give to this company, this bank? What is the objective?

How do you make sure that the objective is achieved; in other

words, you can’t guarantee, but create the best possible circumstance to have it achieved? And do you need more authority

from us to achieve that?

I am going to tell you, the American people are running out of

patience. And Mr. Issa and Mr. Kucinich voted against the legislaVerDate 11-MAY-2000 15:38 Jul 06, 2009 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 U:\DOCS\50097.TXT KATIE PsN: KATIE
40

tion. I have to tell you, I venture to guess most of us wanted to

vote against it, even those who voted for it.

So I am trying to figure out, tell me how do you do that. At some

point the Congress is going to say, sorry, no more, because you

know what, the American people are saying it already.

Mr. KASHKARI. Congressman, these are very good questions. I appreciate you asking these questions.

First of all, if you look at the capital program, we want to make

sure that our banks are lending in our communities, so we designed in very specific contractual requirements to make sure that

happens. Let me walk you through them.

One, no dividend increases. No. 2, restricting share repurchases.

It doesn’t make sense for us to put capital in and then have them

pay it out to their shareholders.

Now, the capital is in the bank; if they don’t put that money to

work, their own returns are going to come down. And so there are

very strong economic incentives to want to make them want to

lend.

Having said that, it is not going to happen overnight because

there is still a lack of confidence in our economy and in our system.

So we believe that the economic incentives are there and are very

strong to get them lending in our communities. And the actions

that the banking regulators are now taking, as their supervisors,

are completely consistent with that objective and are going to be

pushing the banks to lend, No. 1.

No. 2, I’ll be candid with you, my phone is ringing off the hook.

Many people around the country—individuals, businesses, local

and State leaders—are calling and saying, we need help, our community is in trouble, our business is in trouble, can you help us.

I would first say, that is exactly why we are taking the actions

we are taking. If we went out to each of the businesses and communities and helped them directly, the $700 billion wouldn’t go far

enough. So we are trying to take the $700 billion to stabilize the

system as a whole, so credit can then flow out to everybody around

the country who needs it.

We are trying to think every day if we have finite resources, how

do we use those resources to the best possible benefit to the system

as a whole, because that will help every American. And it is not

perfect and it is not going to happen overnight, but that is our objective.

Mr. CUMMINGS. I thank you. My time is up.

Mr. KUCINICH. We are going to go to Mr. Bilbray, and then we

will have a third round of questioning for Mr. Kashkari.

Mr. BILBRAY. Mr. Kashkari, as late at September 5th, the Secretary said that Freddie and Fannie were basically sound and encouraged Americans to purchase shares and invest in those two entities. These investments were wiped out when the Secretary took

over the GSEs.

It appears to any reasonable person that the Secretary misled

the public on September 5th. Is there any justification for how the

Secretary could have made such a terrible mistake that impacted

a whole lot of people that trust the word of their government when

it came down to putting their hard-earned resources into these two

41

entities and then watch it evaporate when the same Secretary took

over control?

Mr. KASHKARI. Well, Congressman, first of all, Treasury is not

the regulator, as you know, sir, of Fannie or Freddie. OFHEO and

now FHFA is, and they have been releasing reviews of their capital

levels and their position. And so any of the Secretary’s comments,

I think, were based on the regulatory supervision and the analysis

that has been done by the regulators, No. 1.

No. 2, I don’t think that the Secretary ever encouraged people to

buy preferred stock in Fannie or Freddie or buy Fannie or Freddie

shares.

Mr. BILBRAY. But he did make the statement that both of them

were sound.

Mr. KASHKARI. Again, sir, I believe it was based on the analysis

done in terms of the regulatory capital levels established by the

Congress and looking at that analysis.

I don’t think anybody was more disappointed than he was, or we

at the Treasury were, that we had to intervene to stabilize these

institutions or risk systemic risk across the world. There are $5

trillion worth of debt, as you know, sir, and mortgage-backed securities around the world. If they had been allowed to collapse, it

would have been disastrous for our economy and our financial system. We had to take action to step in.

Once the decision was made to step in, our highest priority was

stabilizing the situation and a close second was protecting the taxpayers as much as possible.

And so when we went in, when the regulator went in and put

them into conservatorship, with the support of the Secretary and

the Chairman of the Federal Reserve, the taxpayers received some

protections, warrants for 79.9 percent of the company, dividends on

the preferred stock, etc. So this is not action that any of us wanted

to have to take.

Government action can have unintended consequences, as you

know. Fannie Mae was created 80 years ago in the Great Depression. I don’t think anyone would predict that it would grow to become a systemic risk for the entire country. But it did, and we had

to take action.

Mr. BILBRAY. Within 2004 and 2005 that issue was raised. I remember Ed Royce was raising the issue that they had gone from

30 to 70 percent. Wasn’t that kind of an indication that things were

growing a little larger than anybody had predicted?

Mr. KASHKARI. I think you’re right, Congressman; there were

Members of Congress. And members of the administration, before

my time, had been very focused on the systemic risk posed by

Fannie and Freddie, and it was unfortunate that it came to what

it came to, that we had to take this action.

And now Congress and the next administration and the American people will have a very important debate about what form

they should take in the long term.

Mr. BILBRAY. So you are saying that basically the Secretary had

no clue that both of these institutions were on the verge of falling

off a cliff?

Mr. KASHKARI. I don’t have my dates exactly, but I believe in

July he came to the Congress to ask for specific authority to try

42

to support Fannie and Freddie in the event that they ran into trouble. Again, markets—and I have said this a few times, not in this

hearing—the one constant throughout the credit crisis has been its

unpredictability. Fannie and Freddie’s deterioration surprised even

us, just as the credit market’s deterioration surprised us in September and October.

Mr. BILBRAY. Shifting over, is the administration ready to go

back and tighten up the enforcement of the RICO provision on who

and where people get loans in this country? Are we willing to say

now that we want to make sure that the people getting the loans

are actually legal under the system and have a viable ID before

they get that loan?

Mr. KASHKARI. Congressman, with deep respect, I am not deep

in the policy process on that specific issue that you are referring

to. I know it is an important issue. And we are passionate about

making sure that we issue mortgages that people can actually afford, so we don’t get back here again. But I am not deep in that

policy piece.

Mr. BILBRAY. Mr. Chairman, we need to understand that this administration, more than any other administration, has specifically

told lending institutions that they do not have to follow a guideline

that every previous administration has followed to stop the racketeering; and especially in California and along the border region,

where we have huge amounts of assets being laundered by drug

cartels.

To sit there and say that we are not going to enforce RICO for

certain institutions, I think that has opened up a lot of problems,

not just RICO, but I think a lot with this.

Now is the time that the American people want to see us go back

and reform and change our operational pattern to avoid future

problems. I just hope the administration is brave enough to be able

to say, we made a mistake here, we are going to send the signal

that what we said in 2005 and 2006 is not going to be the rule from

now on.

I think this administration ought to do the change before the

new administration, because it is this administration that set the

pattern that has created this problem; and I hope you understand

that—mistakes are made; correct it before the new administration

comes along.

Thank you, Mr. Chairman.

Mr. KUCINICH. We are going to go to a third round of questioning

of Mr. Kashkari.

National City Bank, are you concerned when you pick winners

and losers that you are increasing market concentration that may

work against the interest of consumers in other industries? Are you

concerned about that?

Mr. KASHKARI. We are not actively trying to consolidate the industry.

Mr. KUCINICH. When you talk to regulators, do regulators say it

is OK to concentrate the markets?

Mr. KASHKARI. The regulators, I think, will say that if you have

a failing institution that gets taken over by a healthy institution,

that community is better off.

Mr. KUCINICH. I—not. OK, I want to go on to another question.

43

By my calculation, out of the first TARP tranche of $350 billion, $250 billion has already been spent or pledged, and you have another $40 billion for further aid to AIG, remaining $60 billion for

new capital, a purchase plan for nonbank financial institutions.

Is it fair to say that you have already committed the entirety of the first tranche of $350 billion?

Mr. KASHKARI. The last $60 billion has not been committed.

Mr. KUCINICH. And none of the commitment was for the purchase of mortgage-related assets or conditioned on the recipients of

the TARP funds undertaking any mortgage modifications; is that

correct?

Mr. KASHKARI. Not contractually.

Mr. KUCINICH. Do you anticipate Congress is going to receive requests in the 65 remaining days of this President’s administration

for Treasury to get access to the second tranche?

Mr. KASHKARI. The Secretary has not made any determination

on when he would make such a request.

Mr. KUCINICH. One of the things what strikes me in your testimony is your view that private views, up to and including the

HOPE NOW streamline modification, are sufficient to stem the

foreclosure crisis. It is interesting because we started there.

We started with the private sector and we ended up with

subprime loans. We started with the private sector and we ended

up with $684 trillion in derivatives. We have people losing their

homes. And then we came up with the TARP, which is going to

interfere in the marketplace, but promising us it is going to help

homeowners.

And now we have reversed the course, and we are saying again

it is going to be private efforts, loan modification with regulations.

It is kind of like we are back to the future.

Now, you are still saying this, it is private efforts. Mortgage

money is going to go to borrowers, you are going to stabilize mortgage rates, and people are going to be able to protect their homes.

But at the Financial Services Committee hearing on Tuesday, it

became clear that the efforts by the private sector to remedy the

problems, even efforts coordinated by Federal agencies, were insufficient. As our hearing witness Thomas Deutsch stated at the Committee on Financial Services, ‘‘Macroeconomic forces bearing down

on our already-troubled housing market are simply too strong for

the private-sector loan modification initiatives alone to counteract

the nationwide increase in mortgage defaults and foreclosures.’’

Now, Mr. Kashkari, why do you have more confidence in the ability of the servicing industry to avoid a tsunami of foreclosures than

these observers and, in fact, than the servicing industry has in

itself?

Mr. KASHKARI. If you look at the data on what has been

achieved: increasing modifications from 23,000 a month to 100,000

a month over the course of the past year; over 200,000 Americans

are getting a form of loan workout every month. It is not enough,

but a lot of progress has been made.

I would also very respectfully ask you to consider the incentives

of some folks who are making these plans. There are some folks

who would like nothing more than the government to provide guarantees for mortgage-backed securities. The investors would love

44

that. Investors around the world would love it if the U.S. Government guaranteed all their mortgage-backed securities under the rubric of helping homeowners.

Mr. KUCINICH. If it gave loan modifications and directed lowering

principal and interest rates and extending the terms of payments,

maybe millions of homeowners would love it. I don’t know if you

have thought of that, though.

Can you point to anything in your HOPE NOW or any other private initiative that cures the problems of large proportions of negative equity that many borrowers face now that the housing bubble

is deflating?

Mr. KASHKARI. Negative equity is a very tough problem. The

Hope for Homeowners bill that was passed by this Congress and

signed by the President is directed specifically at that problem, to

encourage servicers to take write-downs to get them into mortgages

that homeowners can afford with positive equity.

Mr. KUCINICH. I have been informed by staff there have only

been 42 workouts. Just thought I would talk about a box score

here.

I have a minute left, and in that final minute, I would like to

apprise the members of the subcommittee. I just talked to Mr. Issa

about this matter. We have many industries that are being looked

at here. I am concerned that with all of this attention to finance

capital, which has been unregulated, we are seeing our industrial

capital crushed here; and we are seeing our industrial base threatened by credit freezes.

In Cleveland, for example, we have a steel mill that is on idle

because orders have dropped, because there is a credit freeze. We

have a credit freeze going on where consumers can’t get auto loans,

so you have people getting laid off in the auto industry. America’s

national security is at risk.

So this subcommittee is going to hold a hearing next Thursday

on this specific issue, and we are going to ask people—I understand

your time availability, but we are going to ask somebody from

Treasury to be present to also discuss about what Treasury’s plans

are, if any, to deal with the fact that we have an industrial base

that is in imminent peril.

When Mr. Cummings said earlier in questioning, and his comments are well taken because when we go back home, people are

asking, what are you doing to keep us in our homes and what are

you doing to help protect jobs. We have a whole way of life threatened in America; and one thing that this subcommittee can do is

require people to come forward and answer questions, and try to

use that information that we gain to suggest new initiatives. I

want to thank Mr. Issa for his willingness to pursue that.

And so next Thursday, we will give you the exact time, but we

will have a hearing on that because we are concerned about using

the assets that the Federal Government has to protect an entire

way of life. I just wanted to make that comment as the chairman.

We are now going to go to Mr. Issa for a continuation of the final

round with Mr. Kashkari.

Mr. ISSA. Thank you, Mr. Chairman, and I will be brief. I don’t

think I will use the whole 5 minutes.

45

I don’t know if you are aware, but later today I will be forming

the Bank of the 49th Congressional District of California. I will be

looking for $10 billion or $15 billion, and I hope I will be favorably

received. I have no deficits, I don’t have a negative net worth, and

the viability of the real estate in California, if anything, has never

been better, because it has never been lower than it is today. So

hopefully someone from your staff will help my staff run through

the application for a Federal charter so we can end this question

of how we get money to creditworthy banks.

Certainly if National City Bank wasn’t creditworthy and needed to go away, I am shocked that PNC would pay $5.5 billion for a

company that was insolvent. That becomes one of the conundrums

I find, is if somebody isn’t worth investing in by the American people, but they are worth, when you invest in somebody else buying

out for $5.5 billion, then my years in business were misspent, I

guess.

Let me go into two questions.

One, earlier in your testimony, and I know you are the messenger and you are bullet-ridden at the end of this hearing, so I

will try to make these last two a little more at the economics level

and a little less at the level of why didn’t you do what we asked

you to do kind of level. You said earlier that if you just bought

mortgages, you would have run out of money, and essentially what

you are saying is you need to leverage it more. I don’t have a problem with that concept. But let me go through a hypothetical for you

real quickly, because I would like to make sure it goes back to

Treasury with you. If you had taken $50 billion and you put it into a fund and you

said this fund exists for banks of exclusive refinance, meaning we

will go to anybody where there is a deep discount for the existing

homeowner to refinance his home, the bank that is walking away

has to agree to be wiped out. But in return, they will get 100 percent of the current market for that product. The homeowner puts

in whatever skin they can and refinances. You then take that refinanced package, understanding that the bank has lost nothing because they were going to foreclose and they were only going to get

market anyway, you have a willing buyer in a sense of a refinance.

If those packages were packaged up, do you believe, or let me rephrase that, do you believe for a minute that you wouldn’t be able

to resell those packages and thus have that $50 billion be leveraged 10 or 15 or 20 times? Because every time you get $50 billion

worth of these new packages and sell them on the market, you

have your $50 billion again, the way originally subprime was done.

And let’s assume for a moment there is a small equity factor in

there; in other words, a certain amount so you don’t get it all back.

Do you believe for a minute you wouldn’t be able to repackage

those and leverage that $50 billion or $350 billion or $700 billion

in order to get people to stay in their homes if they were able to

make a mortgage at current value?

Mr. KASHKARI. Congressman, to make sure that I followed it and

I got it right and I am reacting to what I think I am, let me just

repeat it back to you. So if we bought mortgages and repackaged

them and sold them, that would be a way of leveraging the TARP

funds. Just to keep it really simple——

46

Mr. ISSA. Essentially, yes. Because when it was presented to us,

it was we were going to do it one time originally.

Mr. KASHKARI. Right.

Mr. ISSA. My only question to you is, was that considered?

Mr. KASHKARI. It was, and I will talk you through it.

Mr. ISSA. Why isn’t it being done?

Mr. KASHKARI. It is a lot of the work we are doing to reach where

we are, in looking at that, the idea of buying loans, modifying

them, repackaging them, to free up more space under the TARP.

The challenges that we found is it is a very slow process, a few

months it turns out to acquire, let’s say, $50 billion worth of mortgages.

Mr. ISSA. OK, I will stop you because I want to be respectful of

the time. I am not talking about the loans. I am talking about the

houses. They are new loans. Whoever is foreclosing on Mr.

Kucinich or my constituents, whoever is foreclosing is offered by

the owner based on having gone to the Bank of the 49th Congressional District or the Ohio Bank of Reconsolidation, they say, look,

I have a short sale effectively financed with this. This group is a

willing buyer-willing seller situation. The homeowner is willing to

put their name on the line, presumably a recourse loan, presumably fresh, but it is at a lower rate. It is a short sale, but it is a

short sale to the person that is in the house at current market

price.

Why wouldn’t that system leverage the American taxpayers’ dollars almost infinitely, because we are forcing the banks to recognize

the real mark to market, but we are creating a market for the resale of that asset immediately so it provides real liquidity.

If your program to prop up the banks afterwards is still needed,

that is fine. But why is it we aren’t doing something like that with

this huge amount of money that we gave you almost unlimited ability to use in different ways?

Mr. KASHKARI. Again, just to be clear, I want to make sure I am

answering the right question. So the TARP would be providing the

loan to the buyer at the current market price in a short sale?

Mr. ISSA. It would undoubtedly use a bank or some other entity.

Mr. KASHKARI. But it would be TARP funds going to the homeowner.

Mr. ISSA. It would be TARP funds.

Mr. KASHKARI. OK. And then we would package those up and

sell them.

Mr. ISSA. And they would immediately be sold. Because they are

not corrosive loans. They are not any of this other stuff. They are

at the real market today, perhaps even with a Federal guarantee

in case things go lower.

Why is it we are not doing that so we can get the leverage that

the gentlemen to my left so desperately want?

Mr. KASHKARI. Right. Well, Congressman, at least as we have

talked about it, that sounds an awful lot like the Hope for Homeowners program, where what ends up happening is the borrower

gets put into a new loan that he can afford at today’s market price

for the house, and then those loans are securitized and sold off

through Ginnie Mae. And the challenge is there are very complex

incentives on the existing lender’s willingness to mark down that

47

loan into that loan that homeowner can now afford based on today’s market price.

Mr. ISSA. I am going to cut you off because my time has been cutoff, appropriately. I think your problem is as long as you give the

money to the banks without their fully availing themselves, what

happens is you are discouraging that secondary behavior, because

you are putting the money into their back pocket and causing them

not to be desperate enough to use that other program.

I am going to close with one question I want back for the record

real quickly. Currently, today, Treasury bills at 2 years are 1.22

percent; GSE’s are 2.64 percent. Five years, 2.3 percent versus

2.65. Ten years, 3.72 versus 5.08.

Why has Treasury with their full faith guarantee of GSE not insisted in fact that they beat T bills? Why is it today that the American taxpayer is funding Fannie and Freddie at a rate, a cost of

money rate, that is substantially higher to the American taxpayer

because of what we did in taking it over, without getting T bill

rates? Had you converted GSEs to T bills, you would have been

able to get these rates. I would like an answer for the record.

Mr. KASHKARI. Of course, sir. First of all, we do not—Fannie and

Freddie are not full faith and credit. We have provided very strong

implicit support through these contracts that provides the Treasury’s backing. But they are not the same thing as saying it is full

faith and credit. It is darn close, but it is not quite full faith and

credit, No. 1.

Mr. ISSA. It is not very close on the interest rate, I am afraid.

Mr. KASHKARI. No. 2, the Treasury lending authority, if we wanted to provide all the lending to them instead of them going to the

market themselves, the Congress provided us authority through

the end of 2009. So we need Fannie and Freddie to be able to access the markets directly for their long-term applications to continue to fund themselves. So we could step in on a short-term basis

and provide liquidity, but it is not unlimited authority.

Mr. ISSA. Thank you.

Thank you, Mr. Chairman.

Mr. KUCINICH. I thank Mr. Issa for the final round of questioning

of Mr. Kashkari.

The Chair recognizes Mr. Cummings. You may proceed.

Mr. CUMMINGS. Mr. Kashkari, in the neighborhood I grew up in

the inner city of Baltimore, one of the things that you tried to do

was make sure that you were not considered a chump. And what

‘‘chump’’ meant was that you didn’t want people to see you as just

somebody they could get over on. And I am just wondering how you

feel about an AIG giving $503 million worth of bonuses out of one

hand and accepting $154 billion from hard-working taxpayers?

I am trying to make sure you get it, you know? I mean, you know

what really bothers me is all these other people who are lined up.

They say, well, is Kashkari a chump? We can just go in there—and

I am not saying they are. I don’t know. We can go in there, we will

get some money. And you know what AIG did? They will even tell

you they are coming back for some more. And they have the nerve,

the nerve, to grant some $503 million worth of bonuses.

I am just wondering, do you all say to yourself, boy, this doesn’t

look too good. And I am wondering about them, if it was simply

48

from a PR standpoint, and I know nothing about PR, but one thing

I do know, I wouldn’t want to be asking my friend for some money

to help me stay afloat and if I didn’t get the money I would be out

of business, and then for my friend, I say OK, I am really struggling. Then my friend, who can barely afford to go to McDonald’s,

then walks around and sees me in a restaurant costing $150 a

meal. There is absolutely something wrong with that picture.

So I wonder, does that go through your head, or is it just me?

Am I missing something?

Mr. KASHKARI. No, Congressman. I saw the same images that

you saw of the parties and I share your frustration with that.

Mr. CUMMINGS. What about the $503 million worth of bonuses?

Mr. KASHKARI. Let’s talk about that, because I heard about that

this morning I think as you did in the paper, and I asked my colleagues to check on it. I said, what is this, because I was outraged

when I saw the headlines.

What was explained to me is that this was money apparently,

and I am not defending it, but this was money that had already

been paid to employees that was set aside in a separate fund that

they would get if they left AIG, and we need AIG to keep running

as a company so it can sell off its assets and pay back the taxpayers.

So from what has been explained to me is this money that has

already been paid but set aside to the employees was now released

so that the employees did not have an incentive to quit, because

we need them to keep working so that they can sell off the assets

and pay back the taxpayers.

Mr. CUMMINGS. We need them to keep working, but guess what?

There are a whole lot of people that can replace them because there

are so many people losing their jobs. This is an employer’s market

today.

Mr. KASHKARI. That is true, sir.

Mr. CUMMINGS. Come on now. I guarantee you there are people

lined up saying, please quit so I can get a job. And that is what

the American people are looking at, and they are frustrated.

Now, let me go to another question. You said something very interesting. And, by the way, I thank you. You have a tough job. The

$350 billion that is left, you said that Mr. Paulson has not made

a decision on that. I mean, I don’t want to be considered a chump

either. You cannot convince me that Paulson is not coming back for

the $350, I know you say he has not made a decision, that he is

not coming back for the $350 billion, because you have said here

several times that the $700 billion if you don’t do it this way or

don’t do it that way, you can’t achieve but so much. So obviously

you need that.

I mean, what would be the logical argument to get the $350 billion, if you were advising Mr. Paulson to go after the $350 billion?

Mr. KASHKARI. It would be the priorities that he has outlined. So,

No. 1, additional capital for all sorts of financial institutions, not

just banks, because many of them provide credit to our communities. No. 2, getting consumer credit flowing again.

I talked about auto loans, credit cards, student loans, etc. Those

markets are frozen today. So to get at those problems, that is part

of what we would want to use the second $350 billion for, if he

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makes that determination. So that is what I would be talking to

him about, sir.

Mr. CUMMINGS. So last but not least, a lot of times when we have

these hearings, and I will close with this, and I walk away from

the hearing, I often ask myself, does the witness then go to his

friends and his employees and say, we got through that one, and

then go back to business as usual?

I am praying, and I am talking about constituents, man. I mean,

I am talking about people who are hurting. I am praying that you

will never be the same after this hearing. I am serious. And I know

you have been reaching out.

In other words, I want you to go back with a little bit more fire.

I am not saying you haven’t had the fire, but I want it to be hotter,

to try to help these people who are losing out. These are the people

that I face.

I go home every night. I live in Baltimore, so I see my constituents every day. So they need help, and they are begging for help.

And I just hope that when you go back you don’t say, got past

Kucinich, got past Issa and Cummings. It was a little rough, but,

OK, boys, let’s go back to business as usual.

We can’t afford it, nor can we afford to be chumps. We can’t afford it. It is too much. People are hurting and they are in pain.

So I hope that while we are looking at Wall Street and we are

looking at all the folks that have their hands out and we are looking at all the AIG officials as they go on their little junkets or

whatever, that you keep in mind, as I know you have been doing,

but I want you to do it more, that every decision you make, you

think about those folks who are losing their jobs and who are in

pain and who are not going to have a decent Christmas. They are

going to probably be sitting around the Christmas tree with no presents. You know why? Because they won’t have a job.

All of these people, as I hope as they are coming to you begging

for the taxpayers’ money, that you will remind them of all the people who are suffering and that are in pain, and tell them that it

cannot be business as usual.

Thank you very much, Mr. Chairman.

Mr. KUCINICH. Thank you, Mr. Cummings.

Mr. Kashkari, do you have any response?

Mr. KASHKARI. Thank you for the opportunity to be here today.

Just to Mr. Cummings, I don’t know how to work any harder than

we are already working, and I take your feedback very seriously.

That is why we are working as hard as we are, and we are going

to keep doing it and trying to accomplish it and meet your expectations.

Mr. CUMMINGS. Thank you very much.

Mr. KUCINICH. If I may take the prerogative as Chair to say I

don’t think anyone questions, Mr. Kashkari, that you are working

hard. Our question is who are you working for.

That will conclude this first panel. I want to thank you for your

presence, sir. As Mr. Cummings said, I know that it cannot have

been easy. You have been answering questions for over 2 hours and

the committee will take note that you have engaged in a thoughtful

Q and A here. So we appreciate it. I just want you to know it is

much appreciated and we understand the burdens of your office.

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So we are going to thank Mr. Kashkari for his presence here and

we are going to move on to the second panel. I would ask the witnesses from the second panel to come to the committee table.

Thank you again, Mr. Kashkari, for your presence here.

The committee will take a 5 minute recess while the table is set

up for the second panel.

[Recess.]

Mr. KUCINICH. The committee will come to order.

We are fortunate to have an outstanding group of witnesses on

our second panel. Professor Michael Barr teaches financial institutions, international finance, transnational law and jurisdiction and

choice of law and co-founded the International Transactions Clinic

at the University of Michigan Law School. He is also a senior fellow at the Center for American Progress.

Professor Barr conducts large scale empirical research regarding

financial services in low and moderate income households and researches and writes about a wide range of issues and financial regulation.

Professor Barr previously served as Secretary Treasury Robert

Rubin’s special assistant and Deputy Assistant Secretary of the

Treasury.

Professor Anthony Sanders. Professor Sanders is a professor of finance and real estate at the W.P. Carey College of Business of Arizona State University where he holds the Bob Herberger Arizona

Heritage Chair. He has previously taught at the University of Chicago Graduate School of Business, University of Texas at Austin

McCombs School of Business, Ohio State University Fisher College

of Business. In addition, he has served as director and head of

asset backed and mortgage backed security research at Deutsche

Bank in New York City. He has served as a consultant to various

firms such as Merrill Lynch, UBS, Bank of Scotland, Nationwide

Insurance and Deutsche Bank on the subject of mortgage design,

mortgage-backed securities and commercial mortgage-backed securities, loan servicing and risk management.

Ms. Alys Cohen is a staff attorney at the National Consumer

Law Center, where she focuses on homeownership and other low

income consumer credit issues. She is contributing author of the

‘‘Cost of Credit and Truth in Lending’’ manuals, provides training

and consumer law to attorneys and other advocates, and participates in NCLC’s advocacy records.

Prior to joining the NCLC staff, Alys worked as an attorney in

the Federal Trade Commission’s Bureau of Consumer Protection

Division of Financial Practices where she specialized in credit discrimination and high class lending issues.

Mr. Larry Litton is the president and chief executive officer of

Litton Loan Servicing, overseeing the day-to-day operation of

Litton’s $75 billion mortgage servicing portfolio. As a founding

member of the company, Mr. Litton has been involved in every aspect of the business since its inception in 1988 with more than 20

years of experience in mortgage servicing. He is considered an expert in the field of credit sensitive mortgage loans, was appointed

and served on the Mortgage Bankers Association Residential Board

of Governors, Board of Directors of the Texas Mortgage Bankers

and served on the State of Ohio Foreclosure Prevention Task Force.

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Mr. Stephen Kudenholdt serves as chairman of the Structured

Finance Practice Group of the law firm of Thacher Proffitt & Wood

based in New York, a leader in residential mortgage loan

securitization. His areas of practice include residential and commercial mortgage-backed securities and other asset-backed securities, primarily focusing on residential mortgage loan securitization

as well as resecuritization transactions involving various classes of

mortgage-backed securities.

Mr. Kudenholdt has helped develop many transaction structures

and formats that have become industry standards, including shifting interest subordination techniques.

Mr. Thomas Deutsch. Mr. Deutsch is deputy director of the

American Securitization Forum, a leading trade organization of all

parties to mortgage-backed securities. Prior to joining the American Securitization Forum, Mr. Deutsch held the position of associate in the Capital Markets Department of Cadwalader,

Wickersham & Taft LLP, where he represented issuers and underwriters in various structured finance offerings, including residential mortgage-backed securitizations and credit card securitizations.

Prior to Cadwalader, Wickersham & Taft LLP, Mr. Deutsch was

an associate at McKee, Nelson LLP, where he focused on residential mortgage-backed securitizations.

So this is a panel of experts and we appreciate their presence

here.

I would inform the witnesses, as I did the last witness, that it

is the policy of the Committee on Oversight and Government Reform to swear in all the witnesses before you testify. I would ask

that each of you rise.

[Witnesses sworn.]

Mr. KUCINICH. Let the record reflect that each and every witness

has answered in the affirmative.

Now, as with panel I, I am going to ask that each witness give

an oral summary of your testimony. I would ask you to keep this

summary to about 5 minutes in duration. Your complete statement

will be in the written record. We do this in order to have a little

bit more time for Q and A and interact.

Professor Barr, let’s proceed with you. I want to thank you for

your presence here and I want to thank you for your patience, too.

The questioning of the first witness, as you might expect, went an

extended period of time, but we know that your time is valuable

as well. Thank you for your patience.

Please, Professor Barr, you may proceed.

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STATEMENTS OF PROFESSOR MICHAEL BARR, FORMER DEPUTY ASSISTANT SECRETARY FOR COMMUNITY DEVELOPMENT, DEPARTMENT OF TREASURY, UNIVERSITY OF MICHIGAN LAW SCHOOL & CENTER FOR AMERICAN PROGRESS;

PROFESSOR ANTHONY B. SANDERS, W.P. CAREY SCHOOL OF

BUSINESS, ARIZONA STATE UNIVERSITY; ALYS COHEN,

STAFF ATTORNEY, NATIONAL CONSUMER LAW CENTER;

LARRY LITTON, JR., PRESIDENT AND CEO, LITTON LOAN

SERVICING LP; STEPHEN S. KUDENHOLDT, CHAIRMAN,

THACHER PROFFITT & WOOD; AND THOMAS DEUTSCH, DEPUTY ASSISTANT DIRECTOR, AMERICAN SECURITIZATION

FORUM

STATEMENT OF PROFESSOR MICHAEL BARR

Mr. BARR. Thank you very much, Mr. Chairman, Ranking Member Issa and distinguished members of the committee. It is my

honor to be here today to testify about Treasury’s progress in preventing foreclosures.

There is bipartisan agreement today that stemming the tide of

foreclosures and restructuring troubled mortgages would slow the

downward spiral harming financial institutions and the real American economy. The Federal Government has a range of authority to

take action, but what has been missing is a way to get servicers

who control most of these loans on behalf of mortgage-backed securities investors to restructure the loans themselves or sell the loans

to the Treasury at a discount so they can be modified.

To date, Treasury’s efforts have largely failed. Owing a duty to

countless investors with conflicting interests, servicers have largely

been paralyzed by a fear of liability, of restrictive tax and accounting rules, and the wrong financial incentives. Instead of restructuring loans, most servicers are foreclosing at alarming rates, as you

have seen yourselves in your own communities.

As I will explain further in a moment, what we need now is new

legislation to unlock the securitization trusts so that servicers can

modify loans or sell them to Treasury at a steep discount. Treasury

can then restructure those loans, including a shared equity feature

to protect taxpayers, issue new guarantees on the restructured

loans along the lines that the ranking member has suggested, and

selling them back into the market. This would help homeowners

and restore liquidity and stability to our markets.

In the meanwhile, the administration can act now. They should

use a full court press to help troubled homeowners. They should

stabilize their financial markets and jump-start our economy. In

particular, Treasury can guarantee home mortgages held in trust

and in portfolios in exchange for real restructuring. They can pay

servicers to restructure loans as well. Treasury can contract with

the FDIC to implement a restructuring program, enlist Fannie and

Freddie and bolster FHA. Let me talk about this in a little bit more

detail.

After nearly a year of hoping that the private sector would stem

foreclosures, and in a hurried series of weeks, lurching from bailout

to bankruptcy and back to bailout again, Treasury finally declared

that the time had come for congressional authorization of a program, the Troubled Asset Relief Program, with the dominant raVerDate 11-MAY-2000 15:38 Jul 06, 2009 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 U:\DOCS\50097.TXT KATIE PsN: KATIE
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tionale that Treasury would buy tranches of securities and collateral debt obligations in order to jump-start credit markets. But the

administration’s proposal left intact the conflicts of interest and

legal barriers blocking real home mortgage structuring.

Moreover, the administration’s rationale for the program shifted

significantly between proposal and enactment, and after enactment

the administration put on the back burner its plans to buy mortgage-backed securities, instead focusing on capital injections, hoping that banks would increase their lending. Instead, capital has

been deployed largely to shore up the capital base against further

decline in asset values as well as, the committee noted, to engage

in merger and acquisition activity, and new capital has gone to AIG

as well.

Just this week Treasury announced formally what we already

knew, it had abandoned the idea of buying troubled assets under

the Troubled Asset Relief Program. Despite the limitations of the

approach taken by the administration thus far, the Emergency Economic Stabilization Act’s potential is significant. Under section 109

of the act, the Treasury Secretary is authorized to use loan guarantees. Under section 101 of the act, the Secretary is authorized to

make and fund commitments to purchase troubled assets, including

home mortgage loans. These authorities can be deployed now to

help homeowners. Here is how.

First, guarantee home mortgages in exchange for real restructuring. Treasury can offer to guarantee troubled loans held by

servicers if they modify troubled loans to bring debt-to-income ratios in line with prudent underwriting and sustained affordability.

Second, pay servicers. Right now, trusts pay servicers for the

extra work of foreclosing on homes but largely not for modifications. Treasury could pay servicers to make loan modifications that

meet Treasury guidelines.

Third, let the FDIC act now. The FDIC has led the way in seeking to end this crisis, as you know, and has put forward a plan for

guaranteeing troubled loans. Treasury could just say yes.

Bolster the FHA, in need of real resources. Enlist Fannie Mae

and Freddie Mac beyond the announcement Tuesday that largely

reflected existing practice.

Private label securitization, not the GSEs, however, hold most of

the troubled subprime and Alt-A mortgages. We need to find a way

to unlock those pools. Here is how. There is a three-part plan.

First, preserve REMIC tax benefits. Servicers managing pools of

loans are generally barred from selling the underlying mortgage

loans, but the trust agreements provide that servicers must amend

the new agreements if doing so would be helpful or necessary to

maintain Real Estate Mortgage Investment Conduit status. These

rules provide important benefits for the trusts. Through a legislative fix, we can effectively require the trusts to change their practices.

Second, indemnification of servicers.

Excuse me, Mr. Chairman. I notice my time is up. May I finish?

Mr. KUCINICH. Sure.

Mr. BARR. Thank you.

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Second, we should indemnify servicers. Legislation could provide

a narrowly tailored indemnification of servicers who reasonably

pursue loan modifications or sales under Treasury programs.

And, third, we need to provide legal certainty under accounting

standards. Because selling home mortgage loans to Treasury would

advance important public interests and not conflict with the underlying purposes of Statement 140, the Financial Accounting Standards Board should modify the statement to provide servicers with

legal comfort in broadly modifying and selling mortgage loans

under Treasury’s programs.

Until we provide real home mortgage relief, our economy is going

to continue its vicious downward spiral of foreclosures, home price

implosions, credit illiquidity and decline. We need to end the crisis

now.

[The prepared statement of Mr. Barr follows:]

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Mr. KUCINICH. I thank the gentleman.

Professor Sanders, you may proceed. Thank you.

STATEMENT OF PROFESSOR ANTHONY B. SANDERS

Mr. SANDERS. Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, thank you for the

invitation to testify before you today.

Housing prices in many areas of the United States have slowed

or declined dramatically over the past 2 years. This decline is partly responsible for the large increase in subprime mortgage delinquencies over the same period. According to Hope Now Alliance

Survey data, 14.4 percent of subprime mortgages are 60 days or

more delinquent over the third quarter of 2008, and while 2.3 percent of prime mortgages are 60 days or over delinquent in the same

period, that rate is almost double from the third quarter of 2007

at 1.26 percent. From the third quarter of 2007 to the third quarter

of 2008, there were many, many, many foreclosure sales, of which

over half were subprime borrowers.

But as Adam Smith’s invisible hand, we used to term it as, that

has been replaced by the invisible foot, where homeowners are

being booted out of their houses at record rates.

We are in the midst of a subprime meltdown and the second

wave of Alt-A, the low documentation mortgage ARMs and related

mortgages, and those are beginning to reset. Therefore, it is of critical importance to find ways to slow down the delinquency in foreclosure waves if economically viable.

This urgency is reflected in the announcement by the Federal

Housing Finance Agency on Wednesday that Fannie and Freddie

announced accelerating their loan modification activities. While

Secretary Paulson has announced that TARP will not be used to

purchase troubled loans from banks, it is still of tantamount importance to stabilize the housing and mortgage markets, and loan

modifications are one of the best tools available to Treasury, even

if they decide in the short run not to deploy them.

Hopefully, the acceleration of loan modifications by Fannie and

Freddie will help stabilize the market, but it is dangerous strategy

to rely on the banking system when called to unjam pipes, particularly with an overwhelmed servicing industry.

Once again, it is important to note that Fannie and Freddie,

while Congressman Cummings pointed out maybe 70 percent of the

loans are being touched by Fannie and Freddie, that is the low

hanging fruit. We are not talking about the whole loans, subprime

and Alt-A that are really the source of the problem in the housing

market in the United States.

There are several loan modifications that are currently being deployed by loan servicers. These include loan rate reductions, loan

rate freezes, amortization period extensions, principal reductions.

While the first two are the most common, principal reductions have

been much less so. In fact, only Ocwen currently has been a major

force, with approximately 70 percent of the total principal modifications done to date. According to Credit Suisse, the average balance

decline for first lien principal modifications is approximately 20

percent, and 55 percent for second lien principal modifications.

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As housing prices begin to fall and the number of borrowers experiencing negative equity continues rising, the demand for such

modifications is growing. Principal modifications serve to reduce

the monthly payments and reduce negative equity. Thus, principal

modifications should increase the willingness of borrowers to stay

in the home.

Loan modifications may help keep borrowers in their home and

increase the probability that they will be able to cure their delinquency. Foreclosure involves multiple transaction costs, including

legal filings and selling expenses that can reach almost 50 percent

loss severity on each loan. So during the current housing and mortgage crisis, the capacity of loan servicers to process additional foreclosures has been limited, resulting in an increase in the effective

cost to cure delinquencies and a reduction in the number of households that have been able to obtain a modification.

In summary, preventative principal reductions can actually serve

to stave off defaults and help stabilize the housing and mortgage

market. Waiting until the borrower goes 60 to 90 days delinquent

is dangerous, since the longer a servicer waits to modify a loan, the

more likely the loan is to go into default, generating enormous

costs for the lenders and servicers. Thus, loan modifications are not

a bailout of borrowers per se; rather it is an attempt to reduce

costs to lenders and investors while at the same time preserving

homeownership and reducing systemic risk in the economy.

Thank you for your willingness to let me share my thoughts with

you.

[The prepared statement of Mr. Sanders follows:]

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Mr. KUCINICH. Ms. Cohen, you may proceed.

STATEMENT OF ALYS COHEN

Ms. COHEN. Chairman Kucinich, Ranking Member Issa, thank

you for inviting me to testify at today’s hearing on the Treasury

Department’s TARP program.

On a daily basis, the National Consumer Law Center’s attorneys

provide legal and technical assistance on consumer law issues to

legal services, government and private attorneys representing low

income consumers across the country. From this vantage point, we

are seeing the devastating effects of escalating foreclosures on families and communities. There is no doubt bold and immediate action is needed to save homes and neighborhoods.

Treasury’s recent announcement makes clear, however, that

stopping foreclosures and saving homes and neighborhoods is not

a priority of the current TARP program. We appreciate the FDIC’s

announcement today on the use of the TARP guarantee program.

Such a plan with would be a substantial step in the right direction.

Congress must insist that Treasury use the broad powers provided by TARP to mandate affordable modifications through every

means available. Only such a plan will get at the root cause of this

entire crisis, defaults and foreclosures engineered by overreaching

mortgage loan originators and investors, and thus stabilize the

housing market.

To the extent Treasury provides funds to firms providing nonmortgage credit, there should be a quid pro quo for reforming mass

abuses in those industries, including auto, finance, private student

loans and credit cards.

On mortgages, Treasury should develop a loan modification program that can be routinized and applied on a large scale basis. It

should condition any purchase of an equity interest in a financial

institution on a rigorous loan modification plan. It should provide

guarantees only for affordable loan modifications, and it should

purchase a sufficient stake in assets to enable the implementation

of an aggressive modification program through the purchase of

whole loans, second mortgages, securities or servicing rights. An effective TARP program for homeowners lies in the mechanics of its

loan modification program. The following principles should apply to

such a program.

One, a mechanized program of affordable and sustainable modifications is essential to process the many homeowners facing foreclosure.

Two, the affordability analysis in any loan modification program

must be both objective and have a safety valve for homeowners in

special situations.

Three, loan modifications should include principal reductions to

95 percent LTV so borrowers are invested in long-term homeownership and so they can refinance to make needed repairs, obtain a reverse mortgage or relocate.

Four, second liens should be bought out at a nominal pricing.

Without addressing second liens, a program can go nowhere.

Five, loan modifications should be available to homeowners in

default as well as for those for whom default is reasonably foreseeable.

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Six, late fees and all default servicing fees should always be

waived in loan modifications. As servicers profit enormously from

such fees, they are often out of proportion to the loan balance.

Seven, any shared loss guarantee should favor the most needed

loan modifications.

Eight, loan modifications should not cost servicers more to do

than foreclosures.

In addition, Congress should pass legislation to allow loan modifications through bankruptcy, reform the servicing industry by requiring loss mitigation prior to any foreclosure, and remove tax

consequences for loan modifications.

Why do we need these measures? While the servicing industry

stands at the center of the foreclosure crisis and thus is in the best

position to turn the situation around, the basic structure of the

servicing business requires us to recognize we cannot leave it to

this industry to lead the way out of the foreclosure nightmare.

Even the streamlined modification program is limited in terms and

has been announced by private sector servicing firms that have a

dismal record of providing efficient and fair service.

In the interest of maximizing profits, servicers have engaged in

a laundry list of bad behavior which has considerably exacerbated

foreclosure rates, including cascading fees imposed upon homeowners in default. Servicers profit from levying fees and keeping

borrowers in the sweat box of default contrary to the interests of

homeowners and investors. While clarifying a servicer’s duty to the

entire investor pool and allowing for clear decisionmaking capacity

by servicers will help, more substantial intervention will be needed

to rescue homeowners from a broken system that works against

their interests.

Thank you for the opportunity to testify before the committee

today. A strong loan modification program under TARP is essential, as is passage of legislation to allow for loan modifications in

bankruptcy, to reform the servicing industry and to address the tax

consequences of loan modifications.

Thank you. I look forward to your questions.

[The prepared statement of Ms. Cohen follows:]

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Mr. KUCINICH. Thank you very much for your testimony.

Mr. Litton.

STATEMENT OF LARRY LITTON, JR.

Mr. LITTON. Yes, sir. Mr. Chairman, I just want to thank you

very much for the opportunity to be here today.

I am responsible for running a mortgage servicing company that

is right on the front lines of this crisis. We service 450,000

loans——

Mr. KUCINICH. Hold on, is your mic on now? OK. We want to

make sure——

Mr. LITTON. I talk so loud I wasn’t able to hear myself anyway

through the microphone.

Mr. KUCINICH. When I was on the City Council in Cleveland

years ago, my mic used to be cutoff, so I learned to talk loud as

well. But here they need to pick up the sound of your voice.

Mr. LITTON. There you go.

Mr. KUCINICH. Are we all set now on the technical side? Good.

Mr. LITTON. To top it off, I even have a cold.

Mr. KUCINICH. Thank you for being here. Go ahead.

Mr. LITTON. I would like to thank you again for the opportunity

to address the committee.

I run a mortgage loan servicing company that services 450,000 loans totaling about $75 billion of product. I was asked here today

to provide some insight into the performance of loan modifications

and to explore additional ways that servicers can help homeowners

stay in their homes during these very difficult times.

As a servicer, we are the intermediary between investors in

mortgage loans and mortgage-backed securities as well as homeowners. Servicers perform a host of duties. We are responsible for

collecting monthly payments from the customer. We are responsible

for forwarding those payments on to the investor. We handle taxes,

insurance, as well as other things. We are also responsible for

working with delinquent customers, and we are also responsible for

creating workout opportunities and modifying those loans when we

can do so.

Litton has been a strong proponent of responsible loan modifications since my father founded the company in 1988, and I am very

proud to say, by the way, that I am still working with my dad 20

years later. As a servicer, we not only have a contractual obligation

to our investors, but we also have a responsibility to provide options that give homeowners a second chance.

In the past year, we have observed several notable trends that

are presenting increased challenges to servicers as well as homeowners.

First of all, default rates have increased and have continued to

do so at an accelerated rate.

Second, redefault rates on loans that have been previously modified have gone up and are going up at an accelerating rate.

Third, fewer customers are accepting the loan modifications that

were being offered, including preapproved streamlined loan modifications.

Fourth, foreclosures on vacant properties have doubled from this

time last year.

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And, finally, our customers are facing tremendous economic head

winds driven by higher incidences of job loss, wage compression

and a host of other economic issues.

It is clear to me that we as a servicing industry need to continue

to be even more aggressive than we have been with modifying loan

terms and finding new ways to get homeowners’ payments down

even further than we have done already. We believe that this is

good both for homeowners and communities, and it is also good for

investors whose loans we are servicing.

Over the past 12 months, I am proud to say that we have modified more than 41,000 loans. That represents 12 percent of our

portfolio and it represents 38 percent of loans that were 60 days

or more past due. Whenever we modify a loan, we consider all of

the following approaches. We will write down principal, we will

waive part or all of the arrearage that has accrued on the loan. We

will look at decreasing the interest rate, and we will also look at

extending the term. However, despite that work, despite all the

loan modifications we have done, we have not seen an appreciable

decline or any decline whatsoever in new foreclosure starts over

this same period.

In response to this, it is clear to me as an asset manager responsible for 450,000 mortgage loans, that we have to do more, and the

more that we are doing is we have implemented at Litton a new

debt-to-income standard of 31 percent on our loan modifications.

Our belief is that using this standard will allow us to do more loan

modifications and provide greater payment relief to borrowers and

provide a more long-term sustainable solution. We believe that our

investors will benefit tremendously from this and we are confident

that we will be able to demonstrate that by decreasing future default rates.

Thank you, Mr. Chairman, for the opportunity to address the

committee, and I look forward to answering additional questions

that you may have.

[The prepared statement of Mr. Litton follows:]

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Mr. KUCINICH. I thank the gentleman.

Mr. Kudenholdt.

STATEMENT OF STEPHEN S. KUDENHOLDT

Mr. KUDENHOLDT. Chairman Kucinich, thank you for the opportunity to speak with you today. My name is Steve Kudenholdt. I

am the head of the Structured Finance Practice Group at the law

firm of Thacher Proffitt based in New York.

Mr. KUCINICH. Could you please pull that mic a little bit closer?

Mr. KUDENHOLDT. Certainly, sir.

Since the credit crisis began last year, our firm has worked closely with the American Securitization Forum and other industry participants to improve awareness about the flexibility in existing

securitization structures to perform loan modifications. In today’s

environment, residential mortgage loan servicers need to be able to

use all possible tools to minimize losses and foreclosures.

My comments will focus on how TARP or other programs could

be used to increase loan modifications and reduce foreclosures in

the context of residential loans included in private label

securitizations, non-GSE securitizations.

Most private label securitization governing documents give broad

authority to the servicer to service loans in accordance with customary standards and in a manner that is in the best interests of

investors. Many securitization governing documents specifically authorize loan modifications where the loan is in default or where default is reasonably foreseeable.

EESA Section 109(a) provides that the Secretary may use loan

guarantees and credit enhancements to facilitate loan modifications

to prevent avoidable foreclosures. If a guarantee program were created that covered specific loans that had been modified, this could

result in more modifications.

Under a typical loan modification program, the servicer takes the

following steps: First, a specific proposed loan modification is designed based on the borrower’s current ability to pay. Second, the

anticipated payment stream from that loan as modified is compared with the anticipated recovery from foreclosure on a net

present value basis. Third, the servicer chooses the alternative

with the greater NPV.

Now, in comparing a loan modification with a foreclosure, the

servicer applies an assumed redefault rate, and this factor reduces

the NPV of the modification alternative. But if credit support were

added that eliminated that redefault risk, then the servicer would

be more likely to be able to choose the modification over foreclosure, as long as the cost of the guarantee was less than the reduction in NPV that would have resulted from the redefault risk.

In order to encourage modifications and protect the taxpayers’ interests, such a guarantee program should be limited to servicers

who have demonstrated that they have a robust and systematic

modification program with sufficient staffing and resources to handle a high volume of modification. The program should include procedures to verify current income and should include a reliable

model for calculating NPV. We think a program of this type could

actually change servicer behavior without creating a mandate or

changing the operative documents.

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Another possibility would be to develop a program under TARP

whereby defaulted mortgage loans could be purchased directly from

securitization trusts at a discounted price. Such a program would

be very helpful because there are borrowers who will default who

would like to stay in the home but would not be able to qualify for

a loan modification because they could not document current sufficient income and they may not be eligible for the Help for Homeowners program either. Defaulted loans purchased under this program would be subject to a wider range of workout options, such

as potentially renting the property back to the borrower.

Although typical servicing authority provisions have been broadly interpreted to allow loan modifications, these provisions to date

have not been interpreted to allow such sales for a number of reasons, primarily because FAS 140 does not permit sales of loans out

of securitization trusts. However, most securitization documents

are actually silent on whether defaulted loans can be sold for a discounted price. Where they are silent, we think there is a strong argument that such sales could be made if the loan was in default

and if the cash price resulting from the sale was greater than the

NPV of a recovery under foreclosure, and the servicer safe harbor

provisions that were added under section 119 of these would support this interpretation.

However, an essential element of this type of program would be

an authoritative change or clarification of FAS 140 to permit sales

without adverse accounting consequences. These two programs

would potentially offer additional tools to a servicer to mitigate

losses and prevent foreclosures that they do not have today.

[The prepared statement of Mr. Kudenholdt follows:]

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Mr. KUCINICH. I thank the gentleman.

Mr. Deutsch, you may proceed.

STATEMENT OF THOMAS DEUTSCH

Mr. DEUTSCH. Chairman Kucinich, my name is Tom Deutsch,

and I am the deputy executive director of the American

Securitization Forum. I very much appreciate the opportunity to

testify before this committee on behalf of the more than 330 member institutions of the American Securitization Forum, including

mortgage lenders, servicers and institutional investors, regarding

how the securitization industry and the Federal Government can

work together to prevent avoidable foreclosures under the new

Emergency Economic Stabilization Act.

I testify here today with one simple overarching message: Industry participants have been and will continue to deploy aggressive

and streamlined efforts to prevent as many avoidable foreclosures

as possible. But let me also repeat the statement that you quoted

earlier today, that macroeconomic forces bearing down on an already troubled housing market are simply too strong for private

sector loan modification initiatives alone to counteract the systematic risks imposed by a nationwide increase in mortgage defaults

and foreclosures.

In my testimony here today, I look to outline a number of ways

that the industry and the government can work together under

TARP to target relief to troubled homeowners while simultaneously

helping to restore credit to mortgage borrowers.

The economic and housing market conditions have clearly deteriorated over the last 18 months, and that deterioration has intensified recently. Job losses, declining home values and borrowers’ extraordinary non-mortgage consumer debt have combined to put severe strain on homeowners and drive rising delinquencies, defaults

and foreclosures. Given these unprecedented challenges, servicers

have responded with unprecedented efforts, as no securitization

market constituency, lenders, servicers or investors, benefits from

loan defaults or foreclosures.

As a result, the number of loan modifications, for example, has

increased by over six times the rate at which they were being provided to borrowers at this time last year. One driving force behind

this exponential increase was the streamlined framework the

American Securitization Forum developed last year that all major

servicers have implemented to provide efficient loan modification

decisions to subprime-ARM borrowers facing interest rate resets.

In an effort to expand this framework, we are actively reviewing

criteria from other streamlined loan modification approaches that

have recently been announced, such as the plan implemented by

the FDIC at IndyMac and the Federal Housing Finance Agency

protocol announced on Wednesday.

Ultimately though, we must all recognize the seismic economic

challenges in the United States, the epicenter of which is in the

housing market, are too great for purely private sector loan modification solutions. As such, evolving private sector loan modification

activities, though playing an important part of the solution, have

limits in their effectiveness in addressing the extraordinary challenges in the housing market and should not be seen as a panacea

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for all housing market ills. As such, we believe expanded voluntary

government programs under TARP would be very effective in bridging the gap to address the potential foreclosures that commercial

and contractual obligations cannot prevent.

The newly enacted TARP contains significant opportunity for the

Federal Government to use guarantees to incentivise additional

loan modifications for distressed borrowers. In particular, the act

specifically authorizes that the Secretary may use loan guarantees

and credit enhancements to facilitate loan modifications to prevent

avoidable foreclosures.

We believe there have been some positive general approaches put

forth; for example, by the chairman of the FDIC, that would have

the Federal Government through TARP provide credit guarantees

for redefaults on modified loans that would substantially increase

the number of loan modifications granted and ultimately foreclosures avoided. But the details of the program, such as that

which was announced this morning, are very important. Issues like

DTI and LTV requirements are thoroughly under review by our

members as we speak to evaluate the program and to see about the

next steps the ASF may be able to take.

Since the TARP program announced, there continues to be a

great deal of discussion, much of which has occurred today, regarding what assets the program would purchase and how that ownership would give the Federal Government control over the servicing

of those assets. If whole loans were purchased by TARP directly

from the banks, for example, the government would have complete

discretion to apply its own loss mitigation and loan modification

protocols to those loans. But if the TARP program were to buy

mortgage-backed securities in whole, their ability to exercise control over servicing policy to effectuate their own loan modifications

would be limited unless the program purchased a supermajority of

each outstanding class of each note in the trust.

Given that there is currently $7.5 trillion of securitized mortgage

debt outstanding in the United States, which is slightly more than

half of the $14.8 trillion of mortgage debt outstanding, a third opportunity for TARP should be explored. That is, in this time of extraordinary housing market dislocation, it may be appropriate for

the industry, accounting standard setters and tax officials to reevaluate the ability of servicers to be able to sell individual distressed loans out of mortgage-backed securities pools to TARP,

which could give the Treasury Department unlimited discretion to

modify those loans under whatever protocol they think appropriate.

Currently, mortgage loan servicers generally do not have the legal

ability to sell distressed loans out of mortgage securities.

I would note that it is critical that these programs remain voluntary. As we have noted and as we have heard today, one of the

primary objectives of TARP is to restore credit availability to mortgage and consumer assets throughout the country. Anything other

than voluntary could greatly put that at risk and further entrench

the credit crisis.

I thank you very much for the opportunity to testify here today,

and look forward to answering any questions that you may have.

[The prepared statement of Mr. Deutsch follows:]

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Mr. KUCINICH. Thank you very much, Mr. Deutsch.

I just want to say to each and every member of the panel, thank

you for your very thoughtful, analytical presentations. I have had

the chance to read your testimony, and based on the urgency of

this moment, I am going to ask staff to work together to provide

Members of Congress with the testimony that was given today. We

really need to do that. When Members come back next week, we

need to get to them this testimony from these individuals, because

what we are looking at here is a way forward.

Mr. Issa, I just mentioned that it is so important for Members

of Congress to look at this perspective that has been offered, which

is really a way out of where we are right now, and I have asked

staff to work together to communicate this to the Members of Congress.

We are going to have the first round of questions, 10 minutes,

and I am going to begin. I would like to just go down the line of

witnesses with the same question.

Each of you had the opportunity to sit through the lengthy questioning of Mr. Kashkari, and I am sure that you also are very familiar with Mr. Paulson’s announcement 2 days ago that the TARP

would not buy troubled mortgage assets.

What was your reaction to Mr. Paulson’s statement about how he

views the use of the Troubled Asset Relief Program at this point?

Mr. BARR. Well, Mr. Chairman, I think it is quite troubling that

the administration has decided not to use the authority that the

Congress gave to the Treasury for the purpose of helping homeowners. I think it is a significant policy error and it has enormous

negative consequences for our country. So I was quite disturbed by

it. I am hopeful that Congress can work with the administration

in its remaining weeks to reverse that decision, and I am hopeful

that the new administration would take a different approach.

I think we need to have a systematic effort to restructure troubled mortgages. It sounds like many of the panelists agree that a

program of guarantees, a program of purchase, changes in tax and

accounting rules, are in order to unlock the trusts and help our

country move forward.

Mr. KUCINICH. Professor Sanders.

Mr. SANDERS. Thank you, Congressman Kucinich.

I just wanted to go on record and say I was kind of startled by

the decision to cancel the loan repurchase part of TARP for the

simple reason as this, is that what is causing the problem with

banks are failed loans, and the failed loans are costing the banks

enormous amounts of money, which means they can no longer meet

their capital. So what do we do? We give them checks for more capital in the form of preferred stock, however you want to do it. In

other words, so we didn’t get to the root cause of the problem; we

simply treated what the outcome was, like a rash. I mean, it is

very severe, and I don’t mean to downplay that. Having banks fail

was a horrible thing, but if they are not making loans to anybody,

kind of, why are we doing this, is No. 1?

But, No. 2, in terms of the repurchases, I am trying to, we really

have to do something, and I agree with everyone on this panel

more or less who said we have to become much more aggressive or

assertive in how we are going to modify some of these loans beVerDate 11-MAY-2000 15:38 Jul 06, 2009 Jkt 000000 PO 00000 Frm 00143 Fmt 6633 Sfmt 6633 U:\DOCS\50097.TXT KATIE PsN: KATIE
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cause we have another wave coming, and we are going to get

swamped by business as usual. So I am just pleading with Congress and the incoming administration to take some bold steps, because we are going to be under water severely.

Mr. KUCINICH. That is a point that member of the committee

have made, and we appreciate you making it.

Ms. Cohen, your assessment of the Treasury Secretary’s announcement?

Ms. COHEN. Well, your question reminds me of that weekend

back in September when we saw the first draft of the TARP legislation coming out of Treasury. The purposes of the act then were

only to help banks and not to help homeowners, and folks had to

fight very hard to get the rights of homeowners in.

And so in some ways it is not surprising that the vision of the

Treasury Department and the administration is not different now

from what it was then. In their view, it is all about liquidity; and

on Main Street, it is really about homes and neighborhoods. So it

is a huge disappointment, and I agree with the other panelists that

it needs to be turned around.

Mr. KUCINICH. As we go to Mr. Litton, I just want to say that

I appreciate the relationship that you have with the East Side Organizing Project in Cleveland, OH, where you have worked to complete modifications. And you know, from our understanding, it has

been a model of success in these troubled times, you know, more

success than we’ve seen in other areas. I just wanted to point that

out and thank you and ask you for your assessment of Mr.

Paulson’s pronouncement relative to the work that you are doing

right now and trying to do.

Mr. LITTON. So, as it relates to that announcement, as a servicer

in the trenches every day, servicing loans that are in mortgagebacked securities, it doesn’t impact me as directly on a day-to-day

basis because we can’t sell the assets anyway on a one-off basis,

as these gentlemen had previously indicated.

What does become more clear to me—and Mr. Chairman, I think

that you hit on a great point a moment ago with your acknowledgement of the work that we do with ESOP—is that the borrowers

that I deal with every day cannot afford the mortgages that they

are in, and we are re-underwriting them on loan modifications to

standards that do not produce long-term affordable mortgages. To

me that is the simple, fundamental realization as a guy that is trying to work with these consumers on a day-to-day basis, that we

have to be more effective at coming out with a lower debt-to-income

standard, and we have to be more reasonable as it relates to writing principal off and right-sizing these balances if we are going to

put a stop to the downward spiral on what is going on with home

prices.

So anything that we can do that helps me get that objective accomplished I think is a good thing. Anything that gets in the way

of getting that objective accomplished is, I think, ultimately a bad

thing.

Mr. KUCINICH. Thank you.

Mr. Kudenholdt.

Mr. KUDENHOLDT. Thank you, Mr. Chairman.

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I think I could understand why large-scale purchases of residential mortgage-backed securities in and of themselves would not necessarily reduce foreclosures, would not necessarily enable the government to cause those pools to service the loans differently because it is very difficult to get control over a pool by purchasing

classes. And as Mr. Deutsch mentioned, it is extremely difficult,

considered impossible really, to amend a governing document to

change the rules.

But as I talked about in my testimony, the existing rules of these

securitization documents do permit a wide array of options for the

servicer in mitigating losses. And the existing provisions do support

the types of modification programs that the panel has talked about

today.

Now, the two programs that I talked about which could be done

through TARP or through the FDIC or another government program, namely a guarantee program and a purchasing individual

defaulted loans out of pools program, these could actually change

servicer behavior. They could change outcomes. They would result

in a fewer number of loans going into foreclosure. I think incrementally they could certainly make improvements.

Mr. KUCINICH. Thank you.

And, finally, Mr. Deutsch, your comments on Mr. Paulson’s announcement relative to the Troubled Asset Relief Program.

Mr. DEUTSCH. I think one of the primary objectives of TARP at

the beginning, and continues to be an objective, is to get credit

available to consumers, whether that is mortgages, auto loans,

credit cards, etc. It is one of the primary focuses, because as we all

know, the securitization markets, the secondary and capital markets, are essentially a frozen tundra right now where capital is not

available to the banks in that secondary market, which if banks

don’t have that credit available, they cannot lend it to consumers.

So I do think there was a very fine focus by Secretary Paulson

to get the securitization markets resumed, to get them going again

so banks will have capital to lend to consumers, so that they will

have an ability to refinance, so that they will have an ability to buy

a car, so that they’ll have an ability to use their credit card at reasonable rates. By invigorating that market, by invigorating the

securitization market, it will allow the economy to get back on its

feet and resume as normal.

Mr. KUCINICH. Professor Barr, I want to ask you, do you think

Treasury is justified in diverting its attention away from mortgages

and toward other urgent needs, such as credit card defaults?

Mr. BARR. I think there are growing problems throughout the

credit markets, including in the markets that Secretary Paulson

identified. But I don’t think that it is either appropriate or justified

to move attention away from the origins of this crisis, as Professor

Sanders suggested, in the mortgage markets. We do need to deal

with troubled home mortgages. We need an aggressive, robust plan.

They can do actions now under their existing authorities. They can

take further steps by clarifying tax and accounting rules. I think

that is absolutely essential if we are going to get out of the current

crisis.

Mr. KUCINICH. Well, let’s look at where we are right now, and

I would like your response as to what Congress should do. And if

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anyone else wants to jump in here as I ask my final question of

this round, you can feel free to.

After today, this administration has only 65 days remaining. If

the President asked for the next installment of $350 billion for the

Troubled Asset Relief Program, that’s the TARP, should Congress

give it to him or wait until a new administration has had the opportunity to reconsider Secretary Paulson’s decision not to buy

mortgage assets with the Troubled Asset Relief?

Mr. BARR. Mr. Chairman, I think if the Treasury insists on its

current path and refuses to implement a program of the kind that

has been described by this panel with respect to buying, not the

mortgage-backed securities, but mortgages themselves that can be

remodified; if Treasury continues to block the FDIC’s plan for a

guarantee program, my own judgment is it would be inappropriate

to proceed with the additional funding.

Mr. KUCINICH. Anyone else want to jump in on that question before I go to Mr. Issa? Anyone else want to respond?

Mr. DEUTSCH. I would say that it is urgent that TARP use the

funds that were authorized to get the market resuscitated as soon

as possible. And I think it is imperative for government, both the

administration and Congress, to find a way for that to be spent to

reinvigorate the market.

Mr. KUCINICH. Anyone else?

Mr. Sanders.

Mr. SANDERS. Yeah, I just want to, again, go back to the root

cause issue, that we have to get to the root cause issue as fast and

as expediently as possible. Delays are going to kill us. Housing

prices are not slowing down. I know people like to think that they

are. They are not. They keep falling. Defaults are falling—are increasing dramatically.

What we can do at least in the short run during the current administration is go into a dramatic loan modification—we can even

modify ZIP codes and States. We can prioritize them. We can go

hit some of the cities in the northeast. We can go out to some of

the places in California.

I have maps of all of the hot spots, where the foreclosures are

the largest. And you ought to see it. It is very compelling.

Mr. KUCINICH. I have seen it. We know all about it. We also

know what is going on with the ALT-A in California. We are concerned coast to coast here.

Mr. Kudenholdt, did you have something you wanted to add?

And thank you, professor.

Mr. KUDENHOLDT. Thank you, Mr. Chairman.

I was just going to agree with the panel that, provided that any

systemic risks are addressed, that the most important priority in

the recovery is to find a floor and stabilize home price values.

Mr. KUCINICH. Thank you.

We are now going to go for a 10-minute round of questions to Mr.

Issa.

Mr. ISSA. Thank you, Mr. Chairman. And I am going to continue,

as we have all day, along pretty much your line of questioning but

maybe expand it a little bit.

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A long time ago, somebody said a billion here, a billion there;

pretty soon it is real money. I guess we are talking a trillion here

and a trillion there; and pretty soon it will be real money. Mr. Deutsch, I am a little concerned, $350 billion, in the old days

used to be real money after you put that many billions together.

If we allow this administration in the last 65 days to continue

down the same course they are going, in other words, $350 billion

more to buy investments in American Express, GMAC, other things

that become banks, because they are all becoming banks, because

that is the in thing, it is in fashion, do you believe that urgency

of 65 days preempts the consideration by the new administration

of alternative ways to spend that relatively small amount of money,

$350 billion?

Mr. DEUTSCH. I think there is an urgent need to get TARP

money into the market. I think there are different variations on

how that can get into the market, and I don’t think we are here

today to provide an opinion on exactly how that should be put into

the market. But we have identified, there are a number of ways

that it can get into the market to not only restore pricing within

securitization, and particularly mortgage backed, but also a way to

meet the objectives of the foreclosure standards as well of the bill.

Mr. ISSA. And before I get into sort of the housing portion of this,

I just want to ask one question, realizing you are all very well educated, but you are not Goldman Sachs folks like the last gentleman

we had here, but I still want to ask this: If you are going to price

preferred stock, a debt/equity instrument, and you buy it behind

closed doors at a relatively low return rate, and it is not floated in

the market, how would any of you know that you are paying a fair

value? I mean, I would settle for no one would possibly know, but

I will take an attempt at an answer.

Mr. SANDERS. Well, since everyone is pointing to me on this, I

will be glad to try to answer that. And the answer is, I agree with

you 100 percent. The markets are so ill-liquid right now; we have

no clue what these things are worth. The CBO market, as you’re

aware, has completely failed. We don’t know how to price those. So

I think, we will call it a heroic effort if they think that they can

go through and price these things appropriately.

The only thing I will say is, if they go in and try to buy the loans

off the books or give preferred stock or debt, it will be mispriced.

But knowing the way this whole thing works, they will overpay

rather than underpay.

Mr. ISSA. When I couldn’t get an answer as to whether—since

the credit markets had improved—whether we’d gotten back to par,

I think that said a lot today.

Let me go through a line of questioning because I think it may

lead this committee and hopefully the rest of the Congress as they

review this to some thoughts for, not just the $350 billion, but the

clearly large amount of money that directly or indirectly is going

to be invested in the next Congress in stabilizing home prices. I

keep hearing that you can’t actually get to these instruments and

buy them out. I heard it here just a minute ago.

Mr. Litton, you’re probably the best one to handle this. If the

house burns down, don’t you have to find out who you are going

to give the money to?

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Mr. LITTON. Yeah, so, let me give you a brief description of how

we go about working out these loans——

Mr. ISSA. No, no, I don’t want that. I really want, a house that

is within your servicing burns down, and let’s assume for a moment it was leased land. So you have 100 percent loss, and the insurance company says, we know there is a mortgage on it for

$300,000, but there is $80,000 that we are going to pay on this liquidated asset because that is what it is insured for. You have an

$80,000 check. You’ve got a $300,000 loan. Do you know where to

send that? That check doesn’t just sit in a deposit account? Doesn’t

it go——

Mr. LITTON. No, we actually file a claim with the insurance company. The check comes in, and then we would remit that check as

a remittance through to the investor or mortgage-backed security

that is the owner of that asset.

Mr. ISSA. So taking a piece of that asset and liquidating it, you

don’t have to go find the guy in Abu Dhabi or the sovereign wealth

fund of China, you in fact can start at the home that is underwater, and you can liquidate it because it can happen if there is

a fire, right?

Mr. LITTON. Right.

Mr. ISSA. Mr. Kucinich and I discovered 18 months go that there

was a mass fire in Cleveland because we are watching boards go

on top of homes. And they are going no where. The people are

thrown out. The homes are boarded up, and they are sitting there,

and of course the neighbor’s house goes upside down in value.

Ms. Cohen, you have worked in the community for a long time.

Let me ask you, again, a question that is a little off the main, but

I think it is germane. A road is going through a house, and they

tell people, I’m sorry but you have to go, and here is what your

house is worth. The city tells you that. Your house and your neighbor’s house is worth this amount. They take the house by eminent

domain and give you X amount of dollars, right? And I assume, like

a fire, Mr. Litton would know where to send the check to, even if

the check was less than the loan?

Ms. COHEN. Is your question, who gets the check?

Mr. ISSA. No, Mr. Litton already took care of who gets the check.

But the city comes in and just takes your house, and it turns out

their value is less than you owe on it, so it all goes to Mr. Litton,

and he sends it off to Abu Dhabi. That part we understand. We

know where the check goes.

But cities do that regularly in blighted communities. They do it

in a number of different regions for redevelopment, right?

Ms. COHEN. Well, it is required under the Constitution’s Takings

Clause.

Mr. ISSA. Right. So for us here on the dais, if we began anew

looking at how to deal with blighted homes, upside-down situations, people who could pay the current fair market price of a

home, either theirs or the one two doors down that is boarded up

in the case of many of the homes in Cleveland, the fact is we could

empower the cities with money to do this, to take those homes on

an individual basis, to allow them to figure out where they are

going to stabilize their prices the most. We could do that through

existing sub-government bodies, and we could do it with funds that

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ultimately we’d get substantial amounts back, couldn’t we? And

isn’t that somewhat what we have done from the Federal Government when we are trying to help communities stabilize prices?

Ms. COHEN. I think that is part of the goal of the Neighborhood

Stabilization Program and other programs where essentially they

are trying to make affordable housing out of foreclosed properties.

But to the extent there are homeowners who are in homes that are

their primary residences and they can make reasonable payments

on the homes, we should give them a shot at that first before we

move on to the other plan.

Mr. ISSA. Of course.

So when we look at this $350 billion, and I am somebody who

lobbied my colleagues and was happy when I could get my colleagues, a majority of them, to vote against the TARP because I

thought it was ill-conceived. Now Secretary Paulson agrees with us.

He has decided that his ill-conceived, his fire-ready-aim plan, he is

not doing that firing. But he is now doing other things.

I guess the question is, do any of you see that going to the end

result, the community, as Professor Sanders says, the communities

most blighted, Stockton, CA; Las Vegas, NV; Cleveland, OH; Detroit, MI—we can go city by city—that going to those cities and the

individuals who could pay, will pay, and dealing with them first,

does anyone see that wouldn’t be an every bit as good a use of the

$350 billion remaining, because that is what Mr. Kucinich and I

are here to talk about today?

Mr. LITTON. Well, just to give you some feedback on that, the

chairman referenced our relationship with the East Side Organizing Project, which is a classic example of a relationship that works,

and it works very well. The members of that community feel comfortable working with that group. They act as the intermediary in

many instances between the consumer and ourselves, and we do a

lot of workouts through them.

So dollars that are spent to help expand the reach of those local

groups where there is alignment between the community—and

these are people who live in the community, they care about what

happens in those communities—those have been very effective relationships that we have been able to lever into getting more deals

done. So I can tell you that there are perfect models where that

works, and it works very, very well.

Mr. ISSA. My final question, and it is an important one. During

the bubble, we ran up the prices of homes beyond what would have

been their normal credit value. Given a normalized credit, the bubble would not have given us home prices as high as it has. I understand the first panel, you know, told us that we need to shore up

these markets, shore up these markets. Can any of you or have you

begun to model what the fair value in a normalized credit market

is of home values, and whether or not the Congress needs to look

at that, because—and my question is simply, in some cases, do we

have to go further down against normal credit and ultimately need

to let that happen? And in other cases, we are already below the

fair value, and many areas of Cleveland fit that examination—or

is that they have gotten too low, is that a factor that we can analyze, and if so, who should help us do it?

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Mr. KUDENHOLDT. I’d like to—I think what I would suggest on

that is, you know, a normalized value for the housing market I

think would be values that would prevail in an environment where

we had normalized mortgage lending and where we had mortgage

lending being made under conservative standards with full documentation of income, with loan products that do not include rateshock features.

So, you know, if the mortgage markets were restored and were

lending anew under conservative parameters, having learned the

lessons of the last several years, and maintain those standards, I

think that would over time bring the market values back to a normalized level.

Mr. BARR. I would just add that one of the key problems now is

that foreclosures and defaults and the frozen credit markets are so

dramatically pushing down home values nationally and then even

further in some areas, that it is not a question of reaching bottom.

In other words, we will keep going down. It is a self-reinforcing

cycle of credit decline, credit freezing, foreclosures and defaults.

You don’t break that cycle unless you have a major initiative to

stabilize the credit markets. And so I don’t think that we are going

to reach bottom in a natural state unless we take some rather bold

action.

Ms. COHEN. Can I——

Mr. ISSA. Ladies first.

Ms. COHEN. I just want to highlight how your question fits in

with a couple of other pieces. One is, a lot of borrowers got loans

with inflated appraisals. So notwithstanding the decrease in housing values, and by the way, in east St. Louis and in other places,

there was not a hugely inflated home market to begin with. We are

talking about homes that are worth $10,000 or $20,000 or $50,000

or $60,000. But many of those folks all over the country, even in

California where things were already expensive, got inflated appraisals. So that is another piece of figuring out how the loan piece

fits with the value piece.

And then the other point I just want to make is that to the extent that loan modifications are premised on an analysis of net

present value, your question about where we are in the market and

how do we measure what the value of a home is, is a prescient

question in that context. And we really have to figure out, what do

we mean by net present value, and how do we figure that out? Is

it based on a foreclosure sale? It used to be based on a percentage

of the value of the home, but if we don’t know how to value the

home, we might need to look at another way to do that. And Treasury and everyone else engaged in net present value analyses need

to be more transparent about how they are doing it.

Mr. ISSA. I am shocked that you would suggest that we should

get transparency out of the Treasury. But I appreciate your asking

for it, as this committee has been asking for it.

Thank you, Mr. Chairman.

Mr. KUCINICH. And I want to——

Mr. SANDERS. Can I add one clarifying comment?

Mr. ISSA. I’m sorry. Gentlemen second.

Mr. SANDERS. Mr. Issa, in terms of housing value, until we actually get lending back in the markets, I don’t know where we are

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going to see the bottom of this, but, again, until Mr. Paulson and

Mr. Kashkari can give us some degree of confidence when liquidity

is returning, that would be great.

Also, and the other reason it is difficult to price this, as you

pointed out yourself, we don’t even know what the preferred stock

values are. So it is kind of hard to find the bottom of the housing

market because nothing is being priced correctly.

But one thing I do want to say about TARP, in a perfect, do you

know who I would like to stick the cost of this to? The banks and

the ABS holders. They went through and bought subprime mortgages. They went through and bought these knowing there was a

probability this whole thing was going to melt down. And suddenly

we find out, what we knew all along, from Mr. Kudenholdt, there

were problems with getting ABS holders to accept modifications,

even if it is in their best interests.

And then we are also saying, maybe we should make the banks

do this. Well, it turns out we are giving the banks preferred stock;

at the same time, we are not making them modify the loans that

perhaps they should have done, knowing what the risks were when

they went into this market in the first place. So it is this kind of—

unwinding this is very difficult because there are so many competing problems and competing objectives and competing solutions. So,

I think, unfortunately, we are to the point where we probably will

have to use some taxpayer dollars, but I wish we could unbundle

the ABS and get them to start—really telling them hey, look, you

bought this. You should modify this. You help us save the economy.

And the same to the banks. And that wouldn’t cost taxpayers a

cent. That is really what I would like to say. I don’t know if we

can achieve that any more.

Mr. ISSA. Thanks again, Mr. Chairman.

Mr. KUCINICH. Which raises some of the questions that you, Mr.

Issa, have been looking at, and that is, as the professor points out,

there is a point at which the government does have to intervene.

There are those of us who, when we began this discussion about

the Troubled Asset Relief Program, we thought, well, you know

what, the government is interfering in the market here, picking

winners and losers, and we are looking at a sea change that we are

still finding out what it means. We just don’t know yet what it

means.

We do know, for example, in Cleveland, yes, National City Bank,

they were in trouble because the CEO made a decision to go into

subprime loans. National City was a blue chip bank at one point.

It is a 160-year-old-plus bank, and yet it made some bad decisions.

OK. Even with that, it could have been saved. Even with that. So

a decision was made, and the point you made, imagine if they

would have given that money, instead of giving it to PNC, given

it to National City Bank. They could have saved the bank. I pointed out that they apparently weren’t mindful of the fact that, you

know, let’s face it, on Wall Street, there is a battle going on for

dominance in banking. Banks are eating banks. And now they are

using the TARP to take over banks. There is consolidation going

on. I mean, that seldom gets discussed about the competition that

is still going on.

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National City, short-selling attack, undervaluation of assets, of

their stock, over assessment of their debt, credit agencies, which we

saw how political they are weighing in, just as credit agencies are

weighing in right now, knocking down the auto suppliers, weakening the auto industry a little bit. You know, there is another level

of predatory conduct going on here which goes back to your point

about, if the Treasury is picking these winners and losers, we are

in trouble if you can’t really establish a ground of meaning of what

anything is worth, and I think that this question of value that was

pointed out, that you have been hammering at, Mr. Issa, and that

has been talked about by the panel here, I want to go back to

Cleveland, OH.

Our homes weren’t overvalued there to begin with. We didn’t

really see in the city any kind of a boom, a housing bubble, let’s

say. We didn’t see that at all. But the bursting of the bubble has

affected us, and the subprime wave has affected us. So you have

homes in the city and in some of the suburbs where the property

values have dropped 25 to 30 percent. This is a real loss, I mean,

people, for most Americans, their only investment. So the market

manipulation with the subprime, with the $600 trillion plus and

these derivatives, it is coming home to roost in middle America,

and we are seeing a massive transfer of wealth, just massive transfer of wealth. And the government now apparently is presiding over

it and helping the banks do it. This is my concern.

Now, you know, Mr. Litton, Secretary Paulson apparently left

foreclosure mitigation to private industry. Recently the industry

put out a protocol that looks something like what you have been

doing for years. Do you think, based on your experience, that such

initiatives will be enough to stem the foreclosure crisis?

Mr. LITTON. So here is one of the challenges with our industry.

With the company that I run, the vast majority of the pooling and

servicing agreements gives me wide latitude on being able to operate within doing these loan modifications. There are other servicers

who don’t have quite that same latitude. So that is a problem.

I can tell you, as an asset manager, that if I didn’t have that latitude, then the losses that I would be presiding over as it relates

to trying to administer defaults on these loans would be a lot higher than they are today. So I think that is a significant obstacle and

a significant problem that needs to be dealt with.

Mr. KUCINICH. What is the obstacle?

Mr. LITTON. The obstacle is that there are some pooling and servicing agreements that don’t provide the wide latitude that servicers

like a Litton or in others may have; because of the inconsistency

of those pooling and servicing agreements, it creates obstacles from

servicers being able to execute that. I think that is a problem.

Mr. KUCINICH. Would you comment on a target of the 38 percent

debt-to-income that is the cornerstone of the streamlined modification program issued by HOPE NOW?

Mr. LITTON. Absolutely. From my perspective, when I look at our

recent performance, I look at all of the loan modifications we did

in the last year, 41,000. I look at the redefault rates, which are

now north of 40 percent and going up, going up dramatically. When

I look at that 38 percent debt-to-income standard which has been

our average income-to-debt-rate standard, what that clearly tells

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me is, even though we are doing more loan modifications, the loan

modifications are not as effective as they need to be. It also tells

me that we need to lower the debt-to-income standard so we can

provide a longer-term sustainable mortgage. I think doing that is

consistent with my obligation under the terms of the pooling and

servicing agreements in which I will create lower losses for investors at the end of the day. But a 38 percent standard, in my judgment, based off of performance that I have looked at in my book,

will not be as effective as a 31 percent standard that produces a

lower monthly payment for these borrowers.

Mr. KUCINICH. So what is the role of principal reduction and sustainability of a loan?

Mr. LITTON. From a principal reduction perspective, as we have

analyzed this issue, we believe that more principal reductions need

to occur. Here is the reason why: Servicers, when we service loans

on a day-to-day basis, we make decisions every single day to write

off principal. When we sell a piece of real estate that has been foreclosed on, that is a determination that I as a servicer have to

make, taking into account property value and other things, to sell

that piece of property and take a principal reduction.

When I do a short sale, it is the same type of an analysis. Our

pooling and servicing agreements gives us wide latitude to waive

principal when we need to, so we’ll waive principal which resets

the loan balance at a more reasonable level. We believe using a

market-based note rate, waiving principal creates a longer term affordable mortgage because right now, leaving that balance out

there and rolling it forward is going to make it much more difficult

for that borrower to pay that loan off in the future.

If this was going to be a V-shaped recovery and property values

were going to recover next year, we would want to forebear principal, but nothing in the cards seems to indicate that is the case.

So waiving more principal more aggressively is, I think, the appropriate response given the conditions we are facing today.

Mr. KUCINICH. There is a question of whether the recovery is V

or Z.

Mr. LITTON. Good point, sir.

Mr. KUCINICH. Mr. Litton, what assumptions do you have about

the future of the housing market that—strike that. I’m going to go

to Mr. Deutsch.

Mr. LITTON. Yes, sir.

Mr. KUCINICH. Mr. Deutsch, you have heard other witnesses say

that loan modifications, emphasizing principal modifications, are

needed to restore financial certainty and to keep borrowers in their

homes. What I would like you to comment on is this: Do you think,

left on its own, private industry will perform that kind of modification program? And if not, what might that say about the role the

Federal Government should perform?

Mr. DEUTSCH. Well, let me start with the programs that are out

there. Nearly every loan modification program, including IndyMac

through the FDIC’s program, the Countrywide program, the Chase

program, the Citibank program, all, each and every one of those

programs focuses on interest rate modifications and principal forbearance as the initial steps, as the first things to look at to be able

to get to an ability to pay for each of those borrowers. That is, and

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is included in my testimony as Annex A, is that interest rate modifications can get most borrowers to a point where they have the

ability to pay their mortgage. Some, whether it is a Jose Canseco

in California or others, who choose to walk away from their homes,

who choose to walk away from their obligations, some of those simply cannot be prevented. None of us want or require Jose Canseco

to stay in those homes that are underwater.

Now it is very clear that in certain circumstances and appropriate circumstances that principal modifications can, will be, and

as Mr. Litton said, have been made. But I think those will continue

to be used in limited circumstances.

It does say, to the second part of your question, what is the role,

if any, of the government? I think we have outlined two ways that

can encourage principal reductions, first through purchasing loans

out at sub par prices. That is servicers acting on behalf of investors

could sell loans out of the pool potentially after a number of hurdles could be cleared to the TARP program. Those would not be

sold at 100 percent of the value. They would be sold at something

below 100 percent of the value, depending on the delinquency default probabilities.

So I think, ultimately, and as well as the program announced

this morning by the FDIC chairman, it is looking to take advantage

of providing incentives, to be able to have servicers modify these

loans into programs, to refinance them into the programs like the

Hope For Homeowners, but I do think those take modifications and

a lot of analysis on to the detail.

Mr. KUCINICH. I want to thank you very much for that response.

We are at the conclusion of the hearing. I would just say that your

response and the other witnesses indicates that Secretary Paulson

should be rethinking his decision about the use of TARP funds with

respect to loan modification. Would you agree with that?

Mr. DEUTSCH. I think there is a lot of opportunity to help reduce

foreclosures through the use of TARP funds.

Mr. KUCINICH. Mr. Kudenholdt.

Mr. KUDENHOLDT. I agree. I think that program should be initiated as we discussed to help reduce foreclosures.

Mr. KUCINICH. Mr. Litton.

Mr. LITTON. It is clear that we need to do more sustainable loan

modifications. I think that is absolutely certain.

Mr. KUCINICH. Ms. Cohen.

Ms. COHEN. The government can do a lot for loan modifications,

and they can also allow the private sector and courts to do more

with bankruptcy reform.

Mr. KUCINICH. Thank you.

Professor Sanders.

Mr. SANDERS. And I agree with everything, but I also want to

point out that we do mark-to-market for mortgaged-backed securities, AVFs, CDOs, but the one person or set of groups we don’t do

mark-to-market for is homeowners. If we marked their loans to

market, we wouldn’t be having a default wave.

Mr. KUCINICH. Thank you, professor.

Professor Barr.

Mr. BARR. Yes, I think we need to start quickly with the change

to the tax and accounting rules to unlock the securitization trusts,

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and then we can proceed with a systematic modification program

using the guarantee authority, and the Treasury purchase program

as has been described, I think it would make an enormous difference.

Mr. KUCINICH. I want to thank each and every one of the witnesses. Our staff will continue to be in touch with you as this matter continues to be not just in discussion but vexing the Congress

as far as what to do. Your testimony today shows a path, and it

is very thoughtful testimony. Each and every one of you are very

much appreciated for your presentation here today. We ask you to

feel free to communicate with our subcommittee with respect to

any other observations you have as we proceed.

We certainly have to find a way to keep people in their homes.

As you pointed out, you are looking at loan modifications which include principal, interest, arrearages, and a rescheduling of the

debt. So, thank you, because you give hope to millions of Americans

who are looking for a new direction.

This is the Domestic Policy Subcommittee. I am Congressman

Dennis Kucinich from Cleveland, the chairman of the subcommittee. Today’s discussion has been on this question: Is Treasury using

bailout funds to increase foreclosure prevention as Congress intended?

We have witnesses who included Mr. Neel Kashkari, the interim

assistant secretary of the Treasury for financial stability and assistant secretary of the Treasury for international economics and

development, and we very much appreciate his participation today;

as well as the second panel, Professor Michael Barr, Professor Anthony Sanders, Ms. Alys Cohen, Mr. Stephen Kudenholdt, Mr.

Larry Litton, and Mr. Thomas Deutsch.

Thank you for being here, and I thank the staff for the excellent

work they have done in preparing Members for this, and I thank

my partner, Mr. Issa, for his tremendous participation.

This committee stands adjourned.

[Whereupon, at 1:43 p.m., the subcommittee was adjourned.]

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