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ACCELERATING LOAN MODIFICATIONS,

IMPROVING FORECLOSURE PREVENTION,

AND ENHANCING ENFORCEMENT

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

DECEMBER 6, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–83

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

December 6, 2007 ............................................................................................. 1

Appendix: 

December 6, 2007 ............................................................................................. 75

WITNESSES 

THURSDAY, DECEMBER 6, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 15

Calhoun, Michael D., President, Center for Responsible Lending ...................... 65

Deutsch, Tom, Deputy Executive Director, American Securitization Forum ..... 40

Dugan, Hon. John C., Comptroller, Office of the Comptroller of the Currency . 18

Green, Richard Kent, Oliver T. Carr, Jr. Chair of Real Estate Finance, George 

Washington School of Business, George Washington University ..................... 50

Hyland, Hon. Gigi, Board Member, National Credit Union Administration ...... 20

Kroszner, Hon. Randall S., Governor, Board of Governors of the Federal 

Reserve System .................................................................................................... 17

Pearce, Mark, North Carolina Deputy Commissioner of Banks, on behalf 

of the Conference of State Bank Supervisors .................................................... 24

Platt, Laurence, Partner, K&L Gates, on behalf of the Securities Industry 

and Financial Markets Association .................................................................... 63

Polakoff, Scott M., Senior Deputy Director and Chief Operating Officer, Office 

of Thrift Supervision ............................................................................................ 22

Schwartz, Faith, Executive Director, HOPE NOW Alliance ................................ 43

Shelton, Hilary O., Director, Washington Bureau, National Association for 

the Advancement of Colored People ................................................................... 46

Silver, Josh, Vice President for Policy, National Community Reinvestment 

Coalition ................................................................................................................ 68

Silvers, Damon, Associate General Counsel, AFL–CIO ....................................... 48

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 76

Bair, Hon. Sheila C. ......................................................................................... 78

Calhoun, Michael D. ......................................................................................... 99

Dugan, Hon. John C. ........................................................................................ 110

Green, Richard Kent ........................................................................................ 124

Hyland, Hon. Gigi ............................................................................................. 130

Kroszner, Hon. Randall S. ............................................................................... 148

Miller, George ................................................................................................... 160

Pearce, Mark ..................................................................................................... 166

Platt, Laurence ................................................................................................. 178

Polakoff, Scott M. ............................................................................................. 181

Schwartz, Faith ................................................................................................ 191

Shelton, Hilary O. ............................................................................................. 205

Silvers, Damon .................................................................................................. 208

(1)

ACCELERATING LOAN MODIFICATIONS, 

IMPROVING FORECLOSURE PREVENTION, 

AND ENHANCING ENFORCEMENT 

Thursday, November 10, 2005

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Sherman, Meeks, Clay, Baca, Miller of North Carolina, Scott, Green, Cleaver, Sires, Klein; Bachus, Baker, Pryce, Castle, Royce, Manzullo, Biggert, Miller of California, Capito, 

Hensarling, Garrett, Neugebauer, and McHenry. 

The CHAIRMAN. The hearing will come to order. Can we get the 

doors closed, please? I apologize for the delay. This hearing was 

called prior to the recent announcement by the Secretary of the 

Treasury and the President about a restructuring but it does seem 

to me that it is very relevant. It has become even more relevant 

due to that. 

Now we did call the hearing specifically to talk about further legislation regarding our bill on subprime, that is a complex and ongoing subject, and I will say that the Senate obviously is not going 

to act this year. We will have time to talk about further modifications that could be included in conference. It would be my intention 

to have this committee act on some of those before we do anything. 

Our colleague from Delaware, Mr. Castle, had a very interesting 

bill that we thought about in conjunction with subprime and didn’t 

have enough time. And on the other hand, many of us also believe 

that we need to do a little bit, maybe a moderate amount more in 

enforcement of the restrictions on inappropriate mortgages in general. There are—the pattern and practice is one possible view, but 

we are open, I believe, many of us, certainly my two colleagues in 

North Carolina and many others, to improving this. 

I should also say that people had raised a question about some 

ambiguity in the language by which we seek to prevent people from 

being compensated for getting people into higher interest rate loans 

than they otherwise could have. And that was certainly our intention. People think there is some ambiguity. I always prefer redundancy to ambiguity. And in consultation with the gentleman from 

North Carolina, Mr. Miller, we have been working on it. If we get 

2

to that, we will have language that will make it very clear that 

there was no such possibility. 

I do then want to make two points today. One is a general point. 

What has been striking about the subprime crisis is not simply the 

subprime crisis, but the extent to which it has spread to be the 

most significant financial problem in the world, it seems, since the 

Asian financial crisis. 

As I think about it, it does seem to me there is a problem intellectually and then ultimately politically that we and the Executive 

Branch and the Legislative Branch and in the private sector all 

working together have to solve, and that is, we need to find a substitute. It is a substitute for—the bank regulators are here, and I 

have always been told by bankers that the prime rule of banking 

was to know your borrower. 

What has happened is we have created through a whole group 

of new methods a situation in which you not only don’t know your 

borrower, but you have no idea who your borrower’s borrowers 

were or are. That is, the nexus between the borrower and the lender, I believe, turns out to have been a more important safeguard 

than we thought. 

We have been trying very hard, the private sector has, and some 

of us in the regulatory field, have been trying to find a substitute 

for the borrower-lender relationship. And we have been less successful than we thought. That’s what risk management is. It’s a 

substitute, it seems to me, for trying to know whether the person 

you lent the money to can pay you back. What we need to do is 

to figure out in not just the subprime, but in general, how we deal 

with that. That would be a subject of further hearings. 

How do you keep the benefits of this increased liquidity and find 

some way to preserve, again, what had been the great safeguard 

of not lending money to people you don’t think can pay you back? 

When you don’t have to worry about whether they pay you back, 

and when the people who now own the loans don’t know who in 

effect they lent it to ultimately, we have problems. 

With regard to the proposal that the Administration has put forward, I welcome it. It is a recognition that the increase in the rates 

would cause serious problems and that some public sector concern 

with that is appropriate, that the market can’t be left entirely to 

its own devices, although there is no violation of anybody’s legal 

rights. But I did tell Secretary Paulson in a conversation this 

morning in fact that there are a couple of problems I have with it. 

First of all, I think it is a grave error to say, as I understand 

the proposal does, that there’s a cutoff at the 660 FICO score. Apparently, people have thought that a FICO score or credit rating 

was a good proxy for income. I don’t think it is, and I think we 

would be making a great mistake, morally and also politically, if 

we tell two people who are otherwise similarly situated that the 

one who has been more careful about his or her credit is not going 

to get the benefit, and people who have been more or less careful 

will. I think the 660 FICO score is a great mistake. I understand 

there’s a need for some kind of screen, but all of us I think, literally 

all of us, conservative, liberal, Democrat, Republican, etc., we have 

all been telling people, please, don’t get into debt beyond what you 

can handle. Try and keep your credit score up. We have all been 

3

telling people to keep their credit scores up. But to have a situation 

in which people who listened to us and got their credit scores up 

are now going to be worse off than other people who didn’t keep 

their credit scores up, is a great mistake. 

The other flaw, I think, from the standpoint of someone supportive of the general idea, and I welcome it, and I appreciate the 

initiative and I appreciate what Chairwoman Bair and others have 

done to urge its adoption, is the failure to do anything about a prepayment penalty. It seems to me that if you delay this for 5 years, 

that is a good thing, because the hope is that during that period, 

people can find some way to refinance and avoid the reset. But if 

they still face the prepayment penalty, as I understand it from Secretary Paulson, nothing in this proposal does anything about the 

prepay penalty except in effect to toll it, as the lawyers would say, 

just to push it down the road. But not having the prepayment penalty addressed, I think, is a flaw. 

Finally, there is one where I do think there is a problem, but it 

is not the Administration’s fallback. Now let me say here, I’m going 

to say this later, and—it is not comity. It goes against a lot of the 

norms, but I have to say that the increasing inability of the United 

States Senate to function is becoming a threat to governance. And 

that’s not partisan. I know my Republican colleagues felt it when 

they were in the majority in the House and the Senate, and we feel 

it today. Senate norms, beyond partisanship, have evolved to that 

point. 

I say that because one of the things that we would hope you 

would do with the time that is being bought by the 5 years is to 

help people get alternative financing. That means among other 

things, obviously not entirely, full use of the FHA for subprime borrowers, and full use of Fannie Mae and Freddie Mac. 

This House passed, with a good deal of bipartisan support, differences about some aspects, but a good deal of bipartisan support 

on core principles for having the FHA and Fannie Mae and Freddie 

Mac more able to do this. They have been languishing in the Senate for a variety of reasons, and I hope that we will go forward 

with this. I believe it is a mistake to use that FICO score screen. 

I hope they will recognize that you need to do something about prepayment penalties, but I also hope that the Senate will act on the 

FHA and Fannie and Freddie, the GSE bill, so we can move forward. 

The last point is just a question that my staff had raised with 

me, and I did not and I forgot to ask, and that is, does this allow 

for—or it does not allow for it, because people can still do what 

they want in the private sector—but does it contemplate negative 

amortization? If it does, that would be another grave error. 

Putting off this reset and then having people get further into actual debt during that period would seem to be counterproductive, 

and we have not been able to determine whether that does or 

doesn’t contemplate not doing negative amortization. 

The gentleman from Alabama is now recognized. 

Mr. BACHUS. Thank you, Mr. Chairman, and I thank you for convening what is really the latest of our hearings that the committee 

has held on the turmoil that continues to characterize the U.S. 

mortgage markets. 

4

Since the committee’s last hearing on this issue in October, the 

fundamentals in our Nation’s housing markets have continued to 

deteriorate. Economic growth forecasts have been revised downward, and several of our Nation’s largest financial institutions have 

written down billions of dollars worth of mortgage-backed securities. 

What many had hoped would be a short-term market event that 

could be easily contained has instead become, in the words of 

Treasury Secretary Paulson, the largest single threat to the health 

of the U.S. economy. 

Two years ago, I proposed a very unintrusive legislative solution 

to an emerging crisis in subprime lending, which was obvious to 

some of us. It included registration and licensing of all loan originators, both brokers and bankers, a mandate to regulators to adopt 

and enforce an ability to repay standard for subprime mortgages, 

and additional enforcement mechanisms to address unfair and deceptive, i.e., predatory lending practices. 

At the time, we received some assurances, mainly from the industry, but also from regulators—and there were exceptions—that 

sufficient regulations were already in place and being enforced and 

that the market would, ‘‘take care of the abuses and excesses.’’ 

Today we have reason to suspect those assurances. Undoubtedly, 

we know that the market is taking care of the excesses. Unfortunately, it is taking down the economy and lots more with it. 

I’m still optimistic that a strong world economy will pull us 

through the current malaise, unless protectionist policies here in 

Congress gain the upper hand. With 100,000 new consumers entering the world economy every day, it’s hard to believe that American 

companies won’t benefit from that. And I think we’re very fortunate that we have that backdrop to our current problems. 

Although estimates vary, upward of 2 million subprime adjustable rate mortgages are expected to reset over the next 18 months. 

Very disturbingly, these are some of our poorest mortgages from an 

underwriting standpoint. They’re even worse than the ones that 

have reset in the last year. If, as many predict, a significant number of these borrowers are unable to make their mortgage payments once their introductory rates expire, the result could be a 

wave of foreclosures that deepen the housing downturn and further 

damage our economy. 

As we have heard in previous hearings, the consequences of foreclosure extend far beyond the individual parties to a residential 

mortgage contract, affecting entire communities and straining the 

resources of local governments forced to deal with blighted neighborhoods and declining tax revenues. 

To avoid massive foreclosures, the Treasury Department, the 

FDIC, regulators, and some of the Nation’s financial institutions 

have been actively engaged in efforts to identify and assist borrowers who are in danger of falling behind when their interest 

rates reset in the coming months. 

The Administration, as the chairman said, is expected to announce today an initiative that would expedite the loan modification process by freezing the interest rates on hybrid adjustable rate 

mortgages where the borrower has demonstrated an ability to 

make payments at the lower introductory rate, but will be unable 

5

to do so once the rate adjusts upward. While I intend to reserve 

judgment on the Administration’s plan until all the details are 

known, I commend Secretary Paulson and Chairman Bair and others who have taken an activist role. They should be commended for 

encouraging innovative private sector solutions to a problem plaguing the mortgage market and American homeowners. 

Congress has a role to play as well. The House has previously 

passed legislation to establish a nationwide registry of mortgage 

originators; to address abusive mortgage lending practices, which 

have led to today’s problems; to modernize the FHA program so 

that it can assist a wider range of worthy subprime borrowers; to 

reform the GSEs and the oversight of the GSEs, which play such 

a critical role in providing liquidity in the mortgage market; and 

to provide tax relief to homeowners whose lenders have forgive portions of their mortgage debt. All of these measures await action in 

the Senate, and I would hope that the other body would find time 

on its calendar this year to move forward on some of these initiatives before events overtake us and market conditions deteriorate 

further. 

There’s a broad consensus now that something must be done to 

mitigate, if possible, an inevitable surge in foreclosures as loans 

reset. As we consider what positive steps should be taken, we must 

recognize that the best public policy is to address obvious destructive and predatory financial practices before the market and consumers fall victim, and before they become prevalent, so prevalent 

that a crisis mandates a legislative cure, which may have its own 

negative consequences. 

Benjamin Franklin had it right when he said an ounce of prevention is worth a pound of cure. A word of caution is in order regarding proposals for wholesale corrective action. There is significant 

risk and concern in at least three areas: One, people who are able 

to pay and are not eligible for modification may feel unfairly treated. Questions of fairness, moral hazard, and equity are inevitable. 

Two, litigation can be expected from several quarters. A change 

in the fundamental structure of our mortgage markets over the 

past 30 years has resulted in multiple parties to almost every mortgage contract, including sometimes tens of thousands of investors 

per contract. 

Three, despite denials, we know that there will be costs. What 

are the costs, and who will bear them? There will be significant objections to having the public bear even a portion of the cost of these 

loan modifications. 

In conclusion, Mr. Chairman, we also need to remember that 

there are already laws and regulations available to deal with predatory loans. Under the Truth in Lending Act, the Federal Reserve 

and other regulators already have the power to act to curtail unfair 

and deceptive acts and practices. Additionally, the FDIC and I 

think the OTS have asked for this authority. Indeed, the Federal 

Reserve is expected to issue proposed regulations later this month 

to address abusive mortgage lending practices pursuant to its authority under HOEPA. An energized and motivated regulatory community can address many of the worst cases without action by Congress going forward. 

6

In closing, let me again commend the chairman for holding this 

hearing and the gentleman from Delaware, Mr. Castle, for his efforts on behalf of American homeowners. Thanks also to all our 

witnesses for being with us today. We look forward to your testimony. 

The CHAIRMAN. I thank the gentleman. I would just add, if I 

could get unanimous consent, he referred to the OCC and the 

FDIC’s interest in being able to promulgate unfair and deceptive. 

As members remember, the House unanimously passed a bill giving them that authority yesterday. So, one more we can add to our 

wish list over there, and we are well on the way to having that 

happen. 

The gentleman from Pennsylvania. 

Mr. KANJORSKI. Mr. Chairman, I commend you for convening 

this hearing on loan modifications. I share your concerns about the 

need to advance workable solutions to help borrowers who might 

lose their homes as a result of deceptive lending. We must also protect the stability of our financial institutions to protect against systemic risk and maintain the strength of the U.S. economy. 

Predatory lending is a complex problem that requires a comprehensive national solution. I have long believed that a solution 

must consist of five main points: reforming underwriting standards; 

establishing registry systems for originators; bettering housing 

counseling; improving mortgage servicing; and enhancing appraisal 

independence. 

As a result of the amendment that I offered on the Floor last 

month on escrow, appraisal, and mortgage servicing reform, the 

House-passed lending reform package addresses each of these 

issues. However, I am now convinced that a comprehensive solution 

now requires a sixth part because of the market uncertainty. We 

need to address the issue of homeownership preservation. 

As a result, I and the other leaders on the Capital Markets and 

Financial Institutions Subcommittee sent a letter this week to the 

corporate executives in discussions with the Treasury Department 

about a private solution to this problem. While I look forward to 

the Treasury Secretary’s announcement on these matters later 

today, we will likely need to move a bill on these matters, and I 

am putting together such legislation. 

I have identified three principles that could help to guide our discussions for this task. First, we should refrain from using government resources to bail out those lenders who made bad loans or 

who relied on faulty underwriting standards.We should also limit 

the use of government resources to subsidize those homeowners 

who actively participated in schemes to purchase homes beyond 

their means, or who are here illegally. 

Second, we should, to the maximum extent possible, apply market-based approaches that rely on minimal government involvement to address these problems. While the Treasury Department 

is making progress on this point with its plan, we need to do more. 

For example, my approved mortgage servicing proposal already 

mandates swifter response time by mortgage servicers to consumer 

inquiry. If enacted, this change ought to help ensure that homeowners will receive expedited assistance in the months ahead. 

7

Third, we should identify those initiatives that have worked to 

address similar problems in the past and apply them around the 

country. Pennsylvania has already pioneered efforts to provide help 

to homeowners in danger of losing their home with a refinance to 

an affordable loan, the REAL program, and a homeowner’s equity 

recovery opportunity, the HERO loan program. We might consider 

how to implement these initiatives in the national arena. 

In conclusion, Mr. Chairman, identifying and putting in place 

policies to decrease foreclosures, preserve homeownership opportunities, and protect our economy is a complicated set of tasks. We 

need to approach this solution with an open mind and have flexibility to consider and advance the most pragmatic and practical 

policy solutions that can obtain bipartisan support. I am committed 

to achieving this consensus. 

The CHAIRMAN. The gentlewoman from Illinois is recognized for 

3 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. And I’d like to thank 

you today for holding today’s hearing. It is one of a dozen that we 

have held to examine problems in the mortgage market, and I 

think we have made significant progress in examining and addressing the problem, but we have much more to do, and so I’d like to 

make just a few brief points. 

First, that mortgage loans must be restructured. On this point, 

I’d like to commend all of the participants in the HOPE NOW initiative. Many people in the industry and the Administration have 

been working very hard to develop a solid mortgage restructuring 

plan that will help people keep their homes. I haven’t seen the plan 

yet, but I hear that it might be released this afternoon, and I look 

forward to reviewing it. 

As I have said before, I would be happy to offer my assistance 

in working out some commonsense legislative fixes to help borrowers in trouble. Additionally, I strongly support private sector 

market-based solutions. What I don’t support is a taxpayer-funded 

bailout or special assistance to real estate flippers, illegal immigrants, or those engaged in fraudulent behavior. 

In fact, just yesterday, as Congressman Kanjorski mentioned, he 

had Congresswoman Pryce and Congresswoman Maloney and me 

send letters to lenders offering our assistance and input on this 

very goal. And, Mr. Chairman, I’d like to submit those letters for 

the record as well. 

Mr. KANJORSKI. [presiding] Without objection, it is so ordered. 

Ms. BIGGERT. The second point I’d like to address should go without saying, and that’s FHA reform. The FHA could be a viable alternative to predatory loans for many first-time homeowners, and 

a number of those currently facing foreclosure. 

The House did its work, and the Senate sits on it again. This is 

a disappointing repeat performance from the last Congress, and we 

need to encourage the Senate to pass FHA reform now. 

My third point is that housing counseling must be promoted. It 

is something many of us in this room have pushed for, for many 

years, so let’s do it. Let’s provide more funding for our HUD certified housing counselors. Too many people in mortgage trouble are 

afraid to contact their lender when they need help, and these counVerDate 0ct 09 2002 18:57 Feb 29, 2008 Jkt 040435 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\40435.TXT HFIN PsN: TERRIE
8

selors are available to assist any homeowner who calls at 1–888–

995–HOPE or 1–800–569–4287. 

Finally, I’d like to say how encouraged I am to be looking at 

some new creative proposals here today. The first offered by Mr. 

Castle looks at incentives for the mortgage industry to restructure 

at-risk loans, and the second authored by Chairman Frank, Mr. 

Miller, and Mr. Watt is aimed at imposing civil monetary penalties 

on some bad actors in the mortgage lending industry. 

I would like to thank these members for their leadership, and I 

look forward to hearing from today’s witnesses about this legislation and any additional ideas that they may have. 

With that, I look forward to today’s discussion, and I yield back. 

Mr. KANJORSKI. Thank you. Next we’ll have Ms. Waters of California. 

Ms. WATERS. Thank you very much, Mr. Chairman, and members. I’m very pleased that we’re holding this hearing. It is absolutely one of the most pressing issues confronting this country 

today, foreclosures and the loss of homes. 

Last week the Housing Subcommittee held a hearing in Los Angeles on foreclosure prevention and intervention. We were interested in looking at what servicers were doing to help families either in foreclosure or at risk of foreclosure. The news at that time 

certainly was not encouraging. We heard from homeowners grappling with foreclosure, or worse, bankruptcy, to contend with 

servicers who say they’re willing to work with them but in reality, 

homeowners are complaining about calls that they’re making to 

their banks and financial institutions, or, if they are lucky enough 

to find out who their servicers are, calls that are not being returned, and no answers. 

I walked away from that hearing secure in the knowledge that 

servicers, securitizers, and even we here in Congress will have to 

do more if we are to stave off the foreclosure epidemic that is 

spreading through this country. California has been especially impacted by the wave of current and impending foreclosures. According to third quarter data, California has seven cities among the top 

nationally in foreclosures, although the Los Angeles area ranks 

26th in terms of its foreclosure rate, with one foreclosure filing for 

every 113 households, it has the second highest number of foreclosure filings, with almost 30,000 filings on 19,000 properties. 

At last week’s field hearing, Los Angeles Mayor Antonio 

Villaraigosa testified as to the problems facing the City as a result 

of foreclosures. These problems include vacant and unkempt properties, evictions of renters, reduced property values, reduced gross 

metropolitan product, and reduced revenue to the government. 

It is clear that this is a crisis that is affect homeowners, neighborhoods, communities, cities, and States. We need a solution now. 

It’s absolutely clear that the threats of lawsuits and tranche warfare are contributing to the reluctance of securitizers to do right by 

our homeowners, our neighborhoods, and our economy. Indemnification seems like a reasonable solution to this concern. However, the absence of indemnification should not prevent servicers 

from doing the right thing—allowing our hardworking families to 

stay in their homes. 

9

I’m very much interested in hearing the witnesses’ views on this 

issue. But in closing, I must say that I remain unimpressed with 

the efforts of servicers, securitizers, and the Administration in 

dealing with this crisis. I am unimpressed with the efforts of the 

HOPE NOW Alliance. On Monday, Secretary Paulson outlined 

vague details of a plan to assist families with resetting ARMs who 

were at risk of foreclosure. Now it seems that plan is being more 

fleshed out, although we have yet to see the details. I have to say 

that I wish Secretary Paulson, who is not here today, would have 

started this process months ago, and I wish he would have started 

this process when Chairman Bair was advocating freezing these 

ARMs at the starter rate. 

And I’m very, very disappointed that I woke up to the news this 

morning that Chairman Bair had moved away from her very good 

proposal to freeze the ARMs at the starter rate. We may never 

know how many borrowers could have kept their homes if the process would have been started sooner than later, and my initial review of the plan that the Administration is announcing is that is 

only going to help a very, very small number of people. 

So I’m anxious to hear from our presenters here today so that we 

can hear what justifies this very limited proposal that is being put 

before us. I’d like to have some answers about why the majority of 

those who find themselves in trouble are not going to receive any 

assistance. With that, I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Delaware, Mr. Castle, for 5 

minutes. 

Mr. CASTLE. Mr. Chairman, thank you very much and thank you 

very much for calling this important hearing. 

The housing situation confronting us is serious, complex, and farreaching. No single or simple solution is going to fix the problems 

facing homeowners, lenders, loan servicers, markets, and investors. 

While I supported many of the reforms embodied in H.R. 3915, I 

believed then as I do now that those reforms are for the future, and 

intended to avoid some of the circumstances we find ourselves confronting today. It was clear when work on that bill ended, this committee would need to turn its attention to the present and address 

the facts unfolding before us. So I applaud you, Mr. Chairman, for 

bringing this committee together again and focusing our attention 

on the here and now. 

During consideration of H.R. 3915, I offered and withdrew an 

amendment that would create a temporary, legal safe harbor for 

creditors, assignees, servicers, securitizers, or other holders of residential mortgage loans while loan modifications or workout plans 

were under way. I worried that lawsuits would stall or stop modifications. While this amendment was simple to describe, it is not 

without some complications in its application. 

Therefore, after consultation with the chairman and ranking 

member, we decided the more prudent approach was to introduce 

this as a bill and fully vet these provisions at a hearing. I am interested in what our distinguished panelists have to say about H.R. 

4178 and recommendations they may have for the language. However, I remain quite concerned that at any point some party could 

file suit and many or maybe all the efforts being made to modify 

10

loans would come to an abrupt stop. That would be most unfortunate. 

And, finally, how do we calculate the number of loans that may 

be at risk that bypass Federal regulators altogether when mortgage 

bankers took loans directly to Wall Street? There are a number of 

other statistics that need to be understood, but the point I am making is this: How are we to judge the progress of these modification 

efforts months from now? 

Mr. Chairman, I believe that in foreclosure procedures, almost 

everybody is a loser: the individual homeowner; the neighborhood; 

the lenders; those who may hold the notes on it; or whatever it 

may be. The only winners may be lawyers handling the legal aspects of it. But other than that, there’s nobody else. And I did not 

know the Executive Branch plan that we’re seeing unfold now 

when all this was suggested and all this has to be obviously tried 

to fit in together. And let me just say, I’m open to suggestions. I 

don’t necessarily believe that what I have written and submitted 

is necessarily the be all to end all. I just think we as a committee 

need to work hard on solutions, and whatever is the right way to 

go is where I’m willing to go. 

With that, I yield back. 

The CHAIRMAN. The gentlewoman from New York for 3 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman, and I thank you for 

holding this hearing and I thank our witnesses for being here today 

for the ongoing series of hearings that this committee and the subcommittee have held about the subprime mortgage crisis and its effects on the overall economy. 

By all accounts, we have not felt the worst of the housing slump. 

Millions of Americans are worried that they will not be able to afford to stay in their homes. In this committee and the House of 

Representatives, we have passed sweeping mortgage reform, antipredatory lending legislation, as well as legislation to shore up the 

Federal Housing Authority and the GSEs. But tremendous uncertainty remains about how the subprime fallout and the housing 

slow-down and the credit crunch will affect the broader economy. 

Financial markets continue to suffer by almost daily disclosures 

of wider subprime exposure for major banks and financial institutions. Apparently, some investors did not understand what they 

were buying when they held CDOs and CIBs. The markets need a 

better understanding of their exposure to risk. I applaud the agreement reached yesterday between the mortgage industry and the 

Administration to freeze interest rates on some mortgages. But 

today we are considering other steps we can take to encourage 

servicers to engage in work-outs with borrowers that will revise the 

mortgages so as to prevent default and foreclosure. 

From the start of this crisis, it has been clear that servicers are 

perhaps the only participants in the complex, subprime mortgage 

market who have the ability to revise mortgages. And in recognition of this, this committee has taken steps to help them before, for 

example, by eliminating the unnecessary accounting complications 

from a misinterpretation of FAS 140 that could have prevented 

work-outs. This proposal goes further, and I compliment my colleague, Mr. Castle, in his work. But even it is just one small step, 

just one head of this complex and mini-headed hydra. There are 

11

still a number of other steps such as final passage of our House 

FHA and GSE bills and reform of the Bankruptcy Code that must 

be considered priorities to help Americans keep their homes. 

Chairwoman Sheila Bair and Secretary Paulson’s initiative to 

spearhead a public/private effort, specifically to address foreclosure, 

is overdue, but very, very welcome. I look forward to your testimony today. 

The CHAIRMAN. The gentleman from California for 3 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

We do not want to go down the road of having a government bailout to try to handle this problem. That would be hundreds of billions of dollars once we started that process. And so there is the 

possibility here of some voluntary workouts in the market, and the 

Treasury Secretary hasn’t been involved in that. I think as we look 

at this problem, we have 95 percent of the American people right 

now able to make their mortgage payments on time. 

But there is a huge problem coming in 2008, because 5 years ago, 

the interest rate was effectively one percent the discount rate and, 

as a consequence, that 5 years comes due for all of the individuals 

who took out those 5-year ARMs, principally in 2008. So that’s 

when you’re going to have this huge spike. There’s going to be a 

question of whether the servicers can even handle the sheer numbers there. 

Now, a lot of those individuals are going to lose their homes anyway—those involved in flipping, the speculators—a lot of them will 

lose their homes. But there’s a significant percentage of people who 

would be able to continue to make their mortgage payments at the 

existing rate if they didn’t have to go through the closing costs, the 

appraisal issues, and everything that goes with trying to get a loan 

at a higher interest rate. 

And the consequences of that, of having people able to do that, 

will have a profound affect in terms of the spikes that we would 

otherwise see in foreclosures. What we worry about in these foreclosure spikes are not just the impact on the individual who loses 

his or her home, it is also the impact on the communities, on the 

neighborhoods. Because once that begins to compound, once those 

home values begin to decrease in those neighborhoods, we have a 

considerable problem. 

Now there are certain incentives on the part of lenders and investors and borrowers, because they’re the ones, besides the homeowners, that are also negatively impacted. They lose 30 to 50 percent of the value of that loan when a foreclosure occurs. So they 

have an incentive to be at the table right now, and the Treasury 

Department is trying to bring them to the table to work out an arrangement in which people can stay in their homes if they can continue to make those payments at the current interest rates they’re 

paying. 

That is what we are discussing today. If lenders and investors 

and servicers believe they can benefit from renegotiating a mortgage, they should do so, and we should not be an impediment to 

their efforts to do so. And so the current housing market turn-down 

frankly for us here seems to be the biggest impediment our economy faces. So we want to encourage the Treasury Secretary in his 

efforts here. In terms of pre-payment penalties, with work-outs, 

12

with borrowers, these are being waived routinely now anyway. So 

I think we look forward to hearing the testimony, but I’d like to 

commend Secretary Paulson and all of the regulators for working 

with the private sector to come up with a potential solution that 

is not a government bail-out, but one that is based on a voluntary 

concept, that we don’t want to see 30 to 50 percent costs go up in 

these foreclosures to the borrowers if it can be prevented. 

I wish them well with that endeavor. 

Thank you again, Mr. Chairman. 

The CHAIRMAN. The gentleman from New York for 2 minutes, 

Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. And I want to thank the 

chairman for this most important hearing that we’re here for today. 

And I look forward to hearing the testimony from the individuals 

who are on the panel this morning, because to me we are at a crucial time, and I think that we need to do many things. And I would 

like to hear what you’re saying, but I’ll be quite honest. I’m focused, not on the speculators, not on the flippers, not on the people 

who were involved in real estate for business purposes, but for 

those average American citizens who simply wanted the American 

dream. 

And they were able to purchase a house, and that house is their 

dream. Because what’s at stake for them if they lose their house, 

if they go into foreclosure, is that they will never, ever be able to 

have that dream again. They will never, once you go into foreclosure, be able to buy a home again. They will never be able to 

provide for their families again. They will never be able to have the 

kind of appreciated asset that a home should bring so they can 

send their kids to school later on in life. 

That’s what’s at stake here, the very essence of what America is 

all about. And that’s why we need everybody to come together to 

try to figure out how we save not just a couple of people, but the 

mainstay of these individuals who basically just wanted to live the 

American dream, how we save them and keep them into their 

homes. 

Now, ultimately, we have to stop and pass legislation that goes 

after the predator, that goes after the individual who is greedy and 

wants to rip people off. We have to make sure that we stop that. 

But I want to just say that the other thing that we need to do—

I think this is a crying call that we institute in every private and 

public institution in American financial literacy—that we start 

teaching our young people at a very young age to look at it. 

Because one of the things that someone who is predatory, the 

best way to eliminate anybody that wants to put a predatory loan 

is to give them an educated consumer. And until we’re making series at every school and every child begins to receive financial literacy, then we are going to have some people who are going to slip 

through the cracks and become a victim of some kind of predatory 

loan. 

So I’m anxious to listen to what you have to say today, but it’s 

urgent that we do something, because I believe that the very essence of middle America, people who believe in America and America’s dreams are at stake here. 

I yield back. 

13

The CHAIRMAN. We have 5 minutes left, 4 on this side, and 11⁄2

on the other side. 

The gentleman from New Jersey for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, for holding this important meeting. And I also want to compliment Mr. Castle for his efforts to at least begin trying to address the growing problems that 

are arising between investors, the lenders, and the borrowers, as 

they all attempt to refinance certain subprime loans that might be 

heading towards foreclosure. 

As we all know, no one wins when a loan fails. The investors, 

lenders, and borrowers all experience some sort of loss when a loan 

goes bad. It is essential that a subprime market, the participants 

there, that we work with each one of them. And we look forward 

to hearing more details about the various plans today. 

But with that said, I want to do all we can to help stem the current housing troubles being experienced. I do have concerns that 

too much government interference can have severe, long-term consequences in the future. I feel that a bail-out, as some on the other 

side of the aisle have suggested, would encourage riskier lending 

practices, further erode market discipline, and saddle taxpayers 

who did absolutely nothing wrong with the burden of paying for 

other people’s mortgages. 

I do want to applaud the Treasury Secretary for his efforts in 

bringing together all of the different participants in the mortgage 

loan process to try to work together and to facilitate a reported 

agreement that can keep more people in their homes, provide investors with a maximum return on investment, and prevent the 

current mortgage market problems from trickling into other parts 

of the economy. But, again, I look forward to reviewing the details 

of this agreement in more detail. I do have some initial concerns 

in its conceptual approach. 

In a front-page article in The Washington Post today about this 

supposed agreement, they interviewed an average American, middle-class, a D.C. resident, in fact—someone who had been renting 

and had the opportunity to buy his 600 square foot apartment for 

$310,000 in late 2004. But he thought then that it was ‘‘absurdly 

overpriced.’’ He went on in the article to explain his concerns with 

this reported agreement that we hear: ‘‘Now the government is rewarding people who made irresponsible decisions and bought 

homes beyond their means. There are those of us who purposely 

sat on the sidelines during the course of the last 3 years while this 

senseless frenzy was going on. And we presumed that the free market would be allowed to correct itself. The government is now meddling in the market and looking to prop-up lenders and borrowers 

alike and those of us who wisely bided our time got screwed.’’ 

Whenever the government overly interferes with the marketplace, there is the potential to create a so-called moral hazard that 

can affect future economic decisions and transactions. It is very 

plausible to suggest that the government effectively bails out everyone in this mess. We will continue to bail out bad actors in the future. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from California, Mr. Baca, for 2 

minutes, and then one more, Mr. Neugebauer. 

14

Mr. Baca, then we’ll go vote. Two minutes, quickly. 

Mr. BACA. Thank you very much, Mr. Chairman, for convening 

this hearing. It’s important. 

California, more than any other State in the Nation, has been 

impacted by home foreclosures; 7 of the top 16 metropolitan areas 

with the highest rate of foreclosure in the Nation are in California, 

and especially in San Bernardino, number one in the Nation now 

in foreclosures in San Bernardino County, which is my area, where 

one in 33 homes in San Bernardino, Riverside County, are currently losing their homes. 

And as the gentleman from back here indicated, Mr. Meeks, this 

is the dream of everyone, to own a home, the American dream. And 

many of these individuals have lost their homes. And when they 

lose their homes it’s very difficult to replace them. They lose continuity within the community. They lose self-esteem. They lose confidence within themselves in terms of building hope for many of the 

individuals. And we’re going to continue to lose more homes. 

Our families are being torn apart by this crisis that’s impacting 

them. It’s impacting them going to school. Drop-out rates have increased in a lot of the areas because of the foreclosures. So it’s also 

impacting there. Today the President is going to unveil a plan to 

freeze mortgage rates, but already the plan appears to fall short of 

what is needed, and too many families will be left out. We can’t afford to leave these families behind. Foreclosure leads to, as I indicated, vacant lots, reduced property values, increased crime rates, 

and a depressed economy. 

There are some lenders that have taken proactive stands to help 

these families stay in their homes. In California, Countrywide, 

GMC, and Litton Home & Equity who together serve more than 25 

percent of the subprime mortgage loan issued nationwide, have 

agreed to a fast-track loan modification. But what about the rest 

of the industry? When are they going to step up to the plate? We 

need the other industries to also step up to the plate. This is a crisis. We need to address it. I appreciate our chairman taking the 

leadership on this. We must address it. We must continue to make 

sure that people have the American dream of owning their homes, 

retaining their homes, and staying in their homes. They waited too 

long. It’s time that we addressed the problem. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I think it’s very clear here that this room is full of people with 

good intentions. And now the real challenge is to turn all these 

good intentions into good solutions. I would make just a few points. 

I appreciate the fact that the Administration has been having dialogue with industry through this process. I think that is important. 

I think one of the slippery slopes here that we are moving down, 

we have to be very careful as we move through this process is government picking winners and losers, trying to distinguish between 

borrowers who have been doing the right things and are going to 

be penalized, because in fact they were doing the right thing, 

where we have borrowers who maybe weren’t doing the right 

things and they are now somehow going to benefit from taking advantage of this. 

15

The other thing is that we have to be very careful. We have very 

efficient markets. They’re not always kind, but they are very efficient. And when they clean up a mess, they tend to be pretty swift. 

But the clean-up is generally a clean process. I think a lot of lessons have been learned and I think a lot of the legislation that we 

may be looking at, I don’t think we have to worry about that behavior in the future, because there have been some very painful 

lessons. 

But I think we have to be very careful here of how we influence 

market behavior in the future, because what we may in fact do is 

cause such uncertainty in the markets that the overall cost of mortgages go up. Because people looking at securities that are issued 

in the United States of America have some danger that the Federal 

Government might manipulate those contracts, and we’ve had that 

conversation in previous hearings. 

I think the overall process here—I have been a mortgage lender 

and I have been a mortgage borrower, and no greater stakeholder 

interest exists other than between those two entities. And so I 

think it’s very important that we let that process manifest itself. 

When we start putting third parties in there trying to negotiate 

what’s in the best interest of one or the other, I think that’s sometimes dangerous. I have sat across the table from borrowers in the 

past and sat down, and we worked out a solution that was in their 

best interest and the best interest of the institution that I represented, as well as I’ve sat down at a desk and worked out with 

my lender what might be in the best interest of myself and the 

lending institution that I borrowed that money from. 

So let’s be very careful as we move down that road that we let 

the market forces work the way they should. Let’s let the business 

models that were instituted when these securities were put together work through that process. But let’s be very careful not to 

let the Federal Government cause disruption in these markets in 

the future. 

And thank you, Mr. Chairman. 

The CHAIRMAN. We will now go and vote, and we will come back. 

I apologize to the panel, but that’s life. 

[Recess] 

The CHAIRMAN. We’ll begin, thank you, with the Chairman of the 

Federal Deposit Insurance Corporation, Sheila Bair, who has in my 

mind played a very constructive role in our efforts to minimize the 

problems we face. 

Madam Chairwoman? 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Chairman Frank, and members of the committee, 

thank you very much for the opportunity to testify today. As you 

know, the rising level of foreclosures across America is of great concern to everyone, and we’re just getting into the thick of the problem. 

Some 1.7 million subprime adjustable mortgages will reset by the 

end of 2009; 1.5 million of these borrowers are paying their mortgages on time, but hundreds of thousands could soon be forced into 

default because of unaffordable resets and insufficient equity to reVerDate 0ct 09 2002 18:57 Feb 29, 2008 Jkt 040435 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\40435.TXT HFIN PsN: TERRIE
16

finance. Wide-scale foreclosures will result in significant losses for 

investors and do great harm to communities and neighborhoods 

across America, especially those already hit hard by the housing 

downturn. What we need are commonsense solutions that are effective and long-term. 

Last March, the FDIC hosted a series of meetings with regulators and industry to determine the authorities of servicers to 

modify loans expected to default. We determined that significant 

authorities to modify loans did exist. The regulators subsequently 

issued joint guidance emphasizing these authorities and encouraging servicers to use them. Yet, as we entered the third quarter 

of this year when re-sets began to go up, foreclosures kept rising, 

and loan modification levels remained low. So last September the 

FDIC made its own commonsense suggestions for systematic modifications. 

Specifically, for owner-occupied homes where borrowers are making the payments on time but clearly can’t afford the reset payments, we suggested fast-tracking them into long-term sustainable 

payments at the starter rate. Keeping borrowers at the starter rate 

minimizes the need for re-underwriting because the loan already 

has a performance history at that rate. Limiting the proposal to 

owner-occupied properties helps assure that borrowers being modified are motivated to hold onto their properties and keep paying. 

Because of the huge number of troubled loans, individually renegotiating each of them is costly and too time-consuming, so we suggested a systematic approach for this category to free up servicer 

resources to deal with the harder cases. I am delighted to say that 

our jaw-boning has been turned into action by industry working 

with government leaders. 

Governor Schwarzenegger announced recently an agreement 

with four major subprime lenders to work with homeowners unable 

to afford escalating mortgage payments. His plan is in line with 

our proposal, and we support it. Later today, the White House and 

the Treasury Department are expected to unveil an industry-led 

plan for helping homeowners struggling with their mortgages, 

which also draws upon our suggestions. 

To the critics who say such large-scale approaches are untested 

and unworkable, we say it’s already being done successfully. 

Those companies with active loan modification programs tell us 

they’re saving time and money and they’re keeping people in their 

homes. To those who say modifications are unfair, we say we have 

a difficult situation and there are no perfect solutions. The modifications are preferable to wide-scale foreclosures, which hurt not 

only borrowers, but neighborhoods, communities, and potentially 

the economy at large. Investors also benefit from loan modifications, because they maintain continued cash flows in today’s market that will exceed the value of returns from foreclosing on a property. Just about anything beats foreclosure, which runs down 

neighborhoods and can cost up to half of the initial loan amount. 

Mr. Chairman, the FDIC is committed to working with you to 

find solutions to the growing mortgage crisis, to mitigate damage 

to the economy from the housing market, and to give subprime borrowers who are willing and able to pay, a mortgage they can afford. 

Thank you very much. 

17

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

78 of the appendix.] 

Mr. KANJORSKI. [presiding] The Honorable Randall Kroszner, 

Governor, Board of Governors of the Federal Reserve System. 

STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, 

GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. KROSZNER. Thank you very much. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, I appreciate the opportunity to appear before you today 

to discuss the recent problems in the subprime mortgage market 

and possible legislative solutions. 

We continue to work to find and implement the best and most 

sustainable solutions to the current challenges in the market. First, 

we’ve worked to increase coordination among regulators in the enforcement of consumer protection laws and regulations. Earlier this 

year, for instance, we launched a cooperative pilot project with the 

Federal and State agencies to conduct reviews of certain non-depository lenders involved in the subprime market. And that pilot is 

proceeding. 

Second, the Board along with the other Federal banking regulators has also worked to guide federally-supervised institutions 

and servicers as they deal with mortgage defaults and delinquencies. We support servicers’ efforts to develop prudent work-out 

solutions, because foreclosure is a costly option for consumers, investors, and communities, and should be avoided when other viable 

options exist. 

We also support servicers’ collaborative efforts and creative efforts to scale up their activities to help borrowers on a more expedited basis, and in a cost effective way, without restricting capital 

availability in the market. However, loan modifications must be 

made prudently with proposed solutions that are sustainable in the 

long run. 

Third, the Board continues to work towards more effective consumer protection rules. In the next 2 weeks, we will propose 

changes in the Truth-In-Lending Act, TILA rules, to require earlier 

disclosures by lenders and address concerns about misleading mortgage loan advertisements. At the same time, we will also request 

public comment on significant new rules under the Home Ownership Equity Protection Act, HOEPA, that would apply to subprime 

loans offered by all mortgage lenders to address unfair and deceptive mortgage practices. 

The practices that we have been looking at include pre-payment 

penalties, failure to escrow for taxes and insurance, stated income 

and low-documentation lending, and failure to give adequate consideration to a borrower’s ability to repay the loan. 

Congress has also expressed understandable and appropriate 

concern about subprime lending and the challenges in the mortgage market more generally. The Mortgage Reform and Anti-Predatory Lending Act of 2007, which was passed by the House of Representatives, is designed to extend additional oversight and consumer protections in the market. We were asked to comment on 

18

two issues not addressed in the current version of the Act that 

could be addressed through amendments or other actions. 

One issue is the possible legal exposure of mortgage servicers 

who enter into loan modifications or work-out plans. There are 

many good reasons to be proactive and systematically reach out to 

borrowers. Servicers may often be able to offer alternatives that 

keep consumers in their homes in ways that are transparent, predictable, and in keeping with the general principles of safe and 

sound banking. 

Borrowers who have worked hard to build their credit history 

over time, for instance, may see their options shrink if they get behind in payments and see their credit scores fall. Thus, it’s important to reach out before stressed borrowers get behind. 

We understand there are challenges with systematic approaches, 

including concerns about litigation. We encourage ongoing industry 

efforts to agree to standards for addressing these issues. We are 

hopeful that the industry can resolve these conflicts on a consensual basis, so they do not preclude servicers from taking actions 

that would otherwise be in the overall best interest of consumers 

and the industry. We encourage industry to work diligently to find 

sustainable solutions in the problems facing borrowers today. 

A second issue that we were asked to comment on is the possible 

imposition of civil money penalties when the enforcement agencies 

find that there is a pattern or practice of violations. We would recommend that any such penalties be given a ceiling as well as a 

floor, because the market uncertainty that can be introduced by 

open-ended liability, and thereby potentially reduce the flow of 

funding to the sector. 

We would also suggest that some discretion in the actual amount 

of the penalty, within a range, be given to the enforcing agencies. 

We would also encourage Congress to look at the resource needs of 

the agencies that are authorized to undertake the enforcement actions to ensure that sufficient resources are available for this important role. The Federal Reserve looks forward to continuing to 

work with Congress and others to craft sustainable solutions to 

these very difficult problems. Thank you very much. 

[The prepared statement of Governor Kroszner can be found on 

page 148 of the appendix.] 

Mr. KANJORSKI. The Honorable John C. Dugan, Comptroller, Office of the Comptroller of the Currency. 

STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

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

and members of the committee. Today’s hearing focuses on mortgage loan modifications, and explores two proposed amendments to 

the recently passed mortgage legislation. I want to focus my remarks today on the general issues involved with loan modifications. 

Subprime adjustable rate mortgages typically provide for a lower 

starting rate that resets to a significantly higher rate over a 2- to 

3-year period, the so-called 2/28’s and 3/27’s. The volume of such 

mortgages increased substantially over the last several years, into 

the first part of 2007. And as a result, with the passage of time, 

19

the nation’s mortgage markets now contend with a large volume of 

subprime ARMs that reset each month, a process that will continue 

through at least the end of 2008. 

Because the monthly payment on these loans can increase substantially at reset, by 25 percent or more, borrowers almost always 

refinance into new mortgages at the time of reset, assuming that 

they are able to do so. 

During the recent years, a significant house price appreciation in 

many parts of the country, the vast majority of subprime ARM 

holders were able to refinance at reset into new mortgages because 

of the increased value of their homes. 

Conversely, with house prices becoming flat, or declining in many 

parts of the country during 2007, it has become increasingly difficult for many subprime ARM borrowers to refinance. While many 

such borrowers who remain current on their loans are still able to 

refinance at market rates or into FHA products, an increasing 

number have either fallen behind on their existing payments or 

face the prospect of falling behind when rates reset and they are 

unable to refinance. 

There has been a vigorous and very healthy debate about how 

best to address widespread subprime resets, and the prospect of 

large numbers of defaults and foreclosures. 

The outcome of this debate is obviously critically important to 

subprime borrowers in the first instance, and also to their creditors, typically, investors who hold interest in securities backed in 

whole, or in part by subprime ARMs. 

But another critical stakeholder in the process is the mortgage 

servicers, one of whose jobs is to implement foreclosure when necessary, or in the alternative to make any loan modifications that 

may be appropriate to keep mortgage borrowers in their homes, 

while mitigating the substantial loses that would accrue to mortgage lenders from foreclosure. 

National banks that service subprime loans have been working 

to balance the sometimes competing interests of borrowers and investors. Given the large number of resetting ARMs, and the potentially large number of borrowers who may be unable to afford the 

higher monthly payments at reset however, there is very good reason to explore new approaches to handling these issues on a broader scale. 

Under these circumstances, it does make sense to try and identify a programmatic approach that would facilitate modifications of 

large numbers of mortgages quickly using a common set of criteria. 

Of course, and this is important, any programmatic approach 

should not prevent borrowers who do not qualify under the programmatic criteria, from qualifying for loan modifications based on 

a case-by-case evaluation of their ability to repay under modified 

terms. 

Indeed, for many borrowers who are already delinquent, have already entered foreclosure proceedings, or will not qualify for this 

broader program, the loan-by-loan approach will continue to be the 

best hope for avoiding foreclosure. 

That said, there will be a significant number of borrowers who 

are current on their payments at the initial rate, but will not be 

able to afford payments at the higher reset rate, or to refinance 

20

into market or FHA mortgages. A programmatic approach to modification makes the most sense for these borrowers. Interested 

stakeholders in the lender servicer, and investor community, have 

been in intense discussions over the past weeks, to develop just 

such an approach. And it is our understanding, as has been announced today, that these stakeholders have indeed reached an 

agreement, and although we have not yet seen all the details, we 

very much support that approach in principle, thank you very 

much. 

[The prepared statement of Comptroller Dugan can be found on 

page 110 of the appendix.] 

The CHAIRMAN. Next, we have Gigi Hyland, who is a member of 

the board of the National Credit Union Administration. 

STATEMENT OF THE HONORABLE GIGI HYLAND, BOARD 

MEMBER, NATIONAL CREDIT UNION ADMINISTRATION 

Ms. HYLAND. Thank you Chairman Frank, Ranking Member 

Bachus, and members of the committee. I appreciate this opportunity to testify on behalf of the National Credit Union Administration, regarding proposals to help consumers reduce the risk of foreclosure. 

I will address H.R. 4178, introduced by Representative Mike Castle, and an amendment to strengthen the regime for civil penalties 

against creditors who engage in unfair or unscrupulous lending 

practices. 

In addition, I will briefly discuss the FDIC alternative to H.R. 

4178 in the California agreement between the State and several 

large servicers. These subjects are timely and important given developments that dominate the daily headlines. 

As background, I note that credit unions are a relatively small 

player in the home mortgage market, originating about 2 percent 

of total loans, and about 9 percent of those written by federally insured institutions. Most mortgage loans made by credit unions are 

fixed rate first mortgages. Only 2.1 percent of credit union real estate loans are of the non-traditional types, such as interest only 

and optional payment loans. 

Regarding Congressman Castle’s bill, prudent workout arrangements benefit both credit unions and their members. If Congress 

believes legislation is needed, we have some suggested changes to 

H.R. 4178. Specifically, the safe harbor outline in the bill will ease 

the process of modifying loans and developing workout plans on 

loans previously ineligible for changes. However, the 6-month window may be too short for consumers to act. It could also be difficult 

for credit unions to determine which are problem loans, given the 

multitude of factors to consider in a short timeframe. 

In the alternative, NCUA suggests extending the period to at 

least 12 months. NCUA emphasizes the importance of clearly defined terms, including which loans fall into the safe harbor. We 

suggest using the same definition of reasonably foreseeable default 

used in the September 2007 interagency guidance level issued by 

NCUA and the other Federal financial regulators. 

Regarding the definition of qualified mortgages, given the bill’s 

inclusion of VA loans, and given the focus on loans at a higher risk 

of default, NCUA recommends including FHA loans as well. 

21

The FDIC has offered alternative language to H.R. 4178. NCUA 

commends the FDIC for highlighting the importance of issues related to investors and securitized loan pools. We support good faith 

attempts to facilitate loan modifications. This is not only good for 

consumers, but it is a realistic approach that takes into account the 

importance of the secondary market. The FDIC proposal appears to 

reflect a recognition of servicer’s duty to investors, and creates a 

rebuttable presumption that may encourage workout plans. This 

presumption does not terminate contract rights, but requires a burden of proof to be met by investors. 

We also note, without comment, the absence of a distinction in 

the proposal between prime and subprime loans. Regarding the 

California proposal, NCUA commends Governor Schwarzenegger 

for working constructively with the largest servicers in that State 

to give borrowers financial breathing room when dealing with 

mortgage adjustments. We note that the agreement includes several concepts introduced in the interagency guidance I referenced 

earlier. 

Those common concepts encourage servicers to: number one, 

work with borrowers; number two, review governing documents for 

loans transferred into securitization trusts to determine whether 

they can be restructured; and number three, to develop workout 

plans to be offered to at-risk borrowers. 

The pro-active nature of the California agreement is laudable, 

particularly in that it tries to resolve issues before a default occurs. 

The California agreement also confirms that the States are well-positioned to promulgate these types of solutions. 

Finally, I turn to the Frank-Miller-Watt amendment. The 

amendment imposes civil penalties on creditors who abuse borrowers by failing to abide by certain minimum standards such as 

determination of an ability to repay or determination of net tangible benefit to the borrower, in the case of a refinancing. The language calls for both administrative and civil money penalties to be 

imposed on regulated entities in contrast to non-federally regulated 

entities. 

This is inconsistent with the provisions of H.R. 3915 which applied similar standards to all mortgage originators. Also, allowing 

for the submission of a complaint to any Federal banking agency, 

regardless of whether that agency has jurisdiction, may have the 

unintended consequence of slowing an investigation. Congress 

should consider language to encourage consumers to contact the 

appropriate regulator. 

I will conclude with NCUA’s assessment of the credit union experience with delinquencies and foreclosures. Even though delinquencies have increased, they remain low. In the interest only and 

optional payment end of the market, delinquencies are just .9 percent. Foreclosures have increased this year, but represent a small 

percentage, .1 percent, of credit union real estate loans. These 

numbers may be small, but NCUA is mindful of the broader market dislocation, and will continue to encourage credit unions to take 

extra care in non-traditional lending. 

NCUA supports congressional scrutiny of the complex issues involved, as well as any responsible legislative effort that enhances 

22

consumer protection while preserving the mortgage financing market’s ability to attract and retain capital and liquidity. 

We stand ready to work with Congress on these issues, and I 

would be pleased to answer any questions. 

[The prepared statement of Ms. Hyland can be found on page 130 

of the appendix.] 

The CHAIRMAN. Next we have Scott Polakoff, who is the Senior 

Deputy Director and Chief Operating Officer of the Office of Thrift 

Supervision. 

STATEMENT OF SCOTT M. POLAKOFF, SENIOR DEPUTY DIRECTOR AND CHIEF OPERATING OFFICER, OFFICE OF THRIFT 

SUPERVISION 

Mr. POLAKOFF. Good morning, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to testify on behalf of OTS on loan modifications, foreclosure prevention, and efforts to curb future activities destabilizing to the mortgage markets. 

Based on the recent data, total outstanding mortgage loans in 

the United States are approximately $10.4 trillion. Of this, total 

subprime loans account for $1.2 trillion, or 111⁄2 percent of the U.S. 

mortgage market. 

Subprime 2/28 and 3/27 mortgage loans account for a total of 

$496 billion, or roughly 4.8 percent of the aggregate U.S. mortgage 

market, and 41 percent of outstanding subprime mortgage debt. 

Currently, about 2 million American families have subprime 2/28 

or 3/27 mortgages that are scheduled to reset in 2008 or 2009. The 

initial starter rate for these loans typically range from 7 to 9 percent and a reset generally increases the interest rate by approximately 300 basis points. 

Between 1980 and 2000, the national foreclosure rate was below 

.5 percent of aggregate mortgage loans. In fact, as recently as 2005, 

it stood at .38 percent. Since then, it has increased 55 percent, to 

almost .6 percent of outstanding mortgage loans. Far more troubling than that though, among subprime borrowers holding 2/28 

and 3/27 loan products, foreclosures are projected to jump from 

about 6 percent currently, to about 10 percent by 2009. One of the 

most important considerations in structuring a viable loan modification program is reaching as many borrowers as possible, as 

quickly as possible. In our view, this translates into conducting an 

expeditious and systematic review of outstanding loans approaching reset or for which rate reset has already occurred in order to 

identify broad categories of borrowers eligible for loan modifications. 

In structuring a viable loan modification program, three goals 

should be recognized and incorporated. First, and most fundamental, the program should preserve and sustain homeownership. 

Second, of course, the program should protect homeowners from 

avoidable foreclosures due to interest rate reset. Finally, it is important that our actions preserve the integrity of the broader mortgage markets, including capital market participation and the continued funding of the mortgage markets, as well as ensuring continued safety and soundness of depository institutions. 

23

I would now like to take a moment to offer our views on H.R. 

4178, and the Miller-Watt-Frank amendment offered to H.R. 3915. 

H.R. 4178, the Emergency Mortgage Loan Modification Act, is offered as a safe harbor from liability for creditors, or signees, 

servicers, securitizers and other holders of residential mortgage 

loans in connection with loan modifications they conduct during the 

6-month period after enactment of the legislation. We would like to 

thank Congressman Castle for introducing this bill, and helping to 

spur the debate forward. While we understand and appreciate the 

intent of this legislation, we have outlined a few items in our written testimony that may deserve committee consideration. 

Specifically, we believe that servicers already have adequate 

flexibility to address issues covered by the bill. While we are most 

certainly supportive of actions that will help keep borrowers in 

their homes, and we are also respectful of contract law, and attentive to any immediate actions that could tarnish the interest of investors from reentering the housing market. The Miller-WattFrank amendment would oppose a civil penalty of $1 million, and 

not less than $25,000 per loan on a creditor, a signee, or securitizer 

for engaging in a pattern or practice of originating, assigning or 

securitizing residential mortgage loans that violate the duties of 

care established in H.R. 3915. These duties of care include ensuring the ability to repay requirement for certain mortgage loans in 

H.R. 3915, and the net tangible benefit requirements for certain 

mortgage loan refinancing under the bill. We certainly understand, 

and this amendment emphasizes the importance of H.R. 3915 to 

prospective homeowners in this country. I would like to point out 

though, that the Federal banking agencies already have authority 

which includes a significantly lower threshold than the pattern and 

practice standard to pursue civil monetary penalties against insured depository institutions, as well as their subsidiaries, holding 

company parents, affiliates, and service providers. A mandatory, 

monetary penalty removed Federal banking agency discretion. 

Such discretion is important to address programmatic lending violations and impose penalties and remedies tailored to the nature 

and extent of the violation. 

In closing, Mr. Chairman, I would like to note on a tangential 

issue, that the House passed H.R. 3526, and that OTS looks forward to working with our colleagues in crafting a uniform regulation applicable to all insured financial institutions to address unfair or deceptive acts or practices, thank you. 

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

181 of the appendix.] 

The CHAIRMAN. Let me just take 30 seconds, I very much appreciate you saying that, and I know that there have been some objections to OTS going forward. I think the great majority of this committee appreciates you going forward, we hoped you would go forward, and yes, having coordination with your colleagues would be 

very hopeful. I appreciate that, thank you. 

Now, Mr. Mark Pearce, the deputy commissioner of banks for the 

State of North Carolina, on behalf of the Conference of State Bank 

Supervisors. 

24

STATEMENT OF MARK PEARCE, NORTH CAROLINA DEPUTY 

COMMISSIONER OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS 

Mr. PEARCE. Good morning, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I am Mark Pearce, deputy 

commissioner of banks for the State of North Carolina. I appear 

today as a member of the State Foreclosure Prevention Working 

Group, a joint effort of State attorneys general, State regulators, 

and the Conference of State Bank Supervisors. 

Thank you for inviting us here this morning to discuss our ongoing efforts to prevent unnecessary foreclosures. For the past several 

months, State attorneys general and State regulators have worked 

with 20 of the largest subprime servicers to forge cooperative efforts to prevent unnecessary foreclosures. These servicers account 

for 93 percent of the subprime loans outstanding. 

Through our meetings, we have seen great creativity and 

progress in enhancing servicers’ ability to modify loans prior to 

foreclosure. However, many challenges remain. 

In my testimony today, I want to make three points. First, mortgage servicers are being asked to fix problems created by poor 

origination practices in the subprime market. Many subprime loans 

that originated in the last couple of years have experienced severe 

delinquency before rates reset due to widespread failures of prudent underwriting and mortgage fraud. The addition of impending 

payment increases for over 1 million adjustable rate mortgages, 

will accelerate these delinquencies and further depress home values unless these loans are effectively addressed. At the same time, 

rate resets of subprime loans are only one aspect of the larger challenge of dealing with the reckless lending practices of recent years. 

Second, a significant disconnect remains between aspirations and 

results, as servicers struggle to meet the current and ongoing foreclosure crisis. Today’s mortgage servicing system was not designed 

to deal with large numbers of loans facing payment shock, home 

priced appreciations, and a constriction in refinance options. Today’s challenges require transition from the low-touch debt collection model, to a high tough foreclosure avoidance model, and that 

transition has been uneven at best. Despite positive statements 

from leaders of major servicers, we continue to hear too many complaints from homeowners and counselors about the challenges they 

face in protecting homes from foreclosure. 

To get beyond anecdotal stories and statements of principles, the 

States have begun to gather data to monitor the progress of loss 

mitigation efforts. Last month, the State Foreclosure Prevention 

Working Group finalized a call report for servicers to collect the 

data needed to gain a clear picture of the outcomes of foreclosure 

prevention efforts. 

Third, proposals to freeze rates for current homeowners who will 

default due to payment shock are an important step forward. The 

agreement announced in California last month and press reports of 

the HOPE NOW initiatives proposing rate freezes for certain borrowers may be the type of solution that will prevent significant 

numbers of unnecessary foreclosures. 

In my written testimony, I detailed the elements of a rate freeze 

protocol the State Working Group believes will be critical to success 

25

of any such program. A rate freeze is a sensible approach that 

maximizes returns to investors, enables current homeowners to 

keep their homes and protects neighborhoods and our economy 

from the spillover effects of unnecessary foreclosures. 

This is far from a bail out, as taxpayer dollars are not rewarding 

investors or borrowers for imprudent behavior. Furthermore, when 

you consider that many homeowners could have and should have 

received better loan terms than the subprime loan they received, 

this rate freeze makes good sense. 

While dealing with a slice of subprime loans is a significant step 

forward, we should not be lulled into thinking this proposal will 

solve the foreclosure crisis. Unfortunately, we are at the beginning 

of this road, not at the end of it. 

My written testimony details a few challenges we still face, such 

as the need to improve systems, so that homeowners are able to access the right solution on the first phone call to the servicer, not 

the 5th, or the 6th, or the 12th. They must produce the paperwork 

necessary to modify a loan. We must find solutions for other categories of homeowners not affected by the rate freeze proposal. We 

must continue to expand our outreach efforts, especially utilizing 

the strength of nonprofit housing counselors, as many homeowners 

still do not understand that servicers can provide meaningful assistance. And finally, we must look ahead to payment option ARM 

products, as a second wave of resets will occur as these loans reach 

their negative amortization caps later this decade. 

In conclusion, we appreciate Congress’ efforts to address the foreclosure crisis, and look forward to working with you, the mortgage 

industry, and our Federal counterparts to minimize the impact of 

foreclosures in our communities across the Nation. Thank you for 

your time and attention. 

[The prepared statement of Mr. Pearce can be found on page 166 

of the appendix.] 

The CHAIRMAN. Thank you. Let me begin the questioning with 

regard to the bill that our colleague from Delaware has offered, 

which we think is a very important point to have in the discussion. 

One concern I saw raised is whether this an unconstitutional interference with vested rights. But it did seem that maybe it was 

an analogy. The argument is that when someone bought a security, 

that purchaser had certain remedies against the securitizer, and 

we would be diminishing the remedies. 

But it did seem to me that this Congress did something very 

similar when, over Bill Clinton’s veto, we passed the Securities 

Litigation Reform Act, and I voted to override the veto. That was 

a situation where people had bought securities, and had certain 

rights at the time they bought them to bring certain kinds of lawsuits with certain kinds of evidentiary bars. 

And we passed a law, which diminished the rights of existing 

shareholders. That law was not perspective, it didn’t say that only 

people who are buying stock going forward are limited, it was a 

limit on shareholders. 

It does seem to me that there is some kind of constitutional analogy here. In both cases, we are telling the purchasers of a financial 

instrument that you will have fewer remedies than you used to 

have. 

26

Does anyone want to comment on whether there is a constitutional problem with Mr. Castle’s approach, and whether or not the 

analogy I have given might alleviate some of those concerns? Yes, 

Mr. Dugan? 

Mr. DUGAN. I think you are right, Mr. Chairman, that there are 

instances in which retroactive statutes that modified contract 

rights have been upheld constitutionally, but it can be a murky 

area. I think the point that we would say, is it is not free from 

doubt, and it would still create the potential for litigation if it really did expressly do it, but it is not 100 percent clear. 

The CHAIRMAN. Ms. Bair? 

Ms. BAIR. I think the concern was that the bill could perhaps be 

interpreted as being in conflict with the current contractual provisions of servicing agreements, and I think there would be a fairly 

easy fix to that if you wanted to pursue that, and we have provided 

some language to Congressman Castle. 

We think that the current authorities are sufficient, and that if 

you do a net present value analysis where the loan modification 

value exceeds the foreclosure value, then the servicer has fulfilled 

its obligations to the pool as a whole. 

I think legislation that would clarify what we believe is current 

law, and propose it as a clarification, would be something that 

could be done. I don’t know if it is necessary though. 

The CHAIRMAN. Well, I appreciate it. Let me make two points on 

that, and then I want to get to some other issues. 

One, members of this committee did initiate a letter to the SEC, 

and the SEC Chairman was very responsive. And we do have the 

ruling from the Financial Accounting Standings Board which essentially says that if the servicer finds this to be in the real interest of the holder, they can do the modification. 

But even though, and I would agree with you that yes, those say 

existing authorities there, but we have often been told by people in 

the business community that okay, what you say is true, but people 

are nervous, because you know, people aren’t just worried about 

good lawsuits, they are worried about not so good lawsuits, lawsuits that are invalid. 

So if in fact, what you say, and I think what you say is true, not 

if in fact, it seems to me that argues for the kind of approach the 

gentleman from Delaware is taking, that is, we are not diminishing 

any existing rights, but if you codify it, you give people some more 

insurance, the securitizers who were hoping to be active here, that 

they would be less likely to be sued, and we have been told in other 

contexts, that reassurance helps. 

Let me ask about two of the issues that I raised now with regard 

to the President’s plan. I am going to get into the question of the 

remedies, pattern, and practice for some of the other witnesses, but 

I am troubled by the cutoff of a 660 FICO score. And now I understand, I was talking to the Secretary, and he said, ‘‘Well, that is 

not absolute, it doesn’t mean that if you are above it you can’t get 

it.’’ 

But I think it would be very unwise for us, politically, to take 

people who would be similarly situated in every respect except the 

FICO. Say the person who had gotten herself into deeper debt, goes 

into this process with a little bit of an advantage over someone who 

27

hadn’t. I gather there were some who thought that the FICO score 

was a proxy for income, but I would ask all the regulators if you 

think using the FICO score as a cutoff this way is a good idea, even 

if it is not an absolute one. It seems to me counterproductive. We 

have been telling people watch your credit, get good credit. To penalize people who have better credit than people who have worse 

credit even as a start off seems to be a mistake. Ms. Bair? 

Ms. BAIR. I have not seen the final documents. I do understand 

that this is an initial plan that will be undergoing further refinements. I think the advantage of using FICO is that it is quick and 

it is easy to determine. The disadvantage is exactly as you have articulated; it is really not a proxy for ability to pay. I know some 

servicers use just a strict ratio, a debt to income analysis, 40 percent I know is one, and perhaps that could be another screen that 

could be built in. 

The CHAIRMAN. It doesn’t seem to me to have more relevance 

than the FICO score. 

Mr. KROSZNER. I think it is very important to look more generally beyond just FICO scores, but FICO scores can be useful in 

certain fast track situations. And so I do not think they should preclude working with other borrowers who are facing challenges. It 

seems to be a useful first step, but I do think it’s important to 

think about the effects. 

The CHAIRMAN. It’s a first step and you really are saying—we 

can’t just look at convenience and ease for that. But there’s a 

kind—talk about moral hazard, do you really—I think almost everybody here—all sides, liberal and conservative, we’ve all told people, don’t go too deeply into debt. And now people who have gone 

more deeply into debt are better off than people who weren’t over 

and above the housing. I just do not know why we would want to 

do that. 

Mr. Kroszner, do you want to respond? 

Mr. KROSZNER. Well, I haven’t seen the final details of the proposal but I’m not sure that it makes one group worse off or better 

off. 

The CHAIRMAN. Well, it does. I talked to the Secretary and he affirmed it. If your FICO score is above 660, there is a heavier burden of proof on you to get into this modification than if there isn’t. 

Mr. KROSZNER. But it doesn’t mean that there can’t be other approaches to modification that can help those others. 

The CHAIRMAN. That’s true, but that doesn’t move it away. You 

can’t answer—the fact is that it is a factor. It is meant to be a 

screen. It can make it quicker and then not have any meaning. You 

can’t have it both ways. And it is in fact meant to be—let’s put it 

this way. Everything else being equal, you’re worse off if you have 

a FICO score above 660 than below it. I just think that’s a terrible 

idea for us to perpetuate. 

Mr. Dugan? 

Mr. DUGAN. I guess the way I understood it and I have not seen 

the detail of this particular one. Understanding that, I think there 

is a notion that at this part of the negotiations there had to be 

some kind of screen to indicate the people who could afford to refinance— 

The CHAIRMAN. I agree. 

28

Mr. DUGAN. You are just asking if FICO the right screen? Is that 

the question? 

The CHAIRMAN. Yes. 

Mr. DUGAN. And I haven’t had enough time to look at it. 

The CHAIRMAN. Okay. But there are two questions I’m asking. 

First of all, there is a question about whether it’s a good screen. 

I don’t think it is a good proxy for income. I think it’s, you know, 

it’s better than nothing maybe, but I think it isn’t better than nothing because it goes counter to what we have been telling people—

be careful about your debt. 

We should not be counseling people that in some cases if they 

went deeper into debt and had a lower score, they would be better 

off. 

Let me then switch, unless anybody else wanted to discuss that? 

Mr. Pearce? 

Mr. PEARCE. Sure. I would agree with you. I think especially 

since you have many people who have subprime loans had prime 

quality credit when they got the loan. To penalize those homeowners who were steered into bad loans to begin with is a mistake. 

I think FICO scores especially if you look at trends, they may enable servicers to determine this borrower is in distress. Their credit 

is getting worse. And, as a result of decreasing FICO score, you 

could have—maybe that would be a proxy for having trouble making ability to repay. But I think ability to repay is something— 

The CHAIRMAN. Well, I have run over my time and I apologize. 

I appreciate that because, you know, we never want to lose sight 

as we talk about this about the HMDA data. We’d show that if 

you’re black or Hispanic everything else being equal you had a lot 

more chance of getting a subprime loan and you point to exactly 

that. That you could have people who were pushing the subprime 

loans because there’s an element of racial and ethnic discrimination here. And they would be victimized by this. 

My time has expired. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Chairman Bair, I was looking at your testimony on page 5 in a 

footnote where we’re talking about the servicers moving to protect 

the investors and loan modifications, in the footnote you talk about 

American Securitization Forum statement of principles. 

One of their principles in these modifications is in a manner that 

is in the best interest of the borrower. How does that—I have 

asked the regulators how does that come into play? As you modify 

these, obviously the servicing agreement in most cases will give the 

servicer the right to protect the investor. 

Ms. BAIR. Right. 

Mr. BACHUS. But competing with that, you know, the type of 

modification, how is the borrower protected? 

Ms. BAIR. As I understood it, these principles were developed 

subsequent to some securitization roundtables that we had hosted 

at the FDIC which I mentioned in my testimony. I believe that this 

was, and George Miller will be testifying later and can speak directly, but I think this was relating to the idea that the modified 

loan obligation should be sustainable, one that the borrower can afford. And that is in the best interest of investors, too. So I think 

it is almost a reflection that their interests coincide in that regard. 

29

Mr. BACHUS. All right. On page 7, really what I am talking about 

here is the fairness issue. You talk about the small number of investors or small percentage who even after the escalation of the interest rate continued to pay. 

Ms. BAIR. Right. 

Mr. BACHUS. Those people will not get relief and I would ask all 

of you, how do we—there is going to be a natural response that this 

is not fair to those borrowers. 

Ms. BAIR. Right. 

Mr. BACHUS. How would you respond to that? I don’t, I don’t 

really think you can say that, you know, this may be beneficial to 

the community. It is obviously beneficial for those who are in foreclosure. It may be beneficial for the investor. I guess it is just not 

fair for the person who is current on his loan though, is it? 

Ms. BAIR. Well, this is the case with any loan modification. And, 

again, there are no perfect options here. Especially in a declining 

housing market, it is in the best interest of investors who are rescinding the loans to modify as opposed to foreclose because the 

modification value is almost always going to exceed the foreclosure 

value. And it helps protect surrounding neighborhoods and communities because foreclosed homes can have a devastating impact on 

the surrounding property values. 

And given the scale that we are dealing with I am very concerned about a steep spike in foreclosures having a fairly bad impact on our economy as well. So, yes, there is a fairness issue. And 

that is true with any loan modification. 

I have a very conservative fixed rate mortgage. I am making regular payments. I am not going to get any help here. Probably most 

of us in the room have that situation, but we are between a rock 

and a hard place. 

And if the alternative is foreclosure, I think clearly—and I think 

most would agree—we need to modify these loans and do so systematically so it is feasible to get to them all. 

Mr. BACHUS. Thanks. Comptroller Dugan? 

Mr. DUGAN. I would just add that, you know, in most cases it is 

not a matter of stepping up the interest rate and then paying the 

higher interest rate. The way these things were structured, they 

are really 2-year loans or 3-year loans. And when you got to the 

end, the crease was so much that you would refinance into a different loan. Now you are limited in that. 

And I think the notion here is that there will be people, the people who can afford a higher rate are really hopefully the people 

who can afford to refinance hopefully into a prime loan. And that 

rate one would hope will be something that is comparable to whatever the starter rate reset. And in those circumstances it is not unfair I think. 

Mr. BACHUS. I agree. In fact I think that is one, you know, some 

people have raised concern that 5 years you’re kicking the can 

down the road, but in fact, you know, I do not think that is the 

case because in 5 years— 

Ms. BAIR. That should hopefully give most a chance to refinance 

these very high cost loans even at the starter rate. Over half of the 

2006 originations were above 8 percent. So there will be an incenVerDate 0ct 09 2002 18:57 Feb 29, 2008 Jkt 040435 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\40435.TXT HFIN PsN: TERRIE
30

tive to refinance out of them when they can and hopefully 5 years 

will give most borrowers an opportunity to do that. 

Mr. BACHUS. I have one other question if I could. 

There does seem to be a wide disparity between predictions, for instance, Chairman Bair, you talk about of the $1.7 million hybrid 

loans, you say in your testimony that as many as 1.4 million of 

those may be non-performing. That’s a pretty high percentage. At 

least on page 7 and 8 of your testimony as I read it, you talk about 

1.7 million hybrid loans. And then you talk about on page 8 as 

many as 1.4; there is an indication that as many as 1.4 may not 

perform. 

Ms. BAIR. That’s right. They cannot make the reset rate. And 

that is consistent with the past performance of these loans. As I 

also indicate in my written testimony, the 2003 originations of the 

2/28s and 3/27s which have already gone the full reset, only 1 in 

30 of those perform according to the original contract terms at that 

higher reset rate. 

Mr. BACHUS. I know the OTS, Mr. Polakoff, you talk about 

maybe 6 percent of them don’t perform. And, you know, we are 

talking about the vast majority or 6 percent. Of those type loans, 

what percentage of people, borrowers who took those loans are 

going to be able to—are those loans going to be able to perform 

after they reset? Is it 10 percent? Or is it 90 percent? 

Mr. POLAKOFF. Thank you, Congressman. Part of it is a terminology issue. The 10 percent is actually foreclosure. So frequently 

borrowers don’t perform, cure themselves, don’t perform cure. So 

the 10 percent that I offered in my testimony was a projected foreclosure number for 2008 or 2009 absent some systematic way to address the reset. 

Mr. BACHUS. But you agree with the Chairman Bair that a 

much, much higher percentage of that won’t perform or cannot? 

Mr. POLAKOFF. Absolutely. There is a large percent of the borrowers and it is getting worse because the—the late 2005 and the 

2006 underwriting standards were atrocious in some cases. So that 

number is going to get worse. I agree with the Chairman. 

Mr. BACHUS. So obviously, the vast majority of these loans—

some people have said only a small percentage of it, but really a 

vast majority of this type loan can’t perform at the reset. 

Mr. POLAKOFF. Well, of the universe that remains before reset, 

there is still I would say a portion, maybe 25 percent or so, that 

would qualify for some sort of refinance opportunity. 

Ms. BAIR. That’s right. This is just the people who can’t make the 

reset rate. Some subset of these will presumably be able to refinance even in today’s housing market conditions. 

The CHAIRMAN. I am going to have to go vote. Let me ask unanimous consent if I could just ask one other question that’s relevant 

to this. 

What troubles me here is the prepayment penalty. As I understand it says no waiver of prepayment. And that does seem to me 

in the current situation, you know, if they cannot afford the reset 

rate, can they afford a prepayment penalty? Because as I understand it, there is no waiver of prepayment. It is pushed further 

along to the reset but it is not waived. And that seems to me a serious defect here. 

31

Ms. Bair? 

Ms. BAIR. Yes. As I understand it and, again, I haven’t seen the 

final details, but we testified last week in California at Mrs. Waters’ hearing and I believe the ASF testified then that you are extending the starter rate but not the prepayment penalty. So under 

the contract, the prepayment penalty will expire when the— 

The CHAIRMAN. That wasn’t the impression—but if that is the 

case, I am happy—that I got from talking to the Secretary, you 

know, that is what happens when principals start talking substance without staff around. 

I got the impression that it was in effect a tolling of prepayment. 

Ms. BAIR. I don’t think there is— 

The CHAIRMAN. With what you tell me then I am much reassured. 

Mr. KROSZNER. That is our understanding. 

Mr. DUGAN. That is our understanding, as well. 

Mr. KROSZNER. What Chairman Bair said. 

The CHAIRMAN. That the prepayment penalty will be allowed to 

expire? 

Mr. DUGAN. Because the investors want their money back. I 

mean if they get a pre—they are not going to want to— 

The CHAIRMAN. I misunderstood. Then I still have the FICO 

thing, but that’s a major resolution of a problem I had and I would 

hope that—we will ask that that be confirmed that there will be 

no—that the prepayment penalty will expire and at the end of the 

5 years there won’t be a prepayment penalty facing them in terms 

of refinancing. Thank you. Mr. Kanjorski. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

If anyone on the panel wants to grab the issue? Has there been 

any study as to the analogy of the factors here between the 

subprime lenders and credit card borrowers? Are they similar to 

people who are overstretched in their credit card situation? 

What I am interested in is are we starting or going to find the 

methodology here to ultimately bail out credit card lenders from 

the 30 percent or 34 percent oppressive usurious interest rates that 

are out there? Should we look at that issue at the same time as 

we look at this issue? Does anybody want to grab that? 

Mr. POLAKOFF. Congressman, I would offer that approximately 

half of the 2/28 and 3/27 subprime universe we are talking about 

actually was purchase money. And probably about half of that was 

first time purchase money for homeowners. 

Of the remainder we have heard some anecdotal stories about individuals who refinanced and consolidated their credit card date to 

refinance 20, 24, or 30 months ago and now find themselves in a 

situation having difficulty making their mortgage payments and 

difficulty making their credit card payments. 

Mr. KANJORSKI. Well, if we go into the Paulson idea, is that 

going to be exacerbated now by a credit crunch problem? 

Ms. BAIR. I think this will help to the extent you are not further 

distressed. Borrowers are stretched even at the starter rate. So if 

you try to squeeze some additional return and increase the starter 

rate, you are going to be impairing their ability to pay off other 

forms of debt. So I think to the extent this helps relieve borrower 

distress for the category of borrowers that have been identified exVerDate 0ct 09 2002 18:57 Feb 29, 2008 Jkt 040435 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\40435.TXT HFIN PsN: TERRIE
32

tending the starter rate that presumably will leave households in 

a better position to continue servicing other forms of consumer 

debt. 

Mr. KANJORSKI. But if we do that, then, are we going to encourage the holders of the credit cards to increase their interest rates 

to make up for the differential? I mean are we getting a coordinated effort here? Or can we freeze that, too? 

Ms. BAIR. Well, I think the externalities involved with foreclosures have justified perhaps greater government leadership 

though again this is a private sector initiative. Credit card delinquencies are going up, but I don’t see that we are anywhere near, 

and would not anticipate based on current data, the type of situation we are dealing with now. 

And the externalities of credit card delinquencies and defaults 

are—I don’t think you can compare those to foreclosures and homes 

which definitely have negative impacts on surrounding properties 

and economic health. 

Mr. KANJORSKI. So, you are sort of describing something that we 

are not worried about the individual, we are worried about the 

community he lives in. 

Ms. BAIR. Well, I am worried about borrowers, too. I do not want 

to suggest that. But I think we do have to also look at the external 

costs. The jump in external costs are also factors that weigh more 

heavily for greater government activity. 

Mr. KANJORSKI. When you look across the country on foreclosure 

rates, various States seem to have greater amounts and lesser 

amounts. Particularly being from a very conservative State like 

Pennsylvania, I know the last thing in the world you want to do 

is get yourself into a foreclosure mode because of the judgement requirements. You do not really save anything, and all of your assets 

are at the disposal of the mortgage. 

But is it time that we start looking at it? I keep hearing that one 

of the big problems is the California problem, which would not be 

exacerbated at this point if the sales price of real estate was not 

falling significantly at the same time the foreclosure rate was rising. 

As I understand the California law, you can hand in the keys or 

possession of the property and that ends the obligation on the 

mortgage. If we are doing this in order to avoid destruction of communities in California, how is that going to happen? 

Certainly if I were in one of these mortgages and I had maybe 

2 or 3 percent equity in the property to begin with and then the 

market falls 20 percent, why do I want to even keep the property? 

I want to hand it in. 

For a selfish decision, that is probably a smart decision. But, as 

it affects the neighbor or the neighborhood, it could be catastrophic. 

We will really be offering no relief here. 

Ms. BAIR. I think that really goes to the question of consumer behavior. But the modification program is confined to owner-occupied 

properties who have been paying, making regular payments during 

that 2- to 3-year starter period. 

As Scott pointed out, a good section of these mortgages are refinancing so these people—probably at least half if not more—have 

been in their home longer than that 2- or 3-year starter period. 

33

I am not sure the research would show that consumers think in 

those terms. This is their home. They have been in their home for 

many years. And I think they are more focused on their monthly 

payment and their ability to service debt as opposed to looking at 

their home as a speculative investment. At least this category of 

borrowers. 

I think in terms of the Alt-A market, especially the option ARM 

loans, these were investments—loans of choice for those who 

viewed properties as speculative investments and I think the dynamic you’re talking about may be more in play there. 

But the 2/28s and 3/27s are overwhelmingly owner-occupied. 

And, again, people have been in their homes, at least the category 

we’re talking about for modification, at least 2 or 3 years and probably significantly longer because a lot of these are refinancings. 

Mr. KANJORSKI. I look at the hair color of the panel, and I now 

recognize that I cannot call upon the historical knowledge of the 

S&L crisis. 

If you remember in the S&L crisis, that was one of the problems. 

The price of real estate in subdivisions fell so significantly that people were surrendering the keys of their property to their mortgage 

holder for the purposes of acquiring the property across the street 

at half the price. And particularly, again, that happened in California. 

I am just wondering if we thought— 

Ms. BAIR. Well, I think the S&L crisis was heavily driven by 

commercial real estate lending. Residential was less of a factor I 

think. I don’t deny that some of that took place. But I think here 

there are a number of reasons why. People again have been in 

their homes for many years. And that is the category that we are 

dealing with. 

I would want to state that there would also be credit score consequences. There are possibly tax consequences for doing what you 

suggest. In addition, just having to find another place to live assuming the moving cost, you would really devastate your credit 

scores as Mr. Meeks, I believe, indicated earlier, really inhibiting 

your chance to ever get a mortgage again by doing that. So I think 

there are some disincentives to people doing what you suggest. I 

won’t say it won’t ever happen, but I think there are some significant disincentives. 

Mr. KANJORSKI. All right. Thank you, Mr. Chairman, my time 

has expired. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. I sense some degree of 

unanimity amongst all of you and up here that we really should 

try to address this problem if we can. And the question is how, how 

do we do it? That is a matter of some concern. 

I am a sponsor of the H.R. 4178 which has been referred to on 

several occasions with respect to the safe harbor from legal liability, so I am somewhat concerned about that. And I noticed in your 

statement, Mr. Pearce, that you basically indicated that your office 

has been in contact with many loan officers who feel that they will 

be sued by the investors. And it is a question when, not if. That 

is a fairly definitive statement. Can you substantiate that? 

34

Mr. PEARCE. We met with the top 20 subprime servicers and 

each one of them—we went around the room and a number of them 

brought up the fear of investor lawsuits. So, you know, we have focused with our work with servicers on the things they can do within the contracts they have right now. And we still think there is 

a lot of room for improvement in that. 

There is this fear about lawsuits. And I think the two things specifically related to your amendment, the first is, if there is a constitutional issue or question whether this is going to impair contracts, you know, where is—does that create uncertainty that actually makes less modifications happen because people are unsure 

whether it’s legally okay to do a modification or whether it is going 

to get challenged in court. I think other panelists have testified on 

that. 

The second thing which is just a suggestion as you move forward 

with this is making sure that any kind of immunity is limited to 

investor claims. You know, this is about investors suing other investors. 

One of the fears that I have having looked at abusive lending 

practices is in the modification, itself, as Chairman Frank pointed 

out earlier, you know, could prepayment penalties creep back in to 

some of these loans. Could modification fees be increased? There 

are things in the modification moment that I want to make sure 

that your amendment doesn’t unintentionally permit additional 

abusive lending. 

Mr. CASTLE. Thank you. Chairman Bair, you referenced in your 

oral testimony and it’s in your written testimony that the investors 

also benefit by redoing these loans if you will. I think it’s on page 

12 of your written testimony. You went through some details on 

that. 

I thought that was interesting because I came to this hearing not 

being certain how investors might benefit. 

If I understand it correctly, it has been stated by several of you 

that these loans are not necessarily carried out to the next level so 

that that interest rate is not paid at that level, they go out and obtain another kind of loan or something, so they are probably better 

off if I understand it correctly going through the regular payment 

and not a foreclosure in terms of protecting their loans. Is that 

more or less correct? Or do you want to expand on that? 

Ms. BAIR. That is exactly right. And I think there has been a 

good dialogue with the investor community and enhanced understanding of, again, it gets back to weak underwriting. Most of 

these, the vast majority of these borrowers were underwritten at 

the starter rate and stretched at the starter rate. 

For most of them it takes over 40 percent of their gross income 

just to make the mortgage payment at the starter rate. So you are 

looking at people stretched at the starter rate with a 30 to 40 percent payment shock when the reset kicks in. It is going to be a fairly easy determination for many of them. They just, they just simply 

can’t make it. 

But this was, you know, I think this was a good dialogue with 

the investor community and I think the American Securitization 

Forum really deserves a lot of credit for working with their members and clarifying also that the servicer’s obligation is to the pool 

35

as a whole. So you need to look at the economic benefit to the pool 

as a whole. And I think the modification program that people are 

talking about is very consistent with that. 

Mr. CASTLE. Thank you. 

Mr. KROSZNER. On that point, given that industry estimates are 

that foreclosures typically involve a 40 to 50 percent loss, that 

gives a very a strong incentive to find some sort of alternative to 

foreclosure. And so the types of proposals that are being discussed 

by the American Securitization Forum are ways to try to address 

that and we can reduce the cost and get to people sooner before 

that circumstance occurs. That can be beneficial both to the borrower and to the investor. 

Mr. CASTLE. Thank you. One of the reasons I wanted to have this 

hearing is so we could get ideas from you. And Ms. Hyland, you 

put forward several ideas for amendments we could make to my 

legislation from including FHA loans to extending the window to 

12 months or whatever. Do you have any other ideas that you 

didn’t touch on in your testimony you’d like to bring forward? 

Ms. HYLAND. No, sir. Actually, we have included them in our 

comments and in our written testimony. 

Mr. CASTLE. Okay. I appreciate that. I realize there are certain 

limitations and a number of you pointed out certain things that we 

need to pay attention to. Are there any fundamental underlying 

concerns about taking this approach at all that any of you may 

have? 

Comptroller Dugan? 

Mr. DUGAN. I do have a fundamental concern. And there is the 

litigation question and about whether you are getting rid of one 

form of litigation and getting another. And we already spoke about 

that. But I do think you have to weigh the possibility that by retroactively affecting a contract that you will discourage future investment in securities because people will believe that the contracts 

that they enter into can be modified at a later time. And I think 

you don’t do that unless you really, really need to go down that 

path. 

And I guess my question would be given the voluntary nature 

and the agreements that are coming out now and the good faith negotiations and the notion that servicers believe, seem to believe 

that they have a good bit of authority, I just would be asked the 

question at the current time whether the potential costs outweigh 

the potential benefits. 

Mr. CASTLE. Well, let me ask your question. Based on what 

Chairman Bair said earlier about this may actually benefit to be 

able to redo these loans— 

Mr. DUGAN. I think we all agree that modifications can benefit 

investors as well as borrowers if it is less costly than foreclosing. 

I think the question is if you were to do it in a way that cut some 

investors off from lawsuits you have a different set of concerns by 

investors. 

There are some investors who will say this kind of modification 

does not benefit me and it violates the term of my bargain retroactively and it is not fair. And I am never putting my money in 

this kind of thing again. And I think you have to be careful about 

that. 

36

Mr. CASTLE. Thank you. I yield back, Mr. Chairman. 

Mr. KANJORSKI. The gentlelady from California. 

Ms. WATERS. Thank you very much, Mr. Kanjorski. I am interested in trying to get the best possible proposal to help people save 

their homes, and obviously, what I’ve heard about so far only happens to a very small number. And I’m interested in hearing from 

you how we can expand our efforts. 

I referred to you, Ms. Bair, earlier when I gave my opening statement, because when I had my hearing, I heard that you had an 

idea about maintaining the teaser rate in perpetuity, I mean, till 

the end of—and I liked that a lot, and I thought it made a lot of 

sense. I can understand that there’s pushback from, you know, various sources, but still, I don’t think we should give up on the idea 

that we can do better than just have a 5-year period. 

And so what I’d like to ask you is this. It appears that on some 

of these subprime loans, the teaser rates were even 3 to 4 points 

higher than the prime rate, so that if they had reset, they would 

be paying 11, 12, I don’t know, 13 percent on the 2- or 3-year period of time. So, if in fact the teaser rates were very high and they 

got extended over a longer period of time, it seems to me that the 

investors will still be making money. They just wouldn’t make as 

much money. 

And so why can’t we take that into consideration in one of these 

proposals, looking at what the teaser rate was to begin with? Ms. 

Bair. 

Ms. BAIR. Well, yes, we did originally propose that these folks be 

converted into fixed-rate mortgages. Because as you say, the starter—I didn’t even call them teaser rates, because they’re so high—

the starter rates are quite high. But Washington is about compromises. We got some people’s attention with that proposal, but 

after further discussions, the 5-year benchmark seemed to be 

where we could get agreement, where there was greatest comfort 

among both investors and servicers. 

I will tell you that I don’t think it was a huge concession, because as a practical matter, these loans are high cost even at the 

starter rate, when borrowers can refinance out of them, they will. 

So I anticipate this 5-year term will give the vast majority of those 

who have been modified to refinance out into something lower cost, 

so that the overall duration of these loans probably will still be 

around 5 years. So, that is where the consensus was reached. But 

I do think it will give sufficient breathing room to folks to be able 

to refinance out. 

Ms. WATERS. Well, I’m not going to give up on that, but I appreciate what you said about, you know, how you have to try and compromise. 

The other thing I’d like to ask you is this. It seems that some 

of the considerations for whether or not the loan is going to be 

modified has to do with credit ratings and some other things. I am 

focused on the fact that many of these loans were given knowing 

there was weak credit. Many of these loans were no-doc loans. 

Now why is it—and the modification of these loans all of a sudden, we’re going to have such different standards than we had 

when we extended the loan in the first place? And if it was a nodoc loan, for example, okay, so you want to get some information 

37

and find out who you lent this money to, that’s okay. But why 

would that person be penalized because you now find out information about them that you should have been vetting before? 

Ms. BAIR. Again, I have not seen the final details to be revealed 

by Treasury this afternoon. As I understand it, though, the FICO—

well, let me say this. In guidance the FDIC and the CSBS issued 

some time ago with other agencies on loan modifications, we added 

a sentence suggesting a DTI analysis for determining ability to 

repay. 

So I think DTI is another way, debt-to-income ratio is just another way to look at this that may more closely approximate ability 

to support the debt service. As I do understand it, though, the 

FICO is just an initial screen. If the FICO is below the 660 benchmark, I believe, no income verification is needed. But if you miss 

that, if it’s over, you can still get a fast tracked loan, but the 

servicer is going to go in and redocument your income. So, I think 

there is still some flexibility and that the detailed income documentation is not required for the lower FICOs. As I understand it, 

that’s the way it’s supposed to work. Again, I have not seen the 

final plan. 

Ms. WATERS. All right. Let me just ask quickly, Mr. Kroszner, 

who is a Governor, Board of Governors of the Federal Reserve, I’m 

told that the Federal Reserve was supposed to issue regs on mortgage underwriting standards, and it was never done. Why not? 

Mr. KROSZNER. We have made a commitment, as the Chairman 

of Federal Reserve, Ben Bernanke, did in testimony in July, to 

issue these rules by the end of the year. I have said in my oral remarks here that within the next 2 weeks we will be issuing proposed rules on HOEPA, and so we will definitely being doing that 

and fulfilling our promise. 

Ms. WATERS. What about loss mitigation? Who can talk to me 

about what the banks are doing with loss mitigation, whether or 

not they have departments. I’m told that many of them say they 

have loss mitigation departments but they have offshore companies 

they have contracted with, and people who are seeking some help 

cannot get returned telephone calls. They don’t have any help on 

loss mitigation. Who knows anything about this? Not the regulators surely. That’s something I shouldn’t ask you guys. 

Ms. HYLAND. Congresswoman— 

The CHAIRMAN. Yes, sir? 

Ms. HYLAND. Go ahead, please. 

Mr. PEARCE. Ladies first. 

Ms. HYLAND. Thank you. Congresswoman, from the credit union 

standpoint, we have information in the regulatory system that 

credit unions are reaching out to their members that may have 

these types of loans and offering financial literacy counseling and 

other types of efforts to try to put them in loans that are affordable. 

Mr. PEARCE. Having—part of the reason why the State attorneys 

general and State regulators had these meetings with the top 20 

subprime servicers was that there is this disconnect between the 

‘‘We will do anything to prevent foreclosures,’’ and the reality that 

homeowners are experiencing challenges in saving their homes. 

And some of that is just built into the system that servicers have. 

38

Servicing is intended to be a debt collection practice. It collects payments and get it to investors as quickly as possible. 

Ms. WATERS. So there is no loss mitigation activity? 

Mr. PEARCE. So loss mitigation activities have developed in all 

sorts of institutions, but they’ve been relatively small and a last resort for loans that, you know, have some unusual problems. In fact, 

if you look at the evidence, there’s been very few loan modifications 

in any of these somebody loans prior to the last 6 months. It just 

didn’t happen. 

And so, you know, servicers that we’ve met with I think are making energetic efforts to add staff and do things to make loan modifications easier. However, it’s still at the bottom of the waterfall. 

It needs to be sort of at the top so that people can get that option 

quickly for those that need it. 

Ms. WATERS. And quickly, I understand that the servicers are 

charging fees for loan modifications? 

Mr. POLAKOFF. Congresswoman, I don’t believe that’s accurate. 

It’s actually part of the pooling and servicing agreement that requires the servicers to modify the loans when the net present value 

is beneficial to the trust. That’s part of the fee that they generate 

as being a servicer. So, at this point I’m not aware of any servicers 

that are collecting an additional fee. 

Ms. WATERS. Thank you very much. 

Mr. KANJORSKI. We’re down to the last 5 minutes. We have a bit 

of a problem. Ms. Bair, you have been promised that you’ll be allowed to leave by 1:15? All of you have that commitment? 

Ms. BAIR. The Treasury announcement is at one, so— 

Mr. KANJORSKI. Okay. There’s a general revolt. 

Mrs. MALONEY. I’ll miss the votes if I can ask a question. 

Mr. KANJORSKI. Okay. Well, will you surrender to take the chair, 

then? 

Mrs. MALONEY. Sure. 

Mr. KANJORSKI. Okay. Mel, did you want to continue while we’re 

voting? 

Mr. WATT. I don’t want to continue while we’re voting, but I do 

think this is perhaps the most important panel on this issue, because we get some really good inside information. And I do have 

some important questions to ask about Mr. Castle’s bill. So maybe 

I can propound those questions in writing. I don’t want to hold people here for that purpose, and I don’t want to miss a vote, either. 

So I’ll just play it by ear and see where we are. 

Mr. KANJORSKI. We’re down to the last 5 minutes. 

Mrs. MALONEY. [presiding] Okay. Thank you. Today the Mortgage Bankers Association released statistics showing that the rate 

of foreclosure statistics and the percentage of loans in the process 

of foreclosure are the highest ever. And so we are really not at a 

time for half-measures. 

I want to congratulate Chairwoman Bair for her leadership in 

coming forward with really many good ideas during this crisis, and 

really giving government and regulators guidance in it. But as my 

colleagues have pointed out, you originally had a proposal that 

would have included more homeowners in the loan modifications, 

and what changed you or persuaded you to go along with the narrower proposal? The statistics from the mortgage bankers today 

39

shows that it is the highest ever, and we really need to cover more 

people. 

Ms. BAIR. Well, I haven’t seen the details of the final plan. And 

as I understand it, what will be revealed this afternoon will undergo some further refinements. So, I do think, as I understand it, 

though, it pretty much tracks what we had suggested, which was 

fast tracking those 2/28s and 3/27s that are current, owner-occupied, can’t make the reset and can’t refinance, they will get an extension of their starter rate for 5 years. And the 5 years was a bit 

of a compromise, but, again, I think that will give borrowers plenty 

of time. 

So I think it is, it’s a very positive step forward. And this is a 

collaborative consensus-building process, and I really am greatly 

appreciative of Secretary Paulson for taking the lead the way he 

did, and working with the industry to get this agreement. 

Mrs. MALONEY. Also, Chairwoman Bair, the Administration is 

not proposing any liability safe harbor for the servicers who modify 

loans. And without that, do you think servicers will risk getting 

sued for loan modification? 

Ms. BAIR. Well, I think there has been a lot of talk about that, 

but, again, I think with the attention drawn to this, the universal 

call for systematic modifications and the work of the American 

Securitization Forum to develop best practices and systematic 

modifications will help that process. 

So I think that is really one of the things, one of these reasons 

we’re doing this is to establish consensus that this needs to be 

done. It is in investors’ best interest to do it, and some best practices on how to do it will help protect servicers as they modify these 

loans in scale. 

Mrs. MALONEY. Do you think that we need legislation like the 

Castle bill to help solve this problem? 

Ms. BAIR. I really don’t. I think the current legal authorities are 

sufficient. Again, if you do, I think it would be important to craft 

it so that it’s clearly just a clarification of current law and not any 

suggestion of abrogating current contractual provisions. We offered 

some technical language to Congressman Castle for his consideration, but I do think the legal authority is already there, and the 

legislation really is not necessary. 

Mrs. MALONEY. And I’d like to ask Governor Kroszner, in my 

view, the prepayment penalties, especially in the subprime mortgages, have been really unfair and abusive. And as you know, the 

House bill would ban prepayment penalties in subprime loans an 

amendment that I added on the Floor would limit them and ban 

them in prime mortgages as well. 

But I understand the Fed could regulate prepayment penalties 

by rule, and do you anticipate doing that in your upcoming rules? 

Mr. KROSZNER. This is precisely one of the areas that we have 

been looking at. When I held the HOEPA hearing in the summer, 

we focused on this issue, and that is one of the areas that we will 

be addressing in our rules that we’ll be coming out within 2 weeks. 

Mrs. MALONEY. Within 2 weeks? That’s great. And also, we went 

through a period where we had a great activity in lending, our 

economy was very liquid, and now loans have just—and lending 

has dried up. And I would just like to hear any ideas from the 

40

panel of how to get liquidity back into the marketplace and to get 

lending moving and to get our economy churning again. Just any 

ideas today or in writing. That’s one of the things that we confront. 

And I thank everyone for your testimony. Any ideas in that respect? 

Ms. BAIR. Well, I would just say I think in times like these, deposit insurance plays a very important role, because it helps support the ability of banks to access deposit funding to make loans, 

to make credit available. So I think that is part of it. And in fact—

deposits are providing an important source, an increasingly important source of funding for credit extension. 

Mrs. MALONEY. Okay. I have to run and vote. Put your ideas in 

writing. The Chair notes that some members may have additional 

questions, and they may wish to put them in writing. 

We will now be in recess until the end of this series of floor 

votes, and at that time, we will convene with the second panel. 

I want to thank all of you for your hard work and your excellent 

testimony today. We stand in adjournment. 

[Recess] 

Mr. KANJORSKI. [presiding] The committee will come to order. 

The next panel consists of: Tom Deutsch, deputy executive director, 

American Securitization Forum; Faith Schwartz, executive director, 

HOPE NOW Alliance; Hilary Shelton, director, National Association for the Advancement of Colored People; Damon Silvers, associate general counsel, AFL–CIO; and Richard Kent Green, Oliver 

T. Carr, Jr. Chair of Real Estate Finance at the George Washington School of Business, George Washington University. 

Mr. Deutsch. 

STATEMENT OF TOM DEUTSCH, DEPUTY EXECUTIVE 

DIRECTOR, AMERICAN SECURITIZATION FORUM 

Mr. DEUTSCH. Good morning, and thank you for the opportunity 

to testify here today. I’m honored to be here representing the 

American Securitization Forum on actions that mortgage market 

participants can undertake to help prevent mortgage foreclosures 

and mitigate losses. 

As a side note, the American Securitization Forum is a broadbased, not-for-profit professional forum that advocates on behalf of 

the interests of not only all institutional investors, but also 

servicers, issuers, financial intermediaries, trustees, rating agencies, financial guarantors, legal and accounting firms, mortgage insurers, data analytics vendors and other firms, all in the 

securitization marketplace. So please note that my remarks are not 

only on behalf of servicers but also of investors as well, who have 

both come to agree on a number of pieces of a framework that will 

be announced shortly this afternoon. 

As a general matter, no securitization market constituency—including lenders, servicers, or investors—benefit from subprime 

mortgage loan defaults and/or foreclosures. Foreclosures are nearly 

always the most costly means of resolving a loan default. As a result, it is typically the least preferred alternative for addressing a 

defaulted loan, whether or not the loan is held in a securitization 

trust. The ASF therefore strongly supports the policy goal of avoidVerDate 0ct 09 2002 18:57 Feb 29, 2008 Jkt 040435 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\40435.TXT HFIN PsN: TERRIE
41

ing foreclosures wherever possible and reasonable alternatives 

exist. 

A basic principle underlying the servicing of subprime mortgages 

or subprime loans in securitization transactions is that for those 

who are unable is that—it’s according—their service according to 

their contractual terms and to maximize recoveries and minimize 

losses on those loans. This principle is embodied in the contractual 

servicing standards and other provisions that set forth the specific 

duties and responsibilities of servicers in securitizations. 

In turn, these contractual provisions are relied upon by investors 

in mortgage-backed securities, who depend primarily on the 

cashflows from the pooled mortgage loans for their return on their 

investment. This is a critical point that I’ll address later in the testimony. 

The servicing of subprime mortgage residential loans included in 

securitization are generally governed by a pooling and servicing 

agreement, essentially, a PSA. This is the contract associated with 

securitizations. And servicers are bound by these contracts to follow accepted servicing practices and procedures as they would employ in their good faith business judgment, and that are normal 

and usual in their general mortgage servicing activities. 

Most subprime securitization transactions authorize the servicer 

to modify loans that are in default or for which default is imminently or reasonably foreseeable. This is an important point, as it 

is associated with both REMIC tax law as well as FAS 140 considerations. Contractual loan modification provisions ion 

securitizations typically also require that the modifications be in 

the best interest of the security holders. 

Servicers of mortgage loans in the current environment, given 

market conditions, evolving market conditions, and many of the 

changes that we’ve seen, have redoubled their efforts to both help 

borrowers to avoid foreclosure, and to minimize losses to 

securitization investors. Most servicers have developed and are implementing procedures to reach out to hybrid ARM borrowers well 

in advance of their interest rate reset in an effort to identify and 

prevent potential payment problems before they occur. 

Let me talk a little bit about what’s currently going on in the industry and many of the discussions that we’ve had as of late, and 

what will be announced shortly this afternoon. The application of 

loan modifications and other loss mitigation techniques to distressed or potentially distressed subprime loans has received intensive focus from servicers in the broader securitization market as 

well as policymakers and regulators. 

Working with a broad range of industry members—again, including servicers, investors, issuers, financial intermediaries, and others—the ASF has taken concrete steps to facilitate wider and more 

effective use of loan modifications in appropriate circumstances. 

Last June we published recommended industry guidance designed to establish a common framework related to the structure, 

interpretation and application of loan modification provisions in 

securitization transactions. This document concludes that loan 

modifications for subprime mortgage loans that are in default or for 

which default is reasonably foreseeable, are an important servicing 

42

tool that can often help borrowers avoid foreclosure as well as minimize losses to securitization investors. 

ASF also released guidance supporting the view that borrower 

counseling expenses may be viewed as servicing advances, and 

where consistent with operative securitization documents, can be 

reimbursed from securitization trust cashflows, effectively creating 

additional funds for counselors working with borrowers to help resolve troubled loans. ASF’s statement should be very important in 

addressing some of the funding needs of many counseling organizations. 

Maybe let’s skip down to in response to the challenges and the 

many suggestions about the industry’s efforts, that the ASF is releasing later on this afternoon a framework of looking at 

securitized loans, of segmenting borrowers into different groups, 

and of addressing both the needs of servicers in most efficiently effectuating loan modifications, as well as the needs of borrowers in 

being able to stay in their homes and avoid foreclosure. 

We have developed a criteria by which servicers can systematically evaluate the subprime ARM portfolios for the purpose of efficiently segmenting loans and borrowers to identify various potential loan disposition options. We will also announce development of 

two analytic tools and methods that servicers can apply on a more 

systematic and streamlined basis to evaluate loan affordability, 

borrower capacity and willingness to repay, and other factors that 

are relevant to decisionmaking regarding refinancing opportunities. 

I should note in particular one of the suggestions earlier by 

Chairman Frank was related to prepayment penalties. This framework will address prepayment penalties specifically. Any time a 

loan modification is done, and in particular where it’s done for 5 

years, nearly all prepayment penalties expire at the reset, which 

in a 2/28 or 3/27 is after the first 2 or 3 years. If you modify a loan 

beyond the existing payment, beyond the existing rate, those prepayment penalties expire as that rate resets. Hence, there is no 

prepayment penalty. They don’t effectively stick around until the 

modification ends. 

Also, in terms of refinancing opportunities, the refinancing, as we 

suggest in our guidance, will be done or should be done as close or 

as near as possible to the reset time, again, avoiding any prepayment penalties and making borrowers easier to afford their loans. 

The purpose of all of this effort has been to assist servicers in 

their efforts to streamline their loan evaluation procedures and to 

expedite their decisionmaking process. While this effort is designed 

to streamline these decisionmaking processes, it preserves the essential requirement that loan affordability and maximization of recovery to investors must be determined on an individual loan-byloan basis, including through which the systematic application of 

reasonable, presumptive criteria in appropriate circumstances really make it work faster, quicker, more efficiently for servicers. 

Again, loan-by-loan analysis is still done, but with more simplified and creative metrics. 

Finally, let me address the Emergency Mortgage Loan Modification Act of 2007 that would create a safe harbor from liability for 

servicers or others who modify certain types of residential mortgage loans. 

43

As a general matter, we have significant concerns with any legislation that would abrogate or interfere with the previously established private contractual obligations. Changing this standard 

would alter the commercial expectations of investors and could undermine the confidence of investors in the sanctity of agreements 

which are central to the process of securitization. 

Therefore, we would like to continue to work with Representative 

Castle and this committee to determine if additional steps may be 

necessary or helpful to address any legal, regulatory, accounting, or 

other obstacles to the delivery of loan modifications and other loss 

mitigation relief to borrowers, pursuant to industry-developed 

frameworks, including the streamline approach that will be outlined in more greater detail later today. 

Chairman Frank and distinguished members, I thank you very 

much for the opportunity to participate in today’s hearing. We believe that the interests of the secondary mortgage market and 

those participants continue to be aligned with borrowers, community and policymakers to prevent foreclosures. To that end, ASF 

stands ready to assist and commend your leadership on these important matters. 

Thank you very much. 

[The prepared statement of the American Securitization Forum 

can be found on page 160 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Deutsch. And now 

we’ll have Faith Schwartz, executive director, HOPE NOW Alliance. Ms. Schwartz. 

STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, 

HOPE NOW ALLIANCE 

Ms. SCHWARTZ. Thank you, Congressman Kanjorski. Mr. Chairman, Ranking Member Bachus, and committee members, thank 

you for having me and HOPE NOW come and testify today. My 

name is Faith Schwartz. I am the executive director of the HOPE 

NOW Alliance, and I am here to talk to a liability about the unprecedented joint industry and nonprofit national initiative to 

reach out to at-risk borrowers and find solutions to prevent foreclosure. 

In this role, I work to coordinate the efforts of all of our industry 

and nonprofit partners. HOPE NOW has been in existence since 

October 10th, a little less than 2 months, formed at the encouragement of the Department of Treasury and HUD, and built on the 

efforts that you and other Members of Congress have encouraged 

us to undertake, HOPE NOW has established a coordinated national approach among servicers, investors, and counselors to enhance our ability to communicate with borrowers and to offer them 

workable options to avoid foreclosure. 

On November 13th, loan servicers who are in HOPE NOW, their 

members agreed to a statement of principles to help distressed 

homeowners stay in their home. These principles are to reach out 

to all 2/28 and 3/27 borrowers at a minimum of 120 days prior to 

ARM reset to educate them about the product in ARM and potential interest rate they may be resetting to. 

An important announcement was also made that they agreed to 

establish a single port of entry for all third-party credit counselors 

44

who are working with their borrowers to come into the company so 

they have a single port of entry through a 1–800 number. In addition, they agreed to have faxes and e-mails available for a single 

port of entry so they won’t get lost in the system in the servicing 

companies, and we think this is a great step forward. We are currently proactively implementing those principles as we speak. 

As of November 19th through November 30th, the HOPE NOW 

servicers also agreed to mail out to the most at-risk customers a 

letter to their borrowers on HOPE NOW letterhead, to encourage 

them with a 1–800 number to call their servicers. As you probably 

know, one out of two people who go to foreclosure never talk to 

their servicers. So this is an attempt to reach the most at-risk segment. 

Three hundred thousand letters were sent out, and we’ll soon 

know how that worked. In December, we’ll have a repeat mailing 

with additional borrowers, and in there we will add the 1–888–

995–HOPE hotline number, which will offer them another solution 

and come through a third-party credit counseling agency, monitored and operated by the Homeownership Preservation Foundation. That group directly connects the homeowners with a HUD 

certified nonprofit counseling agency whose counselors will have direct access to lenders and servicers through a single port of entry. 

Very quickly, the homeowners HOPE hotline, 1–888–995–HOPE, 

has already been quite a success. Since 2003, it has received over 

300,000 calls and counseled over 130,000 homeowners. Calls are increasing dramatically to this hotline. In October there were 22,000 

calls to the hotline and it produced over 10,000 counseling sessions. 

As of November 30th, the HOPE hotline had received almost 

150,000 calls in 2007. And these calls have led to 67,000 counseling 

sessions. 

As you also know, NeighborWorks America’s national network of 

more than 240 community-based organizations in 50 States, which 

is part of the HOPE NOW Alliance, and it’s actively providing inperson counseling services to consumers today, as are many other 

counseling groups. Tomorrow, NeighborWorks and other HOPE 

NOW Alliance members will meet with HUD and other counseling 

intermediaries to review ways to include the grassroots counseling 

groups as well into our effort. 

You’ve asked us to come here today to talk a little bit about accelerated loan modifications. Loan modifications are a solution for 

borrowers who have the ability to repay a loan and a desire to do 

so and keep their home but may need some help in doing so. Loan 

modifications are not the only solution, and in many cases, refinancing, forbearance, repayment plans provide borrowers a more 

appropriate option. 

HOPE NOW members have been working very closely with 

American Securitization Forum. Many of the same members are in 

both groups, and their investor members, to identify categories of 

subprime ARM borrowers who can benefit from a workout solution. 

We are working to develop a triage system in advance of a reset 

solution for borrowers who would qualify for refinancing, loan 

modifications and other workout options. The key is to allow the 

servicers to have a system to offer options to borrowers in a manner that does not violate the pooling and servicing agreements with 

45

investors. Servicers need to be confident that the investors will accept and support more far-reaching loan modifications and other 

workout solutions and will not engage in a series of lawsuits that 

can only slow down the effort to assist targeted borrowers. 

It’s important the markets recognize that this approach is needed 

to avoid unnecessary foreclosures that could exacerbate the housing 

market downturn, further erode the value of existing mortgage securities, but most importantly, keep people in their home. 

The three areas being looked at are to look first at the refinancing. There are a large amount of current 2/28 and 3/27 loans 

that will be eligible for agency refinancing, FHA, or FHA secure 

type of financing. It’s important to note that in 2007 alone, 500,000 

of these loans have refinanced. 

For the loan modification, the second category, the segment of 

borrowers includes those with good payment records but who will 

not quite qualify for the refinancing. They’re candidates for streamlined loan modifications in this category, and if they can’t refinance, borrowers will be offered a modification, and the details of 

that will soon be announced. I am not completely familiar with all 

of the details of that at this time, but I will be at some point later 

today. 

And then loss mitigation was something other discussed, so we 

talked about the current set of circumstances with borrowers who 

are current, pre-reset and can’t afford the reset. And then there are 

borrowers who are already delinquent, and there would need to be 

some options for that category. 

Mr. Chairman, it’s important to note that a streamlined, scalable 

solution for current borrowers facing a reset will allow for more detailed attention to the at-risk, hard-to-reach and delinquent borrowers, the borrowers that we’re reaching out to through letters to 

try to get us in the door to the servicing shops. 

We are committed to an aggressive system of finding solutions 

for borrowers. As part of that system, HOPE NOW will track and 

measure outcomes. We will develop measures of trends in delinquencies, resolution outcomes, reinstatement workouts, repayment 

plans, modifications, short sales, and foreclosure. The intent is to 

develop consistent and informative data reports based on a common definition and to develop information that provides insights 

into the nature and the extent of the current mortgage crisis and 

helps in the development of workable solutions that avoids foreclosure wherever possible. 

I would just like to note that we have some testimony on H.R. 

4178 that I’d urge you to look at, and we appreciate the goal in 

Congressman Castle’s legislation and feel it brought us all talking 

about the issue, and that was an important step forward. 

So thank you for inviting us to participate. 

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

191 of the appendix.] 

Mr. KANJORSKI. Thank you, Ms. Schwartz. 

We will now hear from Hilary O. Shelton, director, Washington 

Bureau, National Association for the Advancement of Colored People. Mr. Shelton? 

46

STATEMENT OF HILARY O. SHELTON, DIRECTOR, WASHINGTON BUREAU, NATIONAL ASSOCIATION FOR THE ADVANCEMENT OF COLORED PEOPLE 

Mr. SHELTON. Thank you, Congressman Kanjorski. And I want 

to thank Chairman Frank for once again inviting me here today to 

talk about predatory lending and some of the initiatives your committee is undertaking to help alleviate the problems associated 

with predatory lending and to ensure that we are never faced again 

with a foreclosure crisis similar to what we are looking at today. 

I would like to also take this opportunity to once again thank the 

chairman, as well as Congressman Miller, Congressman Watt, and 

the other members of the committee who have worked so hard and 

for so long to address this problem. Your drive, your initiative, and 

your commitment are deeply appreciated. 

As many of you know, my name is Hilary Shelton and I am director of the NAACP’s Washington bureau. We are the public policy 

and advocacy arm of the nation’s oldest, largest, and most widely 

recognized grassroots-based civil rights organization. 

And I have said it before: Predatory lending is unequivocally a 

major civil rights issue. As study after study has conclusively demonstrated, predatory lenders target African Americans, Latinos, 

Asians and Pacific Islanders, Native Americans, and the elderly 

and women at such a disproportionate rate that the effect is devastating to not only individuals and families but entire communities as well. 

Predatory lending stymies families’ attempts to build wealth, 

ruins people’s lives, and given the disproportionate number of minority homeowners who are targeted by predatory lenders decimates entire communities. 

Because predatory lending is so important to the NAACP and 

our members in the communities we serve, we have been actively 

involved in the predatory lending debate here on Capitol Hill and 

throughout our country. As such, we worked closely with you, 

Chairman Frank and Congressman Miller and Congressman Watt, 

among others, for the development of H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007. And while we supported the bill with amendment throughout the process, we were, 

like most people, disappointed with the final product that passed 

the full House. 

Specifically, we had hoped that the bill would have been improved through the amendment process to provide stronger penalties for lenders who break the law and remedies for the victims 

of predatory lending. We also need to ensure that any final Federal 

product is the minimum standard, allowing States to continue to 

be even more aggressive in eliminating predatory lending and protecting homeowners. 

Thus, we strongly supported amendments offered during the 

floor consideration that would have increased the penalties on individuals or businesses which practice predatory lending. We also opposed amendments that would have weakened key provisions, including the very important anti-steering provisions, the renters 

protections, the prohibition of prepayment penalties in the 

subprime market, and the prohibition on the use of yield spread 

premiums in the subprime market. 

47

We also ardently opposed and shall continue to work against any 

Federal preemption of State law which limits an individual State’s 

ability to respond to local or regional anomalies which may adversely affect their residents, as well as new predatory practices 

which may threaten legitimate homeownership after enactment of 

this Federal law. 

We were dismayed to see that many of the amendments we supported were defeated, and hope to work with the Senate to ensure 

that if and when strong anti-predatory lending legislation becomes 

law, that breaking the law does not become simply the cost of doing 

business. 

Which brings us to the pattern and practices amendment. As 

Chairman Frank stated on the House Floor during the consideration of H.R. 3915, the amendment that was offered was developed 

in a hurry and needed much more consideration. We applaud the 

chairman for his efforts to bring more accountability to the 

securitizers, and we also appreciate his foresight in withdrawing 

the amendment and holding the subsequent hearing to look more 

thoroughly into this issue. 

While we support the goals and the premise of the amendment, 

we do have some concerns about the implementation of any resulting law. 

First of all, and perhaps most importantly, we do not support allowing this pattern and practices provision to be preempted. We believe that every individual should be able to bring a private right 

of action against anyone and everyone involved in predatory lending. 

Secondly, the NAACP has expressed concerns over the last few 

years about the inaction of several Federal agencies when it comes 

to to launching investigative or prosecutory efforts involving civil 

rights violations. Our concern about the tough pattern and practices provision would be that it must be followed up with action by 

the regulators or it is really of little use. 

Finally, Mr. Chairman and members of the committee, the 

NAACP has some concerns about the amounts prescribed in the 

amendment for fining companies found to be in violation of a pattern and practice of predatory lending. To the NAACP as well as 

most Americans, I believe that $1 million plus $25,000 for each bad 

loan would be enough to stop us from even considering breaking 

the law. 

Yet we all know one of the biggest subprime lenders paid $425 

million in a settlement and didn’t blink. Thus, we must ask how 

much this will make the industry sit up and take notice? We don’t 

know the answer to the question, but I suspect it is larger than any 

of us can fathom. 

So I want to thank you again, Chairman Frank, Congressman 

Miller, Congressman Watt, and the other members of the committee for your aggressive response to the predatory lending problem facing our Nation and for your continued diligence on this 

issue. I look forward to continuing to work with you to ensure that 

more homes are not lost to foreclosure either in the near future or 

in years to come. 

The attack by subprime lenders on communities of color across 

the Nation is not only a moral disgrace and ethical shame, it 

48

should be clearly illegal. With your help, we will ensure that it is. 

Thank you, and I welcome your questions at this time. 

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

205 of the appendix.] 

The CHAIRMAN. Next, Damon Silvers, the associate general counsel of the AFL–CIO. 

STATEMENT OF DAMON SILVERS, ASSOCIATE GENERAL 

COUNSEL, AFL–CIO 

Mr. SILVERS. Good afternoon, Chairman Frank. Thank you very 

much for the opportunity to appear today. My name is Damon Silvers, and I am an associate general counsel for the AFL–CIO. I am 

here on behalf of our newly elected executive vice president, Arlene 

Holt Baker, who could not be here due to the death of her mother. 

Everywhere that Arlene has been in her new position in the last 

several months, union members and union local leadership have 

expressed the view that the subprime crisis is becoming the single 

most significant economic problem facing our country. The labor 

movement believes our country faces an urgent financial crisis that 

is threatening to spread into a full-blown recession, threatening not 

only housing, but the stability and health of the broader capital 

markets and jobs of working Americans. 

In the last week we have heard from hundreds of AFL–CIO 

members who are living in fear of losing their homes. One example 

is Kimberly Somsel of Westland, Michigan, an unemployed single 

mother facing foreclosure due to a ballooning 2/28 loan payment. 

She is selling the family car and her furniture just to get by. And 

most telling, in relation to what this committee is looking into, five 

houses on her block are threatened with foreclosure. She is literally 

one in millions. And this crisis is happening now in our communities. 

The AFL–CIO believes that policy, public policy, must be oriented here toward achieving four things immediately. 

The first is a moratorium on foreclosures on subprime loans until 

a viable loan restructuring program for the vast majority of the 

holders of these reset mortgages is not only in place but has been 

given a chance to work, and what will necessarily be in many cases 

individualized solutions are given the time to be worked through. 

We believe such a moratorium would be something in the range of 

6 months to a year. 

Secondly, there must be a long-term loan restructuring program. 

We agree with the original FDIC position that 30 years at the teaser rates is the appropriate solution. 

Third, we must reward restructurings and not foreclosures. 

Therefore, servicers must be encouraged or, if necessary, compelled 

to step away from servicing agreements that reward foreclosing 

rather than restructuring loans. 

Fourth, transparency: Mortgage servicers must commit to publicly reporting, company by company—and that is the key point—

how many subprime loans they are servicing, how many have been 

reset, how many have been restructured, and how many foreclosures are occurring and where. 

And fifth, outreach: With all respect to the efforts of the HOPE 

NOW group, we believe that many of the borrowers here suffer 

49

from significant mistrust of the lending community, and that outreach would best be done at least in collaboration with Federal 

Government agencies so that it is clear that the people who are 

doing the outreaching are not trying in some fashion to again take 

people’s homes. 

These recommendations flow directly from the AFL–CIO’s recent 

successful experience with the mortgage crisis associated with Hurricanes Rita and Katrina in the Gulf. Immediately following those 

storms, the mortgage industry offered hurricane victims 90 days of 

forbearance. At the end of the 90 days, the AFL–CIO helped bring 

together bank regulators, led by the FDIC, community advocates in 

the Gulf and nationally, and the entire community of mortgage 

lenders and secondary market participants. 

In those meetings, the community advocates and the labor movement asked for a one-year forbearance on mortgages in the Gulf 

and a moratorium on foreclosures. And although there was no formal understanding beyond, again, another short-term moratorium, 

there were a series of informal understandings and working relationships that came out of those meetings that led to an effective 

one-year foreclosure moratorium in the Gulf. 

And although there have been foreclosures in the Gulf since that 

time and since the hurricanes, the wave of mass foreclosures widely feared at the end of 2005 never occurred. The credit for that fact 

goes to all the participants in the dialogue, but the key point was 

that the demand to have an explicit moratorium was made, and we 

believe tacitly accepted by the industry. 

Now, in putting forth this agenda for immediate action, the 

AFL–CIO recognizes that much good work has been done to protect 

homeowners in the housing market going forward. The AFL–CIO 

supports this committee’s work to give homeowners more protections through H.R. 3915. However, we strongly urge Congress to 

ensure that on final passage, that bill provides for meaningful multiple avenues for enforcing consumer protection standards, including, at a minimum, the right for a State attorney general to enforce 

its standards. 

The AFL–CIO also strongly urges Congress moving forward to 

quickly pass this committee’s bills, strengthening the FHA and creating a low income housing trust fund, and improving the regulations of the GSEs, as well as moving forward on Senator Durbin’s 

bill that gives bankruptcy judges the authority to restructure home 

mortgage loans in personal bankruptcy and its House companion, 

H.R. 3609. We also favor tax relief for mortgage holders who get 

concessions from their lenders. 

Now, the Administration’s reported deal this afternoon with the 

mortgage industry appears to go part of the way toward a loan restructuring program, although it appears to apply to far too few 

borrowers—according to today’s New York Times, perhaps only 12 

percent of those facing resets. 

However, for this program to work properly, it needs to be paired 

with the foreclosure moratorium we are urging, firm-by-firm reporting, and government outreach to borrowers. Otherwise, we fear 

that the Administration’s program will turn into one more piece of 

lip service to the notion of restructuring loans, where the reality 

50

is that a variety of financial incentives drive firms toward the 

worst possible solution, which is foreclosure. 

Some say, let working people suffer. Markets left alone will get 

it right in the end. Yet somehow there is always help in these situations for the well-connected. Cheap money for the banks, severance packages for their failed executives, billions in bonuses for the 

investment bankers who structured the mortgage deals, while 

workers, single women who are heads of household, people of color, 

and the retired are treated as just so much collateral damage. But 

this time the reality is that we as a Nation must act to help the 

people who really need the help because the alternative is not just 

injustice, it is a genuine economic crisis. 

The AFL–CIO hopes that as you have led so far, Chairman 

Frank, you will continue to bring business and regulators together 

to make real the program we have outlined. In particular, I would 

note that the four points of our program should be at the center 

of any kind of trade around litigation issues. We stand ready to 

work with you to ensure the American dream of homeownership 

and an economy that works for all. Thank you. 

[The prepared statement of Mr. Silvers can be found on page 208 

of the appendix.] 

The CHAIRMAN. Now, Dr. Richard Kent Green, the Oliver T. 

Carr, Jr. Chair of real estate finance at the George Washington 

School of Business. 

STATEMENT OF RICHARD KENT GREEN, OLIVER T. CARR, JR. 

CHAIR OF REAL ESTATE FINANCE, GEORGE WASHINGTON 

SCHOOL OF BUSINESS, GEORGE WASHINGTON UNIVERSITY 

Mr. GREEN. Chairman Frank, and members of the committee, 

thank you for inviting me to testify today. My name is Richard 

Green, and I am the Carr Professor of real estate and finance at 

George Washington University. 

Let me begin by saying that my thoughts on the subprime crisis 

have evolved considerably over the past year. Last March, I was 

quoted rather embarrassingly in Newsweek as saying that I 

thought the damage arising from the subprime mess would be limited. I was clearly wrong. And so as events have changed, my 

thoughts on appropriate policy responses to the crisis have changed 

as well. 

Mass loan modification is one example of how my views have 

changed. Not so long ago, I worried that if contractual loan terms 

were not enforced, future investors would be less willing to invest 

in mortgages. But this point seems moot at the moment. 

Three things have led me to change my mind about modification. 

First and foremost is that it will be difficult to preserve macroeconomic and neighborhood stability if we ignore the fact that already dangerous loans will become even more so when their payments increase, sometimes dramatically. 

For reasons I will describe later in my testimony, I do not think 

that modification is by any means a panacea. But past experiences 

in the history of the U.S. mortgage market give us reason to believe that mass modification can be an effective tool for restoring 

stability to financial markets. 

51

Before the Great Depression, the typical mortgage in the United 

States had some features in common with many current subprime 

mortgages, in the form of a floating interest rate, no amortization, 

and the possibility of payment shock arising from balloon payments. In fact, almost all mortgages originated before the Great 

Depression in the United States had a balloon payment feature. 

The housing finance system actually worked reasonably well 

until the Great Depression, when bank illiquidity made lenders call 

loans when they were due. Households rarely had enough cash to 

pay off their mortgages, and so needed to sell their homes to meet 

the obligation. The lack of liquidity meant that buyers could not obtain financing, so sellers could not sell. This led to waves of foreclosures. The market clearly needed a ‘‘servicing solution.’’ 

In response, the Hoover Administration created the Federal 

Home Loan Bank system, and New Deal housing finance legislation created the FHA to ensure long-term mortgages, and the 

Homeowners Loan Corporation and its successor, the Federal National Mortgage Association, to tie mortgage markets to capital 

markets. HLC reinstated defaulted balloon loans as 20-year fixedpayment mortgages. This can be seen as the first example of mass 

loan modification. 

Second, I have come to appreciate that transactions between borrowers and lenders are hardly typical. Even the simplest mortgage, 

whose cost is a function of rate, term, points, fees, and expected 

time in the home is not a straightforward product. Adjustable rate 

mortgages are even more complicated, exotic ARMs even more so. 

At a conference at Harvard last week, professors of law and economics from leading universities could not explain in detail all the 

characteristics of their adjustable rate mortgages. To expect consumers with far less financial acumen to understand the terms of 

exotic ARMs is unreasonable. I have become increasingly convinced 

that large numbers of borrowers were persuaded to take on products that they did not understand. 

Third, structured finance has made loan modification on an individual loan level more difficult. The interest of different investors 

in various classes of securities can be in conflict. When a loan is 

in default, it is possible that investors holding a senior tranche will 

prefer foreclosure to workout, while those holding junior tranches 

might prefer workout. At the end of the day, this conflict could prevent workouts in cases where borrowers and the sum total of investors would be better off with a workout, indicating that workouts 

are economically efficient, at least in the short run. 

In my opinion, as we think about solving the current crisis and 

developing reforms for the mortgage market of the future, we must 

keep in mind how important it is to develop incentives that will 

allow us to get out of our current predicament and prevent future 

crises. 

To me, a combination of incentives and improved information 

will be more effective than detailed regulation. For the time being, 

the key loan modifications would be: one, to freeze ARM payments 

for particular types of ARMs; and two, to allow ARM borrowers 

whose mortgages have prepayment penalties to refinance without 

having to pay these penalties. 

52

But in determining the level at which to freeze ARM payments, 

we should not freeze rates below A and Alt-A fixed rates, both for 

equity reasons and because we want to encourage borrowers who 

can refinance into A and Alt-A products. And it appears there are 

a fairly large number of such borrowers to do so. 

All that said, it is important to recognize that no amount of 

modification will produce a panacea to the current crisis. First of 

all, we know many defaults occurred before a rate reset, and so 

they were induced by something other than a payment shock. It is 

actually an interesting and open question as to whether those borrowers with the greatest propensity to default have already done 

so. 

In the distant past, that is, the 1970’s and 1980’s, default usually 

occurred in the 3rd to 7th year of a loan’s life. We now have the 

unusual spectacle of books of mortgages that contain a large number of loans that didn’t receive a single payment. This means history gives us little guidance about how these mortgages would perform going forward. 

Second, the current outlook for the housing market is grim. People’s expectation about the housing market, based in part on increasing prevalence of foreclosures, could push down houses for a 

while all by itself, which will eat away at home equity, which will 

make mortgages even more vulnerable. 

Reducing the possibility of payment shocks and making mortgages easier to refinance will help. But for a person who loses his 

job, gets sick, or sees his marriage dissolve, the fact that his mortgage balance is higher than his house value may leave him with 

little alternative but to default. 

Reducing impediments to modification will, however, reduce the 

probability of foreclosure somewhat, and will therefore reduce the 

inventory of homes available for sale going forward. This can do 

nothing but help expectations about future house prices, and therefore make the market less bad than it otherwise would be. 

Thanks for having me today. 

[The prepared statement of Mr. Green can be found on page 124 

of the appendix.] 

The CHAIRMAN. Thank you. I would say to Mr. Shelton, if we 

were having a markup now, you would be a lot happier man than 

you were previously. 

I will ask Mr. Silvers the first question. The foreclosure moratorium obviously is a desirable result. But legally, constitutionally, 

who do you believe would have the authority to promulgate that if 

it were to be a governmental action rather than a plea? If it is a 

plea for voluntary action, I very much agree. But is there any government entity who could decree it? 

Mr. SILVERS. Well, first let me say that I don’t think that plea 

has been made in any serious way. 

The CHAIRMAN. I understand that. 

Mr. SILVERS. So making it would be a good start. I mean, I think 

our— 

The CHAIRMAN. I understand. But let’s get to the question. 

Mr. SILVERS. Our experience in New Orleans is how that got 

done. Now, in terms of forcing it, in terms of saying that it has to 

happen now, I think that, Mr. Chairman, your point earlier about 

53

the PSLRA is a point that suggests that there are many instances 

in which the Congress and the President have together, through 

statute, done things that one might argue impinged on prior contractual rights, and done so without compensation. 

The greater degree of the severity of the national crisis that is 

faced in circumstances like today— 

The CHAIRMAN. All right. Well, let me ask this. And I obviously 

chose the securities litigation because that is one where the business community wanted us to, I believe, curtail some existing 

shareholder rights. I would be glad to have a memorandum from 

you on other, further precedents. 

The other thing I would say is this, and I am not at this point 

calling for a total moratorium. But people should remember that 

the most important principle of legislation is that the ankle bone 

is connected to the shoulder bone. That is, there are financial institutions in this country who would like us in the Congress to do 

things, and there are things they would like us not to do. They 

can’t make us do them or not do them, but they could ask us. 

Similarly, there are things we would like them to do or not do, 

and we can’t make them, but we can ask them. And I have to say 

that they should understand the more accommodating they are to 

our concerns, the more accommodating they might expect us to be 

to theirs. 

And let me be very explicit here. I agree that one of the problems 

that we had in the bill that we passed, and I will say what I have 

said with regard sometimes to some of my friends with their expectations of Nancy Pelosi. During the debate on gay rights, I had 

some friends whom I thought had taken the Wizard of Oz to heart 

too much, and they had the speaker confused with Glinda the Good 

Witch and thought that she somehow had a wand she could wave 

and we as her deputy witches could just get things done, votes and 

political opinion to the contrary. 

But we didn’t get everything we wanted in that bill. In particular, I think we fell a little short in the enforcement area. But 

we will have a further chance at that, and we do want to work with 

you. I understand the concerns about pattern and practice. 

I will say this, too. On the attorneys general, yes, we do think 

they should have a role. It is our view, by the way, that to the extent that remedies are there, attorneys general are fully free to 

take them on. For example, in terms of getting mortgages that 

were granted imprudently and against the bill, that ignored ability 

to pay or net tangible benefit, where you can get the mortgage rescinded and costs, I would hope some attorneys general would 

gather up several hundred people in their community, if that were 

the case in their State, and bring such a case and get full compensation. I think, properly done, the attorneys general could use 

this as a way to hire some staff, knowing that there would be this 

funding source if they could get their legislatures to allow them to 

use it for those purposes and bring a number of cases. 

The gentleman from North Carolina, Mr. Watt, had some amendments we which talked about that we wanted to do. Mr. Miller will 

be working on strengthening up the language on yield spread premium. So we do plan to do that. 

54

But on enforcement in particular, we will be going forward. But 

over and beyond that, I have to say this to the people in the financial services community. And I know they went down to the White 

House, but maybe this will catch up to them. We will be taking further action on this bill, in an open way. It is my hope that we 

might have a subsequent markup, for instance, on some of the enforcement measures that Mr. Watt will be working on. 

And it is possibly the case that some of us want to do more than 

maybe the majority will want to do. The degree to which we will 

be able to toughen enforcement as a factual matter will be affected 

by how the financial services community behaves in the current 

crisis. That is, the fewer mortgages that are restructured, the 

stronger is going to be the argument for much tougher enforcement 

going forward. 

And if in fact we were to get a very forthcoming response with 

regard to the modifications, beyond even what the Administration 

is asking for, which we should go beyond in some cases or in many 

cases, that is going to have an effect. And so I just want to make 

that very clear. 

We intend to toughen enforcement. And one of the problems we 

had with the bill was we didn’t have a lot of experience with some 

of these things. Well, we are going to get some experience now. We 

are going to get some experience with the willingness of people in 

the financial community to show reasonable forbearance, to show 

that they have learned from past mistakes. And the extent to 

which they are responsive will have, I think, a real impact on what 

is going on. 

And I must say a grudging and reluctant response to this, maybe 

I should in some ways say okay because it is going to strengthen 

our hand when we go forward legislatively. But I would rather not 

have innocent homeowners be the victims of that. 

Mr. Silvers? 

Mr. SILVERS. Mr. Chairman, two further thoughts on your initial 

question. One is that foreclosure itself is somewhat different than 

the contractual remedies between the parties. Foreclosure is by operation of State government in relation to property law. 

The CHAIRMAN. Yes. 

Mr. SILVERS. It seems to me not impossible, although I don’t 

have the memo for you this afternoon, that you clearly have under 

the commerce clause the right to do so, could you get the President 

to sign it, to essentially impose— 

The CHAIRMAN. Okay, Mr. Silvers. But let me ask you this. Are 

you asking us to preempt State law in this regard? 

Mr. SILVERS. I am not asking you to do this at the moment because I believe there are several ways of achieving this that are far 

less dramatic. 

The CHAIRMAN. Right. I mean, that is the other problem. One is 

the kind of Fifth Amendment contract clause problem. 

Mr. SILVERS. Right. 

The CHAIRMAN. The other is the State problem. And I know there 

is more preemption in this bill than some people wanted. But there 

is a lot less than other people wanted. And that is one of our constraints in dealing with foreclosure, is that you don’t want to set, 

I don’t think, a wide open precedent on preemption. 

55

Mr. SILVERS. I think the best way to achieve this is the way in 

which we worked in New Orleans, which is by sort of informal understanding. The second best way to achieve it is the way that you 

suggested a few moments ago, which is by carrots rather than 

sticks, by essentially defining a set of criteria that would make for 

a responsible player in the financial services market in this crisis, 

which would include participating in a 6-month foreclosure moratorium, and have certain rewards for joining that— 

The CHAIRMAN. My time is expired. Before I pass it on, I will 

say—maybe I didn’t say it clearly—when you say that my talk is 

carrots instead of sticks, no. I am not talking about carrots or 

sticks. I think the extent to which the mix of carrot and stick that 

they are going to see in enforcement as a practical matter is going 

to be affected by what happens going forward. 

The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. And I would 

like to thank our presenters here today. 

I have a few questions that I would like to ask of Ms. Faith 

Schwartz, executive director, HOPE NOW Alliance. I guess we can 

conclude that the Alliance is very new. Is that right? 

Ms. SCHWARTZ. Yes. 

Ms. WATERS. And being very new, you have adopted some principles. But you are still working on specifics. Is that right? 

Ms. SCHWARTZ. Well, no. These principles are adopted, and we 

have multiple prongs to our effort with outreach to borrowers to a 

technology solution. 

Ms. WATERS. Well, let us talk first about the nonprofits that you 

are working with. And you said these are HUD-approved nonprofits. What does that mean? 

Ms. SCHWARTZ. Well, the original nonprofits that are part of the 

HOPE NOW Alliance when it was announced are NeighborWorks 

America and the Homeownership Preservation Foundation, which 

is running the 1–888–995–HOPE hotline. 

Ms. WATERS. So you describe in much detail the hotline that is 

managed by this entity. And they receive the calls, and they basically do counseling? 

Ms. SCHWARTZ. They do counseling, and they are triaging that to 

bring it back in to the servicers to—because the borrowers won’t 

call the servicers, as it has been brought up before. And this is a 

way for a third party support group to help bring the borrowers 

back into the servicers for options. 

Ms. WATERS. So this hotline is responsible for counseling and 

helping to connect the borrowers with the servicers? 

Ms. SCHWARTZ. That is correct. 

Ms. WATERS. And you gave a pretty impressive list of number of 

calls going back to the original hotline on up until, I think, as recent as December, of the number of calls that they have received. 

Ms. SCHWARTZ. As recently as November 30th. 

Ms. WATERS. November 30th. Can you tell me, in all of those 

calls and all of the counseling, how many modifications have been 

realized? 

Ms. SCHWARTZ. I can’t tell you today how many modifications 

have been realized. We have a significant amount of borrowers who 

were counseled and handed off to the lenders and servicer shops. 

56

Ms. WATERS. But the goal is to make sure— 

Ms. SCHWARTZ. Yes, it is. Right. 

Ms. WATERS. —that people are helped. And part of that is modifications. We would really, really benefit from knowing how many 

modifications have been done that would help us to understand the 

effectiveness of this hotline and the counseling that they are doing. 

Ms. SCHWARTZ. There is a goal we have— 

Ms. WATERS. How are you going to track it? 

Ms. SCHWARTZ. Yes. We are going to track all of our workout solutions, modifications, delinquencies, as an aggregate group to get 

clarity around better numbers than you have had before. So that 

is one of our goals. 

We are also reaching out to many on-the-ground counselors and 

grassroots— 

Ms. WATERS. When do you think you will have a system in place 

by which you can give us the number on modifications? 

Ms. SCHWARTZ. Well, we have one of our first data requests coming back in in the month of December. But we are working to collaborate with every servicer to get all of the data metrics so we will 

have better information to share with you and others monthly, and 

have a baseline for our activity. 

Ms. WATERS. So you would be able to share with Congress that 

information on a monthly basis? 

Ms. SCHWARTZ. We hope to be. We don’t have it yet, but that is 

our goal, to have more information so that we can be transparent 

about the activities and the progress of the HOPE NOW alliance. 

Ms. WATERS. You talk about outreach, and you mention the direct mail program— 

Ms. SCHWARTZ. Yes. 

Ms. WATERS. —that you are involved in. Is this a direct mail program of each of the servicers, or is this something under the HOPE 

NOW Alliance, or how do you do that? 

Ms. SCHWARTZ. This outreach is under the brand of HOPE NOW 

Alliance so that the borrowers will open the letters that go out. 

And it is to also bring them back to a third party counselor instead 

of just the servicers and the— 

Ms. WATERS. So who is targeted? Who gets these letters? 

Ms. SCHWARTZ. Very at-risk borrowers who have not been in contact with their servicers. 

Ms. WATERS. So these letters are targeted by the servicers. These 

are loans that they are working on. 

Ms. SCHWARTZ. Yes. And they are not in contact with their borrowers, so they are trying to get them to call them. Because we 

know one out of two loans that goes to foreclosure never is in contact. 

Ms. WATERS. Where does the database come from for this? 

Ms. SCHWARTZ. Pardon me? 

Ms. WATERS. Where does the database come from? They are not 

coming from the servicers who are working on the loans. 

Ms. SCHWARTZ. No. It is coming from— 

Ms. WATERS. Oh, they are? 

Ms. SCHWARTZ. I am sorry. Yes. 

Ms. WATERS. So the servicers, like 100 days before they are in 

trouble or something like that, some formula— 

57

Ms. SCHWARTZ. I will clarify for you. 

Ms. WATERS. Yes. 

Ms. SCHWARTZ. The first outreach principle we got all the 

servicers to agree to or they can’t be in the HOPE NOW Alliance 

is that 120 days protect an ARM reset, they must contact the borrower, educate them on the terms of the loan, tell them what that 

reset is going to be, and they will get feedback if there is any problem with that loan. 

Ms. WATERS. So they have started that process already? 

Ms. SCHWARTZ. Yes. That is in process. 

Ms. WATERS. Do you have a copy of any of those letters that have 

gone out that you can share with us? 

Ms. SCHWARTZ. Yes. Yes, we have a letter that is—that is just 

outreach to borrowers, phone calls or letters. The outreach— 

Ms. WATERS. Do you have any with you today? 

Ms. SCHWARTZ. The outreach letter that I am referring to in this 

testimony is a letter that is going to at-risk borrowers under HOPE 

NOW. It is a slightly different outreach. We have multiple things 

going on. 

The CHAIRMAN. Let me ask you to submit a copy of every letter 

you send out, and without objection we will make them part of the 

record. 

Ms. SCHWARTZ. Sure. Okay. 

Ms. WATERS. Mr. Chairman, if you don’t mind, just 30 seconds 

more. 

I understand in the outreach, and Mr. Deutsch was at my meeting in Los Angeles, that neither HOPE NOW nor the servicers are 

spending any money on national advertising. I have been watching 

to see if I hear anything on the radio or see anything on television, 

and I have heard nothing. I have seen nothing. And nobody can tell 

me that one dollar has been spent out of the huge budget. 

I see that some of the institutions, even ones that are in trouble 

like Countrywide, are spending a lot of money soliciting more business. But I have not seen anything advertising, ‘‘Call us so we can 

help you.’’ 

Ms. SCHWARTZ. Okay. Congresswoman Waters, the members of 

HOPE NOW have supported the ad campaign through the 

NeighborWorks Council, which is a public service ad, which does 

just that. And it has run in several markets, and it is an ongoing 

advertisement. 

Ms. WATERS. We would like to know more about that. I will have 

some questions I will get to you in writing. 

Ms. SCHWARTZ. And I will submit that. 

The CHAIRMAN. I should say this: All the witnesses should recognize that there may be additional questions submitted by the members, and we will have them in the record. 

The gentlewoman from New York. 

Will the gentlewoman yield? Our colleague from North Carolina, 

who has had such an active role in this, has to be in an interview 

at 12:30. You just want to go ahead? All right. The gentlewoman 

from New York. 

Mrs. MALONEY. Sorry. We are having a few technical problems. 

I thank all of the witnesses for your testimony. 

58

And Mr. Deutsch, how did the secondary market contribute to 

the foreclosure crisis? 

Mr. DEUTSCH. Could you be slightly more specific? 

Mrs. MALONEY. Well, I would say that some have said that the 

secondary market played a key role in the subprime crisis by purchasing and soliciting unaffordable and in some cases abusive 

loans. And a very striking quote that I saw was from one of the 

chief executive officers, now from a company that has gone bankrupt, Own It Mortgage Solutions, and this is what he said. And I 

am quoting from a quote that was in the paper. 

He said, ‘‘The market is paying me to do a no-income-verification 

loan more than it is paying me to do the full documentation loan.’’ 

And he says, ‘‘What would you do? If you were paid more to do a 

no-doc loan than one that is substantial and can prove that the 

person can pay for it,’’ he literally said he was paid more for a nodoc loan than for a legitimate loan. 

And in spite of this, what is happening, basically what I am concerned about, is I believe your organization has opposed any assignee liability standards in the bill that actually we passed. And 

if we don’t have some rules to play by, how are we going to protect 

ourselves or protect consumers or protect our economy from going 

in this direction again? 

And we have to have some standards. We tried to build in standards, assignee liability as a standard. I thought it was a balanced 

standard, a safe harbor. And your comments on the role of the secondary market in the foreclosure crisis, and resistance to building 

in standards to bring in accountability so that we can protect consumers and help our economy. 

Mr. DEUTSCH. Maybe in response to I believe it was Bill Dallas’s 

quote, the chairman of Own It, I guess first to note is Own It, as 

you indicated, is no longer in business. I can’t comment and don’t 

know or understand, in particular, the incentives that they had in 

their structures. Obviously, their business model did not work out 

as I am sure they would have liked or hoped. So I really can’t comment specifically on their incentives or how they worked. 

But I think the secondary market is critical to providing capital 

not only on a going-forward basis to those first-time home buyers 

and others, but it is also very critical—and I think in some of the 

discussions that were just released a bit earlier by the Administration, refinancing right now is the number one opportunity for those 

borrowers in subprime ARMs. In well over have the cases of current subprime borrowers, they are able to refinance into other industry products, FHA products, or FHA secure. 

So the number one way to cut off that financing is to have institutional investors pull credit from the markets or to walk away. 

And I think in particular relation to, say, Representative Castle’s 

bill, that would be a very poor signal right now to send to those 

institutional investors where their contracts may potentially be abrogated by such a provision. 

And I think that would be quite a concern, not only to existing 

homeowners but also those who would like to own homes in the 

near future. 

Mrs. MALONEY. Well, everyone applauds the really dramatic creative role that the secondary market has played in building and 

59

having liquidity and the opportunity for homeowners. But my question is back to standards. We want the secondary market there, but 

we want a secondary market that is healthy. 

And if your organization could possibly look into what Mr. Own 

It, the owner or the chief executive of Own It Mortgage Solutions—

what were the standards that he was talking about? I found that 

as an astonishing quote. And basically, my question is: What steps 

did your members take during this time leading up to the crisis 

that we have reached? 

There were many warnings from consumer groups and advocates. 

I would say industry analysts were out there warning that many 

of these subprime loans had payment shocks in, that they were 

unsustainable. One constituent said to me, you know, I couldn’t afford my rent so I went out and bought a home because I didn’t 

even have to prove anything. The standards for renting were higher than the standards for getting a mortgage. 

So my question really is: What steps did your members take to 

ensure that people were purchasing—that you were purchasing 

sustainable loans, that people could literally pay for the loans that 

they were getting? And again, why is your industry opposing assignee liability or any standards to make sure that the loans that 

you are buying, people can pay for them? 

This is, I think, a legitimate question, and I just would like an 

answer. Thank you. 

Mr. DEUTSCH. Maybe to the first question, in terms of lending 

standards, you have seen quite dramatically this summer lending 

standards tighten significantly so that, say, a year ago if you were 

eligible for a particular loan, as of this summer some of those borrowers would no longer be eligible for a loan. So there was quite 

a significant restriction of credit in that sense, and a strengthening 

of underwriting criteria and guidelines. 

Mrs. MALONEY. And did that come from your organization, or 

where did these new standards come from? 

Mr. DEUTSCH. It is part of the market development and evolution. And I think a backdrop of all of this that is a big part of 

all of the different analyses so far is the housing price appreciation 

or depreciation in certain markets. It is obviously a very important 

backdrop. 

Mrs. MALONEY. Okay. My time is up. Thank you. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MILLER. Thank you, Mr. Chairman. And I think I would like 

to pursue the questions that Ms. Maloney was asking. 

Mr. Deutsch, I have always agreed that we need a vibrant secondary market, that lenders need to be able to sell loans to have 

the liquidity to make more loans, to make credit available for 

Americans to buy homes. And I think homeownership is the way 

most middle class American families really build wealth. And good 

mortgages help people build wealth; bad mortgages steal wealth 

from them. 

And I thought to do that, we needed to have some limitation on 

the liability in the secondary market, that they could not be responsible for everything that happened at the retail level. They 

couldn’t know of every conversation. 

60

And I have supported some limitation. But looking at what has 

happened in the market is kind of hard for me to imagine that you 

all have really proceeded in good faith and had no idea of what was 

going on at the retail level of the market. Five years ago, 8 percent 

of the total mortgages made were subprime; last year, 28 percent. 

That is a 31⁄2 fold increase. 

Mr. Shelton just left the room when I was about to ask a question I wanted him to hear. But more than half of African-American 

families who took out mortgages in the last year took out subprime 

mortgages; among white families, it was 22 percent. We know from 

the HMDA data or from analysis of it you cannot explain that by 

any criteria, any explanation, except race. You can’t explain it by 

credit score. You can’t explain it by income. You can’t explain it by 

loan to value. You can only explain it by race. 

We know from the Wall Street—well, 5 years ago, Freddie Mac 

said that 25 percent of subprime loans were made to people who 

qualified for prime loans. The Wall Street Journal said this week 

that it is now 55 percent of the people who take out subprime loans 

qualify for prime loans. 

Ninety percent of the subprime loans made in the last 2 years, 

in 2006 and 2007, had adjustable rate mortgages with a short adjustment, 2 or 3 years, typically a 30 to 50 percent increase in 

monthly payment. Seventy percent of subprime loans had prepayment penalties, many of them short of the time of the—I mean, 

that extended beyond the adjustment period. Seventy-five percent, 

no escrow for taxes and insurance. Half—I have seen a range, estimate of a range, of 43 to 50 percent were made without full documentation of income. 

Now, the vast, vast majority of Americans can easily document 

their income. They can do it with payroll records. They can do it 

with employment verification. They can do it with bank statements. They can do it with tax returns. It is easy. People who are 

self-employed can verify their income. People who own businesses 

and make their income that way can verify their income. And yet 

almost half of the loans that were coming to the secondary market, 

and they were buying, were made without full income verification. 

And consumers paid more, higher interest rates, if there was not 

full documentation. 

Now, that is what you were seeing coming towards you. Those 

were the loans that you were buying. And you didn’t know anything was going on? You didn’t think something funny was happening at the retail level? 

Mr. DEUTSCH. Well, I guess in answer to the question is part of 

the institutional investors that were purchasing these loans, that 

were purchasing the securities backed by these loans, obviously 

were trying to pay close attention to them. 

But at the time, and again going back to my previous statement, 

is that the housing price appreciation market, especially in particular areas like California where the home prices were increasing 

quite dramatically—many people have noted that there were a 

number of speculators in the market trying to increase, trying to 

obtain homes, and multiple homes, in certain areas where they 

were able to create quite a dramatic increase in their wealth by 

speculating on different homes. 

61

So obviously, the secondary market was purchasing, and institutional investors in particular were purchasing, these subprime 

loans. And in particular, in 2006 there was a significant deterioration in credit quality of some of the underlying borrowers. 

Mr. MILLER. The figure I have seen of the percentage of the loans 

now in default, the subprime loans that went to speculators, people 

who did not occupy the home that they had purchased, is well less 

than 10 percent, the 5 to 7 range. Do you have different information? Because my understanding is that is a pretty small percentage of the problem. 

Mr. DEUTSCH. I don’t have different information. I don’t have the 

data on the exact number of the various investor properties. But 

it is also very difficult to verify by verifiable data to know who is 

an owner-occupied versus investor. There are a number of concerns 

about how verifiable that data is. 

Mr. MILLER. Well, do you think it is dramatically different from 

5 to 7 percent? 

Mr. DEUTSCH. I just don’t have the information. I don’t have the 

data associated with that. 

Mr. MILLER. I am done. 

Mr. WATT. [presiding] The gentleman from Texas, Mr. Green, is 

recognized. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the witnesses for appearing today, and regret that I did not have an opportunity to speak to the first panel. However, I will try as best 

I can to extract some of my concerns—not extract, address some of 

my concerns to this panel. 

The prime rate in January 2005 was 5.25 percent; in June 2005, 

it was 6.1 percent; in January 2006, it was 7.25 percent; in June 

2006, it was 8.02 percent; in January 2007, it was 8.15 percent; 

and we currently have a rate of about 7.74 percent. We heard testimony today indicating that about 7 to 9 percent of these entry level 

rates were—actually, more than half of these entry level rates were 

at 8 percent, over 8 percent, and that most of them were 7 to 9 percent. 

So if they are 7 to 9 percent and most of them are over 8 percent, 

and the prime rate has consistently been pretty much not more 

than 8.25 percent, the question becomes: Does anybody think that 

freezing the rate is a bad idea? If you think freezing the rate is a 

bad idea, raise your hand, please. 

[A show of hands] 

Mr. GREEN. All right, sir. Address it, please. Tell me. 

Mr. SILVERS. I think you are pointing out here sort of the insufficiency of freezing the rate as a solution by itself. If you freeze the 

rate on loans that are inherently exploitative, which I think is 

what your point—what you are getting at, and then leave people 

in a situation where they are being threatened with foreclosure on 

the one hand, and on the other hand being offered a ‘‘solution’’ that 

remains something that remains something that they either can’t 

afford or can’t afford without destroying their family’s ability to do 

other things like feed themselves and provide for their health care 

and their education, then you are not doing anyone any favors at 

all. 

62

And it may very well be the case that for loans of the type you 

are describing, in a landscape in which housing prices are falling 

and in which, contrary to what the industry folks have represented 

to you this afternoon, investors have already completely lost confidence in the secondary market so that anything that is not completely generic, completely safe, that is all-conforming, can’t get 

any investor money right now, in that landscape saying to the borrower, oh, we are going to save your house because we are going 

to let you stay in a loan that is, as you put it, 2 or 3 points above 

prime, is not really a solution. 

The true solution for that person is going to be one in which the 

lender and the servicer and potentially the investors are going to 

take a bigger hit because the only thing that that homeowner may 

really be able to afford, or that any potential purchaser of that 

house may really be able to afford, is either a lower rate or a lower 

principal amount on that loan. 

And so the notion of sort of freezing the rate for that situation, 

which you raise, is not going to be enough. And that is just one example of the various ways in which today is a day in which, unfortunately, some false solutions are being promoted. Some really, 

truly dangerous things are being unaddressed. And some dangers 

are being raised, like the danger that ‘‘we will damage confidence 

in the market.’’ Confidence in it is gone. We will ‘‘damage confidence in the market,’’ so we can’t save actual, real homeowners. 

That notion that is being promoted here is utterly false. 

Mr. GREEN. It looks like we have another vote coming up, so let 

me just move quickly and ask the HOPE NOW representative—Ms. 

Schwartz, is that correct? 

Ms. SCHWARTZ. Yes. 

Mr. GREEN. Ms. Schwartz—well, hold that for just a second. Let 

me come back to you again, sir. 

If we are talking about refinancing these loans, and we have all 

of the financial institutions at the table now talking about the possibility of freezing, who is going to refinance? The people—you have 

the answer, Ms. Schwartz? Please. 

Ms. SCHWARTZ. Sure. With my testimony, I talked a little bit 

about what today is about and then kind of some ongoing efforts 

longer term. So if there is a current 2/28 or 3/27 loan, and we are 

looking at that today, and there is either a refinance option or a 

freeze on a rate, it would be whether they can refinance and they 

have the ability and willingness to stay in their home and pay to 

be modified into an accelerated modification. 

It does not preclude having a different interest rate, a lower interest rate or principal reduction or forbearance plan or any other 

workout solution for all those other borrowers. The point of not 

being able to accelerate modifications across the whole segment of 

loans is that they take a little more thorough analysis. That is the 

only difference. It is not saying they won’t get a modification or 

they won’t get a better workout solution. 

Mr. GREEN. Is there empirical evidence to indicate that this is 

happening? Because I have talked to persons, and I have not talked 

to as many as you have, but the people that I talk to are very frustrated about the system. 

Ms. SCHWARTZ. Right. 

63

Mr. GREEN. They don’t seem to think that the system is working 

as announced. 

Ms. SCHWARTZ. Right. Well, I think it has been a frustrating 

time for borrowers and for servicers. And what we are hoping is 

that while all the good efforts are going on and have been going 

on within a lot of servicing shops to address the change in the market, we are hoping that a more unified and systematic approach—

some of what has been announced today. But that is just a beginning. 

Mr. GREEN. I yield back, Mr. Chairman. Thank you. 

Mr. WATT. Thank you. And I was going to cut you off anyway 

since your time had expired. 

But let me explain the situation because I think I am not going 

to ask any questions of this panel. This is our situation. We have 

been called for a quorum call, which is 15 minutes. And then there 

are going to be some closing remarks on the bill that is on the floor, 

which will probably take another 10 minutes or so. And then we 

are going to vote, 15 minutes. 

We probably have enough time, if we go ahead and take the last 

panel, to get in the testimony of that last panel so that they don’t—

there are three votes and quorum calls and discussions. It would 

probably be another hour before we get back here. 

So I think we are better off to go ahead, release this panel, and 

call up the third panel for their testimony. Whomever feels like 

they need to go to the quorum call—I never have thought much of 

quorum calls myself. I know where I am, and I know I will be there 

when it is time to vote on substance. So we thank these witnesses 

for testifying, and I would like to call up the third panel of witnesses and proceed promptly with their testimony. 

Okay, this panel has three witnesses, I think. Oh, yes, we do 

have three witnesses, and let me introduce them all at one time 

and ask them to proceed in this order so that I don’t waste time. 

The first is Laurence Platt, partner, K&L Gates on behalf of the 

Securities Industry and Financial Markets Association. The second 

is Michael Calhoun, who was on the second panel and agreed to 

move to the third panel, he is the president of the Center for Responsible Lending. The third witness is Josh Silver, vice president 

for policy at the National Community Reinvestment Coalition. 

We thank you for being here. And, Mr. Platt, you are recognized. 

STATEMENT OF LAURENCE PLATT, PARTNER, K&L GATES, ON 

BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL 

MARKETS ASSOCIATION 

Mr. PLATT. Thank you Chairman Frank, Ranking Member Bachus, and members of the committee. Good afternoon. 

I thank you for the privilege of testifying here today on behalf 

of the Securities Industry and Financial Markets Association on a 

proposal that would materially expand the remedies available for 

a violation of title 2 of H.R. 3915. 

Under the proposal, regulators will have authority to impose civil 

money penalties of a million dollars plus at least $25,000 per loan 

on any creditor, assignee, or securitizer that exhibits a pattern and 

practice of making, buying, and securitizing loans without regard 

64

to a consumer’s ability to repay the loan or a loan’s provision of a 

net tangible benefit to the borrower. 

While we appreciate the continuing efforts of the committee to 

strive to find ways to protect borrowers who are victims of unlawful 

lending practices, we oppose this measure as offered during Floor 

consideration of H.R. 3915. 

We would like to make three general points for your consideration this afternoon and refer you to our written submission for a 

more detailed response. First, we believe that consumers can benefit from residential mortgage loans that neither qualify for the 

safe harbor under H.R. 3915, nor constitute high-cost mortgages 

under HOEPA. As you all know, title 2 of H.R. 3915 divides residential mortgage loans that are not high-cost loans subject to 

HOEPA into two types. 

One type is loans that are presumed to satisfy the new law’s requirements on ability to repay and net tangible benefit, because of 

their cost or features. We refer to these as ‘‘safe harbor’’ loans. The 

second type of loan is loans that do not benefit from such a presumption. We call those ‘‘non-safe harbor’’ loans. 

H.R. 3915 provides significant remedies for non-safe harbor loans 

that violate the new law. A consumer is entitled to monetary damages from the creditor, and in addition, the consumer generally 

may rescind the loan against the creditor, the assignee, or the 

securitizer, although one of those parties may cure the violation by 

providing the consumer with a safe harbor loan. In addition, title 

3 of H.R. 3915 significantly expands the universe of mortgage loans 

that are considered high-cost mortgages under HOEPA. 

The secondary market presently does not finance, buy, sell, or 

securitize high-cost mortgages, because of the huge penalties that 

may be imposed on assignees under HOEPA. We firmly believe 

that there is nothing inherently or per se wrong with a non-safe 

harbor mortgage. Indeed, the new law expressly rejects any presumption that a non-safe harbor loan is illegal. 

A non-safe harbor mortgage can serve a valuable role in helping 

subprime and other underserved borrowers obtain mortgage credit, 

subject of course to a creditor satisfaction of its new legal responsibilities under H.R. 3915. We therefore believe that public policy 

should support and not impair the availability of non-safe harbor 

mortgages. 

Our second point is our belief that adoption of this amendment 

on pattern and practice will cause the real estate finance industry 

to treat non-safe harbor mortgages like high-cost mortgages under 

HOEPA and cease funding them. Why do we believe that? 

Well, purchasers of loans are unwilling to assume material legal 

risks for the acts, errors and omissions of others unless they can 

determine in advance of purchase whether the third party complied 

with applicable law. But title 2’s substantive requirements on ability to repay and net tangible benefit are inherently subjective in 

nature. A purchaser cannot conduct conclusive due diligence in advance to determine compliance with a subjective standard. And this 

means that errors in judgment made in good faith could create liability. 

As we understand the proposal, a single, good faith error regarding the propriety of a single practice that’s repeated by a creditor 

65

or assignee, could create direct pattern and practice liability. Experience indicates, as I referenced with HOEPA, that the real estate 

finance industry will not make, buy, sell, finance, or securitize residential mortgage loans carrying a huge financial risk that exceeds 

the amount necessary to compensate a consumer for actual harm. 

Assignees are not likely to assume such a huge risk at all, much 

less in cases where they cannot tell in advance if they are buying 

loans that comply with the law, because of the inherently subjective nature of such law. 

So the effect of the proposal, whether it’s intentional or not, is 

to impose direct, not derivative liability on assignees and 

securitizers, for the mere act of purchasing loans. Thus, we believe 

the amendment effectively will prohibit non-safe harbor loans, 

much like HOEPA effectively outlaws high cost mortgages. Again, 

we believe that public policy should support and not impair the 

availability of non-safe harbor mortgages. 

The third point I want to make is to articulate our belief that the 

House should give the remedies under H.R. 3915 a chance to prove 

their effectiveness before essentially throwing them out and replacing them with an unfeasible arrangement for non-safe harbor 

loans. H.R. 3915 sought to balance the interests of consumers and 

industry. 

How did they do it? Well, on one hand, under the law consumers 

are given the ability to get out of a non-safe harbor mortgage that 

never should have been made. Assignees and securitizers generally 

must cure a violation to ensure that a consumer gets an affordable 

loan providing a net tangible benefit or face rescission of the loan. 

On the other hand, assignees and securitizers are not generally 

subject to monetary damages under H.R. 3915. For example, H.R. 

3915 doesn’t include the statutory or enhanced damages that are 

provided under HOEPA, and as I said, those are loans that the 

market won’t buy. We think that the remedy of cure and rescission 

will cost assignees significantly. The risk of loss is material enough 

to influence secondary market purchasers to be more vigilant in 

evaluating the types of loans that they purchase. 

But the proposed amendment eliminates the carefully crafted 

balance of H.R. 3915 by imposing huge monetary penalties that are 

punitive in nature on assignees and securitizers. We see no reason 

to declare the existing remedies ineffective until they’re given the 

opportunity to work. 

So we respectfully request that the committee give existing H.R. 

3915 a chance in order to support the availability of non-safe harbor mortgage loans that comply with the new law. We appreciate 

the opportunity to testify, and we’d be pleased to answer any questions. 

[The prepared statement of Mr. Platt can be found on page 178 

of the appendix.] 

The CHAIRMAN. Mr. Calhoun? 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Chairman Frank, and members of the committee, 

first individually, and then on behalf of the Center for Responsible 

66

Lending, I want to thank you for your diligent work in addressing 

one of the largest housing and financial crises of our generation. 

In my testimony, I’ll first address several aspects of the current 

mortgage market crisis, and then we’ll address the two amendments before the committee today and the Treasury plan that is 

being announced today. This committee has heard much testimony 

about the mortgage crisis with focus on the 2/28 ARMs. The first 

point and perhaps most important point is that as bad as things 

seem right now, they will get much worse over the next 2 years. 

Moody’s has estimated that 3 million families will face foreclosure, with 2 million of those families ultimately losing their 

homes. Unfortunately, we are still on the front side of two large 

waves of payment resets as shown in a chart that’s included in my 

testimony there are two, large events in groups of loans coming for 

payment resets. The first and the one getting most of the publicity 

now are the so-called subprime ‘‘hybrid’’ ARMs or 2/28 loans. And 

this chart, which many of you have seen, is set out on page 3 of 

my testimony. And the important thing is there are two large 

waves. The one on the left is primarily generated by subprime 

ARMs, and noteworthy is we are on the front side of this wave. The 

front side of this wave. These loans, the resets, will peak around 

May of next year and with foreclosures trailing 6 to 12 months 

after that. 

Something that has gotten very little publicity is there is an 

equally large wave of even greater payment shocks that will follow 

that. And those are generated by the payment option ARM loans 

shown towards the middle and right side of this chart. And, surprisingly, those payment shocks are even much larger for the typical borrower. Under payment option ARMS, when the loan goes 

from the low option payment to a full amortizing payment, that 

issue is usually a doubling or more of the required payment for the 

borrower. Again, loans that very few people or families can actually 

absorb those payment shocks, and if there’s not a rapidly appreciating housing market where they can refinance out of that payment shock, we once again will be dumping more houses onto the 

market through foreclosures. 

I will address the Treasury plan and the two amendments, briefly. The Treasury plan we support, and it will help those families 

that receive it, but it will be, and it’s important, a relatively small 

percentage of those families who need help will actually benefit 

from the plan. The challenge is that the structural obstacles in the 

mortgage market that prevented modifications this year are still 

there and are not really addressed at all in the Treasury plan. 

One of those that’s been discussed today is through Mr. Castle’s 

amendment, is that while it is good for investors at large to modify 

rather than foreclose, it is often worse for individual investors for 

there to be a modification rather than a foreclosure, because under 

the structure of securities, the security that bears the loss of a default and a foreclosure depends on when that loss occurs. And so 

some security holders who are protected from losses if they happen 

under typical structures in the first 3 years of those loans become 

liable for them after 3 years. And so their approach and their explicit threats to servicers has been do not delay this loss. Foreclose 

now rather than put this loss on my watch. And so we have supVerDate 0ct 09 2002 18:57 Feb 29, 2008 Jkt 040435 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 K:\DOCS\40435.TXT HFIN PsN: TERRIE
67

ported the Castle amendment with the caveat that the language 

needs to be clarified that it does not immunize servicers from 

claims by consumers for violations of law and for predatory features, but it is a necessary clarification. The industry press is filled 

with statements that servicers are still regularly threatened by 

lawsuits from investors and that that is thwarting modifications. 

The second structural obstacle is simple financial incentives. 

Servicers are generally not paid for doing modifications. In contrast, as has been reported in the press, foreclosing has in fact become a profit center and quite lucrative for many servicers who 

have added on additional fees and made that a source of additional 

revenue. And so if you’re a servicer, you have a choice of doing a 

public good for which you’re not paid and may get sued, or proceeding with a standard procedures and foreclosing and increasing 

your bottom line. Well in our capitalist system, most of the 

servicers are going to proceed with the foreclosure. 

An even greater obstacle that has received no discussion today 

is that approximately 40 percent of the subprime ARMs have second mortgages. Often they were included as a way to make the 

first mortgages more marketable securities, and to avoid mortgage 

insurance. It is very difficult to modify those loans voluntarily in 

that the first mortgage holder is not going to take a reduction in 

their stream of payments and allow the second mortgage holder to 

benefit from that. And the second mortgage holder is not going to 

give up their position and say, wipe my lien out, without receiving 

compensation. 

So you take out almost half of the subprime ARMs out of feasible 

modifications under the current treasury plan, just by virtue of the 

second mortgages. And then finally, as several witnesses have already addressed, this is a voluntary plan with very, very little accountability. I note that even the statistics promised by my good 

friend Faith Schwartz were, if you noted, aggregate statistics 

where you have no accountability of which lenders, which servicers, 

are actually performing. 

A more effective remedy that the Center for Responsible Lending 

has supported and which is pending before other committees in the 

house how is narrowly targeted bankruptcy reform. Moody’s estimated that that reform would save over half-a-million family homeowners, and yesterday made statements that they believe perhaps 

even more important that it could be instrumental in preventing 

the American economy from slipping into recession. 

In contrast, our estimates are that the Treasury plan would 

serve somewhere at the most optimistic in the range of 145,000 of 

these 2 million families likely to lose their homes. 

Let me comment quickly on the two amendments. 

The CHAIRMAN. We have to do it very quickly. You’re about 3 

minutes over. 

Mr. CALHOUN. I apologize, Mr. Chairman. 

We also support the pattern and practices set out in my testimony. 

Finally, I think we need to send out a message that is important, 

that the Treasury plan could cause real harm if there are not appropriate warnings about it. It should not lull current homeowners 

into the belief that their problems had been solved, that if they 

68

have one of these loans with a big payment shock, relief is on the 

way. Their homes are secure. They still need to be vigilant and 

fight hard and face great obstacles and need further help from this 

Congress to be able to save their homes. 

Thank you, Mr. Chairman. 

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

99 of the appendix.] 

STATEMENT OF JOSH SILVER, VICE PRESIDENT FOR POLICY, 

NATIONAL COMMUNITY REINVESTMENT COALITION 

Mr. SILVER. Good afternoon, Chairman Frank, Representative 

Watt, and members of the committee. 

I thank you for the honor and the opportunity to present testimony on behalf of the National Community Reinvestment Coalition. NCRC is the Nation’s association of 600 community nonprofit 

member organizations dedicating to increasing access to capital 

and credit for working class and minority community. I am also 

testifying today on behalf of the National Consumer Law Centers 

low-income clients. 

We have not seen anything like this foreclosure crisis in modern 

history. You have to go back to the Great Depression to find such 

a period of reckless lending. In the first 10 months of 2007, 1.8 million American families suffered foreclosures. If current trends continue, millions of borrowers will lose their homes, wiping out hundreds of billions of dollars of wealth, costing local governments billions of dollars in foregone tax revenue, and possibly and probably 

plunging the economy into a recession. 

Given this national crisis, strong and decisive legislation is desperately needed. H.R. 3915 has the best of intentions and includes 

comprehensive protections against abusive lending. A flaw in the 

legislation, however, is that the bill does not contain effective enforcement mechanisms. In addition, the bill pre-empts State law. 

Wall Street banks and mortgage brokers are protected by not violating the law. These actors should not be protected by setting such 

a high bar against liability that American families cannot protect 

themselves from abusive bad actors. 

I will comment on the pattern and practice amendment, the Castle amendment, and then propose an individual right of action in 

all cases. The pattern and practice amendment had admirable intentions of bolstering enforcement, but provides a remedy that is 

difficult to achieve. Pattern and practice cases are time consuming 

and require a high standard of proof. It can take several months 

or years, and considerable resources to succeed in a pattern and 

practice case. 

In the last 7 years, NCRC found that the Department of Justice 

settled just five cases involving discrimination in mortgage lending. 

Moreover, none of these cases involved new pricing information in 

HMDA data, although the Federal Reserve Board referred 470 

lenders over a 2-year time period to their primary, regulatory agency based upon the new HMDA data. The Federal agencies are either unable or unwilling to bring pattern and practice cases. 

Another unintended consequence is that pattern and practice 

standards may create an unrealistically high standard. After a 

Federal pattern and practice standard is established, defendants 

69

may be able to convince courts that plaintiffs, such as State agencies, would need to win cases using a pattern and practice standard. 

Consequently, the number of successful cases against predatory 

lenders may decline. In addition, the damages in the pattern and 

practice amendment are limited to $1 million. Previous settlements 

against major predatory lenders have been in the hundreds and 

millions of dollars. The amendment’s penalty is unlikely to serve as 

an effective deterrent. 

Representative Castle’s H.R. 4178 is also well-intentioned, but it 

is not necessary to facilitate modifications. H.R. 4178 provides immunity from all liability for a creditor or servicer if the entity has 

enacted a loan modification. A blanket protection from liability in 

return for unspecified obligations is a risky exchange for borrowers. 

For example, the bill did not specify if the modification is to be 

permanent and does not establish parameters concerning terms 

and conditions of the modification. As a result, temporary fixes 

with usurious fees could qualify a financial entity for immunity 

from liability. An alternative approach is to require servicers to 

make reasonable efforts to engage in loss mitigation prior to foreclosure. 

Failure to engage in reasonable loss mitigation efforts should be 

a defense to foreclosure. If the House Financial Services Committee 

is contemplating boosting enforcement and remedies, we recommend that the committee allow individuals to pursue private action on all loans. Currently, H.R. 3915 prohibits private action if 

the borrower has received a qualified mortgage and a qualified safe 

harbor mortgage. 

Moreover, a borrower of a loan outside the safe harbors has very 

limited remedies under the bill including when a securitizer has 

engaged in due diligence, or when the borrower’s loan violates certain requirements, such as the ability to repay. Under H.R. 3915, 

it is conceivable that a borrower could be suffering due to a predatory loan, but have absolutely no means to seek redress, not even 

a limited venue. 

Currently, the interest of the borrower, the lender, and all other 

actors, through the investor, are not aligned. The misalignment of 

interests has created dysfunctional market that engages in dangerous lending in order to maximize profits without consideration 

of the borrower’s interest. Only when the financial institutions are 

accountable to the borrower, the basic principles of fairness and affordability are the interests of all aligned. And, ultimately, the only 

way to hold financial institutions accountable to the borrower is to 

make financial institutions liable to the borrower to remedy abusive loans. 

Please give Americans aggrieved their day in court. Thank you 

so much for this opportunity to testify on this important matter. 

The CHAIRMAN. Mr. Calhoun, I was struck on page 8 when you 

said: ‘‘The performance of the subprime originally illustrates that 

it is easier to prevent bad loan terms than to pursue bad actors, 

particularly through public enforcement.’’ That is what sort of drew 

me to the bill. And there have been a lot of questions about the 

enforcement piece, but let me go back to that. 

70

What in the bill that passed would you add in terms of preventing bad loans as opposed to enforcement? 

Mr. CALHOUN. Well, I think the key point is you prevent the bad 

loans by having a deterrence there. 

The CHAIRMAN. Well, then I don’t understand your sentence. 

Mr. CALHOUN. The goal here is to make investors look, but also 

for them to still be willing to buy. 

The CHAIRMAN. Okay, when you said, ‘‘prevent bad loans rather 

than to pursue bad actors.’’ 

Mr. CALHOUN. It’s what we’re saying is the primary goal of the 

remedies should be deterrents, not restitution. Because that’s the 

lesson of the crises we’re in now. 

The CHAIRMAN. But I will say public enforcement, one of the 

things that I think has not been focused on, everything we’ve 

talked about doing included in this would be empowering the attorneys general. Nothing in here, in fact, I would hope that attorneys 

general, whatever enforcements were in here, including if there 

was ever any pattern or practice. The attorneys general would 

bring these and we’d get in a conversation. And on that I know 

there has been concern. People said, well, you’re going to be preempting with the attorneys general if you do. 

First, it ought to be made clear under the amendment by Mr. 

Watt, and I think it is that no current cause of action is in any way 

pre-empted, that is until this bill is signed into law and regulations 

promulgated, if I’m correct. There is no bar, so my question then 

is, because I’ll be honest, I have heard more talk about attorneys 

general action recently than I’d seen. Can either of you two gentlemen, Mr. Silver or Mr. Calhoun, can you tell me what are the examples we’ve had of attorneys general going after the securitizers 

and the servicers? 

I hadn’t seen much of it. Is it more than I know? Could I ask 

you, what have the attorneys general been doing? Because obviously, there’s no bar now to their doing it. So what have they been 

doing so far? Mr. Silver? 

Mr. SILVER. There are two cases not against securitizers. 

The CHAIRMAN. Excuse me? 

Mr. SILVER. It’s not against securitizers. You’re right, Mr. Chairman. 

The CHAIRMAN. Well, all right. Answer my question though, because this bill, if it’s against lenders or brokers, this bill doesn’t 

pre-empt anything. So the attorney general will be free if this bill 

became as it is exactly to go after lenders and brokers; it is only 

with regard to securitizers. 

And again I’m told, well this is a problem, because you’ve taken 

away the right of attorneys general to go after securitizers. So how 

much have attorneys general been going after securitizers up until 

now? 

Mr. SILVER. In comparing with the pattern and practices, you 

might be setting such a high standard. 

The CHAIRMAN. Well, I’m not asking you that, Mr. Silver. You 

know that. I mean, look. We’re trying to get evidence on which to 

legislate, and I’m told well wait, you can’t do this. Well, we have 

trade-offs to make if we’re going to get a law passed. 

71

I know there are people who have a touching faith in the Federal 

Reserve, but all of a sudden they’ve become born-again regulators 

and they’re going to take care of everything under HOEPA and we 

don’t need a bill. Good luck to those who believe. This is the Christmas season, so far be it from me to be in a skeptical mood right 

now. But, to the extent that we’re told, look, this is a problem because you’re taking away from the attorneys general the right to 

go after securitizers. How much have they gone after them so far, 

Mr. Calhoun? 

Mr. CALHOUN. Your point is well taken. 

The CHAIRMAN. I didn’t make a point. I asked a question. 

Mr. CALHOUN. They have not to-date gone after them. 

The CHAIRMAN. Why? 

Mr. CALHOUN. One of the biggest obstacles is that we have seen 

some of the most abusive lending in a generation. And one of the 

biggest problems, most of it, has been legal due to the absence of 

standards at either the Federal or the State level to make them illegal. 

The CHAIRMAN. Well, then, if they can’t go after them, how are 

we taking away the right to go after them? 

Mr. CALHOUN. Well, I think to the extent you pre-empt assignee 

liability of State laws, State laws are now moving forward. For example, the ability to repay. 

The CHAIRMAN. All right. Excuse me. 

Mr. CALHOUN. Many States are now imposing that. 

The CHAIRMAN. But you say that they can’t go after them because they’re not against the law, but now you say we’re taking 

away State law. I mean, we haven’t pre-empted any State laws yet. 

What stopped them from going after them? 

Mr. CALHOUN. That the State laws have been recently enacted. 

The CHAIRMAN. When? 

Mr. CALHOUN. And are considered now: Ohio, Minnesota, North 

Carolina. 

The CHAIRMAN. When was the North Carolina law enacted? 

Mr. CALHOUN. The provisions on ability to repay on subprime 

loans was enacted this summer and just went into effect this fall. 

The CHAIRMAN. Are there none that have any longer period? 

Mr. CALHOUN. Not that really went to the core abuse of the last 

several years, which was loans made without ability to repay. 

The CHAIRMAN. How many States have such laws? 

Mr. CALHOUN. Only about half a dozen right now. 

The CHAIRMAN. All right, well then that’s the other issue then. 

That’s the dilemma we have, because the Federal bill that we’re 

talking about does impose that standard. So the trade-off is a couple of States, six States maybe, that have the law and the right of 

the attorney general to do it versus 44 States that have no such 

protection. 

Mr. CALHOUN. And there are a half a dozen or more that are seriously engaged in it. 

The CHAIRMAN. But there is no other basis in which the attorneys general could have brought suits against securitizers? 

Mr. CALHOUN. We believe and have pushed some of the attorneys 

general that they could pursue these practices as unfair trade practice claims. 

72

The CHAIRMAN. But they haven’t done that. 

Mr. CALHOUN. But they have not. 

The CHAIRMAN. All right, you know, look. I understand this and 

I want to work together, but sometimes I get the feeling I’m being 

accused of moth-balling the Swiss Navy. The gentleman from North 

Carolina. 

Mr. WATT. Mr. Chairman, I want to look very closely at Mr. 

Platt’s testimony. Maybe I will ask Mr. Platt one question. You 

didn’t especially like the pattern in practice proposal. Except for 

the six States, or maybe less than six States, does the secondary 

market securitizers have any liability if they don’t exercise any responsibility, or are you saying they shouldn’t have to exercise any 

responsibility, all of the responsibility should be placed on the lenders. 

Mr. PLATT. Well, let me first say that H.R. 3915 explicitly imposes liability on securitizers. The scope of the liability is more limited than some would like. 

Mr. WATT. The scope of the liability is very limited, and one of 

the things that we proposed was to expand it substantially, and it 

was like we had dropped a skunk in the room. So given your 

choice, would you prefer to have that liability extended, or would 

you prefer the pattern in practice, or neither one of them? 

Mr. PLATT. Well, let me respond in two ways. First, to the extent 

that any liability is imposed on the secondary market, we believe 

that it is really important that the market be able to determine in 

advance whether the loans they purchase comply with law. And 

when there is an inherently subjective standard, that is very hard 

to do. That is one reason why if there were to be any assignee liability, the more limited assignee liability in this law, we believe, 

tried to balance the interests of the two. Let me say secondly, that 

at a State level, there are many States that have imposed liability 

on assignees for the purchase of loans that violate the primary 

standards to which the creditors are subject. 

In some of those States, the assignees continue to purchase 

loans, because they believe that the liability is well within the risk 

that they are willing to bear for expanding their capital. But in 

those States where the liability is too high, they have withdrawn 

from the market. And one good example of that is the first State 

predatory lending law that Georgia enacted a few years ago. 

Mr. WATT. And Georgia modified the law, and securitizers went 

back in? 

Mr. PLATT. Yes. 

Mr. CALHOUN. Congressman Watt, if I could add just two things 

quickly. One, there is a little bit of disconnect. I think it is important to remember that the securitizers have a right of indemnification all the way down the chain, back to the originators. And it 

seems somewhat disingenuous that they are saying, ‘‘borrowers you 

should be able to go collect from the originators, the lender, that 

should be your primary remedy and that should be sufficient.’’ But 

they find it an ineffective remedy for them, as a much better funded corporate body, to exercise their blanket indemnity provisions 

that they have in every agreement when they purchase loans. 

The other point to respond to the testimony was there was concern about liability for loans outside of the qualified safe harbor. 

73

Essentially, the qualified safe harbor in the bill requires that you 

underwrite the loan. And then, the other primary factors are that 

it has to be either fixed rate for 5 years, or underwritten to a debt 

to income ratio set by Federal regulators. That does not seem, to 

follow up with the chairman’s nautical analogies, a small harbor to 

steer a ship into. 

Mr. WATT. What would be the problem with ramping up the extent of liability on the originator? I guess what I hear Mr. Platt 

saying is that you have these people buying loans. If you have a 

level of responsibility on the originator, an acceptable level of responsibility and liability, let’s say deterrent, for them being bad actors, why does there also have to be that level of liability on the 

securitizers? 

Mr. SILVER. A lot of subprime knowledge is sold on the secondary 

market. Probably most subprime loans are sold on the secondary 

market. So Representative Watt, we applauded you when you offered the amendment to qualify for immunity from liability. If you 

were a secondary market agent, or a securitizer, you had to either 

offer a cure, and have due diligence procedures. Right now, it is 

offer a cure, or have due diligence procedures, and that is a huge 

problem. 

Mr. WATT. So assume we can put that back in there, I am trying 

to figure out what would be the problem with wrapping up responsibility on the originator, and giving this securitizer less, substantially less responsibility, because they would like to be able to come 

in and buy a package of loans without having to do a bunch of 

work, they are just providing the money. They are not making the 

loan, they are not looking at the documents, but the originators 

are, and ought have, in my opinion, higher responsibility. What is 

the problem with that? 

Mr. CALHOUN. If I can respond, I think the two main are that 

those originators are often very thinly capitalized, and many of 

them have gone out of existence, and just a very practical obstacle, 

it is the trust, the holder of the loans, that forecloses. And so if you 

are a family facing foreclosure, it is little consolation to say I can 

go sue the creditor, but still be foreclosed and put out on the street, 

and maybe a few years later collect some money. 

One suggestion that we made, and I think at times this was considered, and it may even be the intent of the law, was you could 

obviate some of this by requiring foreclosure to be sent back down 

the chain if you will, the loan to be sent back down the chain. You 

can’t have it both ways, you can’t say I can foreclose, but I am not 

subject to any claims. You can not be subject to any claims, but if 

you want to foreclose, send the loan back down the chain. 

Mr. WATT. Thank you, Mr. Chairman, I am just trying to figure 

out the interplay that is taking place here. I mean, I think we are 

trying to get something that works and is effective, and is a deterrent to bad conduct. I agree with Mr. Calhoun, he may not have 

said it artfully in his statement, but the remedies need to be sufficient to deter bad conduct. That is more important than the remedies being sufficient to compensate, because if you can keep the 

bad conduct from taking place, then there won’t be any bad conduct 

to be compensated. 

74

The CHAIRMAN. Well, let me say that I appreciate it, because 

that does clarify it for me, but I also think that I agree with part 

of the question, if we can work it out, that is if you are trying to 

do that, then it is the person who is engaging in the conduct where 

you want to have the most focus, which is where we are, maybe 

we can find some ways to link the foreclosure. Let me also ask you, 

let me ask another question. 

The staff here, who work for the government, tells me a number 

of States, you said six States, but they were aware of only two 

where that applied beyond the HOEPA level. They told me that 

they thought that some of the States where they have done ability 

to pay, like my own State of Massachusetts, it is only at the 

HOEPA level, not at a high enough level, we felt, to do it. Do you 

know how many of the States have done it at only the HOEPA 

level? There were six you mentioned. 

Mr. CALHOUN. It is typical in States that have the so-called miniHOEPA. When I was referring to it, and I was talking about how 

it applied more broadly than the mini-HOEPA, for example, North 

Carolina applies it to subprime loans. 

The CHAIRMAN. How many have the ability to pay standard at 

the full subprime level; that was the question? 

Mr. CALHOUN. I would have to check, but I would be happy to 

provide that information. 

[After the hearing, Mr. Calhoun provided the following answer to 

Chairman Frank’s question: ‘‘Maine, North Carolina, Illinois, Massachusetts, Ohio, and Minnesota.’’] 

Mr. CHAIRMAN. Okay, yes. 

Mr. PLATT. Let me add, if I may, that the Conference of State 

Bank Supervisors promulgated a uniform version of the agency’s 

bank statement on subprime lending, which includes the obligation 

to determine the ability to repair. Virtually every State has adopted that as a guideline. 

The CHAIRMAN. But that is for State banks. If only banks made 

loans, I would not have spent the whole day here. 

Mr. PLATT. No, no, it is for mortgage companies. 

The CHAIRMAN. But there are States where they don’t have any 

enforcement on that. I mean, the State Bank Supervisors can say 

it, but how do the State Bank Supervisors enforce that against 

mortgage companies in States where they don’t have the jurisdiction over them? It is not my understanding that all States regulate 

the mortgage brokers. 

Mr. PLATT. It is adopted principally as a guideline, although 

sometimes a regulation by State— 

The CHAIRMAN. I appreciate that, but it is getting late, and let 

me cut to it, ‘‘guideline, schmideline.’’ I mean, nobody every lived 

in a guideline. Well, we will pursue this, we now have our votes 

coming up, so we will see you. 

[Whereupon, at 3:13 p.m. the hearing was adjourned.] 

(75)

A P P E N D I X

December 6, 2007

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