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50–312 2009

S. HRG. 110–909 

MORTGAGE MARKET TURMOIL: CAUSES AND 

CONSEQUENCES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

THE CAUSES AND CONSEQUENCES OF THE TURMOIL WITHIN THE 

MORTGAGE MARKET 

THURSDAY, MARCH 22, 2007 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 


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C O N T E N T S 

THURSDAY, MARCH 22, 2007 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 5 

Senator Brown .................................................................................................. 5 

Senator Bennett ................................................................................................ 6 

Senator Crapo ................................................................................................... 7 

Senator Bayh .................................................................................................... 8 

Senator Bunning ............................................................................................... 9 

WITNESSES 

Sandra Thompson, Director, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation .................................................... 11 

Prepared Statement ......................................................................................... 62 

Response to written questions of: 

Senator Martinez ....................................................................................... 228 

Senator Bunning ....................................................................................... 229 

Senator Crapo ............................................................................................ 231 

Emory W. Rushton, Senior Deputy Comptroller and Chief National Bank 

Examiner, Office of the Comptroller of the Currency ....................................... 12 

Prepared Statement ......................................................................................... 83 

Response to written questions of: 

Senator Bunning ....................................................................................... 241 

Senator Crapo ............................................................................................ 245 

Roger T. Cole, Director, Division of Banking Supervision and Regulation, 

Board of Governors of the Federal Reserve System .......................................... 14 

Prepared Statement ......................................................................................... 115 

Response to written questions of: 

Senator Bunning ....................................................................................... 248 

Senator Crapo ............................................................................................ 250 

Senator Martinez ....................................................................................... 252 

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

Thrift Supervision ................................................................................................ 16 

Prepared Statement ......................................................................................... 136 

Joseph A. Smith, Jr., Commissioner of Banks, State of North Carolina ............ 17 

Prepared Statement ......................................................................................... 157 

Response to written questions of: 

Senator Bunning ....................................................................................... 253 

Senator Crapo ............................................................................................ 255 

Jennie Haliburton, Consumer, Philadelphia, Pennsylvania ................................ 37 

Prepared Statement ......................................................................................... 190 

Al Ynigues, Borrower, Apple Valley, Minnesota ................................................... 38 

Prepared Statement ......................................................................................... 192 

Laurent Bossard, Chief Executive Officer, WMC Mortgage ................................ 39 

Prepared Statement ......................................................................................... 193 

Sandor Samuels, Executive Managing Director, Countrywide Financial Corporation ................................................................................................................. 41 

Prepared Statement ......................................................................................... 197 

Response to written questions of: 

Senator Bunning ....................................................................................... 257 

Senator Crapo ............................................................................................ 260 


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IV 

Brendan McDonagh, Chief Executive Officer, HSBC Finance Corporation ....... 42 

Prepared Statement ......................................................................................... 204 

Janis Bowdler, Senior Policy Analyst, Housing, National Council of La Raza .. 44 

Prepared Statement ......................................................................................... 214 

L. Andrew Pollock, President and CEO, First Franklin Financial Corporation 46 

Prepared Statement ......................................................................................... 221 

Irv Ackelsberg, Esquire, Consumer Attorney, Philadelphia, Pennsylvania ........ 47 

Prepared Statement ......................................................................................... 225 

Response to written questions of: 

Senator Crapo ............................................................................................ 265 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

‘‘Responsible Lending Guidelines and Best Practices’’, HSBC ............................. 267 

Steven Pearlstine, Columnist, The Washington Post, ‘‘ ‘No Money Down’ Falls 

Flat,’’ article dated March 14, 2007 .................................................................... 289 

Gretchen Morgenson, The New York Times, ‘‘Crisis Looms in Mortgages,’’ 

analysis dated March 11, 2007 ........................................................................... 290 

The New York Times, ‘‘Homeowners at Risk,’’ editorial dated March 15, 2007 . 294 

Becky Yerak and Sharon Stangenes, Staff Reporters, The Chicago Tribune, 

‘‘Subprime Lending Worries Hit Home,’’ article dated March 18, 2007 .......... 294 

Adriana Garcia, Reuters, ‘‘Hispanics’ American Dream Hit by Mortgage Crisis,’’ article dated March 18, 2007 ...................................................................... 296 

Craig Torres and Alison Vekshin, Bloomberg.com, ‘‘Fed, OCC Publicly Chastised Few Lenders During Boom,’’ article dated March 14, 2007 .................... 297 


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MORTGAGE MARKET TURMOIL: CAUSES AND 

CONSEQUENCES 

THURSDAY, MARCH 22, 2007 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

We again thank you all for being here this morning. The title of 

today’s hearing is ‘‘Mortgage Market Turmoil: Causes and Consequences,’’ and I want to welcome all of our witnesses here and 

other guests who are in the hearing room this morning. 

You cannot pick up a newspaper lately without seeing another 

story about the implosion of the subprime mortgage market. The 

checks and balances that we are told exist in the marketplace and 

the oversight that the regulators are supposed to exercise have 

been absent until recently, in my view. Our mortgage system appears to have been on steroids in recent years, giving a false sense 

of invincibility. Our Nation’s financial regulators are supposed to 

be the cops on the beat, protecting working Americans from unscrupulous financial actors. Yet they appear for the most part to 

have been spectators for too long. Risky exotic and subprime mortgages, all characterized by high payment shocks, spread rapidly 

through the marketplace. Almost anyone, it seemed, could get a 

loan. As one analyst put it, ‘‘Underwriting standards became so lax 

that if you could fog a mirror, you could get a loan.’’ 

Some of these loans have legitimate uses for major sophisticated 

borrowers with higher incomes. But a sort of frenzy gripped the 

market over the past several years as many brokers and lenders 

started selling these complicated mortgages to low-income borrowers, many with less than perfect credit, who they knew or 

should have known, in my view, would not be able to afford to 

repay these loans when the higher payments kicked in. 

I am going to take a few minutes to lay out what I can only call 

a chronology of neglect, in my view. Regulators have told this Committee that they first noticed credit standards deteriorating in late 

2003. By then, ratings had already placed one major subprime 

lender on a credit watch, citing concerns over their subprime business. In fact, data collected by the Federal Reserve Board clearly 


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indicated that lenders had started to ease their lending standards 

by early 2004. 

Despite those warning signals, in February of 2004 the leadership of the Federal Reserve Board seemed to encourage the development and use of adjustable rate mortgages that today are defaulting and going into foreclosure at record rates. The then-Chairman of the Fed said in his speech to the National Credit Union Administration, and I quote him, ‘‘American consumers might benefit 

if lenders provided greater mortgage product alternatives to the 

traditional fixed-rate mortgage.’’ That was in February of 2004. 

Three or 4 months after that, the Fed began a series of 17 interest rate hikes in a row, taking the Fed funds rate from June of 

2004 at 1 percent to 5.25 percent by June of 2006. 

So, in sum, by the spring of 2004, the regulators had started to 

document the fact that lending standards were easing. At the same 

time, the Fed was encouraging lenders to develop a market alternative, adjustable rate products. Just as it was embarking on a 

long series of hikes in short-term rates. 

In my view, these actions set the conditions for almost a perfect 

storm that is sweeping over millions of American homeowners 

today. By May of 2005, the press was reporting that economists 

were warning about the risks of these new mortgages. In June of 

that year, Chairman Greenspan was talking about froth in the 

mortgage market and testified before the Joint Economic Committee that he was troubled by the surge in exotic mortgages. That 

indicated that nearly 25 percent of all mortgage loans made that 

year were interest-only. Yet, in December of 2005, the regulators 

proposed guidance to rein in some of the irresponsible lending. Yet 

we had to wait another 7 months, until September of 2006, before 

the guidance was finalized. 

Even then, even now, the regulators’ response is incomplete. It 

was not until earlier this month, more than 3 years after recognizing the problem, that the regulators agreed to extend these protections to more vulnerable subprime borrowers—borrowers who 

are less likely to understand the complexities of the products being 

pushed on them and who have fewer reserves on which to fall if 

trouble strikes. 

We still await final action on this guidance, which I urge the regulators to complete at the earliest possible moment. Let me explain 

why these rules are so important. 

The subprime market has been dominated in recent years by hybrid ARMs, adjustable rate mortgages, loans with fixed rates for 2 

years that then adjust upwards every 6 months thereafter. These 

adjustments are so steep that many borrowers cannot afford to 

make the payments and are forced to make one of three choices: 

either to refinance at great cost, sell their homes, or default on the 

loans. No loan should force a borrower into this kind of devil’s dilemma. These loans are made on the basis of the value of the property, not the ability of the borrower to repay. This is, in my view, 

the fundamental definition of predatory lending. 

Frankly, the fact that any reputable bank or lender would make 

these kinds of loans so widely available to wage earners, to elderly 

families on fixed incomes, or to lower-income, unsophisticated borrowers strikes me as unconscionable and deceptive. And the fact 


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that the country’s financial regulators could allow these loans to be 

made for years after warning flags appeared is equally unconscionable. 

We have invited top five subprime lenders to testify today to explain these practices to us. Unfortunately, New Century declined to 

appear, even as they faced a blizzard of loans going into early default. Their absence from this hearing is regrettable. New Century 

played a leading role in pushing the unaffordable subprime loans, 

and they should be here to explain their actions. 

By implication, I want to thank the others who appeared here 

today to be a part of this hearing. I am deeply grateful to all of 

you for coming out, not only the regulators but also the other lending institutions that are here to talk about some of these issues, 

and I thank them for coming. 

How many homeowners were sold loans they could not afford in 

the time the regulators delayed? How many of these borrowers are 

still receiving these loans? The people paying the price for the regulators’ inaction are homeowners across our country, struggling to 

maintain their piece of the American dream. Home ownership is 

supposed to be the ticket to the middle class. Predatory lending reverses that trip. A study done by the Center for Responsible Lending estimates that up to 2.2 million families with subprime loans 

could lose their homes at a cost of some $164 billion in lost home 

equity. 

In the words of former Fed Reserve Board Member Edward 

Gramlich, ‘‘We could have real carnage for low-income borrowers.’’ 

I am quoting him here. Yet these numbers—these are just numbers—beyond these large numbers. I hope we can stay focused on 

the human tragedies behind them. We need to keep them in mind, 

people like Mrs. Delores King, an elderly retired woman who testified before us last month regarding her circumstances. Mrs. King 

was advised by her mortgage broker to take out a loan whose payments quickly shot up beyond her means, simply to pay off a 

$3,000 debt. 

Or Amy Womble, a small business woman and widow with two 

children, who was promised a mortgage of $927 per month, ended 

up with one, as a result of her financial adviser—at least what she 

thought was her financial adviser—with a mortgage costing her 

over $2,000 a month. Both of these women are now struggling to 

keep their homes. We should not let them struggle alone, obviously. 

We need to let them know and the American people know that we 

intend, all of us here, to fight for them to see that this kind of practice is stopped. 

We will hear this morning from another woman, Mrs. Jennie 

Haliburton, about how those practices caused so much hardship in 

her case. 

The challenges are clear, in my view. We need to take several 

steps. First, we need to put a stop to abusive and unsustainable 

lending. The regulators must finalize decent subprime guidance as 

quickly as possible. 

Second, the Federal Reserve should exercise its authority under 

the Home Ownership and Equity Protection Act, the HOEPA bill, 

which was adopted, I think, in 1994, is that correct? Some 13 years 

ago—which, by the way, uses the words very clearly, to quote the 


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HOEPA legislation, ‘‘The Board, by regulation’’—I am quoting now. 

‘‘The Board, by regulation or order, shall prohibit’’—‘‘shall prohibit’’—‘‘acts or practices in connection with—’’ and it goes on, 

‘‘[(A)] mortgage loans that the Board finds to be unfair, deceptive, 

or designed to evade the provisions of this section; and (B) refinancing of mortgage loans that the Board finds to be associated 

with abusive lending practices, or that are otherwise not in the interest of the borrower.’’ It is not advisory. It is not a voluntary 

question. It is a demand. Thirteen years ago that legislation was 

adopted. 

And under the FTC Act, by the way, it prohibits these abusive 

practices and products for all mortgages and mortgage participants, 

including, by the way, not only federally chartered but State-chartered. I was stunned this morning to read in the Wall Street Journal a quote from a Federal Board member that does not know the 

distinction here, saying that it is only under federally chartered. 

You can go back and the law is very clear, when it comes to these 

universal fair credit practices here, that any kind of lending practice, whether it is done by a State or a federally chartered institution. And under the FTC Act—and I will quote it as well here— 

‘‘The Board of Governors of the Federal Reserve System shall prescribe regulations to carry out the purposes of this section, including regulations defining with specificity such unfair or deceptive 

acts or practices and containing requirements prescribed for the 

purpose of preventing such acts or practices.’’ Again, the language 

is very clear about shall act here. 

Anyway, the third point I want to make is that I intend to work 

with our colleagues here and others who are interested to introduce 

legislation to attack the problem of predatory lending generally. 

Passing such legislation will be hard. I understand that. And there 

are plenty of market players out there who stand to lose if we provide decent protections for consumers. But we must push forward 

in this area. 

And, finally, we need to deal with the problems of the millions 

of homeowners who may face foreclosure after being hit with the 

payment shocks built into their mortgage. The solution to this 

problem may not be legislative. Instead, I would seek to ask leaders from all the stakeholders—regulators, investors, lenders, GSEs, 

FHA, consumer advocates—to come together and try to work out 

an efficient process for providing some relief for these homeowners 

who will be caught in this bind. And I will have more to say on 

this in the coming weeks. 

One thing I know for sure, we simply cannot sit back and watch 

2.2 million families lose their homes and, with them, their financial 

futures. 

Let me be clear. The purpose of this hearing is not to point fingers per se, but to try and find some solutions to this issue. We 

need to get to the bottom of this problem, understand thoroughly 

what went wrong, and then work to make sure we don’t see a repeat of this problem. 

With that, let me turn to my colleague from Alabama for any 

opening comments he may have, and we will go to our witnesses 

unless any of my colleagues want to make any brief opening statements. 


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STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Senator Dodd. Thank you for calling 

this hearing. 

It is clear from recent headlines and from our observations of the 

mortgage market that there are significant problems in the 

subprime sector. This Committee has a responsibility to examine 

fully all aspects of what appears to be a deep and a growing problem. While I believe it is important to hear from the bank regulators and some lenders, we must also hear from other relevant 

market participants because we have a number of questions that 

need to be answered, such as: What is the full scope of this problem? What caused it? In other words, was it a single factor or a 

series of factors? Who are all the market participants? And what 

role does each of them play here? What type of products are involved? How is the market responding to this crisis? And what effect is it having? Is there a role for Congress, or is it too early to 

tell? 

In order to answer these questions, Mr. Chairman, I believe that 

we will need to hear from not only regulators and lenders but from 

mortgage brokers, bankers, the Wall Street firms involved in 

securitizing these mortgages, and the credit rating agencies whose 

ratings make the sale of these securities possible. 

As always, I remain interested in facilitating market-based solutions to market-generated problems. But when the market fails, I 

am not altogether opposed to seeking some alternative solutions. 

My hope, Mr. Chairman, is that we today will hear that our witnesses are taking meaningful steps to mitigate damage done by the 

changing real estate market and a growing number of mortgage delinquencies and foreclosures. We might be at the tip of an iceberg 

in the subprime area. I hope that we are making headway, but I 

am not sure. 

Thank you. 

Chairman DODD. Thank you very much, Senator. 

Let me ask briefly if any of my colleagues want to make a brief 

opening statement. Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. I want to thank you 

for calling today’s hearing. I want to thank the many witnesses 

who have joined us to help us understand the crisis we face and 

what options we have for limiting the damage. 

Viewed from the supervision of financial markets or from the 

vantage point perhaps of Federal regulators, ‘‘crisis’’ may seem like 

too strong a term. That is probably true. I do not think what is 

happening in the subprime mortgage market will undermine the 

safety and soundness of our banking system, and the companies 

who will testify today will no doubt weather the storm. But ‘‘crisis’’ 

exactly describes what is going on in Ohio and in many other 

States. My State has a greater percentage of properties in foreclosure than any other. Families are losing not just their homes, 

but in many cases their life savings. Neighborhoods are being 

dragged down as one foreclosure piles upon the next. 

Ohio had some of the weakest consumer protection laws in the 

country, so the State shoulders some of the blame. But the Federal 


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response has been far too slow. The mortgage industry seems almost to have turned on a dime in 2004, pushing subprime and exotic mortgages on consumers so as to keep the pipeline full for investors. But here we are 3 years later still talking about these 

problems. 

Certainly Congress should have acted more quickly, could have 

acted more quickly, but by design, our process is cumbersome. We 

rely on our regulatory agencies to be as nimble as the industries 

they regulate, and that has not been the case with respect to nontraditional and subprime loans. It is better that we act now—certainly better now than never, but hundreds of billions of dollars 

worth of dubious mortgages have been made while we dithered, 

and the futures of thousands upon thousands of Ohio families and 

others around the country have been jeopardized. 

The Cuyahoga County Treasurer, Jim Rokakis, has been a leader 

in my State in calling attention to the mortgage crisis. Exactly 1 

week ago, he attended an auction of the house he grew up in on 

Cleveland’s Garden Avenue. The house had an $85,000 mortgage 

on it. It sold for $19,000. 

Ohio will do everything it can to address this crisis. Governor 

Strickland has formed a high-level task force to figure out how best 

to help people hang onto their homes, but Ohio needs and deserves 

our help. It needs the help of the regulatory agencies. It needs the 

help of Congress. It needs the help of the companies that have been 

doing and continue to do business in my State. Mortgage companies have demonstrated they can be innovative and they can be 

persuasive. I hope we can count on the same level of energy from 

them being devoted to solving this crisis that we have seen from 

them over the past several years. 

Thank you, Mr. Chairman. 

Chairman DODD. Senator Bennett, do you want to make any 

opening comments at all? 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Just one quickly, Mr. Chairman. You go back 

to the Dutch in tulip time; in our own time, you go to the dot-com 

bubble and then the housing bubble. It seems we never learn that 

things that are too good to be true are. And this was stoked by the 

tremendous increase in housing prices and housing assessments, 

appraisals, and they got very much out of hand. And then everybody came to the same conclusion the Dutch did in the 1600’s, that 

the price of tulips was never going to come down. And when the 

housing prices started to come down, everybody had to pay the 

price. 

So here we are once again, whether it is the dot-com bubble or 

the housing bubble or whatever the next one will be, once again we 

are dealing with the consequences of that, and I think it is appropriate that we have the regulators here to remind them once again 

that when these bubbles come up, there is always a burst somewhere at the end of the line. 

Chairman DODD. Excellent. 

Senator Casey. 

Senator CASEY. Mr. Chairman, thank you, and thank you for 

calling the hearing. I will be very brief. 


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I want to thank those witnesses who are here for your testimony 

today, but I want you to understand something, and many of you 

do, and I hope you do: that this issue is real for a lot of people out 

there, people that have to work two jobs and sometimes more, and 

people that have to try to make ends meet. And the cost of everything in their life is going through the roof. Health care especially, 

college tuition, you name it, the cost is going up for these people. 

The last thing they need is to be scammed in a subprime mortgage or some other deal that puts them at a disadvantage. And it 

is up to you as regulators, not just to understand that but to crack 

down on it in a way that will bring some measure of relief to these 

people. 

It is great we are here at a hearing, and we have got a lot people. 

That is wonderful. But where the rubber hits the road on this is 

how you do your jobs in a way that fulfills your obligation. We have 

got an obligation here, everybody around this panel has an obligation, to do the people’s business, and not just to talk and pontificate and give speeches, but to get to work to fix this problem. And 

until that happens, all the hearings and all the discussions in the 

world are not going to mean anything to real people. 

So you have got an important obligation, and we do as well. But 

I think what people expect us to do is to discharge the duties of 

our office. You know what your duties are, and I hope today is one 

way to remind all of us about that basic obligation to real people 

in their real lives in the real world. 

Thank you. 

Chairman DODD. Thank you, Senator Casey. 

Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. I will be 

brief as well. 

I want to associate with the comments of Senator Shelby about 

hoping that we can focus as much as possible on market-based solutions rather than trying to assume a higher regulatory burden 

than is necessary. But once again we are in a circumstance where 

there are problems. The hearing that we had in February showed 

very clearly that the system got ahead of us. 

I can remember just back a few months, 3, 4, 5 months ago, 

when we were all extolling the manner in which the housing market in our country was keeping the economy strong and stable. 

Now we are talking about problems in the housing market as it 

overheated. And as Senator Bennett indicated, as the bubble 

reached its popping point and prices of real estate started to drop, 

now we have seen that yet once again a market is operating. And 

there are problems in this market, and I hope that we as a Committee and our regulators are able to recognize the right adjustments that need to be made. Already, if you look at the market 

itself, adjustments are occurring. Stock prices of major subprime 

specialists have plummeted. Credit spreads on lower-rated 

tranches of subprime securities have widened appreciably as investors demand a greater return on the riskier investments. Various 

segments of the subprime market have already raised credit standards on their own, and we see that credit is tightening for conVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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sumers with lower credit ratings, all of which should have occurred 

and should have occurred sooner. 

In fact, I think that the biggest lesson I learned from our last 

hearing was that although we do have pretty significant market 

discipline in place that occurs, it lags as we face one of these types 

of things, and a lot of damage occurs in the wake of the slow reaction of the market and the slow reaction of the regulators and the 

Congress to the issue. 

It would be good if we all had the prescience to be able to see 

when these bubbles were going to occur and when we needed to be 

prepared to act. But I think the real lesson here is that we have 

to contemplate them. We have to recognize that they will come, 

and we need to have the right regulatory model in place, and we 

need to have the right oversight at Congress in place. And, frankly, 

the markets need to be recognizing this same type of thing as markets operate with their internal mechanism and market-driven responses. 

So I guess the overall message I want to deliver here is that I 

am very pleased that we are having this hearing. It is a very, very 

significant issue, and there are significant problems in the 

subprime markets. But yet once again I wanted to be sure that as 

we address it, we don’t swing that pendulum too far back to the 

point where we start restricting credit to people who should have 

credit or who should have some amount of credit but maybe not as 

much as the hot markets were driving onto them in the last little 

while. It is a very delicate balance that we have to reach here, and 

I appreciate and applaud the Chairman’s efforts to shine a spotlight on this so that we can try to help us get to that balance. 

Chairman DODD. Thank you, Senator. Very thoughtful statement. I appreciate it very much. 

Senator Bayh. 

STATEMENT OF SENATOR EVAN BAYH 

Senator BAYH. Mr. Chairman, I would like to begin by thanking 

you. Today’s hearing deals with one of the most pressing economic 

challenges that our country faces. Yesterday’s hearing dealt with 

one of the most significant national security challenges that our 

country faces. And so I am delighted to see the Committee being 

so aggressive in taking on some of the major issues of our time, 

and I want to thank you and Senator Shelby for that. 

I, too, will be very brief. This is an important issue for my State. 

We rank second in the country in delinquencies and fourth in foreclosures for reasons that are similar, I think, to Senator Brown’s 

statement about his own State of Ohio. Many people are struggling 

in the Midwest and places like Ohio and Pennsylvania and Indiana 

because of the changes in the manufacturing economy and also, 

Mr. Chairman, because of the overall middle-class squeeze that is 

going on, with rising health care costs and college tuition and people having trouble making ends meet. And we see that reflected in 

the mortgage markets. 

We rely upon markets to allocate resources and risks, and we 

have learned over history that markets do that better than any 

other mechanism that we have been able to come up with. But 

markets, as we have all learned and as Senator Bennett reminds 


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us, are not perfect. And that is why we have regulation, particularly when information is not perfect. And we rely upon regulators 

to ensure that markets operate efficiently, but within some bounds 

of reason so that people are not hurt for reasons that are not adequate to them. 

So, Mr. Chairman, I thank you for this. Senator Bennett, I want 

to thank you for your comments about the tulip bubble. I am going 

to date myself. I was having a Tiny Tim moment here with your 

discussion about tulips. But I will just end on a statement about 

‘‘A Tale of Two Cities,’’ maybe on a more literary note, in ‘‘A Tale 

of Two Cities,’’ when Dickens said, ‘‘It was the best of times, it was 

the worst of times.’’ We see that in our country today. Many people 

are doing quite well. Others are struggling to make ends meet. We 

see the manifestations of the latter here today, and we are gathered to do something about it, Mr. Chairman, and I thank you for 

that. 

Chairman DODD. Thank you very much, Senator. 

With that, let me turn to our witnesses, and I thank our panel 

for being here. 

Senator BUNNING. There are others on the Committee—— 

Chairman DODD. I am sorry. I apologize. 

Senator BUNNING. That is all right, Mr. Chairman. I notice that 

everybody else has been taken care of. 

[Laughter.] 

Chairman DODD. Mea culpa, mea culpa, mea maxima culpa. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. That is OK. Thank you very much. I am 

amazed that sitting here, listening to all of our colleagues on this 

Committee, and they forget about who used to come here before 

this Committee and brag about the housing market carrying the 

economy: none other than our former Chairman of the Federal Reserve, Alan Greenspan. And, he was in charge of bank regulation 

at the time that all these kind of sophisticated mortgages came into 

being. I did not hear him say a word about those mortgages when 

he was here, and now I hear him criticizing everybody that is in 

the business of lending. 

We have a lot of people in housing over their heads, and they are 

over their heads because of the subprime market lending practices 

that went on under Greenspan’s watch. I think if you are going to 

criticize and watch a bubble burst, as Greenspan did not only in 

the housing market but in the market prior to that where he predicted the dot-com downfall before it came, you ought to at least 

take some of the responsibility on your shoulders for having it happen under your watch. 

I say that knowing that we are going to try to fix this problem. 

It is real. It is a problem centered in the Midwest because of the 

manufacturing base that has been lost in the Midwest; Kentucky 

has not been affected nearly like Ohio or Indiana because we have 

not lost our manufacturing base nearly as bad. We do have some 

foreclosures, but we also have a lot of people that did not get in 

over their heads, and they were subject to people trying to entice 

them into overbuying. And I say that as kindly as I can, because 

I know—I have a lot of children that are buying houses, and the 


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first thing I told them is don’t take an interest-free mortgage on 

your house or just an interest-only mortgage on your house. Take 

one that you have to pay some of the principal off, because, you are 

never going to have a change or be able to capture and buy that 

house if you just are paying interest, because if the interest rates 

change you are going to get stuck. And that is what we have had 

with subprime lending as a problem right now. 

And I say that, Mr. Chairman, as kindly as I can, hoping that 

we find a nice, reasonable solution to this problem. 

Thank you. 

Chairman DODD. I should point out, and I apologize for missing 

my colleague from Kentucky here, but I should also note for the 

record that the one individual a year or so ago who held two hearings on this subject matter was the Senator from Kentucky, along 

with Senator Allard. And I am grateful to him for raising the issue 

early on, and what we did in February and what we are doing here 

today is a continuation of your efforts in this regard. So I want the 

record to express my appreciation for your work on that, in addition to apologizing to you. How did I miss a white-haired guy on 

the Committee? 

[Laughter.] 

Well, let me introduce our witnesses here and thank them once 

again for being with us. 

Ms. Sandra Thompson—and we thank you, Ms. Thompson, for 

being here—is the Director of the Federal Deposit Insurance Corporation’s Division of Supervision and Consumer Protection. I want 

to recognize the leadership, by the way, and the role that the FDIC 

and Chairman Bair have exercised in the effort to put out the proposed subprime guidance. I am very, very grateful to the leadership 

that Ms. Bair has shown in this area, and I am hopeful that she 

will be able to bring this effort to fruition sooner rather than later, 

as I mentioned in my opening comments. 

Emory Rushton—we thank you as well, Mr. Rushton, for being 

with us—serves as the Senior Deputy Comptroller and Chief National Bank Examiner in the Office of the Comptroller of the Currency. He is also Chairman of the Committee on Bank Supervision. 

Roger Cole—Mr. Cole, we thank you—is Director of the Division 

of Banking Supervision and Regulation at the Federal Reserve 

Board. In his capacity, he is the senior Federal Reserve Board staff 

official with responsibility for banking supervision and regulation. 

Mr. Scott Polakoff in November of 2005 was named as the Deputy Director and Chief Operating Officer for the Office of Thrift Supervision. He joined the OTS after serving 22 years with the FDIC, 

and we thank you for being here. 

And Mr. Joseph Smith, Jr., was appointed the North Carolina 

Commissioner on Banks in 2003. He is a member of the Conference 

of State Bank Supervisors and currently serves as the organization’s secretary, and we are very grateful to have you here representing your fellow bank supervisors from all across the country. 

Thank you for being with us. 

We will begin with you, Ms. Thompson, and, again, what I would 

like to do here is, all of your statements, any supporting documentation you want to make sure is a part of this Committee hearing will be included in the record. That will go for all of the witVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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nesses here today, and any of my colleagues that want to have 

opening statements or additional background information they 

think may be of assistance to the Committee will be included. So 

we do not need to repeat that again. 

I am going to urge you, if you can, each of you here, to try and 

keep your remarks down to about 5 minutes apiece so we can get 

to the question-and-answer period for us here. I am not going to 

hold you rigidly to that, but keep in mind the clock ticking so we 

can try and move along. 

Ms. Thompson, thank you. 

STATEMENT OF SANDRA THOMPSON, DIRECTOR, DIVISION OF 

SUPERVISION AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. THOMPSON. Good morning, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. I appreciate the opportunity to testify on behalf of the FDIC regarding the residential 

mortgage market. My written testimony covers the impact that 

nontraditional and subprime mortgages are having on consumers, 

on FDIC-supervised institutions, the supervisory standards the 

Federal banking agencies have imposed, enforcement actions the 

FDIC has taken, and options for troubled borrowers. I will touch 

briefly on a few of the key points in my testimony. 

The current U.S. mortgage market reflects a number of trends 

that substantially change the marketing and funding of mortgage 

loans. These factors include rising home prices, historically low interest rates, intense lender competition, mortgage product innovations, and an abundance of capital from lenders and investors in 

mortgage-backed securities. 

Lenders diversified mortgage offerings and eased lending standards as they competed to attract borrowers and meet the financing 

needs of prospective home buyers. While liberalized underwriting 

standards allowed more borrowers to qualify for home loans, competitive pressures eventually led to the abandonment of the two 

most fundamental tenets of sound lending: approving borrowers 

based on their ability to repay the loan according to its terms, not 

just at the introductory rate, and providing borrowers with clear 

information to help them understand their loan transaction. As a 

result of lenders’ failure to follow these principles, many borrowers 

find themselves with loans they do not understand and loans they 

cannot afford. 

With respect to mortgage lending, over the past 2 years the Federal banking agencies have published a number of examiner and 

industry guidance documents warning about deteriorating underwriting standards. The agencies’ concerns included interest-only 

and negative amortization features; limited or no documentation of 

borrowers’ assets, employment, or income; high-loan-to-value and 

debt-to-income ratios; simultaneous second liens; and increased use 

of third-party or broker transactions. 

The agencies’ recent mortgage guidance says that consumers 

should be provided with clear and accurate information about these 

products. To help the industry provide necessary information to 

borrowers, the agencies proposed model disclosures that institutions may use to assist customers as they select products or choose 


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payment options. Collectively, the standards articulated in the various guidance build on fundamental and longstanding consumer 

protection and risk management principles. 

The FDIC enforces mortgage lending standards through examinations and supervisory actions. We have identified those insured 

institutions that are engaged in subprime lending, and we are 

closely monitoring their practices. Our examination processes led to 

the issuance of more than a dozen informal and formal enforcement 

actions that are currently outstanding against institutions that fail 

to meet prudential mortgage lending standards. 

While the Federal bank regulators have issued guidance to address the issues raised by nontraditional and subprime loans, as 

well as taking appropriate enforcement action, there remain a large 

number of borrowers who obtain these loans and face potential economic hardship. Some borrowers with loans due to reset may be 

able to take advantage of the current interest rate environment 

and refinance into a fixed-rate mortgage. However, this is not going 

to be an option for everyone. In many cases, these loans have been 

securitized, which makes it more challenging to apply the flexibility 

necessary to develop solutions for borrowers because the terms of 

the securitizations limit loan workout options. 

The FDIC has already begun discussions with lenders, servicers, 

and other participants in the subprime market. With regard to 

subprime loans held in insured depository institutions, the FDIC is 

working to reassure financial institutions that they do not face additional regulatory penalties if they pursue reasonable workout arrangements with borrowers who have encountered financial difficulties. 

In addition, programs that transition borrowers from higher-cost 

loans to lower-cost loans may receive considerable favorable consideration as a lender’s Community Reinvestment Act performance is 

assessed. The FDIC strongly supports such programs. 

Simply put, we want people not only to be able to buy a home, 

but also to keep their home. It is in the long-term best interest of 

both the borrower and the lender to have a loan product that is 

prudently made and appropriately meets the borrower’s need and 

financial capacity. 

This concludes my statement, and I will be happy to answer 

questions that the Committee might have. 

Chairman DODD. Thank you very much. You did it on time. You 

were right on the button. 

Mr. Rushton. 

STATEMENT OF EMORY W. RUSHTON, SENIOR DEPUTY COMPTROLLER AND CHIEF NATIONAL BANK EXAMINER, OFFICE 

OF THE COMPTROLLER OF THE CURRENCY 

Mr. RUSHTON. Thank you, Chairman Dodd, Ranking Member 

Shelby, and members of the Committee. I appreciate this opportunity to answer your questions about mortgage lending in national 

banks and our supervision of it, especially in regard to the 

subprime sector, now so much in the news. 

I bring the perspective of 42 years as a national bank examiner, 

during good times and bad. I have had the opportunity to examine 


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banks throughout the country, and I have spent a number of years 

here in Washington working on bank supervision policy. 

We are very concerned about declining loan performance and rising foreclosures in the subprime market. It is easy to forget in this 

environment that such loans have enabled homeownership for millions of Americans. Even today, most subprime borrowers are paying their loans on time and are expected to continue doing so. 

Subprime loans are not inherently predatory or abusive, but those 

that are have no place in the banking system. 

Underwriting standards in certain segments of the mortgage 

market have been declining for several years. This trend was epitomized by the growing popularity of so-called nontraditional mortgage products, such as interest-only and payment-option ARMs. 

The OCC signaled its concern about this trend in a series of escalating steps beginning in the fall of 2002. By 2005, we had instructed our examiners to more aggressively address these risks in 

national banks that were making them, even though home prices 

were still rising. Comptroller Dugan and other OCC officials spoke 

publicly and privately about this problem with industry leaders, 

and we initiated the interagency process that resulted in the nontraditional mortgage guidance last year. 

That guidance addressed the underwriting and consumer protection issues associated with payment shock for borrowers who were 

qualified on the basis of low start rates in effect during the early 

years of their loans. The guidance required financial institutions to 

evaluate the borrower’s repayment capacity, making fully amortizing payments at the fully indexed rate. It also addressed the increasingly common practice of reliance on reduced documentation, 

especially unverified income, and it directed lenders to provide borrowers with better and more timely information about these products. 

Because we had not included all categories of mortgages with the 

potential for payment shock in that nontraditional guidance, and, 

Mr. Chairman, in response to the constructive recommendations we 

received from you and others, we have turned our attention to the 

subprime sector, and especially to hybrid ARMs. These make up 

the biggest portion of the subprime mortgages being originated 

today. 

As compared to nontraditional loans, reset margins on hybrid 

ARMs tend to be much bigger and the potential for payment shock 

even more severe. We are also concerned about the structure and 

size of prepayment penalties that can be a major obstacle when 

borrowers try to refinance. As with the nontraditional guidance, 

the proposed subprime statement calls for higher standards of underwriting, disclosure, and consumer protection. 

Having said this, Mr. Chairman, we are keenly aware that any 

steps we take to address problems in this area—prime or 

subprime—must be sensitive to the potential impact on existing 

and future homeowners and on the broader economy. 

I want to emphasize that national banks are not dominant players in the subprime market. Last year, their share of all new 

subprime production was less than 10 percent. We know of some 

subprime lenders that have abandoned their plans for a national 

bank charter rather than submit to the supervision of the OCC. 


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Moreover, subprime lending in national banks tends to be higherquality lending, with delinquency rates only about half the industry average. When delinquencies do occur, we strongly urge national banks to work closely with borrowers to help resolve their 

problems. 

Unfortunately, regulatory oversight tends to be less rigorous in 

precisely those parts of the financial system where subprime practices seem most problematic. We hope the subprime guidance that 

we have proposed will inspire comparable measures by other regulators, just as occurred with the nontraditional guidance last year. 

In conclusion, let me assure you that my colleagues and I at the 

OCC are committed to bank safety and soundness and fair treatment of consumers, and we do this through supervision that addresses abuses without stifling healthy innovation. 

We look forward to working with you, Mr. Chairman, and members of the Committee. I will be pleased to answer your questions. 

Chairman DODD. Thank you very much. 

Mr. Cole. 

STATEMENT OF ROGER T. COLE, DIRECTOR, DIVISION OF 

BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. COLE. Chairman Dodd, Ranking Member Shelby, Members of 

the Committee, I appreciate the opportunity to discuss the problems in the subprime mortgage sector and the Federal Reserve’s 

supervisory response. 

I have been in banking supervision for more than 30 years. To 

date, the deterioration in housing credit has been focused on the 

relatively narrow market for subprime adjustable rate mortgages 

which represent fewer than one in ten outstanding mortgages. 

There also is some deterioration in Alt-A mortgages. Borrower performance deterioration has been concentrated in loans made during 

the past 18 months. Problems in those loans started to become apparent during the latter half of 2006. 

The Federal Reserve is concerned about the human dimension of 

these developments. Some subprime borrowers are clearly experiencing significant financial challenges, and more may join these 

ranks. At the same time, some subprime lenders and investors 

have faced financial difficulties as the subprime market corrects. 

There also may be additional fallout in this market segment. 

The Federal Reserve has been monitoring developments in the 

subprime mortgage market over the past 10 years and has adjusted 

our supervisor activities as facts and circumstances have warranted. In our examinations of supervised institutions, most risk 

management practices we have observed in the subprime lending 

area have been sound; however, in cases where we observe weaknesses, either from a safety and soundness or from a consumer protection perspective, we have directed management to take corrective actions. 

As early as the late 1990s, we became increasingly concerned 

about institutions with significant concentrations in subprime lending. As a result, Federal Reserve examiners conducted reviews of 

underwriting standards, management information systems, appraisal practices, and securitization processes. In some cases, suVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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pervisors took formal enforcement actions to address deficiencies 

identified in these examinations and, I might also add, levied significant fines. 

More recently, we have conducted examinations on stress testing 

economic capital methods and other quantitative risk management 

techniques to ensure that banks are assessing the level and nature 

of the risks of subprime and nontraditional lending appropriately. 

Since the early 1990s, the Federal Reserve and the other agencies 

have issued a number of guidance statements on residential real 

estate lending that have focused on sound underwriting and risk 

management practices, including the evaluation of the borrower’s 

repayment capacity and collateral valuation. 

In 2005, the agencies issued guidance on nontraditional mortgage loans that permit the deferral of principal and in some cases 

interest. As the principles of sound lending have been with us for 

generations, most of the guidance we issue is to remind bankers 

what they should already be doing. 

Earlier this month, the agencies proposed additional guidance in 

subprime mortgage lending which emphasizes the added dimensions of risk when such products are combined with risk-layering 

features. The Federal Reserve also has significant rule-writing responsibilities for consumer protection laws. In 2002, the Federal 

Reserve expanded the information that lenders are required to collect under the Home Mortgage Disclosure Act for certain higherpriced loans and extended reporting responsibilities to more Stateregulated mortgage companies. The Federal Reserve also has responsibility for the Truth in Lending Act and its required disclosures and has begun a comprehensive review of Regulation Z, 

which implements that act. 

As you are aware, the Federal Reserve and the Office of Thrift 

Supervision recently added information about nontraditional mortgage products to the Consumer Handbook on Adjustable Rate 

Mortgages. We also published a consumer education brochure on 

interest-only mortgages and option ARMs. 

The Federal Reserve believes that the availability of credit to 

subprime borrowers is beneficial when such loans are originated in 

a safe and sound manner. Our focus is on sound underwriting and 

risk management practices and on promoting clear, balanced, and 

timely consumer disclosures. Lenders and investors should take an 

active role in working through the current problems in the 

subprime market and in understanding how a stressed environment may affect credit quality. The Federal Reserve also recognizes 

that a rising number of borrowers are having difficulty meeting 

their obligations. Examiners will not criticize institutions if they 

pursue reasonable workout arrangements with borrowers. Working 

constructively with borrowers is in the best interest of lenders, investors, and the borrowers themselves. 

That concludes my oral remarks. Thank you. 

Chairman DODD. Thank you very much, Mr. Cole. 

Mr. Polakoff. 


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STATEMENT OF SCOTT M. POLAKOFF, DEPUTY DIRECTOR AND 

CHIEF OPERATING OFFICER, OFFICE OF THRIFT SUPERVISION 

Mr. POLAKOFF. Good morning, Mr. Chairman, Ranking Member 

Shelby, Members of the Committee. Thanks for the opportunity to 

represent OTS’ views today. 

In the limited time that I have this morning, I would like to 

focus on three key areas: No. 1, the difference between subprime 

and predatory lending, including the importance of this distinction; 

No. 2, the extent of subprime lending in OTS-regulated thrift industry and our concerns with subprime lending activity outside of 

the insured depository arena; and, No. 3, OTS’ efforts in examiner 

training on overseeing subprime and nontraditional mortgage lending programs combating predatory lending. 

First, it is important to recognize that subprime lending and 

predatory lending are not synonymous. Specifically, not all 

subprime lending is predatory, and not all predatory lending is in 

the subprime market. Appropriately underwritten loans to the 

subprime borrower are an important element of our financial economy. We believe that timely and appropriate regulatory responses 

will effectively address the issues of predatory lending in our regulated financial entities, without, most importantly, restricting appropriate credit to worthy borrowers. 

As I explain more fully in my written statement, a significant 

and ongoing OTS concern is striking the right balance with guidance that is targeted at the subprime market. We want to promote 

responsible lending by the institutions we regulate. We do not want 

to divert subprime borrowers to less regulated or unregulated lenders. 

The next issue I would like to highlight for you is where 

subprime lending activities are concentrated, and it is not the thrift 

industry. Recent data indicates that nearly 69 percent of all U.S. 

households are homeowners, with national home mortgage debt 

around $10 trillion. Subprime mortgages account for about $1.3 

trillion, or roughly 13 percent of the national mortgage debt, and 

hybrid ARMs are the predominant product in the subprime market. 

2006 data shows that only 17 of our 850 thrifts have significant subprime lending operations. These institutions have $47 billion in 

subprime mortgages, which represents less than 4 percent of the 

nationwide subprime market. 

We believe that up to 80 percent of the subprime loans are originated through mortgage brokers, and currently there are roughly 

44,000 licensed mortgage brokers in the United States. Mortgage 

brokers are typically required to obtain a State license, but frequently there are no testing or educational requirements as part of 

that process. Complicating the picture is the difficulty in doing reliable background checks to draw from a national criminal data 

base, such as the FBI’s system. 

It was recently reported in the American Banker that eight 

States have no regulation of mortgage bankers and lenders. Two of 

these States have the highest delinquency rates in the country for 

subprime hybrid ARMs, with delinquency figures substantially 

above the national average. We understand that the Conference of 

State Bank Supervisors and the American Association of ResidenVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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tial Mortgage Regulators are currently working on a nationwide 

residential mortgage license program to address part of the problem, and we applaud that effort. Addressing subprime lending 

abuses requires attention at the point where the abuse occurs. This 

is almost always the point of contact between the borrowers when 

they make their loan decision and the mortgage brokers. 

Finally, I would like to address OTS’ efforts aimed as overseeing 

subprime and nontraditional mortgage lending programs in combating predatory lending. OTS-regulated institutions that engage 

in significant subprime lending programs are subject to heightened 

OTS supervision with respect to the conduct and operation of these 

programs. Institutions are reviewed from the safety and soundness 

perspective, and they are also scrutinized to ensure that their institution is lending responsibly and following applicable consumer 

protection laws and regulations. Our review includes an assessment of any unusual consumer complaint activity regarding their 

mortgage lending operations. 

We also stress the need for institutions to work with their borrowers to resolve payment delinquencies in a timely manner. Strategies to prevent foreclosure can often be beneficial to the lender, 

the borrower, and the community. We encourage all of our regulated institutions to consider and adopt such programs in a manner 

consistent with safe and sound practices and consumer protection 

regulations. 

The OTS has an effective formal and informal enforcement program to address problematic and potentially abusive consumer 

lending practices. A few of our regulatory actions resulted in the 

institutions surrendering their charter. 

A final point regarding OTS efforts to improve and promote compliance with applicable consumer protection programs is our robust 

consumer complaint process. We continually track consumer complaints on both an institution-specific basis and complaint category 

basis to ensure both timely and appropriate regulatory responses. 

Consumer complaint data is reviewed again as part of our examination process to focus our examination resources properly. 

That concludes my remarks. Thank you for the opportunity, and 

I look forward to answering any questions. 

Chairman DODD. Thank you very much. 

Mr. Smith, thank you for being here. 

STATEMENT OF JOSEPH A. SMITH, JR., 

COMMISSIONER OF BANKS, STATE OF NORTH CAROLINA 

Mr. SMITH. Thank you, Mr. Chairman. 

Mr. Chairman, Ranking Member Shelby, it is an honor to be 

with you today. In addition to being the Commissioner of Banks, 

which is the job I thought I took in 2003, I am also Commissioner 

of Mortgages. My office licenses 1,600 mortgage firms and 16,000 

individual mortgage loan officers, so I have a little experience in 

this business. I would like to emphasize I am speaking today on 

behalf of my colleagues in CSBS, and I guess indirectly on behalf 

of AARMR. I would like to talk about three or four points and then 

answer any questions to the best of my ability that you may have 

for me. 


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First, how did we get here? One of your questions in your kind 

invitation was how the heck did we get in this fix anyway. There 

has been, in fact, a revolution in mortgage finance, generally IT 

driven, that has changed the mortgage market since I borrowed my 

first home loan in Norwalk, Connecticut, in 1978 from the Norwalk 

Savings Society, when loans were made by local institutions and 

held by those institutions, to a situation now where in the mortgage market a majority of the home loans are made through networks of independent contractors, mortgage brokers, independent 

mortgage bankers, vendors, securitizers, investors, and servicers, 

all of whom are different institutions, many of whom have never 

seen the customer. 

The result of this revolution has been—there is the good, the 

bad, and the ugly, as I have said sometimes. The good has been 

increased liquidity in the marketplace, increased availability of 

mortgages to people who used not to be able to get them. That has 

been the good news. The bad news has been increased foreclosures, 

and the bad news is also—well, the bad news really had been 

fraud, an increase in fraud because of the moral hazard that this 

independent contractor network situation sets up. And the ugly has 

been increased foreclosures. 

My second point is this: The States have been the first responders to crises from this revolution. Many States—my own, North 

Carolina, I am proud to say was the first to adopt predatory lending laws to address problems in 1999, which in those days were 

asset stripping through the flipping of loans and through other inappropriate conduct. We then went into the mortgage licensure, 

and I think it is fair to say today I believe the correct answer to 

the question about how many States act in this area is 49. Alaska 

has not. I guess they haven’t gotten the memo yet. Anyway, we 

hope to bring them in soon so that all 50 States act in some way 

or other to try to regulate the mortgage market. 

I would have thought that we would have been applauded by the 

industry and our colleagues in Government at the Federal level for 

these activities. In fact, we were not. We were criticized. We were 

accused, among other things, of reverse redlining, of being wellmeaning chuckleheads who were denying mortgage finance to people who needed it. And we were preempted. That is the bad news. 

The good news is recently, in terms of our cooperation between 

States—Mr. Polakoff, my good friend, is correct—the States are 

working together to form a national licensing system. It will be 

ready for operation, we hope, in early 2008, and 29 States are 

pledged to be on board by the end of 2009. And we also have, working with our Federal colleagues, we were glad to follow them, have 

adopted the nontraditional mortgage guidance, and I look forward 

to also adopting comparable additional guidance with regard to the 

subprime release. So I think it is fair to say we have acted. 

I would like to talk a minute now in the little time I have about 

people, because I agree with you, we in the States live with the 

problem. When there is a problem in our neighborhoods and our 

communities, we see it firsthand. 

I would suggest, Mr. Chairman, that you are correct to suggest 

that a way to deal with this is more locally or through the cooperation of the many stakeholders. My good friend and colleague, Steve 


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Antonakes, who is the Commissioner in Massachusetts, has just 

gotten an award from NeighborWorks for calling a mortgage summit in Massachusetts to try to bring people together to solve—to 

deal with the issue. I do think a local treatment of these issues of 

rescue is important, because the reasons, frankly, vary around the 

Nation. There are structural issues in Ohio and Pennsylvania. 

There are other issues in other States. Lord knows what the issues 

are in California. I do not envy them. 

Finally, I have, I hope not too presumptuously, suggested in our 

testimony a few things that Congress could do, if you wish, to help 

set broad rules of the road for the mortgage market as we go forward, and I would be happy to discuss those or anything else you 

would like us to discuss with you. But, again, thank you very much 

for this opportunity. 

Chairman DODD. Well, thank you very, very much. It is very 

worthwhile to have your presence here with us, giving us a good 

local perspective on how you grapple with these things at the local 

level. 

I am going to ask the clerk here to allocate 7 minutes to each 

of us here in our question period so we give everyone a chance to 

move through. We have a second panel as well. And, by the way, 

there may be some additional questions in writing that members 

will submit. We would ask the witnesses to respond in a timely 

fashion to those requests for the record as well. 

Let me, if I can, Mr. Cole, focus a bit on the Fed, if I can, in my 

line of questioning for you. The Chairman of the Federal Reserve— 

I made note earlier of the speech given to the credit unions back 

in February of 2004 in which—where is that opening? Well, you got 

the quote from him. You can put that one down from a second, 

when he says, ‘‘the American consumer might benefit if lenders 

provided greater mortgage product alternatives to the traditional 

fixed-rate mortgages. A traditional fixed-rate mortgage may be an 

expensive method of financing a home.’’ That is the quote. You can 

take that one down. That is from the Chairman of the Federal Reserve in February of 2004. 

I then want to put up this chart here because this one really— 

this is now—the zero line indicates sort of a neutral position, if you 

will, on credit standards. And what you see above the line is sort 

of increasing credit standards; the blue lines that go below are lessening of credit standards. And what you have happening here, beginning in the first quarter of 2004, ironically, about the very same 

time the Chairman gives his speech, running all the way through 

until the third quarter of 2006 is a lessening of these credit standards, really dropping down. 

Now, again, it is one line in a speech that day. I do not know 

what all the other remarks were about, but clearly when the Chairman of the Federal Reserve talks about proposing these exotic or 

alternative instruments, and you get a reaction from the lending 

institutions that begin to lessen those standards, you begin to see 

a pattern coming in. 

Then what you watch happen here—and I just want to get 

through this quickly, if I can. We then watch during virtually the 

same period of time, beginning right around the first quarter of 

2004, you find a record number of these adjustable rate mortgages 


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jumping up to as high as 33, 34 percent of these instruments going 

out. 

So you have the speech, you have the lessening of the credit 

standards, and you have a jump in these rather exotic instruments 

coming up that have resulted in, of course, much of what we are 

looking at here today. 

Then you have beginning about 3 months later, of course, the 

raising, going from the 1-percent interest rate and beginning those 

17 increases in the short-term rates for the next 24 months, concluding in June of 2006, here with up to 5.25 percent. All of this 

is happening at a time when obviously people are getting involved 

in these issues. You have as the underlying statute, which I quoted 

earlier to you, from the FTC Act, which dates to 1975, and the 

HOEPA Act in 1994, not a voluntary request of the Fed to adopt 

and prescribe certain regulations and rules but, rather, a requirement, it shall prescribe, it shall promulgate regulations. 

The obvious question is: Why hasn’t the Fed acted—first of all, 

going back earlier, but second, when all of this begins to show up, 

according to the testimony of the Fed, talking with our Committee 

Members, the examiners of the Federal Reserve observed a deterioration in credit standards in late 2003, early 2004. So the credit 

standards begin to drop. The Fed takes note of it here. You have 

the increase in the rates occurring in June. You have this jump in 

the ARMs, these exotic instruments in here. And yet it takes up 

until now, still waiting here, for any clear indications of how the 

Fed is going to step in and do something about this. Here we are 

into 2007. 

How does the Fed respond to this criticism? 

Mr. COLE. All right. Well, thank you for the opportunity to respond. I believe a timeline was distributed earlier this morning 

that we are making part of the record, and in that regard, we have 

laid out a number of actions that we, as well as the other agencies, 

have taken in response to what we have identified even going back 

into the late 1990s as a problem with subprime lending and predatory practices. 

But, you know, kind of picking up at 2003, we did issue appraisal 

guidance clarifications indicating the importance of appraiser independence from the loan origination and credit decision process. 

Then in 2003 through 2006, we have issued formal enforcement actions as well as informal enforcement actions against institutions 

that we identified engaged in predatory lending and ill-advised 

subprime lending activities from a safety and soundness perspective. 

Chairman DODD. That is safety and soundness from the lending 

institution’s perspective. 

Mr. COLE. Correct. 

Chairman DODD. But the statutes I quoted to you talk about protecting the borrower as well here. 

Mr. COLE. And one of the key points that we have made along 

the way in this guidance is—a key aspect of underwriting standards that we hold these institutions accountable for is judging the 

ability to repay of the borrower. That is a very important part of 

our guidance going back throughout this period, and, in fact, I 

think it goes back for generations, actually, as sound underwriting. 


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So as we saw the problems developing, we did increase our focus 

on efforts to review what the banking industry and the mortgage 

origination firms under our responsibility were doing. 

In 2004, the Federal Reserve and the FDIC issued interagency 

guidance on unfair or deceptive acts or practices by State-chartered 

banks, and, in fact, what we did here was in part a response to 

your question with regard to the Home Ownership and Equity Protection Act. What we were doing in terms of the 2004 guidance was 

using our authority under the Federal Trade Commission Act to 

enforce provisions against predatory and unfair and deceptive lending. 

Chairman DODD. Could I ask you, Mr. Cole—the chronology is 

interesting, but it seems a very simple thing would have been here 

with these new adjustable rate mortgages, which have the teaser 

rates coming in at a very low number, and then every 6 months 

those rates moving up. It seems common sense that you would 

want to determine whether or not the borrower was in a position 

to financially pay at the fully indexed rate. This is not terribly complicated. 

Mr. COLE. That is right. 

Chairman DODD. Why didn’t you do that? 

Mr. COLE. Well, that is part of the underwriting requirements. 

Chairman DODD. Well, I know, but you did not—you had the authority under HOEPA that says you shall do these things, and the 

FTC Act. Why wouldn’t you have just done that? 

Mr. COLE. Well, under the FTC Act, we were providing this type 

of guidance to do it. 

Chairman DODD. Why not specific regulations? Why not saying 

you have to meet that fully indexed rate, require that as an underwriting regulation? 

Mr. COLE. In terms of judging the ability to repay, we would hold 

the institutions responsible for considering those types of teaser 

rates. In terms of what the Chairman said with regard to ARMs, 

you know, I understand there have been some clarifications going 

through that, but what I would take that as meaning was that 

ARMs per se are worth considering. There are many different 

types—— 

Chairman DODD. No one is arguing with that. I understand that. 

But if you are going to make—for underwriting purposes here, you 

want to make sure that that borrower here is going to be able to 

meet the obligations of the fully indexed rate is a requirement to 

meet underwriting requirements here. Why wouldn’t that simple 

rule have been promulgated earlier when you began to see these 

problems emerging as late as late 2003, early 2004, 3 years ago? 

Why wouldn’t there have been a promulgation saying this is a requirement, an underwriting requirement? Why wouldn’t that have 

happened? 

Mr. COLE. Well, what we did was in November or December of 

2005 put out the draft statement on nontraditional mortgages 

which had that specific language in it. And when that went out, 

our understanding is that that had quite an effect on the industry. 

The notice was taken by the industry. 

But I would say, you know, as a supervisor, that I would hold 

an institution to doing that type of analysis when they came up 


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with this idea of these teaser rates. In designing these products 

and layering these additional risk dimensions to these products, 

they are responsible for making a determination on an individual 

basis of ability to repay. 

Chairman DODD. Well, last here, can I—I made the request in 

the opening statements about getting some prompt response on finalizing and formalizing this guidance. Do you have any indication 

when that might happen? 

Mr. COLE. Well, the comment period ends May 7. It will take us 

several weeks to review the comments, and then hopefully shortly 

after that we will be able to move forward on a final. 

Chairman DODD. And, by the way, you wouldn’t disagree, if you 

did this, you took the authority under the HOEPA Act, that would 

apply to States as well, not just federally chartered institutions. 

Mr. COLE. That is correct. 

Chairman DODD. Yes. 

Mr. COLE. That broadly applies. 

Chairman DODD. Well, are you going to do that? Is that going to 

happen? 

Mr. COLE. I will go back to the Federal Reserve Board, talk to 

the Governors. We will have discussions. 

Chairman DODD. Well, I would urge you to do that again here. 

Again, that covers that purview generally under fair credit, but 

people when borrowing expect certain standards to be met. You 

have the authority granted 13 years ago under that act. It is not 

a request. It is a demand in many ways, and we hope you would 

do that. I would certainly hope you would do that. Thank you. 

Senator Shelby. 

Senator SHELBY. I will start with you, Ms. Thompson. What is 

the percentage of subprime loans outstanding that are nonperforming, that are 30 days late or more, in your best judgment 

today? 

Ms. THOMPSON. Well, Senator Shelby, the total outstanding balance of subprime—— 

Senator SHELBY. Would you speak up where we can hear you? 

Ms. THOMPSON. Sorry. The total outstanding balance of subprime loans is about $1.28 trillion as of—— 

Senator SHELBY. That is total loans outstanding? 

Ms. THOMPSON. Total outstanding—— 

Senator SHELBY. One-point-two—— 

Ms. THOMPSON. Trillion, total outstanding—— 

Senator SHELBY. $1.2 trillion. 

Ms. THOMPSON. Correct. 

Senator SHELBY. Now, what percentage of those loans are 30 

days in delinquency or more? 

Ms. THOMPSON. According to the Mortgage Bankers Association 

data, as of the fourth quarter 2006, subprime loans are roughly 

14.4 percent delinquent. 

Senator SHELBY. Do you believe that that has gone up since the 

end of December of 2006? 

Ms. THOMPSON. I believe it has gone up since the end of December 2005, and I am not—— 

Senator SHELBY. And continues to go up, but you don’t have the 

data as to the percentage—— 


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Ms. THOMPSON. I do not have the data. 

Senator SHELBY. So you cannot say if it is 14 percent, 16 percent, or 20 percent of the outstanding $1.2 trillion portfolio. 

Ms. THOMPSON. Senator Shelby, we get the data for the fourth 

quarter soon in the—— 

Senator SHELBY. The fourth quarter of last year? 

Ms. THOMPSON. Of last year, yes, sir. It is about 3 months’ lag 

time. 

Senator SHELBY. Do you have any preliminary figures on that? 

Ms. THOMPSON. Yes, sir. From the Mortgage Bankers Association, it is about 14 percent. 

Senator SHELBY. 14 percent of that, so that means out of a $1.2 trillion portfolio, so to speak, so you have got, say, $150 billion, at 

least, of delinquent mortgages in the subprime area. 

Ms. THOMPSON. As of fourth quarter 2006, yes. 

Senator SHELBY. Do you anticipate that that will continue to escalate? 

Ms. THOMPSON. Well, we believe that there is about a million 

loans that are scheduled to have their interest rates reset this 

year, and that means that they are going to have these payment 

changes. 

Senator SHELBY. And that means that interest rates are going to 

go up on them, not down. Is that right? 

Ms. THOMPSON. That is absolutely correct, sir. And—— 

Senator SHELBY. And that will exacerbate the problem, will it 

not? 

Ms. THOMPSON. Yes, sir. And next year, in 2008, there is just 

over 800,000 adjustable rate mortgages that will have their interest rates reset, and the payments will change as well. 

Senator SHELBY. And by ‘‘reset,’’ that means adjusted, the interest rate, upward not downward? 

Ms. THOMPSON. Yes, sir. 

Senator SHELBY. So we are probably just touching the tip of the 

iceberg, maybe, as far as subprime. Is that fair? 

Ms. THOMPSON. That would be a fair statement to say, sir. 

Senator SHELBY. OK. Is there enough capital in the banking system and the private banking system and the people who have underwritten a lot of these mortgages, you know, as securities, is 

there enough capital to underwrite this to absorb this loss? Because I believe it is going to be big. 

Ms. THOMPSON. There is a lot of capital in the banking system, 

sir, but many of the banks do not hold these mortgages—— 

Senator SHELBY. They have sold them, have they not? 

Ms. THOMPSON. They have sold them to securitization structures 

and they are now existing in the form of secure—— 

Senator SHELBY. But have some of the banks bought those securities back? 

Ms. THOMPSON. Yes, there have been some early payment defaults and first payment defaults from some of the securitizations 

that have been issued that comprise these hybrid subprime ARM 

loans. And to the extent that they violate representation and warranties, then the institution will have to purchase them back. 

Senator SHELBY. Well, who is holding the risk here, ultimately? 

If you securitize mortgages that are subprime, that are questions 


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to begin with, and you put a stamp on them, and then the banks 

sell them, then they buy them back as securities, there is still a 

risk there, is there not? 

Ms. THOMPSON. That is correct, sir. 

Senator SHELBY. And who is holding the risk? 

Ms. THOMPSON. When the securities are created—— 

Senator SHELBY. The people that hold the securities? 

Ms. THOMPSON. The investors that hold the securities have the 

risk. 

Senator SHELBY. And that could be part of our banking system 

holding the securities, could it not? 

Ms. THOMPSON. Our financial institutions typically hold highly 

investment grade or highly rated securities, AAA through BBB. 

Senator SHELBY. Now, how do the rating agencies rate subprime 

loans that are questions to begin with, high risk, and they underwrite them and they rate them as high-grade investments? How do 

they do that? Is that stretching your imagination a little bit? Does 

that concern you? 

Ms. THOMPSON. Sir, subprime ARMs generally—the hybrid 

ARMs concern us generally. We are very concerned about the increase in delinquencies. We are very concerned about the increase 

in foreclosure. And when the FDIC looks at this issue, it is not just 

a market issue; it is about the people. 

We have said that we want to make sure that borrowers have 

information, that the lenders that originate these loans have some 

responsibility to work with the borrowers to restructure these loans 

so that the borrower can keep their homes and continue to make 

payments that they can afford. 

Senator SHELBY. Do you believe that you as a regulator and the 

other regulators bear some responsibility in lax underwriting 

standards in this area? 

Ms. THOMPSON. Sir, I believe that we do have a responsibility to 

make our institutions adhere to prudent underwriting standards, 

which means that borrowers have to know what kind of loan products they are eligible for and are entering into. They have to understand that they are going to get a loan where the payment changes. 

They need to make sure they understand that. They absolutely 

have to—the lenders have to make sure that they are underwriting 

these borrowers to the ability where they can really afford to repay 

the loan, because we want to make sure that borrowers not only 

can get the loans but that they can keep their homes as well. 

Senator SHELBY. Well, I think that is the whole idea behind this, 

is pushing home ownership. But if you put people in houses because money is so lax and the standards are so loose and you 

have—it defies common sense to say they are going to make those 

payments when their incomes were never verified. Everybody 

wants a better house. We understand that. That is the American 

way. But can they afford this? And if the standards are so low, you 

are not doing the average American any favor to put them in a 

house that they are going to lose and put them in a quandary as 

far as their credit is going to follow them all their life. 

Ms. THOMPSON. We agree, Senator Shelby, which is why we have 

the standards out there that will require our lenders to underwrite 

these loans to the fully indexed, fully amortized rate. And, again, 


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we do want to make sure that borrowers are getting loans that 

they can afford because we do not just want to promote home ownership, we want to preserve it. 

Senator SHELBY. Well, Mr. Rushton, are you concerned at all 

about the ability of the banks, the banking system, to absorb losses 

in this area? And there will be some, and they will be big. This 

could be the beginning of a real crisis that will continue to creep 

and creep and creep until it reaches a certain point, maybe 2, 3 

years down the road. 

Mr. RUSHTON. We are always concerned about losses in the banking system, but we have tried to put some parameters on this one, 

and right now it does not appear to pose any viability threat to any 

national bank or any other bank that we know of. 

Senator SHELBY. Are you saying that these are going to be minimal losses? 

Mr. RUSHTON. They are not going to be minimal. 

Senator SHELBY. No. They are going to be big. 

Mr. RUSHTON. In terms of capital, the net exposure of the national banks that are most heavily exposed in this market amounts 

to only about 5 percent of their total capital. So it does not really 

threaten the bank, and we are not concerned about bank viability. 

It could affect some of their earnings, to be sure. 

We are more concerned, quite frankly, about the continued availability of credit and how a sudden contraction of market liquidity 

for these sorts of securities in the secondary market could affect 

the ability of homeowners to refinance to get new loans. A great 

deal of this paper is in the hands of unregulated investors, both 

from the U.S. and abroad, who are not driven by the same incentives of working with customers that banks are. 

Senator SHELBY. How do the rating agencies rate some of these 

securitized subprime loans that they package in the—— 

Mr. RUSHTON. Well, those are the—— 

Senator SHELBY. How do they rate them highly—or if they are 

rated high—and they are, a lot of them are—how can they justify 

that? 

Mr. RUSHTON. I think some of those ratings are getting quite 

shaky right now. The ratings are most important to regulated financial institutions that want to buy the securities and other investors that have some criteria for quality. They pay attention to 

the ratings. A lot of the money, however, flows into this market 

from investors who are looking for risk and are willing to accept 

extremely high risk in return for an extremely high return. They 

are not so much concerned about ratings as they are with their 

ability to make money on the securities, and those are largely the 

unregulated entities. 

Senator SHELBY. Well, I think they better be concerned with the 

risk. 

Thank you, Mr. Chairman, for calling this hearing. 

Chairman DODD. Thank you very much. 

Senator Casey. 

Senator CASEY. Mr. Chairman, thank you very much, and I appreciate this hearing. 

I wanted to focus, I guess, on two areas, which is probably all 

I will have time for. One is in the area of enforcement, and, Ms. 


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Thompson, I know you were speaking to that in the abbreviated 

version of your testimony. I know you did not have time to read 

all of it, to go through all of it. But I am looking at page 9 of your 

testimony, and you say in part there that—you are talking about 

taking action. In the second paragraph on page 9 under ‘‘Enforcement,’’ you say, ‘‘Our examination process has led to the issuance 

of more than a dozen formal and informal enforcement actions that 

are currently outstanding against FDIC-supervised institutions 

that failed to meet prudent mortgage lending standards.’’ And it 

goes on from there. 

Tell me about your current enforcement actions in terms of the 

specifics, but also if you can briefly—and I know we do not have 

much time, but briefly describe the enforcement process, the actions that you take and how that unfolds, how long it takes and 

what the penalties are. 

Ms. THOMPSON. OK. When we go in and conduct examinations on 

institutions, if we find problems, then we usually try to work 

with—we will cite a violation, and we will talk to the institution’s 

management, board of directors, and let them know what those 

problems are. To the extent that they do not correct those, we 

cite—it is called ‘‘progressive supervision,’’ and we will have a 

cease-and-desist order, which is a formal enforcement action. We 

might have a memorandum of understanding with the board if we 

have particular issues, and we will give them the opportunity to 

correct. So a lot of violations go through the informal process before 

they reach the formal process. 

The FDIC currently has a couple of cease-and-desist orders outstanding on financial institutions that were engaged in subprime 

mortgage lending, and they are public. And to the extent that you 

have questions or comments, what I would say is that we do go 

into the institutions, we examine them for safety and soundness 

and good risk management and consumer protection principles. 

And to the extent we find issues, we cite violations. We communicate those violations to board management and boards of directors, and we also engage in memorandums of understanding with 

board and bank management. And to the extent that they do not 

comply, we go to the formal process, and we might issue a ceaseand-desist order. 

Senator CASEY. So the cease-and-desist order is as a result of the 

initiation of a formal process? 

Ms. THOMPSON. Yes, sir. 

Senator CASEY. OK. Now, how does that play out in terms of 

time? How long does the informal part of this take? Is there a time 

limit on that? 

Ms. THOMPSON. It depends, but to the extent that we have a 

cease-and-desist order process, it could go anywhere from 1 to 3 

months when we get the information. All of it has to relate to the 

information that we get from the exam. 

Senator CASEY. What I am trying to get a sense of is: Is there 

a requirement under your procedures that you exhaust any kind of 

informal process before you initiate a formal procedure which could 

result in a penalty? 


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Ms. THOMPSON. There is not a requirement, but we do try to 

work with institution management and boards of directors so that 

they can correct problems when they get to the formal action. 

Senator CASEY. OK. And I want to get a sense also—and this 

is—I want to review it, but if there is a—in other words, when you 

get to the end of the road, say you are in the formal process, you 

can issue a cease-and-desist order. Are there other tools that you 

can use, or are there things that you believe that Congress or even 

through a rulemaking process, other tools that we could give you 

or you could be provided to have additional penalties or additional 

enforcement vehicles? 

Ms. THOMPSON. We believe we have the supervisory tools available. We can issue civil money penalties, and we can issue orders 

against specific board members and bank management so that they 

are curtailed in banking practices. 

Senator CASEY. I would ask anyone else on the panel, in terms 

of enforcement, in terms of getting to a solution—we are spending 

a lot of time today, and it is great, on what happened and why and 

that is important. But I want to get to the point where we start 

talking about how we can correct this, at least on the enforcement 

level. Mr. Smith? 

Mr. SMITH. There are 50 State authorities who do do a lot of enforcement. Ameriquest, which was the largest consumer settlement 

in the mortgage—I believe in the history of the mortgage industry, 

which regulating of predatory lending was done by the States. 

Household Finance Settlement was led by the States, although I 

must say in fairness, HSBC has been a terrific supporter of our 

mortgage project, national mortgage project. But there was a time 

when they were not. 

You have 50 State Attorneys General. You have 50 State mortgage—49 State mortgage regulators. In North Carolina, we have an 

active program of enforcement. Our problem, to be candid, sir, is 

to pick the targets that will yield us the best returns the quickest. 

So there is a lot of enforcement activity going on outside the Beltway. 

Senator CASEY. And you are saying that you think the States, by 

and large, have the right—they have enough—— 

Mr. SMITH. And, in fairness, it is our responsibility for the nonregulated mortgage brokers and bankers. I mean, that is our job. 

But a lot of that we are doing—we are working as hard as we can, 

and it is frustrating, and it takes—to answer your other question, 

how long does it take for a major investigation—and, again, I was 

a bank lawyer before I took this job. I did not know about investigations. But the preparation and prosecution of a matter, an administrative matter, under the Mortgage Lending Act takes time. 

It just takes time and money. But we are working on it. 

Senator CASEY. And I am running out of time. Thank you for 

that answer. 

Let me ask you, because you spoke earlier as someone who not 

only knows a lot about this problem and the solutions, but you are 

dealing with it at a local and statewide level. You pointed in particular in your testimony to mortgage brokers and the need for regulation. 

Mr. SMITH. Right. 


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Senator CASEY. What do we have to do on that issue in terms 

of cracking down on mortgage brokers who seem to be at the root 

of a lot of these problems? 

Mr. SMITH. Well, I think there are several alternatives. First, I 

will say my good friend David Blanken from Pennsylvania is doing 

outstanding work under your law in policing the mortgage market 

in Pennsylvania. 

Senator CASEY. I wish I could take credit for that. I cannot. 

Mr. SMITH. All right. Somebody should. Maybe Mrs. Blanken, his 

mom. But, anyway, I think we do have a system of national mortgage regulation, coordinated regulation that can work in the relatively near future. Two things would be helpful. 

We would not mind a little money. We are raising money, but to 

complete this will cost less than the Federal Government spills in 

an hour. 

The second thing is I think Congress could, if it wished, in terms 

of the system, give us a sort of Gramm-Leach-Bliley style deadline 

to get our system up. You remember calling the Gramm-Leach-Bliley and I believe some of the privacy provisions, the States had to 

act, over insurance, I can’t—I believe it was privacy. They had to 

act within a certain time or the Feds would do it for us. 

There are those of us who have real skin in this game. I am getting rid of a million dollar system that works pretty well. You can 

ask David. We have invested $250,000 more of our own money to 

make this thing work. Some States help us. Some States do not. 

It would be nice to encourage them to help get with the program. 

I do think a State-organized system is the quickest and best result 

to policing in the way you are talking about. So that is another 

thing. 

I have also had the temerity to suggest a few normative things 

you may want to consider in terms of the market in the future, but 

that would probably beyond my—I do not want to be—get above 

my rearing. I will stop there. 

Senator CASEY. Thank you, sir. I appreciate it. 

Chairman DODD. Thank you, Senator Casey. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

Chairman DODD. Let me inform my colleagues, by the way, we 

are going to have to take a break in a few minutes. There are going 

to be some votes on the floor and so we are going to take a recess. 

But we will go as long as we can here to get as much covered by 

our colleagues. We may have to come back for those who want to 

complete some questioning for this panel. 

Senator CRAPO. Thank you, and I realize we do have those votes 

coming up. So I will just ask a couple of my questions and then 

submit others for the record if that is all right. 

For anyone on the panel, my first question is at the last hearing 

we held in February a number of reasons were tossed out as to why 

it is that we are seeing this dynamic now, in terms of the subprime 

loans, the number of mortgage delinquencies and home foreclosures 

that we are seeing in the subprime market. 

Would any or each of you jump in and try to help explain to us 

what are the causes? What is causing this high rate of delinquency 

and the dramatic increase in mortgage foreclosures? Mr. Smith? 


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Mr. SMITH. I was going to say from where I sit, I agree with you, 

Senator, about market discipline. What, from my perspective, has 

been stunning to me is where is the market discipline, in terms of 

underwriting, in terms of the rating agencies? 

We do our best to please the marketplace. We are not perfect but 

we try. But we did assume, naively, that up the line that lenders 

and securitizers were doing diligence on the people they did business with. I do not know that that is the truth. We assumed that 

there was going to be underwriting by the lenders of the kind that 

would assure that got repaid. 

Forget even fairness to the borrower. It is just why would you 

make a loan, no money down, teaser rate loan to somebody with 

bad credit? 

Senator CRAPO. That raises a very important question because 

the same point was made at the last hearing. The argument was 

made that why would anybody, at any stage in the level, make a 

loan that they knew was going to go delinquent? 

But there was an argument brought up by at least one of the witnesses there that there is a financial gain to some parts of the industry from having that loan made, whether it goes delinquent or 

not. 

Mr. SMITH. In the food chain what happens is the broker makes 

the loan, gets a fee, goes upstream, the securitizer puts them together, sells it, gets markup, either a gain on sale or a fee of some 

kind. It goes out into a trust which goes to investors. And then the 

derivatives markets gets involved. And I would love to tell you 

about that but I do not understand it. People make money that 

way. 

And so the result is that you have a fee-driven, volume-driven 

machine that was proceeding for reasons—well I have said in an 

article recently in the American Banker—they did not have anything else to publish so they put one of mine in, but it was funny— 

the animal spirits overcame what remained of the control environment in the capital markets. 

But I just, for the life of me—— 

Senator CRAPO. And at some point at that food chain, somebody 

pays the piper. 

Mr. SMITH. Absolutely, and we do not know yet who that—I do 

not know yet. 

Senator CRAPO. I was just going to ask you why, at that stage, 

there is not some market-driven control? Anybody else want to 

jump in on this? 

Mr. POLAKOFF. Senator, I would offer that I have the perspective 

that market capitalization is a key ingredient to this problem. As 

Mr. Smith just described, there are willing investors out there for 

almost any type of product. 

The securitization process typically takes this pool of loans and 

breaks it into a AAA rating. And there are many ways to structure 

it to get the AAA rating. That AAA rating, indeed, may not be 

wrong. 

Then there is a mezzanine part of the securitization. And then 

there is that last part, the residual part, which can really be nasty. 

But the market and the volume of investors in moving the 

money—and the market has already reacted to subprime via the 


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pricing. It has pretty much shut off the liquidity for the subprime 

market right now. 

Senator CRAPO. Mr. Cole. 

Mr. COLE. I would also offer that the low interest rate risk—interest rate environment that preceded the run-up in 2004 did encourage a lot of entrants into the market. Then with the 

securitization, that certainly provided a very robust financing vehicle. So that encouraged significant increase in home prices. 

Frankly, it was that perception, that prices were just going up 

and up, that made a lot of these deals seem viable that otherwise 

would not be. 

Senator CRAPO. I think that one way to put it, and I have heard 

it said by several members here today, we are not necessarily saying that many of the people who are finding themselves in trouble 

now should not get any credit. It is that they were extended credit 

for far too great a purchase or put into a product that they did not 

understand that extended their cash—that overextended their 

cash-flow. 

I would like to explore this topic for a long time with you but I 

do not have time. I have just one other question I would like to toss 

out. 

I am reading a report to Congress from CRS, the Congressional 

Research Service, on the subprime mortgage issue. Interestingly in 

here it indicates, I will just quote from it, it says that ‘‘Government 

policies designed to aid lower income consumers to achieve home 

ownership may have contributed to the expansion of subprime 

lending.’’ 

And then it goes on to talk about the Community Reinvestment 

Act that encourages lenders to provide loans in poorer areas of the 

market where subprime borrowers are in a higher percentage. And 

also HUD’s affordable housing goals that encourage the GSEs to 

focus their resources in this area of the marketplace, as well as 

some aspects of the FHA operations. 

So the question I have to you is have we driven part of this from 

the policy level in Washington by the directives that we have given 

to our housing programs in this country to go into these markets 

and start servicing them better? 

Mr. POLAKOFF. Senator I would offer the answer is now, that 

there are just absolutely outstanding loans made to low and moderate income communities, even if they are loans to individuals 

who have tainted credit, i.e. maybe subprime in nature, they can 

still be underwritten in an appropriate fashion. 

Ms. THOMPSON. I would agree with that. And the Community Reinvestment Act encourages safe and sound loans, loans that are 

made with prudent underwriting standards. 

Senator CRAPO. I am glad to hear that answer because that is 

the answer I had hoped that I would get. And it also reaffirms the 

issue that I raised earlier of the availability of credit, which is such 

an important part of helping people to get into their homes or to 

move up the chain in the American dream is something that we do 

not want to dampen here beyond reasonableness. 

What you are telling me that is we can achieve some of these objectives with good solid loans. And that there is a different problem 


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other than our effort to try to get as deep as we can into these markets to help people get access to home ownership. Is that correct? 

I see everybody on the panel shaking their head yes. 

Mr. Chairman, thank you for this hearing. 

Chairman DODD. Thank you very much. 

I would just point out that is a very good question you have 

asked, Senator. It has been pointed out to me that there are 10 

million households in this country that have never stepped into a 

bank, a thrift, or a credit union, and do not have access to mainstream financial services in this country. 

One of the goals of this Committees is going to be the whole 

issue of access to capital. And that home ownership, what a difference it makes in a neighborhood and a community. 

I know that Senator Shelby feels as I do here. I do not want anyone in this room to believe for a single second that we believe that 

subprime lending is the equivalent of predatory lending. It is not 

at all. And good solid subprime lending has made a huge difference 

for people in this country. 

And so our goal here is to try to sort this out. My concerns have 

been, as I said at the outset here, that we could have taken some 

steps early on that I think would have made a difference. And I 

regret that has not been done by the regulators and I am going to 

give you a chance to respond in the coming days. 

Let me turn to my—I do not know which one of you arrived first. 

I apologize. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

I want to jump off on where Mr. Smith made a comment, that 

the animal instincts got control over the market. The reality is this 

is something that I had hoped that the industry itself would have 

taken attention to. Several of us called their attention to it. Now 

we find ourselves in the circumstances that we do. 

And I want to put a human face on these abusive practices. In 

my home State of New Jersey I have heard from many individuals 

who are facing this situation. One of them, Ms. Gilbert finds herself—she lost her job, she fell behind on her monthly mortgage payments. She was facing foreclosure. And she was contacted by a 

mortgage company promising to bring her out of the foreclosure 

and actually lower her payments. 

She was given an adjustable rate mortgage of $3,000 per month. 

When she told the lender that that was far too much because she 

only earned $30,000 a year, which is about $2,500 a month, $500 

less than her mortgage, her response to her was well, as long as 

you use the cash to pay during the first year, we will be able to 

get you an affordable—refinance you into affordable loan after 1 

year. 

We all know where the story is going. The reality is she was not 

able to make the payments after the year and that mortgage company instituted a foreclosure action against her, which is pending 

today. 

So it seems to me, based particularly on the answers that Senator Shelby got from Ms. Thompson, that what we are looking at 

is a tsunami of foreclosures that is on the horizon. And we get desensitized by the numbers, $160 billion and then moving on to next 

year and whatnot. 


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But that means thousands of families that we are going to transform the dream of home ownership and we are going to make it 

a nightmare for them. And we are going to affect their credit in the 

long-term. 

That is a huge consequence. Mr. Chairman, one of the things 

that enormously bothers me about this issue is when I look at minority home buyers. 52 percent of African Americans seem to be 

finding themselves in this context. 47 percent of Latinos are finding themselves in this context. Their percentage is far beyond the 

rest of the population. 

So it seems to me that this practice is particularly amongst those 

who are already struggling to try to make this dream a reality. 

And so it is, in my mind, particularly heinous in that respect. 

I really believe that we have got to look at some national standards that define and penalize predatory lenders, that we have to 

certainly create access to financial literacy programs and counseling service so that prospective home buyers make informed decisions. We need to ensure that borrowers are qualified and can afford the loans they are given. 

But as we look toward that, I want to ask you, Mr. Cole, I understand and I want to pick up where the Chairman asked some of 

the questions. I understand that the Federal Reserve has broad authority to regulate any unfair lending practices under the Home 

Ownership and Equity Protection Act. Is that not a fair statement? 

Mr. COLE. That is correct. 

Senator MENENDEZ. And in that respect, it is my understanding 

that the Federal Reserve has taken no significant action against 

any subprime lender, nor have you issued any warnings to hybrid 

ARMs; is that right? What actions have you taken against 

subprime lenders? 

Mr. COLE. We have, as indicated in the time line we provide this 

morning, taken three formal actions and three informal actions in 

the last 5 years. 

Senator MENENDEZ. Against those who have conducted actions 

that are, in fact, inviolative of the law? 

Mr. COLE. Yes. But I think more importantly—— 

Senator MENENDEZ. Out of how many? What’s the universe? You 

took three actions out of what is the universe? 

Mr. COLE. What I was—we supervise all bank holding companies. 

Senator MENENDEZ. When we are looking at this rate of default 

that is being talked about, 14 percent, $160 billion, another one 

million homes next year that are resetting its rates, and 800,000 

after that. And then we look at the specifics of the growing numbers of cases that we get that are focused on predatory lending, it 

just seems to me that you all are asleep at the switch. 

Mr. COLE. Let me respond. First of all, we do have an alternative 

enforcement mechanism under the Federal Trade Commission Act. 

We are using that very effectively working with the other agencies. 

Also, we do have a process through the examinations to put a lot 

of pressure on institutions without going to an informal or a formal 

enforcement. So there is a lot of activity in that regard. 

I also have to say—— 


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Senator MENENDEZ. Are you telling me this would even be greater, but for your actions? 

Mr. COLE. No, as we do examinations and find problems we address them in the process. 

Senator MENENDEZ. But the size of this problem leads me not to 

understand. Maybe I cannot comprehend. The size of this problem 

that we have heard defined here already leads me to question, regardless of everything that you are telling me, how could it be this 

big and you have done your job? 

Mr. COLE. I will say that given what we know now, yes, we could 

have done more sooner. 

Senator MENENDEZ. And why did you not do more sooner? 

Mr. COLE. We were doing a good deal. And what we have observed in terms of the risk layering that has really created the 

problems that are coming to light now is something that we have 

observed in the extreme in the last year. In 2006 is when the risk 

layering really started to compound in terms of the various dimensions of these contracts that made these loans unviable. 

I would also offer that we have done a lot in terms of education 

and outreach, that we have a program that was created by Congress called NeighborWorks America. And we have, through that, 

the ability to have outreach to communities across the country 

along with the other agencies in providing counseling to borrowers 

to understand the mortgage refinance options. 

Chairman DODD. Mr. Cole, I am going to—with all due respect, 

I apologize. I want to give Senator Martinez a chance here to get 

some comment in before we take a break for the vote. I apologize. 

Bob, those are great questions. The question is, in a sense, setting the standard ahead of time—enforcement actions, the cow is 

out of the barn. Getting the standard set early the prohibits certain 

things from happening is really what we are driving at here. 

Senator Martinez. 

Senator MARTINEZ. Mr. Chairman, thank you very much for fitting me in. And I want to associate myself with so many of the 

comments from my dear colleague from New Jersey. 

There is a sense of outrage about those of us who have worked 

so hard to get people into home ownership, particularly people in 

the minority communities where there are so underrepresented 

among homeowners. And to now see what is coming, what we are 

seeing and what is coming, which is a backtracking, which is that 

horrible disappointment of seeing your dream of home ownership 

now turn into a nightmare of a lifetime of debt. 

What I wonder is, as we look at what we can do in the future 

to prevent this from occurring again, how can we really, as bank 

regulators, have allowed so many loans to be made which are obviously not designed to be performing loans in 60 days, a year, or two 

with not having qualifying standards for the higher rate that is inevitably coming, but only looking at the current qualification standards under the current rate? 

I do not know if it is Ms. Thompson or Mr. Cole who could provide perhaps just a quick top-of-the-line answer. We have to go to 

the vote and I do not have long to pursue the question. 

But I wonder if the sense of outrage that I feel is not something 

that is counterintuitive to what bankers should be doing, which is 


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making only loans that will perform. It seems like they have been 

making loans, it is counterintuitive. They are making loans they 

know are not going to perform. 

So I guess the securitizing is what gives that freedom? 

Mr. COLE. I can only say that in terms of underwriting standards, making loans that are unsustainable from the very day of inception, that is an unsafe and unsound practice. 

Senator MARTINEZ. But therefore how can it occur in what we believe to be a sound banking system that we have in our country? 

Because you know, I mean, I am surprised. I agree with your conclusion. But I know that the consumer at the end of the food chain 

does not really understand all of this. They are just lucky they are 

going to get a loan and they are happy to go into their home. 

But how do we, who are more responsible, how are we who 

should be looking out for them and avoid the nightmare they are 

now facing, how have we failed those families? 

Mr. COLE. Part of our challenge is balancing the needs of the 

consumer and innovative markets against standard setting, rule 

writing. 

And frankly, in terms of the HOEPA issue, one of our real concerns is that yes, we could write very detailed rules that applies 

to all mortgages throughout the country. And the problem then 

would be well, if they are going to be detailed, to really hone in on 

the problem areas are we going to be able to avoid—— 

Chairman DODD. Mr. Cole, I apologize to you. We are going to 

miss the vote here if we do not get out of the room. 

Listen, thank you all very much. I am going to let you go. 

Senator Carper wanted to raise some issues here. He will submit 

them in writing to you. 

We will take a recess here until the conclusion of these votes and 

come back with our second panel. 

I want to thank all of you here. To the regulators, we want this 

back soon now, this guidance. I do not want this to go on any 

longer. What has happened already has got to stop. 

The Committee stands in recess. 

[Recess.] 

Chairman DODD. The Committee will come to order. 

Again, my apologies to our witnesses for the delay. We had hoped 

by this hour the Committee would have been concluding its hearing 

this morning but with five votes we just had it has caused some 

delay. 

I want to thank our second panel for their patience. We have 

kind of jammed you in and crowded you in here at this table, so 

I regret that. We will try and move this along. 

It will help if we can ask you to keep your opening comments 

somewhat limited. I am going to put the 5 minute clock number on 

there. And again, what I said to the first panel, I will say to you. 

I will not hold you to that number rigidly. But keep it in mind so 

we can try to get down to the list and then turn to my colleagues 

as they come in and show up here. 

Let me, and I will say this slowly to give him a chance, my colleague from Rhode Island may want to make an opening comment 

or two here. Is that all right, Jack? Do you want to just go ahead? 

Senator REED. Go right ahead. 


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Chairman DODD. I said earlier the Committee had asked New 

Century to send its CEO to testify this morning. That is one of the 

five largest subprime lenders in 2006. 

Unfortunately, they refused to come before the Committee, before 

obviously the American public through the vehicle this Committee 

hearing provides. 

There are many, many questions that have been raised about the 

way they have done business, particularly with regard to treating 

their borrowers. And I regret they made the decision not to be 

here. 

I want to also simultaneously thank those who have come here 

to be a part of this. I am very grateful to you. It did not take browbeating at all to get you to show up and be a part of this discussion, which obviously is very important to all of us. 

So I thank those companies that are here. They all have varying 

degrees of percentages of your business that are involved in this. 

I understand that. In some cases, it is not the largest volume of 

your business. But nonetheless you are an important player in the 

country in terms of the largest businesses that engage in subprime 

lending. 

I want to say again to this panel, as I have to others, home ownership and access to the wonderful dream of almost every American 

is to have their own home, to raise their family in their own home. 

That has been one of the great achievements we have been able to 

do. 

So subprime lending, as you have heard other witnesses testify, 

has provided an opportunity for those that never otherwise could 

imagine having that dream fulfilled, to come a reality for them. 

And the distinction between that and those who would lure people 

into these arrangements with the full knowledge and awareness 

that they are probably never going to be able to keep that dream 

is what really drives this Committee hearing and the concerns that 

people have. 

A staggering number of our fellow citizens may find themselves 

not only not having the dream of a home, but as others have said, 

Senator Menendez and Senator Martinez, the nightmare of losing 

that home and a lot of earnings and savings that they may have 

put together to make that home a possibility. 

So while some may argue in the total volume of mortgages and 

everything else that this is a large number, but that the institutions themselves are not threatened. And I gather that is the case. 

That is a story that has very little comfort to those out there who 

may fall into that category of the potentially 2 million homeowners 

that will lose that dream of theirs. To them this is a nightmare for 

them. 

So I am determined, one, that would put the brakes on so that 

these numbers can be stopped. And second, we look at means by 

which we can offer those who have lost their homes some opportunity to stay in that house. 

I am going to be very interested, if not in this setting certainly 

as we go forward, to hear some ideas on how we might do that. 

As Senator Shelby pointed out earlier, we still have other elements to come forward to this Committee and talk about their 

ideas and interest in the subject matter, as well, beyond the FedVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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eral regulators and those who have been directly involved in the 

business and those who represent or work with them. 

So let me begin by introducing Mr. Al Ynigues. Is that the correct pronunciation? 

Mr. YNIGUES. Al Ynigues. 

Chairman DODD. Thank you. 

Al is a borrower from Apple Valley, Minnesota. We thank you for 

joining us. 

Jennie Haliburton, Jennie we thank for being here this morning 

from Philadelphia, Pennsylvania. 

Mr. Laurent Bossard. Is that a correct pronunciation? 

Mr. BOSSARD. Yes, it is. 

Chairman DODD. Serves as the Chief Executive Officer of WMC 

Mortgage. I want to note that WMC is fully embracing the proposed subprime guidance. And I want to congratulate you on that, 

taking that position. It is very helpful to have endorse and support 

the concepts here that will give us some real hope of coming—at 

least stopping this process from getting worse. 

Mr. Sandy Samuels is the Executive Managing Director of Countrywide Financial Corporation. We thank you very much, Mr. Samuels, for being here. 

I understand again, this part of your business is about 10 percent I think someone has mentioned me of your overall business, 

a sizable part of the national market but nonetheless about 10 percent of Countrywide’s business. 

Mr. SAMUELS. It is about 7 percent, sir. 

Chairman DODD. 7 percent. 

Mr. Brendan McDonagh serves as the Chief Executive Officer of 

HSBC Financial Corporation. We thank you, Mr. McDonagh, for 

joining us. 

Janis Bowdler; is that correct? 

Ms. BOWDLER. Yes. 

Chairman DODD. Is a Senior Policy Analyst at the National 

Council of La Raza, and we thank you. 

Mr. Andrew Pollock serves as the President of First Franklin Financial Corporation. 

And Mr. Irv Ackelsberg is a well-known consumer attorney from 

Philadelphia. And we thank you very much for being a part of this, 

as well. 

We will begin with you, Ms. Haliburton. Is that OK with you, if 

we start with you? You have to pull that microphone over close to 

you so we can hear you. 

And thank you for coming this morning. We are deeply grateful 

to you and to Mr. Ynigues. This is not comfortable to have to come 

forward in a very public setting and to talk about some personal 

circumstances. 

But it is important you understand you are representing an 

awful lot of people who will never get a chance to be heard but who 

know exactly what you have been through and are very interested 

in your circumstances as a way of making the case, that when we 

stop the present practices and figure out some way to be helpful 

to people like you. 

So I thank you very, very much for coming forward. The floor is 

yours. 


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STATEMENT OF JENNIE HALIBURTON, CONSUMER, 

PHILADELPHIA, PENNSYLVANIA 

Ms. HALIBURTON. Well, I am here because I am one of those who 

have mortgage problems. 

Chairman DODD. You have to speak right into that microphone 

if you can for me. 

Ms. HALIBURTON. That has mortgage problems. My husband had 

passed and he had left me with a lot of debt. 

I was sitting down watching TV one day and they were saying 

that I could get this loan to pay off my bills and have extra money 

to, you know, fix my home or fix it up, whatever, you know. And 

I called them up. 

They came to the house and they explained to me I can get this, 

they will pay off all the other bills, and I could have some left to 

fix the house or whatever I would like. 

So I agreed to that. They came out to the house and they told 

me I would not pay very much mortgage. I says well, I am paying 

$700 now and I could go eight. He said oh, we will take about 

eight. I asked him repeatedly, three times, is that all I have to pay 

is eight because I have to pay gas, electric, phone, taxes on my 

home, and I have to buy groceries and I have to buy medication. 

Oh he said oh, we will not take much. 

The next thing I know I am paying $1,100 a month and I am 

back on gas, electric and I have not paid my taxes yesterday, on 

the 21st of March, because I have no money. 

I was in the hospital for 2 months, April to June. I had back surgery, I had a metal plate taken out, a metal plate put back in. Now 

they are affecting my knees. They say it is coming from so many 

back surgeries, because I have had three and it is taking effect on 

my knees. I cannot bend them. I have to keep them out. If I bend 

them to get up, it hurts. 

But anyway I cannot afford—when I called them on the phone 

to pay my mortgage, I call them on the phone to pay it. They give 

me about 15 members and I have to pay them $22 for calling them 

on the phone to pay my mortgage. They take that out of my bank. 

And they just took what they want. 

So September, I had changed my route number so they could not 

take any more money. So this way I have to call them on the phone 

to tell them I am paying my mortgage. If I pay on the third and 

the fifth of the month, my grace period is the 15th of the month. 

How can I be late? And they charge me for late fees when I know 

I am not. 

So they start taking a lot of my money so I just decided to get 

a lawyer and a consultant to talk to me about it first, and then I 

had to get a lawyer. 

I would like to see what he has to offer, if it is OK. Thank you. 

Chairman DODD. Just quickly, I do not need to know specifically, 

but your income? Are you on a fixed income? 

Ms. HALIBURTON. Yes, I only get Social Security. 

Chairman DODD. So you are retired. I am presuming that your 

fixed income, the monthly amounts you get each month are equal 

or less than the mortgage payment or a little bit more? How does 

that work out? 


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Ms. HALIBURTON. It is about seven more but it is not enough to 

pay the hospital bill. It is not enough—my medication is $125 a 

month and I am taking four medications. And the phone bill, that 

is up, the gas and electric is up. The water bill is about $125. 

Chairman DODD. Food. 

Ms. HALIBURTON. And then, how am I going to pay my taxes on 

the house? And that is every year March the 21st. 

Chairman DODD. So this has put you in a very difficult financial 

position? 

Ms. HALIBURTON. Yes, it did, because they are taking too much. 

Chairman DODD. We thank you very much for being here. 

Ms. HALIBURTON. And I thank you, Your Honor. 

Chairman DODD. Thank you for listening to us. 

Mr. Ynigues. 

STATEMENT OF AL YNIGUES, BORROWER, 

APPLE VALLEY, MINNESOTA 

Mr. YNIGUES. Thank you, Mr. Chairman, and thank you for having me make this presentation. 

What I am speaking is not only for myself but also for the voice 

of the other people. I am also here on behalf of ACORN, a really 

good organization. 

So I just want to give you a little background on myself. I am 

a senior of 65 years old. I belong to the Latino community. 

I did get this loan through a person who was taking music lessons from me. He and his kids were taking lessons from me and 

so I had this relationship with this mortgagor, just at a music lessons level, for about 5 years. Then he pressed me and said why do 

not you start—instead of renting start doing a mortgage? And I can 

help you with that, he said. 

So we started going through all this searching and researching 

and I specifically asked him for a 30 year fixed and that is what 

I thought I was going to get. And then I also asked him, because 

Dakota County in Apple Valley, Minnesota, does have a program 

for first-time buyers. And he completely discouraged me from that. 

So as we were going along, now it has come time for signing the 

papers. And I find out that he could not get me a fixed so instead 

he got me an ARM which turned out to be an arm and a leg. 

And then he said well, don’t worry about it because sometimes 

the mortgage rates go down. If they go down, you will pay less. So 

upon that, because I am so trusting and gullible, I went along with 

it. I knew that I was getting an ARM but I also had to have a second mortgage on it because I did not have a down payment on it. 

So I started off with something that I could afford, it started off 

at approximately $1,645 for the first mortgage, about $440 for the 

second mortgage. I could pay my other bills, as well. 

All of a sudden the taxes started going up, the mortgages have 

jumped up, and now I paying pretty close to $2,300 a month and 

it is still going to be going up, not only for—and that is pretty 

much what I am taking in on my music lessons right now. All of 

my other credit cards, my utilities, I am completely behind on, and 

I have no way of getting out of it. 


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I am looking for some answers, some relief not only for myself, 

but also for all the other people that have found themselves in this 

same predicament. 

One of the things that the mortgagor did that I am starting to 

find out as I am talking to other people, he actually deliberately 

lied about the amount of money that I made per month. He said 

that I made $10,000 a month, knowing exactly how much money 

I made because he has been with me as a student for about 5 

years. That was a total surprise and I did not find this out until 

about 2 weeks ago. 

I also found out that he padded all of the closing costs specifically on the annual yield spread. So he actually got a kickback 

from the mortgage company for about $5,000 just to get me into a 

higher interest rate. 

And I am starting to find that this is common practice and it is 

legal. I am hoping that this Committee will find someplace to not 

only make it illegal but just cease-and-desist this type of practice. 

I am also aware that the law cannot go in retrospect, go back. 

But if it could, there would be a lot of people who would be reimbursed for all the stress that they have been going through. 

I really did not realize all of the hidden costs that were involved 

in the closing of it. But now I am really aware. And even thought 

it was explained, it was explained very briefly at the closing at the 

title company. And they basically rushed me through saying that 

is OK, just sign at the bottom, initial at the bottom, and then we 

will be done in less than an hour. 

So me being the gullible, trusting person that I am, I just went 

ahead and signed. 

I am now involved in an almost interest-only loan. So very little 

of that goes to the principal. So I am looking for some relief where 

I can actually refinance that. But at this time, because where I am 

in my credit report, there is not any financer or mortgagor that is 

going to touch me right now. 

The bottom line is right now I cannot even finance a bag of cat 

food with my credit report, because of this mortgage. 

So I want to thank this Committee for listening to me and I hope 

that things will get done in an expeditious manner and not to let 

things go like things have been going on for the past three or 4 

years. 

Chairman DODD. Did you have a good credit rating before? 

Mr. YNIGUES. I had a fair rating. 

And I welcome any questions that this Committee might have for 

me. 

Chairman DODD. We will get back to you on some questions. 

Mr. YNIGUES. Thank you very much. 

Chairman DODD. Thank you very much for being with us. 

Mr. Bossard. 

STATEMENT OF LAURENT BOSSARD, CHIEF EXECUTIVE 

OFFICER, WMC MORTGAGE 

Mr. BOSSARD. Good afternoon, Chairman Dodd, other members of 

the Committee. 


smartinez on DSKB9S0YB1PROD with HEARING
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Thank you for the opportunity to address you today on this important issue. My name is Laurent Bossard. I am the CEO of WMC 

Mortgage. 

I am pleased to be here today to participate in the Committee’s 

effort to gain a better understanding of the economic and industry 

conditions affecting the market and to learn from them. 

Like members of this Committee, we believe that a vibrant and 

responsible industry plays an important role in consumers’ ability 

to access credit for home ownership. 

As you may know, WMC is a wholly owned subsidiary of GE 

Money, the consumer lending division of the General Electric Company. WMC was a company that originated non-prime mortgages 

and sold them in the capital markets to a variety of institutions including investment and commercial banks. WMC was acquired by 

GE Money in June 2004. 

Along with the members of this Committee, we are concerned 

about the impact of recent market developments. These changes affect both consumers and lenders. 

WMC has been responding to these changes in a number of 

ways. First, we have made changes to our own business. I joined 

WMC in November 2006 as President and was named CEO in January. We are reconstructing WMC in order to adapt its operations 

to the evolving market environment. In addition, GE Money made 

the decision post-acquisition to play WMC’s mortgage operations 

under Federal regulations. This was accomplished by bringing the 

mortgage business under GE Money’s Federal Savings Bank. This 

process was completed on January 1st, 2007. 

Over the last 12 months we have made improvements to our underwriting process. WMC adheres to the Federal Interagency Guidance on Nontraditional Mortgage Products. In addition, we support 

the Federal bank regulators’ proposed statement on subprime 

mortgage lending and are implementing the recommendations. 

For example, borrowers will be qualified using the fully indexed 

rate. 

Second, on new loans prepayment penalties will expire 60 days 

prior to the first interest rate reset date. This provides borrowers 

with enhanced flexibility to avoid prepayment fees. 

Third, WMC will not make loans based on stated income except 

in the case of borrowers who are self-employed and then only with 

the appropriate verification. 

Beyond what has been proposed in the guidance, WMC will continue its historic policy to not offer any option ARMs or products 

with negative amortization. And going forward, we will begin to 

hold a portion of this loan portfolio on our own books. This will 

allow us to better work with borrowers and other industry participants to help keep homeowners in their homes. 

These changes help us meet our goal of providing consumers 

with access to fair and competitively priced mortgage products with 

clear and understandable terms and to keep them in the homes 

they purchase. 

We are here today to contribute to a discussion that leads to a 

better understanding of the current market conditions. We also 

want to emphasize our desire to work with you and with our reguVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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lators on solutions. To this end we would support standards to govern the conduct of all participants in the mortgage process. 

In closing, I would like to thank the Committee for the opportunity to share our views with you today. We look forward to working with you and our regulators. We want to play a responsible role 

in providing consumers with products that meet their needs, allow 

them to live in their own homes, and invest in their futures. 

Thank you very much. 

Chairman DODD. Thank you very much, Mr. Bossard. 

Mr. Samuels. 

STATEMENT OF SANDOR SAMUELS, EXECUTIVE MANAGING 

DIRECTOR, COUNTRYWIDE FINANCIAL CORPORATION 

Mr. SAMUELS. Thank you, Senator Dodd, and Senator Reed. 

Countrywide is primarily a prime lender, as I mentioned. 93 percent of our originations are to prime borrowers. We are the largest 

originator in the country and we are the leading lender in the 

country to minority and low and moderate income borrowers. We 

are very proud of that fact. We offer the widest arrays of products 

available in the marketplace and we believe that this gives us a 

unique perspective on what has happened in the subprime market. 

It is not one thing. It is a convergence of several factors that explain the growth of the subprime market and the current circumstances of high delinquencies. Home prices appreciated at rates 

far exceeding income growth, causing housing affordability issues. 

Industry expanded underwriting guidelines to allow borrowers to 

qualify for loans on more expensive homes. 

Interest rates began to rise from 50 year lows. The refinance 

boom slowed, resulting in significant overcapacity in the market. 

The housing market slowed in 2005 and 2006 causing more expansion of underwriting guidelines in order for lenders to maintain 

their volumes and to try to increase their market share. And 

throughout, liquidity in the global markets was searching for mortgage assets. 

In 2006, home prices started to flatten or decline and delinquencies increased. We saw high LTV ratios combined with lower 

FICO scores, and this was particularly exacerbated in areas suffering economic weakness. When people got behind in their payments, they found it more difficult to recover. 

Our analysis indicates, however, that these delinquencies were 

not caused by hybrid ARM payment adjustments. 

The market now has begun to self-correct by materially tightening credit guidelines. So where does the subprime market go 

from here? Well, we need to preserve access to credit for those who 

cannot qualify for prime loans. Hybrid ARMs, the 2/28s and 3/27s, 

reduce the cost of home ownership. In the fourth quarter of 2006, 

50 percent of Countrywide’s hybrid ARMs went to purchase homes 

and 54 percent of those went to first-time home buyers. 

They are a good bridge for people who can improve their credit 

or who can expect increased income in the future. Let me give you 

some data on that. 

From 2000 through 2005 for Countrywide customers who refinanced their hybrid ARMs with Countrywide, almost 50 percent received a prime loan. 60 percent received a fixed-rate loan, prime 


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and subprime. So 75 percent of all of those refinances fell into 

those top two categories, people who improved their situations. The 

other 25 percent refinanced into other subprime ARMs. They took 

cash out and they generally had lower loan-to-value ratios, about 

75 percent. 

So as I said, hybrid ARMs are a valuable tool for customers to 

afford a first home or as a bridge to overcome temporary financial 

setbacks. 

Cumulatively, over the past 10 years, Countrywide originated almost 540,000 hybrid ARM loans and less than 20,000, less than 3.5 

percent of those hybrid loans, have gone through foreclosure. So 

that means over 96 percent of our borrowers were successful. 

So what I am here to ask today is that balance must be struck 

between maintaining affordability in the marketplace and lessening payment shock. Wherever you draw the line someone will be 

shut out of the market. Every attempt to raise the start rate, 

lengthen the fixed-rate period, reduce caps, and lengthen reset periods will raise the price of the loan product to the consumer. 

Now the market has already begun to tighten so the pendulum 

has clearly started swinging back. What I am asking is that this 

Committee and our regulators be careful about an over correction 

because we want to make sure that we keep home ownership a viable opportunity for those Americans who can qualify for it. 

I want to speak a minute about home ownership preservation because it is something that we care deeply about. We are concerned 

very much about delinquencies and foreclosures and we can help 

customers preserve their homes so long as the borrower wants to 

remain in the home and continues to have a source of income. Our 

biggest challenge is to have the borrower respond to us. 

We are also involved in an organization called the Housing Preservation Foundation which is a third-party independent counseling 

service. I happen to serve on that board. We help borrowers find 

solutions to their problems. 

We are committed to working with the rest of the industry to 

make sure that people like Ms. Haliburton and Mr. Ynigues can 

stay in their homes. 

We are very supportive of most of the agency’s guidance, use of 

impound accounts, restrictions on use of prepayment penalties, improved disclosures, and choice. We think we ought to give people 

a choice between an ARM and a fixed-rate loan for which they can 

qualify. 

Thank you, Mr. Chairman, for the opportunity to share 

Countrywide’s perspective on the mortgage market and I would be 

happy to answer any questions. 

Chairman DODD. Thank you very, very much, Mr. Samuels. We 

appreciate you being here. 

Mr. McDonagh. 

STATEMENT OF BRENDAN McDONAGH, CHIEF EXECUTIVE 

OFFICER, HSBC FINANCE CORPORATION 

Mr. MCDONAGH. Chairman Dodd, Senator Reed, my name is 

Brendan McDonagh and I am the Chief Executive Officer of HSBC 

Finance Corporation. I am also the Chief Operating Officer for 

HSBC North America. I have been with HSBC for 27 years but I 


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was only appointed to these positions at the beginning of this 

month. 

Thank you for inviting me to testify today on behalf of HSBC. 

As you well know, HSBC Finance is a large player in the 

subprime mortgage market. We originate and service loans 

throughout our 1,400 retail branches in 46 states and through our 

wholesale broker channels. HSBC Finance has the second-largest 

subprime servicing portfolio in the subprime industry. Our portfolio 

is primarily fixed-rate loans with documented income. Indeed, adjustable rate loans are only 32 percent of our portfolio compared to 

70 percent for the industry. As a result of our origination and underwriting practices, HSBC Finance’s delinquency levels are almost 

half of the industry levels during the past 2 years. 

In the interest of time, I will skip my statement’s section addressing how we got to this subprime market problem, because it 

has been covered in both earlier statements. 

What I would like to do now is talk about how HSBC Finance 

is addressing these issues both in the area of originations and servicing. 

First, I would like to take the opportunity to thank Joe Smith 

of the Conference of State Bank Supervisors for recognizing the efforts of HSBC in supporting their various initiatives. 

We have been servicing customers for over 125 years. We take 

the current situation very seriously. We are taking strong steps to 

minimize the impact. 

In our retail branch network, we have had policies in place for 

more than 5 years that largely parallel the new interagency guidance on nontraditional mortgage products. We believe this guidance brings appropriate strengthening to the industry’s underwriting standards. We note these rules currently apply only to federally regulated banks and bank holding companies. To create the 

fullest consumer protection they should apply to all lenders. 

Regarding the notion of suitability, HSBC Finance implemented 

a comprehensive net tangible benefits test in its retail subprime 

lending business in 2001. We have also largely eliminated the purchase of loans originated by other lenders and sold into the secondary market, giving us greater control over quality, building on 

our strength in our customer facing channels. 

We recognize the long-term answer to this current marketing 

condition is not just tightening credit but also introducing products 

that help subprime customers improve their circumstances. Our 

Pay Right Rewards product, which rewards customers for timely 

payments with interest rate reductions is one example. 

Finally, we select and work only with responsible brokers who 

comply with all State and Federal laws. 

Regarding our servicing and what we are addressing in that 

area, we have reviewed most at risk ARM customers and we have 

implemented a proactive program which offers payment shock relief, rate modification, et cetera. To date we have assisted more 

than 2,000 customers and expect to reach more than 5,000 this 

year. 

We truly believe that foreclosure is the worst alternative for all 

partners concerned and we go to great lengths to avoid foreclosure. 

In fact, we have a foreclosure avoidance program which was actuVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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ally established in 2003 and to date has provided over $100 million 

in financial relief to 9,000 customers. 

In addition to the direct assistance to our own customers we help 

consumers at risk of foreclosures with other lenders. 

In closing, I would like to state that clearly the mortgage industry is experiencing significant contraction. With that in mind, we 

believe any additional regulation needs to be carefully weighed 

against the implications of credit availability. Certainly, we believe 

that uniform legislation could benefit the industry and consumers. 

There are numerous versions of Federal anti-predatory lending legislation that contain many of the best practices we employ. HSBC 

supports the guidelines that put everybody in the industry on a 

level playing field. 

I hope my testimony today reflects for you HSBC Finance’s commitment to responsible and fair lending and servicing. And we are 

continually looking at our current and prospective products and 

services in this light. 

Once again, thank you for inviting HSBC to today’s important 

discussion and I am happy to answer any questions that you may 

have. 

Chairman DODD. Thank you very, very much. 

Ms. Bowdler. 

STATEMENT OF JANIS BOWDLER, SENIOR POLICY ANALYST, 

HOUSING, NATIONAL COUNCIL OF LA RAZA 

Ms. BOWDLER. Good afternoon. My name is Janice Bowdler. As 

a Senior Policy Analyst for the National Council of La Raza, I conduct research and analysis on home ownership issues facing the 

Latino community. 

In my time at NCLR, I have published on issues related to fair 

housing and Latino home ownership. I have also served as an expert witness before the House Financial Services Committee and 

the Federal Reserve. 

I would like to begin by thanking Chairman Dodd and ranking 

member Shelby for inviting NCLR to weigh in on this important 

issue. 

And also, Senator Dodd, I would like to extend a personal greeting from our President and CEO, Janet Murguia, who wants to 

thank you for all of the work you have done on behalf of our community. 

I have to tell you that the mortgage market is not working well 

for Latinos today. Home ownership among Latinos is at an all-time 

high of 50 percent, but so is Latino foreclosure. One in 12 Latino 

homeowners is projected to lose their home in coming years. This 

is a huge strike against the wealth low-income and minority communities have fought so hard to obtain. 

Our office has been flooded with reports of Latino families who 

have been misled in various mortgage transactions. Our home ownership counselors went from one call a week from families fearing 

foreclosure to five a day. That is a near 100 percent increase in call 

volume. 

This lapse in market performance, though, is not a surprise to 

us. Last year we helped 3,000 families become homeowners 

through the NCLR Home Ownership Network. We understand 


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what it takes to get low income immigrant and Latino families into 

homes. And our families have unique credit needs. 

But lenders in the prime market have shied away from making 

the loans that accommodate Latino borrowers. Those loans just do 

not earn the banks enough profit to make it worth their effort. 

With prime lenders taking a back seat many subprime lenders 

have rushed in to serve our families with ill-fitting products. The 

result, families have been matched to loans they cannot afford. 

Many are on a path of endless refinance. This strains the wealth 

that home ownership is supposed to build. 

Let me share with you a story. Mrs. Ruiz is a mother of six in 

California. She and her family dreamt of becoming homeowners but 

thought it was out of reach for them. Her husband works two jobs 

and earns most of the income for the family, while she worked as 

a housekeeper so she could stay home with their kids. 

Neither of them had ever owned a credit card but they had always paid their rent and utilities on time. So a friend told them 

about a mortgage broker that would be able to help them out. 

After their mortgage payment jumped unexpectedly, they called 

one of our counselors. Their payment was eating up most of their 

monthly income. Upon further investigation, our counselor discovered the Ruiz family had a stated income ARM. Even though the 

Ruiz’s could document their salaries, their income was quoted at 

thousands over what they made combined. 

Worse, the family did not get an inspection. Their mortgage 

broker told them it was a waste of money. They ended up having 

to replace their own roof and they spent the winter without heat. 

Two weeks ago, Mrs. Ruiz saw no alternative for her family. She 

filed bankruptcy and they moved back into an apartment. 

Across the country Latino families turn to mortgage brokers to 

serve as a trusted advisor. They see them as professionals that can 

be trusted to explain complex and dynamic transactions, much like 

we trust our doctors and our lawyers. But in reality, brokers are 

not legally liable and many are long gone by the time a borrower 

gets in trouble. 

With little incentive to direct Mrs. Ruiz to a more appropriate 

loan, the broker sold her the one that was the easiest to process 

and earned the highest return. 

The point is that brokers are an important part of the mortgage 

system and no solution is complete without considering their role. 

Subprime loans are an important tool for families with damaged 

credit but clearly the system is broken. Families are getting 

matched to risky and expensive products regardless of their credit 

risk. More than one in five Latino families does not have a credit 

score. Many have multiple sources of income, multiple wage earners, and cash savings. But this does not mean that they are a 

riskier borrowers. Families should not be steered to subprime products simply because they are considered hard to serve. A mortgage 

system that works well connects borrowers to fitting products, regardless of how they enter the market, whether it is the prime or 

subprime arenas. This is especially important for Latino shoppers 

who are bombarded with ads in Spanish newspapers for risky products. Turn to English newspapers and you will find neat charts 


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that make product comparison easy. Borrowers ought to be 

matched to safe products that reflect their true risk. 

Let me close by just making a couple of recommendations on how 

I think we can make this happen. Briefly, consumers should be 

able to count on the advice and information provided by their lender and broker. We must level the playing field between borrowers 

and lenders. Lenders must be required to make loans families can 

afford to repay and brokers must be held accountable to the borrowers they serve. 

We need a national solution to the rising foreclosure rates. We 

need a foreclosure rescue fund for families in financial crisis and 

those caught in bad loans. And we need to support the work of 

home ownership counselors across the country that are on the front 

lines of trying to save so many homes. 

Thank you, and I’d be happy to answer any questions. 

Chairman DODD. Thank you very, very much for that testimony. 

Mr. Pollock, welcome. 

STATEMENT OF L. ANDREW POLLOCK, PRESIDENT AND CEO, 

FIRST FRANKLIN FINANCIAL CORPORATION 

Mr. POLLOCK. Thank you. Mr. Chairman, Senator Reed, my 

name is Andy Pollock and I am the President and CEO of First 

Franklin Financial Corporation. I appreciate the opportunity to testify today on the state of the subprime mortgage industry. 

Over the last few weeks the mortgage industry has been at the 

center of the financial news, with the current market conditions 

presenting significant challenges for some firms in the industry. I 

want to take this opportunity to share with you my thoughts on the 

subprime market and where First Franklin fits into that market. 

First Franklin has been in the residential mortgage business for 

25 years, successfully managing the business through various economic and credit cycles. We are proud of our long history of providing expanded and fair access to credit to all credit worthy individuals. We have a proven history as a responsible lender and a 

critical component to our success has been the discipline underwriting we embrace as a company. 

We have enabled hundreds of thousands of hard-working families 

and individuals to realize the American dream of home ownership 

over the quarter century that we have been in business. 

Three months ago we were acquired by Merrill Lynch and we operate as a stand-alone operating subsidiary of Merrill Lynch Bank 

and Trust Company Federal Savings Bank. First Franklin is an acknowledged leader in the subprime market place, originating loans 

with higher credit scores, lower delinquency rates, and generally 

higher performing mortgages than other subprime lenders. 

As I will demonstrate, we are committed to responsible lending 

standards which help protect consumers. By strategic design, First 

Franklin has strengths that many other lenders in the subprime 

market do not. Specifically, we employ underwriting standards that 

assure the quality of the loans we originate. These underwriting 

standards are designed to ensure that borrowers can afford to 

repay the mortgages we originate as well as those we have originated in recent years. 


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First Franklin has one of the lowest delinquency rates in the industry, a testament to our underwriting standards and to the quality of the loans we originate. It is our goal not only to allow more 

Americans to be able to buy homes but to assure they have the capacity to keep them. 

To further our goal, as a matter of policy, we do not originate 

high-cost loans as defined by Federal or State law. Prior to making 

owner-occupied refinance mortgage loans, we require a net tangible 

benefit to the borrower. We do not make loans based solely on collateral value. Specifically, all loans are underwritten based on the 

applicant’s credit history and ability to repay the debt. We do not 

originate negative amortization subprime loans. We do not engage 

in packing fees; specifically we limit the amount of origination fees 

and costs which can be financed. 

We also comply fully with the Interagency Guidelines on Nontraditional Mortgage Product Risks. These agencies have also recently proposed a statement on subprime lending of which we endorse the key principles. 

The shake-out in the mortgage market has taken place quickly 

for those originators that did not maintain a commitment to quality 

or a culture of discipline. First Franklin’s 25 years of industry experience and our commitment to responsible lending standards has 

allowed us to weather the current difficult situation and will enable 

us to continue to succeed in the future. 

First Franklin intends to remain a leader in the residential mortgage market by adhering to prudent industry practices that will 

help consumers achieve and maintain home ownership. Wealth creation and financial security often begin with home ownership. We 

have a commitment to lending practices that help make homeowners make economically sound decisions and to maintain their 

homes. 

First Franklin appreciates the opportunity to appear before you 

today and I would be happy answer any questions that you may 

have. 

Chairman DODD. Thank you very, very much. 

Mr. Ackelsberg. 

STATEMENT OF IRV ACKELSBERG, ESQUIRE, 

CONSUMER ATTORNEY, PHILADELPHIA, PENNSYLVANIA 

Mr. ACKELSBERG. Chairman Dodd and Senator Reed, my name 

is Irv Ackelsberg. I am a Philadelphia consumer lawyer specializing in defending mortgage foreclosures. I am a member of the National Association of Consumer Advocates and I am on the board 

of the newly launched Organization of Americans for Fairness in 

Lending. 

I retired last year after 30 years of service with Community 

Legal Services of Philadelphia, the Nation’s leading civil aid program. I want to just say, parenthetically, that CLS was, until 1996, 

funded by the Federal Legal Services Corporation. We had to give 

up that funding in order to avoid the restrictions imposed by Congress in 1996. Those restrictions would have prohibited much of my 

anti-predatory lending work. And I encourage the Senators to consider, as part of the effort to increase enforcement in this area, to 

unshackle the legal aid lawyers of this Nation. 


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I and my former colleagues at CLS have probably reviewed more 

abusive subprime transactions than any law firm in the country. 

We are familiar with the practices of the companies that once 

dominated the subprime mortgage market and those that are now 

the leaders. The subprime mortgage market has, for the last decade we know, grown astronomically. This growth has been fueled, 

in large part, by a complete collapse in underwriting practices and 

responsible lending principles, by a sales pressured get rich quick 

environment that has infected the market with blatant fraud and 

abuse, and a regulatory apparatus that has abdicated its traditional role to protect the American consumer from exploitive lending practices. 

In my view and in the view of most consumer housing specialists, 

this fraud infested market has been producing very little in the 

way of social benefit. While the particular abuses most prevalent 

are somewhat different than those we saw in the late 1990s, the 

effects on the American consumer, the American homeowner, have 

been steadily growing and are cumulative: unprecedented levels of 

foreclosures and equity theft, all happening in full view of banking 

regulators. 

At the ground level, from the standpoint of America’s neighborhoods, this growth in subprime lending has been the equivalent of 

a gold rush where the gold being prospected is the home-equity 

wealth of America’s homeowners. This gold rush has erupted because of the collapse of underwriting integrity. To put it bluntly, 

mortgage origination practices have been run over by the pursuit 

of profits at any cost. 

I want to describe for you some of these gold rush induced underwriting practices. But first I want to dispel two myths about 

subprime mortgage loans that the industry has been promoting. 

First, it is simply not true that the typical subprime borrower is 

a low-income first-time home buying purchaser. You heard numbers from Countrywide. The national numbers, I believe, are only 

11 percent of the subprime loans being originated are for first-time 

home buyers. The majority of the loans are to existing homeowners 

who are being convinced to refinance their debt inappropriately. 

Sometimes the occasion for the transaction is a home improvement. 

Sometimes it is runaway credit card balances driving the deal. And 

sometimes, frankly, the reasons for the loan are difficult to discern. 

The bottom line is that if we want to look at these transactions 

as opportunity loans, the opportunity lies with the broker or lender 

profiting on the deal not with the homeowner. 

The second myth is that the mortgages are credit repair products. If that were true, most borrowers with subprime loans would 

be transitioning into prime products and the industry would be essentially lending itself out of existence. In fact, we know the opposite is true. The subprime portion of the market has been steadily 

rising and, in fact, we have some data in Philadelphia that confirms that there is very little scant evidence of credit repair using 

subprime. 

You have heard about some of the abuses. Two of the witnesses 

here give examples of some of the abuses. There really are four 

central abuses that I think you should focus on. First, the exploding adjustable mortgages with initial teaser rates that are underVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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written to the teaser rate not to the inevitable adjustment. This 

means that at the time the loan is being made, there is virtually 

no evidence of borrower repayment ability. 

What you have to—I believe, frankly, that the only purpose 

served for that initial teaser rate in this so-called hybrid ARM is 

deception. That is its role. That is what it is doing. And it needs 

to be banned. 

The second is the widespread use of no doc stated income loans. 

You heard Mr. Ynigues refer to that. We have seen this for years. 

The so-called stated—where that act of stating the income occurs, 

it is on the application. And that application is generally presented 

to the borrower at the closing to make it seem like the loan that 

they are getting is actually a loan that the borrower asked for in 

the first place. That is why, as Mr. Ynigues said, he was surprised 

to see that there was income that he did not have appearing, because it is buried in the documents that are signed at the closing. 

The absence of escrow for tax and insurance. This was an element of Ms. Haliburton’s loan with Countrywide, which was one of 

these hybrid ARMs. No tax and insurance escrow. And what happens is inevitably, as happened with her case as described in her 

written testimony, then they pay the taxes the next year and then 

they increase their payment. This all happens before the ARM 

kicks in. 

Last, you have a prepayment penalty which locks people in and 

penalizes them if they discover how they have been scammed and 

try to get out of it. 

In the testimony I gave to the Federal Reserve Board last year, 

I called their attention to a simple securitization of New Century 

from the first quarter of 2006. Of the $1.4 billion of mortgage loans 

in that particular pool, only 10 percent were traditional 30 year 

fixed rates and an amazing 45 percent of those mostly adjustable 

rate loans in the pool were no docs, stated loans. 

The coming foreclosure crisis should not be a surprise to anyone, 

except perhaps for the magnitude. What we are seeing, I believe, 

is a runaway train that is only starting to gather speed. These recent foreclosures reflect large numbers of early payment defaults, 

that is homeowners defaulting before the fixed-rate period on their 

loan expire and the adjustments kick in. We have yet to see the 

full effect of those adjustments. It is not unreasonable to predict as 

many as 5 million foreclosures over the course of the next several 

years, a number that represents one out of 15 homeowners in this 

country. 

The inevitable question then is what can be done to reverse this 

course? We need to focus on constructing relief for those in trouble 

now and on imposing appropriate limits on the future lending practices on the industry. I have just several suggestions. 

In terms of addressing the foreclosure tsunami, to use Senator 

Menendez’s phrase, we first have to recognize who is doing the 

foreclosures and why. We hear from many lenders oh, we do not 

want to take your house. But we have to understand, it is not the 

lenders who will be foreclosing. These loans are all made to order 

for Wall Street investors who purchase them almost immediately 

after they are created. Foreclosure decisions are made by massive 

servicing organizations that work for those investors. In the ordiVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 E:\HR\OC\A312.XXX A312

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nary course of their business, the servicers never have to justify a 

foreclosure. They do, however, have to answer their investors for 

any forbearance being offered to the borrowers. 

I believe that Congress will need to mandate moratoriums and 

debt restructuring in order to avoid a national disaster and to ensure that the investors are absorbing some of the losses that otherwise would fall solely on America’s homeowners. 

In the long run, however, the interests of financial markets and 

of homeowners are not in conflict. The downward spiral in property 

values that will be caused by massive foreclosures is something 

that only real estate speculators should wish to see. 

Finally, as for civilizing this origination market gone amok, there 

are many sensible proposals that consumer advocates have been offering for years, such as imposing a suitability standard on mortgage writing like what exists in the sale of securities. And imposing 

assignee liability on those who purchase these loans and fuel the 

market. 

On the latter approach, Congress already has used this tool effectively in the HOEPA legislation to successfully drive down the excessive points and fees that represented the earlier generation of 

predatory lending. 

Congress can and should take similarly dramatic action to curb 

these so-called exotic mortgages which I submit should probably be 

named poisonous mortgages or irresponsible mortgages. 

Actually the Federal Reserve, as we heard this morning, has the 

authority to do it on its own using the unfair and deceptive practices authority that Congress granted it. 

And finally, at the very least, Congress should let the States continue to make progress in this area and put to rest the specter of 

industry sponsored Federal preemption. 

Thank you. 

Chairman DODD. Very good. Thank you very much. Thank you 

for that. 

I appreciate the testimony of all of you here and since there are 

only two of us here, we will try and go a few minutes and just engage back and forth here, Senator Reed and I. 

I will invite members to respond. If I ask someone a question and 

some of the other want a comment about it, please feel free to 

share some thoughts. 

Mr. Pollock, let me begin with you. You had, I thought, a very 

important statement in your prepared remarks in that you endorse 

or First Franklin endorses the key principles of the statement on 

subprime lending. 

I see the key principles as been the following: that subprime hybrid ARMs will have to be underwritten to the fully indexed rate; 

that the full payment of principal, interest, taxes and insurance 

should be taken into account in looking at debt-to-income ratios 

and analyzing a borrower’s ability to repay; and that a no doc—no 

document or low doc—loans must be limited to situations in which 

there are mitigating factors that support the underwriting decision. 

Do you agree, are those the key principles which First Franklin 

agrees to? 


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Mr. POLLOCK. We do believe in the key principles of the draft. 

We are still reviewing it to prepare our final comments back to the 

agencies. 

The fully indexed underwriting, I think we need to be cautious. 

To fully underwrite to the index, which most likely will never 

occur, 90 percent of the time it could in fact force homeowners into 

take a fixed-rate product even though they prefer an ARM program 

to use as interim financing. 

Not every homeowner is going to be in their home for 30 years 

and use the same mortgage instrument over 360 payments. The 

consumer of today is mobile, does relocate regularly, and buys different homes as they relocate, and likes the luxury of being able 

to have access to the ARM product. I think that is something that 

we should be cautious as we go down this path. 

Chairman DODD. But what about the other ones here? The other 

principles? 

Mr. POLLOCK. We do incorporate our debt-to-income ratios on the 

mortgage and the taxes and insurance, so we do endorse that. 

Chairman DODD. What about the no doc and low doc? 

Mr. POLLOCK. We do not do any no doc products. And the now 

income verification program, the low doc, the no income 

verification, stated income product, is a very small part of our business. Over the last 5 years it has represented about 10 percent of 

our volume and it is getting smaller everyday as we make additional guideline and changes to our product line. 

Chairman DODD. So when you look at the ability of a consumer 

to pay, you do look at the taxes and insurance costs as part of that 

calculation? 

Mr. POLLOCK. Of their debt-to-income ratio, that is correct. 

Chairman DODD. You do. When it comes to underwriting, do you 

base that on the teaser rate or the index rate? 

Mr. POLLOCK. The start rate. We do base it on the—— 

Chairman DODD. The teaser rate? 

Mr. POLLOCK. Correct. 

Chairman DODD. So a little bit short of the key principles. That 

is a pretty important one. 

Mr. POLLOCK. As we stand today, yes, Mr. Chairman. 

Chairman DODD. At the time of the underwriting, if the borrower 

cannot afford the higher payment, on what basis do you conclude 

that he cannot afford the loan? 

Mr. POLLOCK. When we underwrite a loan we take into consideration a number of different factors, Mr. Chairman. No. 1, we look 

at the borrower’s capacity, their income. We calculate our debt-toincome ratios to make sure they are reasonable and customary 

within our guidelines so that the person can afford that product. 

We also look at their credit history. We look at their FICO 

scores, the depth and breadth of that FICO, and the years that 

credit has been maintained. 

Last but not least, we do look at the collateral. We do perform 

appraisals on the properties that we lend on to ensure that the values there are accurate values. 

Chairman DODD. Let me ask all of you here, the lenders anyway, 

one of the arguments we frequently hear against underwriting at 

the fully indexed rate is that the borrowers do not qualify because 


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the debt-to-income ratios would be too high. I wonder if you could 

each give me a ballpark figure of what the debt-to-income ratios 

would look like if the hybrid ARM borrowers—for hybrid ARM borrowers if they were underwriting at the fully indexed rate? Mr. 

Samuels? 

Mr. SAMUELS. I do not know what that number is, Mr. Chairman. I will tell you that about 60 percent of the people who do 

qualify for the hybrid ARMs would not be able to qualify at the 

fully indexed rate. 

Now there might be other products for which they might qualify, 

but there is a not insubstantial number who would have difficulty 

qualifying in any event. That is the concern and I think that is 

what Mr. Pollock was referring to, that we have to be concerned 

in adopting any kind of regulation or legislation that we do not 

make it harder for families to qualify for a home purchase or refinance when they can qualify to do it and when we are sure that 

they can—or we have a good idea—that they can be successful in 

that loan. 

Chairman DODD. Mr. Bossard or Mr. McDonagh. 

Mr. BOSSARD. We do not have that number either here. We will 

provide it. 

Chairman DODD. I cannot hear that. I am sorry. 

Mr. BOSSARD. We do not have the number you are asking either 

here, but we will provide it. 

We have the same estimation as Mr. Samuels said, about 40 percent of the borrowers would not qualify at the fully indexed rate. 

Chairman DODD. We were told by the regulators, I asked—we 

asked the regulator this question—that some debt-to-income ratios 

could be as high as 70 percent. Do we have any disagreement with 

that? Mr. McDonagh? 

Mr. MCDONAGH. I would agree with the regulators that under 

some circumstances prior to the issuance of the interagency guidance the debt-to-income ratios could be as high as 70 percent. As 

I stated at the hearing, however, HSBC supports the interagency 

guidelines issued by the banking regulators and, as of April 30, 

2007, in its Consumer Lending, Decision One and Mortgage Services divisions, HSBC is in compliance with that guidance. In 

HSBC’s prime/Alt A mortgage lending division, Mortgage Corporation, we are waiting for further guidance from Fannie and Freddie 

on changes to their underwriting systems to ensure compliance 

with the guidance. 

Chairman DODD. And indexed rate, you are going to be doing 

that yourselves? 

Mr. MCDONAGH. Yes. As of April 30, 2007, Consumer Lending, 

Decision One and Mortgage Services began manually underwriting 

to the fully indexed rate or ceased origination of interest only mortgages until those divisions can systematically underwrite to the 

fully indexed rate. 

Chairman DODD. How about you, Mr. Samuels? I know you disagree with that a little bit, but given the fact this is only a small 

percentage of the—7 percent of the business. 

Mr. SAMUELS. That is right. If this is the rule that goes into effect, Countrywide will be fine. There is no issue there. The concern 


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that we have is the impact on the housing market and the impact 

on borrowers who are in the subprime market. 

And so we hope the regulations can find a balance that will allow 

consumers to benefit from lower housing payments while protecting 

them from unaffordable payment increases. 

Mr. ACKELSBERG. Senator Dodd, I think if you look at the 

Haliburton numbers, when her payment fully indexes in 2008, next 

year, her payment will be 70 percent of her Social Security income. 

Chairman DODD. We were asked, by the way, staff looked over 

some of the subprime pricing sheets from July of 2006. And looking 

at the sheets, it is pretty clear to us that borrowers would pay a 

lower rate to get a 30 year fixed-rate loan than they would for a 

more risky 2/28 ARM if they are willing to document their income. 

In fact, on a New Century rate sheet from July 2006, a borrower 

with a 615 credit score would qualify for 30 year fixed rate loan 

at 8.75 percent. A 2/28 stated income loan would cost 9.5 percent. 

Obviously it is not true that the 2/28s are the only mortgages that 

credit impaired borrowers can get. 

So I wonder if these loans are, in fact, more costly? How do you 

explain that? Mr. Pollock. 

Mr. POLLOCK. I cannot speak on behalf of New Century. It seems 

irrational to me. 

Mr. ACKELSBERG. I think, Senator, the answers is that these decisions are being made for consumers by those arranging the transaction, not by the consumer. Obviously, much of these transactions, 

if you look at them, they make no sense whatsoever from the 

standpoint of the consumer. So then how does that happen? And 

I believe that is the issue before the Committee. 

Chairman DODD. Let me turn to Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman, and this is 

a very important topic. It affects thousands of people across this 

country. And we see particularly two individuals here who, I thank 

you for your testimony. It is very compelling. 

We have been told that in Rhode Island there are lenders who 

will not accept payment if a borrower is 30 days in arrears and will 

begin foreclosure. Is that your policy, Mr. Samuels? 

Mr. SAMUELS. I am sorry, I did not understand that, sir. 

Senator REED. We have heard from Rhode Islanders that after 

they are 30 days delinquent, the lender will not accept payment 

and begin foreclosure proceedings. 

Mr. SAMUELS. No, that is not our policy. 

Senator REED. Not at all? 

Mr. SAMUELS. No. 

Senator REED. Is it your policy, Mr. McDonagh? 

Mr. MCDONAGH. We work with our borrowers to try to keep them 

in their homes from the time we learn of their financial difficulty 

until the last possible moment of an unavoidable foreclosure. We 

want to avoid foreclosures as much as possible because we lose 

money on every foreclosure. The entire foreclosure process consists 

of many steps, usually takes from 6 to 8 months and we are ready 

and willing to work out a solution with our customer that is mutually beneficial until the very last day of that process. 

Senator REED. Mr. Pollock? 

Mr. POLLOCK. No, we do not follow that policy. 


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Senator REED. So that is not the policy of any of these companies 

here today. Mr. Bossard? 

Mr. BOSSARD. No, it is not our policy. 

Senator REED. Given the fact that many of the loans that you 

issue are then securitized, is that the policy of any of these security 

instruments, that they will not accept payments after 30 days of 

delinquency? 

Mr. SAMUELS. Not that I am aware of. 

Mr. MCDONAGH. We actually hold all our mortgages on our balance sheet. We have over $90 billion currently on our balance 

sheet. 

Senator REED. Mr. Pollock? 

Mr. POLLOCK. I have not heard of that. 

Senator REED. Mr. Bossard? 

Mr. BOSSARD. I am not aware of it. 

Senator REED. One of the problems, I think, that has been illustrated by the testimony is that there does not seem to be significant accountability at every stage of the process. Your brokers, and 

Ms. Haliburton and Mr. Ynigues has described brokers who seem 

to be deliberately deceptive or certainly misleading or less than 

candid. I think Mr. Ackelsberg, it is his indication is that happens 

too often. 

They work for you lenders. Once—except for the case of Mr. 

McDonagh, who holds the paper, the incentives you have are just 

to put the paper in a securitization process and get it out. And then 

it goes off to somebody else, to Wall Street. 

And I think that is one of the biggest problems in the whole system. No one is really accountable. 

Let me ask, Mr. McDonagh, you said that you work with outstanding brokers. Do you have statistics correlating between the 

brokers and the number of foreclosures on the paper they have 

issued? 

Mr. MCDONAGH. I do not have them today but I will check and 

submit them. We have a pretty robust process of monitoring our 

brokers. They must comply with State and Federal laws. We look. 

We monitor the loan terms and fees. We have capped the back-end 

premium spreads. We make sure that we are at least equal to or 

much better than the industry standards. 

Senator REED. The problem we are talking about today is people 

who are going into foreclosure with these subprime loans. Do you 

have statistics that would correlate a broker and the number of his 

clients that fall into this category? 

Mr. MCDONAGH. We do not have that statistic. Because so many 

loans are sold into the secondary market and/or securitized, it is 

very difficult to follow the loan from the broker through the entire 

securitization process, the payment process, delinquency and foreclosure. We do, however, track ‘‘early payment defaults (EPDs).’’ 

We are required to repurchase loans under circumstances where 

the borrower fails to make timely payments to the investor soon 

after the loan is sold. The EPDs have been analyzed from a variety 

of perspectives, including, more recently on a broker basis. Brokers 

that submit loans that have unacceptable frequencies of EPDs are 

terminated. 


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1The document can be found starting on page 267 of this hearing. 

Historically, our delinquency and foreclosure analysis was product based, resulting in the elimination of products that had higher 

frequency of delinquency and foreclosure. Seller score cards were 

developed, however, that evaluated delinquency and foreclosure 

rates on an originator or lender level basis for those loans retained 

in portfolio. We found that vigorously enforcing repurchase of EPD 

or fraudulent loans by the originating lenders drove better behavior 

on the underwriting side. 

Although we do not have the statistics you refer to, we do track 

our brokers. The tracking of brokers that we do shows that from 

March 2005 to March 2007 we had 24,201 approved brokers, although only 8,400 of them were active. During that time, 1,679 

were added to our ‘‘Ineligible List’’ and 1,774 were added to our 

‘‘Watch List.’’ In March of 2007, we started to deactivate brokers 

due to their borrower’s credit quality. For the month of March, the 

only figures we have at this point, 61 brokers were deactivated. 

For your information, I have also attached our ‘‘Responsible 

Lending Guidelines and Best Practices’’ document which is distributed to any and all brokers approved by HSBC.1

Senator REED. Could you provide that for us? 

Mr. MCDONAGH. Yes, I can provide that. 

Senator REED. What would happen if you found a certain, a high 

correlation. 

Mr. MCDONAGH. We would stop doing business with that broker. 

Senator REED. How many brokers have you stopped doing business with? 

Mr. MCDONAGH. Again, I will have to submit that information 

later on. 

Senator REED. Mr. Samuels, what about your concern? 

Mr. SAMUELS. Yes, the same thing. We do have a number of processes to work with our brokers and monitor their activity. We have 

a broker scorecard. I think it goes exactly to what you are referring 

to. And if we find that there are too many loans that are involved 

with fraud or something like that, we would cut them off immediately. 

Senator REED. Mr. Pollock, do you have a comment? 

Mr. POLLOCK. Absolutely. Broker management is an important 

key to this business. Chairman Dodd. Someone has not paid the 

electric bill. 

[Laughter.] 

We do track the broker performance. And if we see acts of fraud 

by a broker, we reject the broker from our approved list. And if 

there have been damages, we go after them. 

Senator REED. Thank you. 

Mr. Ackelsberg, the light—— 

Mr. MCDONAGH. Senator Reed, if I could just also add, another 

way which we are able to monitor and protect the situation is we 

originate the majority or 50 or 60 percent of our mortgages through 

our own branch network. And so we look at those and then look 

at the ones that are coming in from the broker community. And 

that way we have our own internal way to self-check. 


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Senator REED. Mr. Ackelsberg, from what the two borrowers 

have said, that they seem to have failed to link up with these excellent brokers, which you suggest that there is a lot of broker misbehavior going on. And yet, the lenders seem to suggest that they 

have controls and they worry about this and they are concerned 

about it. 

Mr. ACKELSBERG. There absolutely is broker abuse. It starts with 

the fact that in many States the brokers have taken the position, 

and the States have allowed them to take the position, that they 

have no fiduciary responsibility to anybody, neither to the lender 

nor to the borrower. They basically say they represent themselves. 

So if they are representing themselves, no surprise, we have all of 

these kind of transactions out there. 

But I think it would be a really bad mistake for this Committee 

to think that the problem can be solved by reining in the brokers. 

We have to understand that they are selling the products that the 

lenders want them to sell. And the lenders themselves are selling 

the products that Wall Street has ordered. 

The ultimate consumer here is not the homeowner. There is no 

real market demand for being ripped off. The real market demand 

is on Wall Street for bond securities. And the broker and the lender 

and everybody else in between is part of a factory that is producing 

bond securities for Wall Street. That is the real market and that 

is the real culprit. 

Senator REED. Mr. Chairman, I have to go on to Appropriations. 

Chairman DODD. I just want to pick up on the question. I had 

asked this before and I would just remind the lenders here, we 

looked on the website of the National Association of Mortgage Brokers under frequently asked questions. The very first question is 

why choose a mortgage broker? 

The answer given on a Mortgage Brokers Association website is 

as follows ‘‘The consumer receives an expert mentor through the 

complex mortgage lending process.’’ 

I looked up the word mentor. I think it means a wise and trusted 

counselor under Webster’s definition. 

So they are holding themselves out as the mentor, in the sense. 

Exactly what happened in two cases here, one I presume, Ms. 

Haliburton, you had never met this individual before they came to 

your home or you called them? 

Ms. HALIBURTON. No, I had not. 

Chairman DODD. In the case of you, Mr. Ynigues, this was someone actually you had had a long-standing relationship with? 

Mr. YNIGUES. Yes. 

Chairman DODD. So a different set of circumstances. But clearly 

in the case of you, Ms. Haliburton, was it your feeling that this individual you were talking to was actually helping you through this 

process and giving you advice and counsel as someone who was 

really sort of on your side, watching out for you? Was that the impression you had? 

Ms. HALIBURTON. Yes, I did. 

Chairman DODD. How about you, Mr. Ynigues? Was that similar? 

Mr. YNIGUES. Same thing. 

Chairman DODD. Even though you knew this individual? 


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Mr. YNIGUES. Yes, I did know and I had fiduciary trusting relationship with him prior. 

Chairman DODD. Are you still giving music lessons to that—— 

Ms. HALIBURTON. Not any longer, no. 

Chairman DODD. My imagination thinking about some sort of 

music lessons you might like to give is almost endless here. 

Mr. YNIGUES. Yes. 

Chairman DODD. I just point that out to those lenders. You 

might want to take a look at these websites in a sense here, because that answered the question. I mean, it seems to me that at 

least the assumption is here is your new broker here. You hold 

yourself out as the mentor is a really very troubling instruction, in 

a sense here if, in fact, there is not that fiduciary relationship between the borrower and that broker. 

And in most cases the broker is pretty much out of the deal within 10 to 12 weeks anyway, I presume, because once you securitize 

these mortgages they have been paid their fees and whatever and 

move on. 

I remember in the case of one of the individuals who appeared 

before us in February, this woman, a widow, said that she had 

tried to get back in touch and has never heard from again the 

mortgage broker to find out what was going on and what happened. They disappeared on them, obviously, not to be found again. 

Listen, there are very many good mortgage brokers. I do not 

want this to be an indictment of people out there doing the business every day. But when the association of the brokers lists this 

kind of information on their website, I mean do any of you have 

any difficulty with that kind of piece of information, that you are 

holding yourself out as a mentor? Is that what you tell your brokers? 

Mr. Samuels. 

Mr. SAMUELS. I am sorry. 

Chairman DODD. The national brokers, they are giving answers. 

‘‘The consumer receives an expert mentor through a complex mortgage lending process.’’ 

Mr. SAMUELS. That is the broker who does that. Yes, I mean we, 

as the mortgage company, do not hold ourselves out as a fiduciary 

to the borrower. 

Chairman DODD. In terms of the brokers that you use and so 

forth holding themselves out as a mentor, was that a proper description of their role? 

Mr. SAMUELS. Some do and some do not. Some do hold themselves out as a fiduciary, and others are very clear that they are 

offering a rate just like anybody else, any other bank or any other 

lender. 

Chairman DODD. But what should that role be in the broker, 

with regard to the consumer coming in? What would your advice 

be to someone like Mrs. Haliburton here who is dealing with an individual? How should that broker have conducted himself in dealing with her? 

Mr. SAMUELS. In any case, everybody needs to make sure that 

the disclosure of what the person is getting into is correct, that 

there is no fraud. 


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From our perspective, from Countrywide’s perspective, we win 

when we have an educated borrower. That is very important to us 

because we want the borrower to know exactly what they are getting into so that we can make sure that they can stay in their 

home, that they know what their goals are and we can help them 

achieve those goals. That is very important. 

Chairman DODD. In the case of Mrs. Haliburton, we had what, 

$1,600? What is your monthly—— 

Ms. HALIBURTON. $1,700 a month. I am 77 and I never saw a 

broker. Two people came to my home and a very young guy, and 

he was like a car salesman. He could really sell you. And I believed 

in what he said. But there was no broker. 

And who was he working for? I do not know. But he says Countrywide. 

Mr. SAMUELS. Mr. Chairman, if I may, I commit to you and to 

Mrs. Haliburton that I am going to make sure that we look at all 

the facts involving her situation and that we do everything that we 

can to make sure that she stays in her home. We do that for all 

of our borrowers. We want to do that here. 

Chairman DODD. I appreciate that. Thank you very much for 

that. 

Ms. Haliburton. 

Ms. HALIBURTON. I feel like they took advantage of me because 

I am 77 and they figure oh well, she is old and she will die soon 

and we will take over. But there are so many elderly people like 

me are suffering and they are losing their homes. 

My husband was a policeman for 25 years. He worked hard in 

the cold, walking, standing. And I deserve to take my last days of 

my life and live at peace and ease. My kids have grown and gone. 

They are not all in Philadelphia. I need to relax for what I have 

done through the years. And that is over 58 years. 

Chairman DODD. Anybody who ever called you shy made a huge 

mistake. 

[Laughter.] 

Mr. YNIGUES. Mr. Chairman, I would like to make a—— 

Ms. HALIBURTON. Oh no, I am not shy. 

[Laughter.] 

I have been around too long. 

Chairman DODD. Thank you very much, Ms. Haliburton. 

And the point being made obviously, too, Ms. Haliburton, is we 

are talking about—and I appreciate very much the offer to be of 

help to Ms. Haliburton. 

But obviously, we could not have a table of, a roomful of just witnesses coming in who have through this, and a lot of people are. 

And the point is we need to figure out something to do here to 

make sure that the numbers that we are talking about, that could 

happen here with people put in that situation that we can find 

some way here to minimize the ability that these people can lose 

their homes and maximize the opportunity for them to stay in their 

homes during this difficult period. We are going to be very interested in how we can achieve that and do that. 

Again, the point I have made in the past, and I will keep on saying it again here, it is very, very valuable in my mind that we 


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maintain and have instruments available for people to be able to 

move into their home ownership. 

There was a statement again, Mr. Samuels made, that these 

teaser rates—and I am quoting you here—‘‘Are a critical bridge for 

our customers, reducing costs for homeowners experiencing temporary financial challenges.’’ 

That may be in some cases, but most of the people we are talking 

about here, a lot of them are on—it is not temporary to the circumstances. There are people who are lower income, do not have 

historically good credit ratings. In the case of fixed incomes and 

older people here on Social Security or some retirement program 

that does not allow for a lot of flexibility in terms of what they can 

handle. 

And again, looking at some of the numbers here, it seems to me 

that an awful lot of people we are talking about, the range of their 

financial circumstances are not terribly elastic. They are not going 

to expand considerably. That is a pretty fair statement to make unless they have some good fortune at the lottery or something else. 

So the idea that it is a bridge to get through a temporary set of 

circumstances just does not seem to hold up, in my view, unless 

you can convince me otherwise. 

Mr. SAMUELS. This is our experience, Mr. Chairman, that many 

who get into these 2/28s or 3/27s are able to repair their credit 

within that 2 year or 3 year period. And so if they are able to do 

that, and the statistic that I gave is that 50 percent of those who 

re-refinance from a subprime 2/28, we were able to refinance into 

a prime loan. 

So that if someone is able to make their payments on time, keep 

their credit good for that period of time, their FICO score is going 

to go up and we are going to be able to make them a prime loan. 

That is the purpose of these kinds of products. 

Chairman DODD. What is the point of the teaser rate, the sense? 

It seems to me—— 

Mr. SAMUELS. It makes the loan affordable. 

Chairman DODD. But if it is only for a year or so, and the circumstances are not going to change—— 

Mr. SAMUELS. It is 2 years. 

Chairman DODD. Two years. 

Mr. SAMUELS. But it is for 2 years—— 

Chairman DODD. How does someone that is 70 years old with a 

teaser rate, and she is 72, what is the circumstances? 

Mr. SAMUELS. If she makes the payment on time for the period 

of those 2 years, her FICO score will go up and we will be able to 

refinance her into a—— 

Chairman DODD. Then she is going to pay more, though? 

Mr. SAMUELS. No, into a prime loan. She will pay less because 

she will have gone from a subprime loan into a prime loan. 

Chairman DODD. Anybody want to make any comments on this 

at all, on this particular—— 

Ms. BOWDLER. Yes, I would like to. 

I think it is a great thing for the borrowers that that happens. 

But I think what we have seen is that certainly is not the universal 

experience. And to the extent that these products are putting families in a position where they are going to be going through endless 


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cycles of refinancing, I mean no family should be in a position 

where they have to refinance to keep their home. And that is what 

we are seeing with our borrowers that are coming in to their counselors. 

I am not going to say that an investor out there cannot use a sophisticated product to do whatever they need to do with that. But 

what we are seeing are average every day people who did not make 

the decision for themselves that they wanted a 2-year teaser rate 

and now are in a position where they are just going refinance after 

refinance, and no equity left to show for it. 

Chairman DODD. Would any of the lenders on here besides Mr. 

Samuels, you do not restrict these hybrid ARMs to borrowers who 

are experiencing temporary financial difficulties? Is that true? 

Mr. MCDONAGH. In our case, in the last few months, we have actually withdrawn a number of products which we believe are not 

appropriate to the consumer, in reaction to what is going on. 

As I mentioned too, our organization is perhaps a bit unique in 

the sense that we have 1,400 of our own branches. In that case, 

we are very much able to provide the loan on a know your customer—I think what you would call knowledgeable counsel, sort of 

the thing that was on the website of the brokers. 

Our way of controlling, as I said about the brokers, is we look 

at the statistics, the correlation that Senator Reed mentioned. If we 

find that a broker is not maintaining the standards that would be 

associated with our brand, then we will cut them off. 

There is no silver bullet here, Mr. Chairman. I think there are 

a number of things people can do. We need to improve financial literacy. The average consumer out there certainly does not have to 

know about complex products. But we need to bring up their level 

of education by a certain amount. 

At the same time, and then equally, I think the lenders have to 

make sure that the range of products are properly controlled for 

the segment that they are dealing with. 

I think quite a few—I can only speak to my own organization but 

I am sure a number of my industry colleagues here have financial 

literacy programs. I mentioned our foreclosure avoidance program. 

I think the industry, broadly, has to be encouraged to work with 

the community groups to have similar programs. That is one way 

of starting to solve the problem. Then you look at the products, as 

well. 

And then, as we talked about it, we support the guidelines. 

There is a certain amount of regulation that is required. There is 

a certain amount that is not because we do not wish to dry up the 

credit that is available. There are people out there who need loans. 

I think if we initiated a collection of all those suggestions you 

will begin to see an overall improvement in the marketplace. 

Chairman DODD. I hope so. We are going to look at all of that. 

And I do not disagree about financial literacy. 

But you are looking here, even well-educated people, sophisticated people, this can be a pretty daunting experience even 

through a normal closure that occurs that people go through in 

terms of buying a home through a prime lender, prime lending 

practice. So it is a pretty overwhelming experience for people. 


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And there is an excitement and enthusiasm, and you are hoping 

that this is going to work out. So your inclination is to want to say 

yes to everything at the time. 

The advantage between the lender and the borrower in these 

cases are such that that borrower is so determined and so anxious 

to achieve that dream. And the thought that you might get turned 

down or that you might not get accepted has a profound effect on 

the quality of the bargaining position, so to speak, in those critical 

moments where people are not aware of choices and options available to them. 

So you get kind of drawn into a situation that can be difficult. 

So there is responsibility on the consumer side, clearly. But I would 

say respectfully, Mr. McDonagh, I think there is a higher degree 

of responsibility on the part of the lender, who is a sophisticated 

operator here, much more sophisticated than that borrower in 98 

percent of the cases are going to be, even with educated consumers, 

about these issues. 

My hope is, and I am encouraged by what I have heard here 

today on the part of the lenders who are here, that are going to 

either accept either the changes that will be made by the regulators or on your own are going to do so. And I strongly encourage 

that, if I could, because really this situation that my colleagues 

here, some of them, have predicted dire consequences of what may 

happen in the coming weeks and months. I do not know with any 

certainty what is going to hope—I hope they are wrong about that. 

I hope this can be relatively contained and that we do not have 

the kind of shock in the marketplace here that could really be of 

great harm to our economy. 

But we need to talk to some other people, as well, and we need 

to be prepared to make sure that those who could be put in the position of losing their homes can avoid that catastrophe, and in the 

meantime to put the brakes on this stuff as quickly as possible. 

For those of you who made the statements here that you are 

going to change your policies, I would urge you to do so immediately. There is not a better message that could come out of this 

hearing than the other people who could be disadvantaged, you are 

going to make every effort to see that does not happen. 

And I appreciate that very, very much and your willingness to 

be here and to participate. And we thank all of you for coming. 

There will be a lot of questions, I am sure we will submit to ask 

written answers to in a timely fashion, if we could. 

We have kept you a long time and I apologize for doing that. You 

are patient and I appreciate that very much. 

Ms. Haliburton, Mr. Ynigues, we thank you both very, very much 

for being here. 

The Committee will stand adjourned. 

[Whereupon, at 2:07 p.m., the hearing was adjourned.] 

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


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARTINEZ 

FROM SANDRA THOMPSON 

Q.1. There is a sense of outrage about those of us who have worked 

so hard to get people into homeownership, particularly people in 

the minority communities where they are so underrepresented 

among homeowners. And to now see what is coming, what we are 

seeing and what is coming, which is a backtracking, which is the 

horrible disappointment of seeing your dream of homeownership 

now turn into a nightmare of lifetime debt. 

As we look at what we can do in the future to prevent this from 

occurring again, how can the bank regulators have allowed so 

many loans to be made which are obviously not designed to be performing loans in sixty days, a year, or two years, with not having 

qualifying standards for the higher rate that is inevitably coming, 

but only looking at the current qualification standards under the 

current rate? 

Q.2. I believe that we have a sound banking system in this country. So how, in terms of underwriting standards, can making loans 

that are unsustainable from the very day of inception be safe and 

sound? How do we as legislators and you as regulators look out for 

the consumers who now find themselves in nightmare scenarios? 

How have we failed those families? 

A.1. & 2. The financial industry created certain adjustable rate 

mortgage (ARM) products that were intended from their outset to 

be temporary credit accommodations in anticipation of early sale or 

refinancing rather than long-term loans. These products originally 

were extended to prime customers in anticipation of the borrowers’ 

intended temporary residence or in expectation of future earnings 

growth. For these narrow circumstances, this product structure 

was a reasonable fit for the borrowers’ needs. Later, lenders subsequently broadened their use and began to offer them to subprime 

borrowers as ‘‘credit repair’’ or ‘‘affordability’’ products. 

On June 29, 2007, the federal financial regulatory agencies 

issued the Statement on Subprime Mortgage Lending (Subprime 

Statement). The FDIC believes the implementation of the Subprime 

Statement will address the loosened underwriting standards that 

contributed to consumers, especially subprime borrowers, receiving 

loans that they cannot afford after the interest rate resets. The 

FDIC also supports the Federal Reserve Board taking action 

through its authority under the Home Ownership and Equity Protection Act to prohibit certain inappropriate underwriting practices. 

These regulatory measures would do much to promote the provision of credit to both prime and subprime borrowers on terms that 

they understand and under which they can reasonably expect to 

repay. It seems clear that past inadequacies in underwriting practices have contributed to the increases in problem subprime mortgages, and this additional regulatory guidance can help improve 

the future performance of mortgage credit markets. 

In addition, the federal financial regulators and Congress could 

take additional important steps to improve protections for consumers obtaining credit. These include: 


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• The creation of national standards for subprime mortgage 

lending by all lenders which could be done by statute or 

through HOEPA rulemaking; 

• Expand rulemaking authority to all federal banking regulators 

to address unfair and deceptive practices; 

• Permit state Attorneys General and supervisory authorities to 

enforce TILA and the FTC Act against non-bank financial providers; and 

• Provide funding for ‘‘Teach the Teacher’’ programs to provide 

for more financial education in the public schools. 

The FDIC would welcome an opportunity to assist in the implementation of these important reforms. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM SANDRA THOMPSON 

Q.1. What can be done to stop the fall out in the housing market, 

particularly in the sub-prime sector? 

A.1. In the April 2007 interagency Statement on Working with Borrowers, the FDIC, along with the other federal financial institution 

regulatory agencies, encourages financial institutions to work constructively with residential borrowers who are financially unable to 

make their contractual mortgage obligations or are reasonably believed likely to become delinquent. The agencies believe prudent 

workout arrangements that are consistent with safe and sound underwriting practices are generally in the long-term best interest of 

both the financial institution and borrowers. 

Restrictions in the securitization documents of loans that have 

been securitized into mortgage-backed securities may hamper the 

ability of servicers to consider loan modifications for borrowers. 

However, the American Securitization Forum issued a Statement of 

Principles, Recommendations and Guidelines for the Modification of 

Securitized Subprime Residential Mortgage Loans in June 2007. If 

widely adopted, these guidelines might provide servicers with 

greater flexibility when considering workout arrangements with 

subprime borrowers. A copy of the Statement of Principles is attached. 

Additionally, the FDIC—working through its new Alliance for 

Economic Inclusion (AEI) initiative—has partnered with the 

NeighborWorks® Center for Foreclosure Solutions to promote foreclosure-prevention strategies for consumers at risk of foreclosure 

from subprime and nontraditional mortgage lending. The goal of 

the partnership is to keep good-faith borrowers in their homes. The 

partnership will focus its efforts in nine markets around the country that are served by both organizations. The partnership between 

the FDIC and NeighborWorks® seeks to build capacity at the local 

level to reach out to at-risk homeowners, identify successful foreclosure intervention strategies and deliver homeownership education counseling. 

Finally, the Statement on Subprime Mortgage Lending released 

by the federal financial institutions regulatory agencies on June 

29th should help to ensure that future originations and mortgage 

refinancings are sustainable and that borrowers can meet their obVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00233 Fmt 6602 Sfmt 6602 E:\HR\OC\A312.XXX A312

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ligations because the loans will be underwritten using fully-indexed 

and amortizing terms. 

Q.2. Some argue that the market is already working to pull itself 

out of this downturn. What practices do you see mortgage holders 

and lenders taking to help struggling borrowers? 

A.2. Mortgage lenders and servicers are taking a variety of actions 

to work with borrowers. For example, some contact borrowers in 

advance of the reset date to remind them of the pending change to 

their monthly payment amounts. If the borrowers indicate that 

they anticipate not being able to meet the higher payments during 

these contacts, the lenders and servicers may discuss the possibility of workout arrangements or the availability of financial counseling. 

Servicers also are increasing the amount of contact with borrowers who have fallen behind on their payments in order to develop an appropriate workout option. 

Some lenders and servicers also have indicated they are revising 

their processes for loan workout arrangements by working with 

nonprofit counseling agencies and supporting initiatives such as a 

national toll-free number for borrowers to call. Finally, lenders and 

servicers are considering a wide array of workout arrangement options, such as converting the loan to a fixed-rate or extending the 

maturity. The success of all of these efforts relies on increasing the 

amount of contact between servicers and borrowers. The earlier 

these conversations occur, the greater is the likelihood of a successful outcome. 

Q.3. What Congressional or regulatory actions could potentially 

harm the market or slow a recovery? 

A.3. Regulators should avoid imposing rules that unduly interfere 

with the ability of lenders to make credit available to subprime 

borrowers in a safe and sound manner. The Statement on 

Subprime Mortgage Lending provides strong guidance without imposing unduly restrictive rules that may stifle safe and sound innovations in the mortgage credit market. In addition, investor liability could be a potential impairment to the credit markets, as it 

might lower demand for subprime backed paper and could affect 

credit availability. 

Q.4. In Mr. Smith’s written testimony, he stated that refinancing 

will have little or no effect on boosting the market. Yet, it seems 

that several subprime and prime lenders are offering no-penalty refinancing to save borrowers from costly resets that may drive them 

into foreclosure. Do the rest of you agree with Mr. Smith’s assessment? 

A.4. The FDIC agrees that higher interest rates, a reversal or slowing in home appreciation trends, and tighter underwriting standards have made it more difficult for all borrowers to refinance their 

loans. We also agree that individuals who recently purchased 

homes with little or no equity and without the income to support 

a fully-indexed mortgage rate are very likely not in a sustainable 

homeownership situation. However, refinancing into a fixed-rate 

loan or entering into workout arrangements with borrowers who 


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1 Inside B&C Lending, May 18, 2007. 2 April 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices, Board of Governors of the Federal Reserve System. 

have demonstrated an ability to perform are usually in the best interests of both the financial institution and the borrower. 

Attachment follows Ms. Thompson’s answers to Senator Crapo. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM SANDRA THOMPSON 

Q.1. To what degree has credit tightened for consumers with less 

than perfect credit, and what indicators do you follow to track this 

movement? What are your short term and long term forecasts? 

A.1. The FDIC tracks subprime origination trends using external 

data sources that closely follow the market. These data sources indicate that subprime mortgage origination volume is down significantly from the high levels reported over the past three years. The 

FDIC does not make forecasts regarding credit availability, but 

does consider forecasts made by outside parties as part of our analysis. 

Origination volume was about 32 percent lower in the first quarter of 2007 than a year ago, and the lowest since the third quarter 

of 2003.1 There are a number of possible explanations for the decline in subprime mortgage origination volume. Market forces, such 

as declining liquidity in the subprime market, have increased the 

cost of making subprime loans. In addition, lenders have tightened 

their underwriting standards for loans made to consumers with 

less than perfect credit. 

According to the April 2007 Senior Loan Officer Opinion Survey 

on Bank Lending Practices, almost one-third of respondents reported that they have tightened lending standards on subprime 

loans ‘‘considerably,’’ while another one-quarter indicated they have 

tightened standards ‘‘somewhat.’’ 2 More than 45 percent of respondents also reported that they have tightened lending standards 

on nontraditional mortgages. 

Q.2. Is it true that in the vast majority of cases, finding a way to 

keep a customer in their home and continuing to pay their mortgage is the best economic proposition for the customer, the service, 

and the investor? Please explain why or why not. 

A.2. The FDIC believes that prudent workout arrangements that 

are consistent with safe and sound underwriting practices are generally in the long-term best interest of both the financial institution 

and borrowers. Determining whether a workout arrangement is the 

best economic proposition depends on several critical factors. When 

considering a workout arrangement, lenders and servicers need to 

reevaluate all aspects of the transaction, including the borrowers’ 

financial capacity and the collateral, according to safe and sound 

underwriting practices. Lenders also must ensure that their accounting for the transaction conforms to generally accepted accounting principles (GAAP). The lenders and servicers should compare the anticipated recovery under the loan modification to the 

anticipated recovery through the legal process. 


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This analysis can indicate that it is more economically feasible 

to enter into a workout arrangement than to foreclose the property. 

In most cases where the borrower occupies the home, has made 

regular payments, and commits to a workout arrangement tailored 

to his ability to pay, the calculations for a workout scenario usually 

indicate a more favorable result to the lender, and thus the borrower, than a foreclosure scenario. Securitization can complicate 

matters, bringing a variety of participants with different objectives 

into the decision making process. 

The American Securitization Forum released a Statement of 

Principles, Recommendations and Guidelines for Modification of 

Securitized Subprime Residential Mortgage Loans in June 2007, 

which states that when loan modifications are permitted, the 

servicer should be allowed to conduct them so long as the modification is in the best interests of investors in the aggregate. These 

principles attempt to harmonize the interests of the various parties. A copy of the Statement of Principles is attached. 

Q.3. Please (a) describe the workout options that allow homeowners facing difficulties to remain in their homes. Can you (b) 

provide hypothetical examples of bow this modification process 

works? What are (c) the limitations placed on a servicers’ ability to 

modify a loan by investors or others involved in the securitization 

of mortgage loans? 

A.3. Workout options that allow homeowners facing difficulties to 

remain in their homes typically involve some type of permanent interest rate reduction, extension of the maturity date or a combination of these two factors. While loan modifications that provide 

temporary relief (i.e., granting short-term interest rate concessions, 

adding payments in arrears, or rollover refinancing into another 

unaffordable loan) lower the monthly payments for a short period, 

borrowers still might not be able to perform when their loans reset 

to their contractual terms. 

Loan modifications are generally considered and made on a loanby-loan basis, taking into account the unique combination of circumstances for each loan and borrower, including the borrower’s 

current ability to pay. One type of temporary modification provides 

a short-term ‘‘freeze’’ or continuation of the initial fixed-rate after 

it was originally scheduled to expire. The interest rate reverts to 

the original variable rate after the extension ends. However, many 

borrowers will not be able to meet the higher monthly payments 

after the loan reverts to its original contract terms. 

Lenders and services also can consider a variety of permanent 

loan modifications in a workout arrangement. For example, the 

lender or servicer might convert a variable rate to a fixed rate for 

the remaining term of the loan. This modification provides borrowers with a predictable payment amount. Lenders and servicers 

also might combine two or more types of modifications, such as converting a variable interest rate to a fixed interest rate (but at a 

higher level than the previous illustration) and extending the term 

of the loan from 30 years to 40 or 50 years. This modification would 

lengthen the repayment period substantially but would lower the 

borrowers’ monthly payment amount. 


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The lender and servicer must calculate the net present value of 

the modified terms and the cost of foreclosing on the property. A 

workout arrangement is generally considered more favorable when 

the net present value of the payments on the loan as modified is 

likely to be greater than the anticipated net recovery that would 

result from foreclosure. 

Servicers’ ability to modify loans is governed by the pooling and 

servicing agreement (PSA). Most, but not all, PSAs authorize the 

servicer to modify loans that are either in default or for which default is either imminent or reasonably foreseeable. Permitted modifications include changing the interest rate on a prospective basis, 

forgiving principal, capitalizing arrearages, and extending the maturity date. However, many PSAs place limits on the dollar volume 

or the number of loans in the pool that can be modified. Further, 

the PSAs require the modifications to be in the best interests of, 

or not materially adverse to, the security holders. In addition, entities that hold certain types of derivatives may contest any modifications that result in reduced defaults. Changes to the PSA to 

allow for increasing the loan modification restrictions would often 

require an investor vote, which could be very difficult to accomplish. 

Attachment follows. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM EMORY W. RUSHTON 

Q.1. What can be done to stop the fallout in the housing market, 

particularly in the sub-prime sector? 

A.1. Many of the problems facing the subprime market stem from 

relaxed underwriting standards and the layering of risk characteristics (e.g., reduced documentation, higher loan-to-value limits) on 

mortgages originated during the past two years. The increase in 

credit risk in the subprime market, and to a lesser extent the AltA market, is now prompting the capital markets to reassess exposure to, and tolerance for, credit risk across all market segments. 

In response, investors have dramatically reduced their tolerance for 

risk and tightened credit standards, greatly diminishing available 

mortgage market liquidity. 

We are closely monitoring mortgage portfolio conditions and 

available market liquidity at all national banks significantly engaged in mortgage banking activities. While our attention is currently focused on market conditions and the tightening of market 

liquidity, we believe that the stability of market conditions in the 

long-term can best be addressed by improving the quality of the information borrowers receive prior to selecting a product, strengthening the underwriting of new loans, and seeking effective ways to 

work with borrowers facing difficulties performing on their existing 

mortgages. 

To facilitate more enduring changes, the OCC and the other federal banking regulators responded to concerns about subprime and 

Alt-A mortgage lending by issuing the ‘‘Interagency Guidance on 

Nontraditional Mortgage Product Risks’’ in October 2006, and the 

‘‘Interagency Statement on Subprime Mortgage Lending’’ in June 

2007. These issuances highlight the risks inherent in nontraditional and subprime mortgage products, and communicate regulatory expectations for prudent underwriting, risk management, 

and the control systems necessary to effectively administer these 

products. The guidance also describes recommended practices to 

ensure consumers have clear and balanced information about the 

relative benefits and risks of both nontraditional and subprime 

mortgage products. Adherence to these issuances will promote 

stronger credits in these higher risk tiers going forward. 

Because subprime mortgages are predominantly originated by 

non-federally regulated lenders, it is critical that state regulators 

enact standards comparable to those adopted and applied by the 

federal banking agencies. It is vital that state regulators with the 

authority to oversee the activities of state-licensed subprime mortgage lenders take the actions necessary to prevent those lenders 

from originating loans with no realistic prospect of repayment. The 

OCC is encouraged that 38 states, led by the Conference of State 

Bank Supervisors (CSBS), have adopted or endorsed policies and 

regulations similar to the nontraditional mortgage guidance, and 

that a similar effort is underway with respect to the subprime 

mortgage guidance. However, it is imperative that the states not 

only adopt, but effectively enforce these prudent mortgage origination standards. 


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Q.2. Some argue that the market is already working to pull itself 

out of this downturn. What practices do you see mortgage holders 

and lenders taking to help struggling borrowers? 

A.2. The market is exhibiting greater discipline when originating 

subprime mortgages. In the past several months, many subprime 

mortgage lenders have discontinued more problematic products (2/ 

28 and 3/27 loans), and all are tightening their underwriting standards (e.g., higher minimum credit scores, lower loan-to-value limits, 

increased documentation requirements), and reinforcing the repayment analyses. The OCC expects these actions to result in improved future performance and long-term stability in the subprime 

mortgage market. 

In addition, several national banks, state authorities, the GSEs 

and HUD, and various nonprofit housing groups have announced 

and implemented programs and actions designed to assist troubled 

subprime borrowers refinance or modify their loans and avoid foreclosure. 

In June 2007, the OCC published the report, ‘‘Foreclosure Prevention: Improving Contact with Borrowers,’’ which sets forth a variety of strategies lenders can use to reach borrowers for whom 

loan workouts may be necessary and appropriate (available at: 

http://www.occ.gov/cdd/ForeclosurelPreventionlInsights.pdf). A 

number of banks are implementing initiatives to work with borrowers to avoid foreclosure and loss of their homes, for example, by 

contacting borrowers at an earlier stage to inform them of reset information and potential options; offering toll free numbers for additional help; and referring them to credit counseling services or 

third party debt management programs if appropriate. Examples of 

programs that may be available to assist customers to remain in 

their homes include refinancing plans; repayment plans for delinquent balances; forbearance programs; and loan modification programs in which one or more of the terms are permanently changed. 

Examples of programs that may be available if remaining in the 

home is not an option include sale; short sale (a workout option 

where the borrower sells the secured property for an amount less 

than that which is owed to avoid foreclosure); auction programs 

with deficiency notes; or deed-in-lieu-of-foreclosure programs. 

The OCC has stressed the importance of national banks prudently working with residential loan borrowers facing difficulty in 

meeting their contractual payment obligations. The OCC is using 

all available tools to encourage lenders and borrowers to work together, facilitated by supportive organizations such as counseling 

agencies, to maintain the smooth functioning of the residential 

lending industry and to help keep borrowers in their homes except 

where foreclosure is the only prudent course of action. To this end, 

we are co-hosting forums in parts of the country hit hard by foreclosures to introduce banks to the range of delinquency intervention services that community-based counseling organizations can 

provide. 

In April of this year, the OCC and the other federal regulators 

published the interagency ‘‘Statement on Working with Mortgage 

Borrowers.’’ This statement encourages institutions to consider prudent, safe, and sound workout arrangements that increase the potential for financially stressed borrowers to keep their homes. It 


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emphasizes that existing guidance and standards do not require institutions to immediately foreclose on homes when a borrower exhibits repayment difficulties. The Statement also reminds financial 

institutions that the Homeownership Counseling Act requires institutions to inform certain borrowers who are delinquent on their 

mortgage loans of the availability of homeownership counseling. Finally, the statement informs lenders that they may receive favorable Community Reinvestment Act consideration for programs that 

transition low- and moderate-income borrowers from higher cost 

loans to lower cost loans, provided that the loans are made in a 

safe and sound manner. Similarly, in September, the agencies 

issued the ‘‘Statement on Loss Mitigation Strategies for Servicers 

of Residential Mortgages’’ that encourages servicers of mortgage 

loans that have been securitized, to review and make full use of 

their authority under pooling and servicing agreements to identify 

borrowers at risk of default and pursue appropriate loss mitigation 

strategies designed to preserve homeownership. 

In addition to guiding national banks in these outreach efforts, 

we also are working with nonprofit partners to encourage borrowers to work with their lenders. One very promising partnership 

is the NeighborWorks Center for Foreclosure Solutions, a partnership among mortgage lenders, insurance companies, governmentsponsored enterprises, and community-based nonprofits. The Center, which builds capacity among foreclosure counselors through 

training, researching borrower behavior, working with the industry, and conducting public outreach campaigns, is sponsored by 

NeighborWorks America and the Homeownership Preservation 

Foundation. Once contact is established, the NeighborWorks Center and its foreclosure prevention coalitions are able to help many 

borrowers negotiate loan workouts with their lenders. Local nonprofit housing counseling groups then work with these borrowers to 

help ensure that they have the personal financial and money management tools to meet their restructured obligations under these 

workout plans. 

Many borrowers in default do not realize that loan workouts are 

an available option, in part because they avoid contact with their 

lenders and servicers, viewing them as adversaries once they fall 

behind in their payments. Yet, the record shows that a large number of delinquent borrowers can avoid foreclosure if they make that 

call—and the sooner the better. Because early contact is so important, the OCC helped to launch NeighborWorks America’s national 

ad campaign, made up of TV, radio, print, and web Public Service 

Announcements (PSAs), all of which were aimed at encouraging delinquent mortgage borrowers to contact their lenders or a trusted 

housing counselor in order to avoid foreclosure. The OCC also produced its own radio and print PSAs, which ran in both English and 

Spanish and reached a potential audience of 100 million people in 

35 states. Both sets of PSAs encourage homeowners having difficulty paying their mortgages to call the Center’s toll-free hotline—888–995–HOPE—which is open twenty-four hours a day, 

seven days a week. Calls flow into a national call center staffed by 

HUD-approved English- and Spanish-speaking counselors for borrowers to discuss their problems. The hotline, which has been in 

operation since April of 2005, has received over 100,000 calls from 


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borrowers in distress and has lately been averaging 1,000 calls 

each day. 

Depending on the nature of the problem, counseling can be provided as part of that initial call or through a series of follow-up 

calls or in-person visits to a local housing counseling service. These 

on-the-ground referrals are fielded by community-based nonprofits, 

including a growing number of local NeighborWorks America® and 

consumer credit counseling organizations. If a workout can be arranged with the lender, then these groups’ counselors can provide 

budgeting assistance and other financial education to help ensure 

that these borrowers are able to meet the terms of their workout 

agreements. 

Q.3. What Congressional or regulatory actions could potentially 

harm the market or slow a recovery? 

A.3. Congressional and regulatory interest focuses attention on key 

issues and helps spur discussion and analysis. The importance of 

the housing sector to our economy, borrowers, lenders, and other 

interested parties warrants discretion and care to avoid jeopardizing market segments that are working well, and to resolve weaknesses in those that are not. Prudent and well-conceived actions 

are especially important in the current environment of market turmoil. The OCC is closely monitoring and consulting with all national banks that have significant exposure to the mortgage market, activities facilitated by our on-site examiner presence at the 

largest institutions. Overly prescriptive government directives, regulations, or guidance could further disrupt market liquidity, thereby placing financial institutions at risk and impairing homeownership opportunities for new and existing borrowers. 

At the OCC, we believe that an effective approach to improving 

performance and promoting the long-term stability of the subprime 

mortgage market involves prudent underwriting of new mortgages 

in combination with the reasonable administration of existing 

loans. As discussed above, the federal bank regulatory agencies are 

promoting this balance with the Nontraditional Mortgage Products 

guidance and Statement on Subprime Mortgage Lending. These 

issuances call for the application of prudent underwriting standards and effective loan portfolio supervision. They also remind financial institutions to avoid predatory lending practices and to follow fundamental and appropriate consumer protection principles. 

Q.4. In Mr. Smith’s written testimony, he stated that refinancing 

will have little or no effect on boosting the market. Yet, it seems 

that several sub-prime and prime lenders are offering no-penalty 

refinancing to save borrowers from costly resets that may drive 

them into foreclosure. Do the rest of you agree with Mr. Smith’s 

assessment? 

A.4. The agencies believe that prudent workout arrangements consistent with safe and sound lending practices, including mortgage 

refinancing and loan modifications, are generally in the long-term 

best interest of borrowers, financial institutions, and the overall 

subprime market. In the interagency ‘‘Statement on Working with 

Mortgage Borrowers,’’ and the interagency ‘‘Statement on Loss 

Mitigation Strategies for Servicers of Residential Mortgages’’, the 

federal regulators encourage financial institutions and mortgage 


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servicers to consider prudent workout arrangements that increase 

the potential for financially stressed residential borrowers to keep 

their homes. The Statement on Subprime Mortgage Lending reemphasizes the benefits of prudent workout arrangements. 

We recognize that in the current market environment many 

mortgage originators are having difficulty originating mortgages 

that are not eligible for FHA guaranty or sale to Fannie Mae or 

Freddie Mac. The GSEs announced their intent to broaden the eligibility standards for additional mortgage products, including additional Alt-A and subprime loans. The OCC will continue to encourage national banks to make use of the GSE expanded loan programs, FHA programs, and other available alternatives to assist 

existing mortgage borrowers. We expect that these actions will help 

provide long-term stability to the subprime market. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM EMORY W. RUSHTON 

Q.1. To what degree has credit tightened for consumers with less 

than perfect credit, and what indicators do you follow to track this 

movement? What are your short term and long term forecasts? 

A.1. Rapidly deteriorating subprime loan performance and concerns 

about the volume and impact of upcoming ARM rate resets have 

resulted in a dramatic tightening of credit risk acceptance across 

all segments of the capital markets. This has greatly diminished 

available liquidity for borrowers, particularly in the subprime segment. Mortgage originators are currently having difficulty pricing 

and selling mortgages that are not eligible for FHA guaranty or 

sale to Fannie Mae or Freddie Mac, severely constricting credit 

availability for subprime borrowers. 

In response, the GSEs announced their intent to broaden the eligibility standards for mortgage products, including additional AltA and subprime loans. Consequently, many mortgage originators 

are revising their products and criteria to ensure that new mortgages are eligible for the expanded GSE programs or FHA guaranty. Hopefully, this will expand the credit options and opportunities for subprime borrowers. 

To monitor changes in credit availability, our sources of information include industry trade statistics on originations by product 

segment and funding source, as well as product-level origination 

and servicing volumes in the larger institutions we supervise. However, please note that our ‘‘internal’’ view is somewhat limited in 

that only a small fraction of subprime originations come from national banks, i.e., less than 10% in 2006. 

Subprime mortgage originations declined significantly in 2007. 

According to Inside Mortgage Finance, origination of new subprime 

mortgages totaled $56 billion in second quarter 2007, down 41% 

from first quarter 2007 and off 66% from the $165 billion originated in second quarter 2006. Issuance of new subprime mortgagebacked securities was 32% lower in the first half of 2007 than the 

first half of 2006. Second quarter 2007 issuance was down 12% 

from the first quarter 2007, and down nearly 30% from the fourth 

quarter 2006. Various market publications report that new 

subprime mortgage originations have been virtually nonexistent 


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during the first weeks of August. This is the result of a number of 

factors: 

• Lack of market liquidity; 

• Reduced capacity, i.e., the number of non-bank subprime mortgage originators that have gone out of business, and those that 

are for sale and operating at reduced production levels; 

• Elimination or modification of the subprime and Alt-A products 

offered by many institutions; 

• Tightened underwriting standards, including higher credit 

score and larger down payment/equity requirements. 

Forecasting the full impact of these changes is extremely difficult. However, we expect that while subprime originations will increase once the market stabilizes, they will not return to the origination levels of the past few years. This is not necessarily a bad 

thing. Rather, since the issuance of the Interagency Statement on 

Subprime Mortgage Lending, lenders have refocused on the importance of repayment capacity. This should help avoid situations 

where borrowers get into situations where they cannot perform and 

face the prospect of losing their homes. 

We will continue to encourage the availability of prudently underwritten credit to all potential homeowners, and to support 

banks’ efforts to work with existing borrowers with financial difficulties. 

Q.2. Is it true that in the vast majority of cases, finding a way to 

keep a customer in their home and continuing to pay their mortgage is the best economic proposition for the customer, the servicer, 

and the investor? Please explain why or why not. 

A.2. The OCC believes that reasonable workout arrangements that 

are consistent with safe and sound lending practices are generally 

in the long-term best interest of both the financial institution and 

the borrower. The OCC recognizes and appreciates the many benefits of home ownership to the borrower, the community, and to the 

economy as a whole. We also acknowledge the benefits to lenders, 

servicers, and investors of promoting borrowers’ continued ability 

to make mortgage payments. The interagency Statement on Working with Mortgage Borrowers and the interagency Statement on 

Loss Mitigation Strategies for Servicers of Residential Mortgages 

encourage financial institutions and mortgage servicers to consider 

prudent workout arrangements that increase the potential for financially stressed residential borrowers to keep their homes. 

However, we also recognize that there may be instances when 

workout arrangements are not economically feasible or appropriate. 

Lenders and/or investors in mortgage-backed securities have the 

right to expect timely repayment of the loan to the fullest extent 

possible. There may be cases where the borrower’s financial condition has changed, or they simply borrowed more money than they 

can reasonably expect to repay. In either case, prolonging an untenable position may not be in any party’s best interest. In those 

cases where reasonable workout arrangements cannot be developed, it may be in the borrower’s best financial interest to preserve 

any remaining equity by selling the home. We will continue to encourage national banks to exercise an appropriate degree of cusVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00250 Fmt 6602 Sfmt 6602 E:\HR\OC\A312.XXX A312

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tomer sensitivity when home sale or foreclosure is the only available option. 

Q.3. Please describe the workout options that allow homeowners 

facing difficulties to remain in their homes. Can you provide hypothetical examples of how this modification process works? What are 

the limitations placed on a servicer’s ability to modify a loan by investors or others involved in the securitization of mortgage loans? 

A.3. Workout options can vary widely based on the borrower’s financial capacity and whether an institution holds the loan on its 

own books or is servicing the mortgage for a third party. Workout 

options are also affected by conditions in the mortgage markets. 

Current market disruptions are making it difficult for many mortgage originators to refinance mortgages that are not eligible for 

sale to Fannie Mae or Freddie Mac. While the GSEs have announced their intent to broaden the eligibility standards for additional mortgage products, including additional Alt-A and subprime 

loans, many current mortgages may not be eligible for the GSE 

programs. 

Workout arrangements not involving the refinance of an existing 

mortgage may include the modification of loan terms, such as reducing the interest rate and/or principal balance, extending the 

final maturity of the loan, or converting variable rate loans into 

fixed-rate products. Many of these workout programs and actions 

involve the coordination of efforts among servicers, lenders, investors, and community-based non-profit groups. The OCC’s Community Developments Spring 2006 newsletter article titled ‘‘National 

Community Organizations’ Foreclosure Prevention Initiatives’’ 

(copy available at: http://www.occ.gov/cdd/spring06b/cd/ 

index.html) highlights various community organization foreclosure 

prevention initiatives, including the Neighborhood Assistance Corporation and several others. In June 2007, the OCC Community Affairs Department published the report ‘‘Foreclosure Prevention: Improving Contact with Borrowers’’ (available at: http:// 

www.occ.gov/cdd/ForeclosurelPreventionlInsights.pdf). This report discusses best practices used by loan servicers to improve contact with delinquent mortgage borrowers, the first step in helping 

prevent foreclosures. The report also highlights a variety of foreclosure prevention options that may be available to subprime borrowers. These alternatives may provide financially stressed borrowers with predictable and affordable mortgage payments, thereby 

enabling them to retain their homes. However, in some cases where 

a workout program may not be feasible, it may be in a borrower’s 

best financial interest to sell the home. In these cases, we will continue to encourage national banks to exercise an appropriate degree of sensitivity when working with their mortgage customers. 

There is considerable ongoing discussion about whether servicer 

agreements, accounting and tax considerations, and fiduciary responsibilities to various investor classes limit a servicer’s ability to 

work with troubled borrowers. The SEC addressed one of these potential impediments in July when it stated that a mortgage held 

in a securitization trust may be modified when default is ‘‘reasonably foreseeable,’’ and that it would not trigger on-balance sheet accounting. Earlier this month, the federal financial regulatory agenVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00251 Fmt 6602 Sfmt 6602 E:\HR\OC\A312.XXX A312

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cies and the Conference of State Bank Supervisors (CSBS) issued 

a statement encouraging federally regulated financial institutions 

and state-supervised entities that service securitized residential 

mortgages to review and make full use of their authority under 

pooling and servicing agreements to identify borrowers at risk of 

default and pursue appropriate loss mitigation strategies designed 

to preserve homeownership. Nonetheless, determining when it is 

likely that a borrower will not be able to make future mortgage 

payments continues to be a challenge in terms of when to initiate 

effective workout arrangements. Another difficulty is determining 

whether a workout arrangement benefits all investors in a mortgage securitization structure. Market participants, including the 

federal regulatory agencies, industry, and consumer groups are 

continuing efforts to resolve remaining issues and concerns. The 

OCC strongly favors a reasoned approach to resolving these issues 

in line with our belief that workout arrangements that are consistent with safe and sound lending practices are generally in the 

long-term best interest of the financial institution, the borrower, 

and the investor, and hence, the mortgage markets. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM ROGER T. COLE 

Q.1. What can be done to stop the fallout in the housing market, 

particularly in the sub-prime sector? 

A.1. Until recently, both the housing and the subprime mortgage 

lending sectors have enjoyed robust growth driven by relatively low 

interest rates, strong home price appreciation, and an abundant 

supply of mortgage financing. As interest rates rose and home price 

growth began to decelerate, real estate sales slowed and mortgage 

defaults, especially in the subprime sector, began to increase. Lending to subprime and near-prime borrowers likely boosted home 

sales in 2005 and 2006; curbs on this lending are expected to be 

a source of some restraint on home purchases and residential investment in coming quarters. Tighter standards on subprime lending may affect the broader economy primarily through the housing 

market. The cooling of the housing market that has occurred has 

likely been an important factor restraining economic growth over 

the past year. However, given the fundamental economic factors in 

place that should support demand for housing, the effect of the 

troubles in the subprime sector on the broader housing market 

going forward is expected to be contained. 

Q.2. Some argue that the market is already working to pull itself 

out of this downturn. What practices do you see mortgage holders 

and lenders taking to help struggling borrowers? 

A.2. Although there are indications that the market is correcting 

itself, the Board remains concerned that over the next one to two 

years, existing subprime borrowers, especially those with more recently originated adjustable rate mortgages (ARMs), may face further difficulties. The Board and the other federal banking agencies 

(the Agencies) have encouraged financial institutions to identify 

and contact borrowers who, with counseling and financial assistance, may be able to avoid entering delinquency or foreclosure. As 


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I outlined in my statement, the Federal Reserve Banks’ community 

affairs offices have initiatives underway to increase awareness and 

understanding of the issues surrounding troubled borrowers and 

identify strategies to respond to their needs. 

Additionally, many lenders, sometimes in conjunction with community groups or state governments, have expressed a willingness 

to modify loan terms for borrowers at risk of foreclosure. Other 

lenders and market participants have formed programs to assist 

troubled borrowers. These programs include the following: 

• Fannie Mae and Freddie Mac announced that they will purchase $20 billion or more of subprime loans to help minimize 

defaults and foreclosures. 

• Washington Mutual has committed up to $2 billion to help 

homeowners with subprime mortgage loans avoid foreclosure. 

The funds will be used to refinance subprime loans at discounted interest rates. 

• Neighborhood Assistance Corporation of America (NACA) recently announced it would commit $1 billion to refinance loans 

of lower-income people at risk of losing their homes. The financing is being provided by Bank of America and CitiGroup. 

NACA anticipates using the funds to refinance 7,000 to 10,000 

adjustable rate subprime mortgages into fixed rate loans. 

• The State of Ohio has announced that it is establishing a $100 

million fund to aid troubled borrowers. The fund will be financed by municipal bonds. 

Because many subprime loans are in securitized pools, loan 

modifications and workouts can have an added layer of complexity. 

Servicing agreements in securitizations sometimes restrict the 

share of accounts that the loan servicer can modify prior to obtaining investor approval. Additionally, accounting rules, such as FAS 

140, may require the modified pool to be brought back on the originator’s balance sheet if the servicer does not specifically follow the 

accounting statement. Extensive modifications that change expected cash flows to the securities can also trigger a rating agency 

review. 

Q.3. What Congressional or regulatory actions could potentially 

harm the market or slow a recovery? 

A.3. The Board believes the rise in subprime delinquencies and 

foreclosures needs to be addressed in a way that minimizes abusive 

practices while preserving prudent lending standards and product 

innovation in order to maintain access to credit by non-prime borrowers. To that end, on June 29, 2007, the Board and the other 

Agencies issued the Interagency Statement on Subprime Mortgage 

Lending emphasizing the need for prudent underwriting and clear 

communications with consumers about adjustable rate mortgages 

targeted to subprime borrowers. 

In June 2007, the Board held a public hearing to gather information on how it might use its rulemaking authority under the Home 

Ownership and Equity Protection Act (HOEPA) to address concerns 

about abusive lending practices in the subprime market. Rising 

foreclosures in the subprime market over the past year have led 

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making authority to address these concerns. In doing so, however, 

the Board must determine how to reduce abuses while also preserving incentives for responsible lenders in order to maintain continued access to credit for deserving borrowers. 

Q.4. In Mr. Smith’s written testimony, he stated that refinancing 

will have little or no effect on boosting the market. Yet, it seems 

that several sub-prime and prime lenders are offering no-penalty 

refinancing to save borrowers from costly resets that may drive 

them into foreclosure. Do the rest of you agree with Mr. Smith’s 

assessment? 

A.4. Mr. Smith states that borrowers with adequate equity and income can be refinanced through the operation of the market. He 

further states that individuals who recently borrowed with ‘‘nomoney-down’’ loans are in unsustainable homeownership and these 

loans will likely result in foreclosure without government assistance. He also discouraged a federal government bailout program for 

subprime borrowers. 

Many lenders, sometimes in conjunction with community groups 

or state governments, have expressed a willingness to modify loan 

terms for borrowers at risk of foreclosure. Other lenders and market participants have formed programs to assist troubled borrowers 

(as discussed above). In April 2007, the Agencies issued a statement encouraging financial institutions to work constructively with 

residential borrowers who are financially unable to make their contractual payment obligations on their home loans. This statement 

was reiterated in the June 2007 interagency Statement on 

Subprime Mortgage Lending. Prudent workout arrangements that 

are consistent with safe and sound lending practices are generally 

in the long-term best interest of both the financial institution and 

the borrower and increase the potential for financially stressed residential borrowers to keep their homes. Further, existing supervisory guidance and applicable accounting standards do not require 

institutions to immediately foreclose on the collateral underlying a 

loan when the borrower exhibits repayment difficulties. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM ROGER T. COLE 

Q.1. To what degree has credit tightened for consumers with less 

than perfect credit, and what indicators do you follow to track this 

movement? What are your short term and long term forecasts? 

A.1. Underwriting standards for credit to nonprime borrowers are 

becoming more conservative. In the Board’s most recent Senior 

Loan Officer Opinion Survey of April 2007, more than half of the 

respondents who indicated that they originated subprime mortgages, reported that they had tightened standards on such loans. 

Additionally, preliminary information on subprime mortgagebacked securities (MBS) issued in the first quarter of 2007 indicates that these securities contain fewer loans with simultaneous 

second-liens that allow borrowers 100 percent financing. Borrower 

credit scores in these securities also showed signs of improvement 

in the first quarter. 


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Issuance of subprime mortgage backed securities (MBS) has fallen over 25 percent from peak issuance during the first half of 2006. 

Although there has been a reduction in volume, based on subprime 

MBS issuance data, industry surveys of originations, special questions on bank lending practices, proprietary datasets and (for earlier years) the HMDA data, to date, we have not seen a sudden 

halt in lending to borrowers with less than perfect credit. 

Q.2. Is it true that in the vast majority of cases, finding a way to 

keep a customer in their home and continuing to pay their mortgage is the best economic proposition for the customer, the servicer, 

and the investor? Please explain why or why not. 

A.2. Prudent workout arrangements that are consistent with safe 

and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower. High rates 

of foreclosure can have adverse consequences on borrowers and 

their communities and can decrease housing values and, therefore, 

lenders’ collateral values. In April 2007, the federal financial institutions regulatory agencies issued a statement encouraging financial institutions to work constructively with residential borrowers 

who are financially unable to meet their contractual payment obligations on their home loans. Such arrangements can vary widely 

based on the borrower’s financial capacity. For example, an institution might consider modifying loan terms, including converting 

loans with variable rates into fixed-rate products to provide financially stressed borrowers with predictable and sustainable payment 

requirements. 

Q.3. Please describe the workout options that allow homeowners 

facing difficulties to remain in their homes. Can you provide hypothetical examples of how this modification process works? What are 

the limitations placed on a servicers’ ability to modify a loan by investors or others involved in the securitization of mortgage loans? 

A.3. Lenders generally determine loan workout strategies on a 

case-by-case basis, taking into account the unique circumstances of 

each borrower. For example, a workout arrangement would normally be considered for a borrower who exhibits fundamentally 

sound economic prospects, but is facing a temporary income shortfall such as a job loss or other emergency. However, loans to borrowers who are fundamentally unable to meet their obligations 

may need to be resolved through the foreclosure process or by the 

lender and borrower coming to some other mutually acceptable 

agreement that provides a sustainable solution. These agreements 

can vary widely, including temporary or permanent interest rate 

reductions, forgiveness of principal, maturity extensions in some 

cases, and other non-foreclosure alternatives such as the lender accepting less than the full amount due through a short sale or discounted payoff in a refinancing transaction. 

Because many subprime loans are in securitized pools, workouts 

can have an added layer of complexity. Servicing agreements in 

securitizations sometimes restrict the share of accounts that the 

loan servicer can modify prior to obtaining investor approval. Additionally, accounting rules, such as FAS 140, may require the modified pool to be brought back on the originator’s balance sheet if the 

servicer does not specifically follow the accounting statement. ExVerDate Nov 24 2008 03:38 Nov 25, 2009 Jkt 050312 PO 00000 Frm 00255 Fmt 6602 Sfmt 6602 E:\HR\OC\A312.XXX A312

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tensive modifications that change expected cash flows to the securities can also trigger a rating agency review. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARTINEZ 

FROM ROGER T. COLE 

Q.1. There is a sense of outrage about those of us who have worked 

so hard to get people into homeownership, particularly people in 

the minority communities where they are so underrepresented 

among homeowners. And to now see what is coming, what we are 

seeing and what is coming, which is a backtracking, which is the 

horrible disappointment of seeing your dream of homeownership 

now turn into a nightmare of lifetime debt. 

As we look at what we can do in the future to prevent this from 

occurring again, how can the bank regulators have allowed so 

many loans to be made which are obviously not designed to be performing loans in sixty days, a year, or two years, with not having 

qualifying standards for the higher rate that is inevitably coming, 

but only looking at the current qualification standards under the 

current rate? 

A.1. The Board shares the concern that certain mortgage products 

targeted to subprime borrowers (such as those with low initial payments, very high or no limits on how much the payment or interest 

rate may increase, and limited or no documentation of a borrower’s 

income) present substantial risks to both consumers and lenders. 

These risks are increased if borrowers are not adequately informed 

of product terms and features before they take out a loan. In response to these concerns, the Board and the other Agencies issued 

the Statement on Subprime Mortgage Lending. The statement provides guidance on the criteria and factors that an institution 

should assess in determining a borrower’s ability to repay the loan. 

The statement also provides guidance to protect consumers from 

unfair, deceptive, and other predatory practices, and to ensure that 

consumers are provided with clear and balanced information about 

the risks and features of these loans. 

One key aspect of the Statement on Subprime Mortgage Lending, 

which is also addressed in the 2006 Guidance on Nontraditional 

Mortgage Product Risks, is that borrowers should be qualified for 

a loan based on the fully indexed rate, with a fully amortizing repayment schedule. This analysis should consider both principal and 

interest obligations, plus a reasonable estimate for real estate taxes 

and insurance, whether or not escrowed. 

Additionally, the Agencies believe that verifying income is critical 

to conducting a credible analysis of a borrower’s repayment capacity. The Statement on Subprime Mortgage Lending provides that 

stated income and reduced documentation should be accepted only 

if there are mitigating factors that clearly minimize the need for 

verification of repayment capacity, and that such factors should be 

documented. The statement also encourages institutions to structure prepayment penalties so as to allow borrowers a reasonable 

period of time in which to refinance to avoid payment shock. 

Many residential borrowers may face significant payment increases when their ARM loans reset in the coming months. These 

borrowers may not have sufficient financial capacity to service a 


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higher debt load, especially if they were qualified based on a low 

introductory payment. The Agencies encourage financial institutions to work constructively with residential borrowers who are financially unable to make their contractual payment obligations on 

their home loans. Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the 

long-term best interest of both the financial institution and the borrower and increases the potential for financially stressed residential borrowers to keep their homes. Finally, the Agencies have long 

encouraged borrowers who are unable to meet their contractual obligations to contact their lender or servicer to discuss possible payment alternatives at the earliest indication of such problems. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM JOSEPH A. SMITH, JR. 

Q.1. What can be done to stop the fall out in the housing market, 

particularly in the sub-prime sector? 

A.1. From a capital markets perspective, we are experiencing a 

lack of confidence in the mortgage markets and lender underwriting. Both regulators and the industry have been responding. 

One thing that I believe will help restore confidence is the recently 

issued Statement on Subprime Mortgage Lending. Investors are 

recognizing the importance of this guidance and should be assured 

that it will be consistently applied across the industry. The Conference of State Bank Supervisors (CSBS), the American Association of Residential Mortgage Regulators, and the National Association of Consumer Credit Administrators (NACCA) are developing a 

parallel Statement on Subprime Lending, which will be applicable 

to state-supervised mortgage providers. 

In addition CSBS and AARMR recently issued a consumer alert, 

encouraging borrowers with adjustable rate mortgages (ARMs) that 

are scheduled to reset to educate themselves on the characteristics 

of their mortgage, contact their mortgage servicer for additional information, and to seek the advice of a trained adviser for assistance 

or guidance. CSBS and AARMR also issued an industry letter urging mortgage providers and servicers to conduct outreach to their 

customers to provide assistance or information as necessary. Please 

see the attached consumer alert and the industry letter. 

In an effort to prevent abuses in the future, CSBS and AARMR 

have developed the Nationwide Mortgage Licensing System to improve and coordinate mortgage supervision. Scheduled to go live on 

January 2, 2008, the system will enhance consumer protection and 

streamline the licensing process for regulators and the industry. 

The Nationwide Mortgage Licensing System is a major step in improving the accountability of mortgage brokers and lenders and 

keeping the bad actors out of the industry. 

All too often, it also seems, that complicated and numerous disclosure statements have been used to take advantage of borrowers. 

Therefore, CSBS is developing a model disclosure form to provide 

vital information in a clear manner. The model form has not yet 

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sure. Please see the attached model disclosure form and explanatory statement. 

With regard to regulatory structure, maintenance of the existing 

state system of regulation is essential. What is needed is more 

seamless and coordinated state and federal supervision of the mortgage industry. State authorities are working diligently to assist 

borrowers. These efforts should be supported, not supplanted by 

federal actions. I acknowledge the need for state and federal activities in policing the market to be coordinated; my only exception to 

that statement is that the coordination should not compromise 

meaningful state authority. 

Q.2. Some argue that the market is already working to pull itself 

out of this downturn. What practices do you see mortgage holders 

and lenders taking to help struggling borrowers? 

A.2. I am aware that representatives of the mortgage lending industry, government and consumer advocates are meeting and 

working together to resolve structural issues in securitizations that 

may inhibit work-outs. FDIC Chairman Bair and her staff deserve 

a great deal of credit for facilitating roundtable discussions with all 

market participants to determine what is possible in terms of restructuring. I believe these discussions have been helpful in determining that loan servicers do have flexibility in working with borrowers. I believe the public attention to this issue has provided the 

necessary pressure on loan servicers to use the authority they have 

to work with borrowers. This will undoubtedly improve the mortgage market going forward as the industry develops standard documentation and servicing agreements. 

In addition, a number of activities are taking place at the state 

and local level to address the needs of distressed homeowners. One 

good example is the mortgage summit sponsored by Commissioner 

Steven Antonakes of the Commonwealth of Massachusetts, which 

brought together representatives of the private, public and nonprofit sectors to review problems in the subprime market and propose solutions. Several of the suggestions that emerged from the 

Summit have recently been included in proposed legislation. Please 

see the attached Report of the Mortgage Summit Working Groups. 

This participation between industry, consumer groups and regulators should serve as a model for a coordinated approach to fixing 

the housing market. 

Q.3. What Congressional or regulatory actions could potentially 

harm the market or slow a recovery? 

A.3. The mortgage finance market has evolved dramatically in the 

past decade. Because of the complexity and sensitivity of 

securitization markets, there is an even greater risk of unintended 

consequences from legislation or regulations. 

Recent regulatory guidance has encouraged more appropriate underwriting, encouraged more coordinated state and federal supervision to apply applicable law and regulation, and increased transparency so investors can more clearly understand product risk and 

the integrity of origination. 

In my opinion, three actions could do harm: 


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1. A tax-funded ‘‘bail out’’ of investors. We need to address those 

in foreclosure without eroding market or borrower discipline. 

Therefore, any efforts to address foreclosures must be targeted 

in order to avoid assistance to any speculators, incompetent 

lenders and improvident borrowers. Such a bail out could further mask the problems in the market and therefore allow 

lenders and borrowers to repeat the practices that caused the 

current crisis. 

2. Congressional action that would undermine state authority to 

police the mortgage market. Any solution which does not recognize the local nature of real estate and foreclosures, and 

therefore does not recognize the role local authorities must 

play, can prove detrimental or insufficient. 

3. Congress should carefully examine issues of liability whether 

for investors or originators. Congress should draw from state 

successes and challenges in their attempts to create more accountability. 

Q.4. In Mr. Smith’s written testimony, he stated that refinancing 

will have little or no effect on boosting the market. Yet, it seems 

that several sub-prime and prime lenders are offering no-penalty 

refinancing to save borrowers from costly resets that may drive 

them into foreclosure. Do the rest of you agree with Mr. Smith’s 

assessment? 

A.4. In my written testimony, I intended to convey that refinancing 

will address some, but not all, of the problems we are seeing in the 

housing market. Instead, it is vital to maintain market discipline 

and establish accountability for both lenders and borrowers. Underwriting practices must be sufficient to allow analysis of a borrower’s ability to repay a loan. Based upon some underwriting 

practices that were utilized, the lender was often not aware if the 

borrower could repay the loan they were purchasing. Sound underwriting principles must be utilized and borrowers must exercise 

discipline when purchasing loans. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JOSEPH A. SMITH, JR. 

Q.1. To what degree has credit tightened for consumers with less 

than perfect credit, and what indicators do you follow to track this 

movement? What are your short term and long term forecasts? 

A.1. In my home state of North Carolina, my agency is following 

the volume growth of our mortgage market (total and subprime) 

relative to the Southeast and the US to assess the effects of our 

regulatory efforts. Nationally, a comparable measure would have to 

be found; perhaps, mortgage market growth compared to GDP 

growth. In my view, the ultimate best measure of what is going on 

is the home ownership rate. The effects of the current ‘‘mortgage 

meltdown’’ will be most clearly revealed by the home ownership 

rate in two or three years compared to today. 

In an effort to improve data, a number of states are working on 

legislation that will collect foreclosure data on a statewide basis. 

This will allow for banking departments to better analyze foreclosure data. 


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Q.2. Is it true that in the vast majority of cases, finding a way to 

keep a customer in their home and continuing to pay their mortgage is the best economic proposition for the customer, the servicer, 

and the investor? Please explain why or why not. 

A.2. Finding a way to keep a customer in their home is most often 

in the best interest of the homeowner, the servicer or lender, and 

the investor. 

Foreclosure is personally disruptive to customers, destructive to 

communities and almost always results in a loss to the lender or 

investor. 

But it is wise to recall that this is our first housing crisis that 

has occurred since the dramatic growth of the secondary housing 

market. The industry, regulators, consumers and Congress are all 

effectively learning as we go through this crisis. There is no precedent for us to recall as we struggle with the market downturn. 

Therefore, regulators and Congress should allow some time for the 

market to correct itself, flexibility for the industry to adjust their 

practices, and ensure that the solution we create does not reward 

poor lender underwriting or consumer behavior. It is vital that our 

corrective actions do not erode or block market discipline. 

Q.3. Please describe the workout options that allow homeowners 

facing difficulties to remain in their homes. Can you provide hypothetical examples of how this modification process works? What are 

the limitations placed on a servicers’ ability to modify a loan by investors or others involved in the securitization of mortgage loans? 

A.3. As stated in the testimony of several witnesses, the mortgage 

market has changed significantly over the last 20 years, with new 

products, origination channels, and securitization. For the most 

part, this market has not experienced a significant housing crisis. 

This has forced all of the market participants to evaluate what is 

possible to assist borrowers. Assistance is complicated due to the 

tax laws and contracts necessary to facilitate a secondary market. 

Above contractual limits, restructurings require approval of all security holders. 

While the options for restructuring are numerous, it most certainly will require some investor loss. In order for the process to 

work, the borrower will need to work with the servicer to fully document the loan to determine the true ability to repay. If a loan can 

not be restructured, the servicer and borrower may be able to agree 

to a ‘‘short sale,’’ where the borrower sells the home and the 

servicer accepts the sale proceeds. 

FDIC Chairman Bair and her staff deserve a great deal of credit 

for facilitating roundtable discussions with all market participants 

to determine what is possible in terms of restructuring. I believe 

these discussions have been helpful in determining that loan 

servicers do have flexibility in working with borrowers. I believe 

the public attention to this issue has provided the necessary pressure on loan servicers to use the authority they have to work with 

borrowers. This work will undoubtedly improve the mortgage market going forward as the industry develops standard documentation 

and servicing agreements. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM SANDOR SAMUELS 

Q.1. We all know that lenders much prefer owning mortgages to 

owning homes. What steps are your companies taking to help 

struggling borrowers? 

A.1. Countrywide’s comprehensive efforts to prevent foreclosures 

and preserve borrowers’ ability to stay in their homes are longstanding and pre-date recent challenges in the housing market. 

Countrywide makes every effort to work with our borrowers who 

are experiencing financial hardships. We have established industry-leading home retention programs designed to reach distressed 

borrowers in order to evaluate their individual situations and develop customized solutions. As part of our efforts to help our customers sustain the dream of homeownership, we strive to keep 

hard working families in their homes should they experience difficulty making their payments. The reasons people suffer financial 

setbacks are as varied as the individual circumstances of the people themselves. 

Despite the mortgage industry’s efforts to reach delinquent borrowers, a recent study from Freddie Mac indicates that 50% of borrowers do not call their lenders when they are in financial distress. 

This lack of communication can have significant consequences. For 

example, in 2006, when a customer contacted Countrywide to inform us of an inability to make their payment due to hardship, we 

were able to establish a workout plan with the borrower 80% of the 

time. Many borrowers, however, are unaware of options available 

to avoid foreclosure, and this lack of knowledge causes them to 

avoid contact with their lender. 

At Countrywide, we encourage our borrowers to call us the very 

first time they anticipate problems with sending in the mortgage 

payment. We maintain a team of employees dedicated to assisting 

homeowners who are experiencing financial difficulties. This team 

with currently 2,400–2,600 specialists is known as our HOPE team 

(HOPE: Helping homeowners, Offering solutions, Preventing foreclosures, Envisioning success). 

Countrywide recognizes that homeowners are sometimes reluctant to contact a lender when their payments become delinquent. 

We reach out to borrowers in a variety of ways: 

• To encourage communication, we include helpful information 

in borrowers’ monthly statements and attempt to reach our 

borrowers by phone. We utilize other methods to get information out to borrowers who are not responsive to our outreach 

by mail and phone. For example, we provide borrowers with a 

DVD that they can view in the privacy of their own homes that 

explains the possible repayment options. (A copy of this DVD 

is enclosed.) We also mail out a copy of our brochure entitled 

‘‘Keeping the dream of homeownership: Solutions for the times 

when hardship makes it difficult to meet a monthly home loan 

payment.’’ This brochure includes our toll-free number for borrowers (1–877–327–9225) to contact our dedicated team of specialists. (A copy of the brochure is enclosed.) Finally, we have 

planned but not vet implemented a strategy that would allow 

homeowners to access a secure website where they could obtain 


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information about a possible workout, modification or other solution. 

• Countrywide extends its outreach to distressed homeowners in 

their own communities. Our HOPE team specialists travel to 

our local branch offices around the country to personally meet 

with our borrowers who need help. 

• Countrywide leverages our efforts to reach and communicate 

with our borrowers by forming partnerships with local and national nonprofit counseling organizations, like ACORN Housing, in order to make the important connection with our borrowers. Our efforts have included co-branding joint communication letters and advertisements encouraging the borrowers 

to contact either Countrywide directly or to work with a third 

party counselor who can assist them through the process. We 

augment this written outreach with local counselors who make 

‘face-to-face’ contact with the borrowers. inviting them to work 

with us. To support the efforts of the many local counseling 

agencies around the country, we also have established a dedicated contact system (via phone and email) that allows the 

counseling agencies working with our borrowers to quickly and 

directly contact Countrywide’s HOPE team specialists and 

identify what we can do to assist our borrowers. 

• Because Countrywide appreciates the role that others can play 

in conducting successful outreach to distressed borrowers, 

Countrywide is also a founding sponsor of the Homeownership 

Preservation Foundation (‘‘HPF’’), a national nonprofit foreclosure prevention counseling agency that assists borrowers in 

all markets, every day. I currently serve on the Board of Directors for HPF. The most important development in assisting 

borrowers in trouble is the ‘‘1–888–995–HOPE’’ hotline developed by the HPF with the support of Countrywide and others 

in the mortgage lending industry (www.995hope.org). Borrowers are often bombarded with foreclosure rescue scams and 

other solicitations directing them to untrained counselors or 

untrustworthy organizations. The HOPE hotline provides borrowers with qualified and highly trained counselors whose sole 

mission is to help borrowers avoid foreclosure. In June 2007, 

the National Ad Council launched a multimedia campaign for 

the ‘‘1–888–995–HOPE’’ hotline. 

• Countrywide hosts homeownership preservation seminars in 

local communities. These seminars are designed to bring together lenders and housing counselors to educate our borrowers and the general public on the options available to avoid 

foreclosure. We have held such seminars in cities as diverse as 

Atlanta, Dallas, Detroit, New Orleans, and New York. We also 

provide free access to counseling, including third party counseling from community organizations like Neighborhood Housing Service, ACORN Housing, and Consumer Credit Counseling Service. Across the country. Countrywide works with almost 60 different counseling organizations. 

Once we are in contact with our borrower, we take the following 

steps: 


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Assess Homeowner Circumstances.Reason for default—Our counselors are trained to determine the reason for the 

default and to learn other relevant information that can help us develop a 

plan to keep borrowers in their homes. 

Customized help—A counselor determines the most appropriate next steps 

based on the information gathered (e.g., review financials, assess workout 

options. etc.) 

Assess Ability to Pay 

Going Forward.

Gathering financials to enable us to assess a borrower’s ability to make timely 

monthly mortgage payments. 

• Short Term Default—Financial analysis shows ability to pay; options presented to the borrower may include a short term forbearance and repayment plans allowing the homeowner to recover over a 3–9 month period. 

• Long Term Default—If unable to complete a short term recovery/repayment plan, our counselors engage the homeowner in discussions about 

longer term workout options. 

Identify Workout Options ... Home retention—Repayment plans; loan modification. 

Liquidation—Short sale or deed in lieu of foreclosure. (Foreclosure is a last resort.) 

Countrywide employs a number of internal procedures to ensure 

that our borrower reviews are thorough and complete. We have no 

tolerance for improper referrals to foreclosure. We carefully monitor loans for any outstanding regulatory notices, pending workouts 

or other servicing issues that need to be resolved prior to referring 

a home to foreclosure. Likewise, we review all declined workouts to 

determine whether there is more that should be done in the particular situation. Countrywide monitors all workouts so that no 

particular type of workout is under-utilized and to help us assess 

a success ratio as compared to foreclosures. 

Every borrower’s situation is different and this often drives the 

options that are available when the borrower encounters financial 

difficulties. We offer the following as specific examples of workouts 

that reflect the range of possibilities: 

• Health issues placed the borrowers in distress with one of 

them ultimately being placed on long term disability. Our efforts to help them retain their home included reducing the interest rate by almost 3 percentage points for a period of one 

year and capitalizing the missed payments to help them rebuild their credit. 

• Unexpected medical problems for the family forced the borrower to quit his job and use emergency funds to pay rising 

medical expenses. The borrower contacted Countrywide’s Home 

Retention Division to request assistance. The borrower was offered and accepted a 90-day forbearance with a provision that 

the situation can be reviewed every 90 days to determine if additional assistance is necessary. 

• The borrower was in contact with a non-profit organization 

when her home was referred to foreclosure. The organization 

works with Countrywide on a regular basis and contacted the 

Home Retention Division on the borrower’s behalf. Countrywide arranged a loan modification that included a write down 

of a portion of the loan balance and a fixed rate almost 4 percentage points lower than the original rate for the remainder 

of the loan term. 


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1 ‘‘Nonprime’’ refers to loans to borrowers who (a) had one or more late mortgage payments 

on an existing mortgage in the last 12 months, (b) had a FICO score below that allowed in our 

prime loan programs (generally 620), or (c) required a product feature not offered in our prime 

loan programs and generally requiring higher minimum FICO scores. 

As you are aware, servicers are required to observe accounting 

and contractual obligations that limit the ability to offer certain 

workout or loan modification alternatives. The limits and available 

options are defined by the pooling and serving agreements and the 

trust documents that accompany each securitization. The accounting constraints on a servicer’s ability to anticipate a default are 

rooted in FASB Statement No. 140. Indeed, the interpretation of 

this FASB statement by the accounting industry has required 

servicers not to initiate a loan workout with a borrower until the 

loan was two payments in default. With Senator Dodd’s encouragement, robust discussion continues between servicers and investors 

on how to best work within these constraints and appropriately assist borrowers experiencing financial difficulties. 

Lastly, Countrywide appreciates the effects that foreclosures can 

have on neighborhoods and communities. We are working on an innovative program to work with local officials to address the maintenance and appearance of properties that borrowers vacate during 

the foreclosure process or that become our real estate owned properties. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM SANDOR SAMUELS 

Q.1. To what degree has credit tightened for consumers with less 

than perfect credit, and what indicators do you follow to track this 

movement? What are your short term and long term forecasts? 

A.1. Between January 1, 2007 and May 31, 2007, the availability 

of credit has tightened for borrowers whose credit histories and/or 

choices of loan features place them within Countrywide’s categories 

of nonprime borrowers.1 This tightening reflects a response to market conditions coupled with the impact of the Interagency Guidance 

on Nontraditional Mortgage Product Risks. The data below for our 

nonprime lending illustrates the impact. 

January 2007 May 2007 % Change 

Total Loan Volume (millions) .......................................................................................... $2,733.6 $1,708 ¥38 

Purchase Loans (% of monthly number of loans) ......................................................... 36% 15% ¥58 

First Time Home Buyers (% of monthly number of loans) ........................................... 25% 8% ¥68 

Borrowers with 100% financing (% of monthly number of loans) .............................. 26% 2% ¥92 

Stated income borrowers with >90% financing (% of monthly number of loans) ...... 33% 2% ¥94 

Forecasting further credit tightening on a short term or long 

term basis is very difficult, at best, given the number of variables 

that affect or influence the credit markets and their implications 

for a diverse universe of potential borrowers. 

Q.2. Is it true that in the vast majority of cases, finding a way to 

keep a customer in their home and continuing to pay their mortgage is the best economic proposition for the customer, the servicer, 

and the investor? Please explain why or why not. 


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2 In our experience, it is rare for a homeowner to not take advantage of selling their home 

where there is equity, i.e., an amount in excess of that required to pay off lien holders. 

A.2. It is generally true that where there is a willing borrower, the 

best economic proposition for that borrower, the servicer, and investor is to have the borrower remain in the home and continue to 

pay his/her mortgage. In order for borrowers to suffer losing their 

homes to foreclosure, two things need to occur. First, they must 

lose the ability or desire to make payments, and second they must 

be unable or unwilling to sell the property and pay off the lien 

holder(s). 

Foreclosures are overwhelmingly the product of life events and 

not loan products. Our analysis of the reasons for foreclosure on 

Countrywide’s loans shows that foreclosure due to a payment increase occurred less than 1% of the time. On the other hand, factors like curtailment of income, divorce, medical issues, and death 

remained the top four reasons accounting for 91% of the foreclosures. When the resulting loss of the ability or desire to make 

payments combines with the borrower’s inability to sell the property and pay off lien holders 2, foreclosure is the ultimate outcome. 

These types of life events need not, however, be insurmountable 

and result in foreclosure. Countrywide actively pursues workouts 

that assist willing borrowers with positive income to remain in 

their homes. These workouts can take the form of repayment plans 

that cure prior delinquencies, forbearance that temporarily suspends or reduces payments followed by a period of repayment to 

bring the loan current. or modifications to one or more terms of the 

loan. For more details, please see our response to item 3 below. 

In those regrettable situations where the borrower has no ability 

to maintain payments or adhere to a reasonable workout, Countrywide still makes efforts to work with borrowers so that they may 

obtain a more favorable economic resolution than foreclosure. 

Three such avenues are short sales, where less than the payoff 

amount is accepted, assumption of the loan by a new buyer, provided the loan permits, and a deed in lieu of foreclosure. Though 

the borrower does not remain in the home under these scenarios, 

the borrower avoids foreclosure with its negative effects on the borrower’s credit report. 

Q.3. Please describe the workout options that allow homeowners 

facing difficulties to remain in their homes. Can you provide hypothetical examples of how this modification process works? What are 

the limitations placed on a servicer’s ability to modify a loan by investors or others involved in the securitization of mortgage loans? 

A.3. Countrywide’s comprehensive efforts to prevent foreclosures 

and preserve borrowers’ ability to stay in their homes are longstanding and pre-date recent challenges in the housing market. 

Countrywide makes every effort to work with our borrowers who 

are experiencing financial hardships. We have established industry-leading home retention programs designed to reach distressed 

borrowers in order to evaluate their individual situations and develop customized solutions. As part of our efforts to help our customers sustain the dream of homeownership, we strive to keep 

hard working families in their homes should they experience difficulty making their payments. The reasons people suffer financial 


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setbacks are as varied as the individual circumstances of the people themselves. 

Despite the mortgage industry’s efforts to reach delinquent borrowers. a recent study from Freddie Mac indicates that 50% of borrowers do not call their lenders when they are in financial distress. 

This lack of communication can have significant consequences. For 

example, in 2006, when a customer contacted Countrywide to inform us of an inability to make their payment due to hardship, we 

were able to establish a workout plan with the borrower 80% of the 

time. Many borrowers, however, are unaware of options available 

to avoid foreclosure, and this lack of knowledge causes them to 

avoid contact with their lender. 

At Countrywide, we encourage our borrowers to call us the very 

first time they anticipate problems with sending in the mortgage 

payment. We maintain a team of employees dedicated to assisting 

homeowners who are experiencing financial difficulties. This team 

with currently 2,400–2,600 specialists is known as our HOPE team 

(HOPE: Helping homeowners, Offering solutions, Preventing foreclosures, Envisioning success). 

Countrywide recognizes that homeowners are sometimes reluctant to contact a lender when their payments become delinquent. 

We reach out to borrowers in a variety of ways: 

• To encourage communication, we include helpful information 

in borrowers’ monthly statements and attempt to reach our 

borrowers by phone. We utilize other methods to get information out to borrowers who are not responsive to our outreach 

by mail and phone. For example, we provide borrowers with a 

DVD that they can view in the privacy of their own homes that 

explains the possible repayment options. (A copy of this DVD 

is enclosed.) We also mail out a copy of our brochure entitled 

‘‘Keeping the dream of homeownership: Solutions for the times 

when hardship makes it difficult to meet a monthly home loan 

payment.’’ This brochure includes our toll-free number for borrowers (1–877–327–9225) to contact our dedicated team of specialists. (A copy of the brochure is enclosed.) Finally, we have 

planned but not yet implemented a strategy that would allow 

homeowners to access a secure website where they could obtain 

information about a possible workout, modification or other solution. 

• Countrywide extends its outreach to distressed homeowners in 

their own communities. Our HOPE team specialists travel to 

our local branch offices around the country to personally meet 

with our borrowers who need help. 

• Countrywide leverages our efforts to reach and communicate 

with our borrowers by forming partnerships with local and national nonprofit counseling organizations, like ACORN Housing, in order to make the important connection with our borrowers. Our efforts have included co-branding joint communication letters and advertisements encouraging the borrowers 

to contact either Countrywide directly or to work with a third 

party counselor who can assist them through the process. We 

augment this written outreach with local counselors who make 

‘face-to-face’ contact with the borrowers, inviting them to work 


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with us. To support the efforts of the many local counseling 

agencies around the country, we also have established a dedicated contact system (via phone and email) that allows the 

counseling agencies working with our borrowers to quickly and 

directly contact Countrywide’s HOPE team specialists and 

identify what we can do to assist our borrowers. 

• Because Countrywide appreciates the role that others can play 

in conducting successful outreach to distressed borrowers, 

Countrywide is also a founding sponsor of the Homeownership 

Preservation Foundation (‘‘HPF’’). a national nonprofit foreclosure prevention counseling agency that assists borrowers in 

all markets, every day. I currently serve on the Board of Directors for HPF. The most important development in assisting 

borrowers in trouble is the ‘‘1–888–995–HOPE’’ hotline developed by the HPF with the support of Countrywide and others 

in the mortgage lending industry (www.995hope.org). Borrowers are often bombarded with foreclosure rescue scams and 

other solicitations directing them to untrained counselors or 

untrustworthy organizations. The HOPE hotline provides borrowers with qualified and highly trained counselors whose sole 

mission is to help borrowers avoid foreclosure. In June 2007, 

the National Ad Council launched a multimedia campaign for 

the ‘‘1–888–995–HOPE’’ hotline. 

• Countrywide hosts homeownership preservation seminars in 

local communities. These seminars are designed to bring together lenders and housing counselors to educate our borrowers and the general public on the options available to avoid 

foreclosure. We have held such seminars in cities as diverse as 

Atlanta, Dallas, Detroit, New Orleans, and New York. We also 

provide free access to counseling, including third party counseling from community organizations like Neighborhood Housing Service, ACORN Housing, and Consumer Credit Counseling Service. Across the country, Countrywide works with almost 60 different counseling organizations. 

Once we are in contact with our borrower, we take the following 

steps: 

Assess Homeowner Circumstances.Reason for default—Our counselors are trained to determine the reason for the 

default and to learn other relevant information that can help us develop a 

plan to keep borrowers in their homes. 

Customized help—A counselor determines the most appropriate next steps 

based on the information gather (e.g., review financials, assess workout 

options, etc.). 

Assess Ability to Pay 

Going Forward.

Gathering financials to enable us to assess a borrower’s ability to make timely 

monthly mortgage payments. 

• Short Term Default—Financial analysis shows ability to pay: options presented to the borrower may include a short term forbearance and repayment plans allowing the homeowner to recover over a 3–9 month period. 

• Long Term Default—If unable to complete a short term recovery/repayment plan, our counselors engage the homeowner in discussions about 

longer term workout options. 

Identify Workout Options ... Home retention—Repayment plans; loan modification. 

Liquidation—Short sale or deed in lieu of foreclosure. (Foreclosure is a last resort.) 


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Countrywide employs a number of internal procedures to ensure 

that our borrower reviews are thorough and complete. We have no 

tolerance for improper referrals to foreclosure. We carefully monitor loans for any outstanding regulatory notices, pending workouts 

or other servicing issues that need to be resolved prior to referring 

a home to foreclosure. Likewise, we review all declined workouts to 

determine whether there is more that should be done in the particular situation. Countrywide monitors all workouts so that no 

particular type of workout is under-utilized and to help us assess 

a success ratio as compared to foreclosures. 

Every borrower’s situation is different and this often drives the 

options that are available when the borrower encounters financial 

difficulties. We offer the following as specific examples of workouts 

that reflect the range of possibilities: 

• Health issues placed the borrowers in distress with one of 

them ultimately being placed on long term disability. Our efforts to help them retain their home included reducing the interest rate by almost 3 percentage points for a period of one 

year and capitalizing the missed payments to help them rebuild their credit. 

• Unexpected medical problems for the family forced the borrower to quit his job and use emergency funds to pay rising 

medical expenses. The borrower contacted Countrywide’s Home 

Retention Division to request assistance. The borrower was offered and accepted a 90-day forbearance with a provision that 

the situation can be reviewed every 90 days to determine if additional assistance is necessary. 

• The borrower was in contact with a non-profit organization 

when her home was referred to foreclosure. The organization 

works with Countrywide on a regular basis and contacted the 

Home Retention Division on the borrower’s behalf. Countrywide arranged a loan modification that included a write down 

of a portion of the loan balance and a fixed rate almost 4 percentage points lower than the original rate for the remainder 

of the loan term. 

As you are aware servicers are required to observe accounting 

and contractual obligations that limit the ability to offer certain 

workout or loan modification alternatives. The limits and available 

options are defined by the pooling and serving agreements and the 

trust documents that accompany each securitization. The accounting constraints on a servicer’s ability to anticipate a default are 

rooted in FASB Statement No. 140. Indeed, the interpretation of 

this FASB statement by the accounting industry has required 

servicers not to initiate a loan workout with a borrower until the 

loan was two payments in default. With Senator Dodd’s encouragement, robust discussion continues between servicers and investors 

on how to best work within these constraints and appropriately assist borrowers experiencing financial difficulties. 

Lastly, Countrywide appreciates the effects that foreclosures can 

have on neighborhoods and communities. We are working on an innovative program to work with local officials to address the maintenance and appearance of properties that borrowers vacate during 


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the foreclosure process or that become our real estate owned properties. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM IRV ACKELSBERG 

Q.1. To what degree has credit tightened for consumers with less 

than perfect credit, and what indicators do you follow to track this 

movement? What are your short term and long term forecasts? 

A.1. As an attorney who has been specializing in assisting homeowners who have been fooled into abusive and dangerous subprime 

mortgage transactions, I must confess to regarding the tightening 

of this kind of credit as generally a positive development. I realize 

that there is a common assumption that more credit is good, and 

that tightening credit is bad. Before the rise of Wall Street securitizations that fueled the subprime mortgage explosion, I myself 

generally subscribed to that view, particularly as it related to credit access in low-income and minority communities. However, current realities in the mortgage market require us to be more selective in our reaction to market shrinkage and to consider the negative, as well as positive, aspects of the kinds of mortgage products 

and practices that have been dominating the subprime market in 

particular. 

In fact, there is evidence that, in any case, many of the same 

abusive mortgages are still being made, despite all the current attention on this market. I refer you to the testimony provided the 

Committee by Michael Calhoun, President of the Center for Responsible Lending, on June 26, 2007, in which he analyzed mortgage pools underlying recent securitizations and discovered the 

same kind of mortgage characteristics that are now associated with 

the foreclosure explosion. His view, which I share, is that market 

forces cannot be counted on to control the practices that have produced the crisis now upon us. Action by Congress or the Fed is, in 

our mind, essential. 

Q.2. Is it true that in the vast majority of cases, finding a way to 

keep a customer in their home and continuing to pay their mortgage is the best economic proposition for the customer, the servicer, 

and the investor? Please explain why or why not. 

A.2. As a lawyer representing homeowners in foreclosure, the goal 

of my case work has usually been to persuade the servicer, and the 

investors represented by that servicer, that a modification of the 

underlying mortgage loan—i.e., reconstructing the obligation into 

an affordable one going forward—is in their economic interest, as 

well as the interest of my client. More recently, however, there appears to be a growing consensus between consumer advocates and 

industry groups that finding a way to keep the homeowner in the 

house, and making an affordable, monthly payment, is often the 

smartest direction for all concerned. From a purely economic standpoint, investors are coming to a realization that a modification of 

the underlying mortgage can produce greater value over time when 

compared to the anticipated net recovery from a foreclosure. This 

is, of course, a matter for case-by-case analysis, but I do believe 

that there is a greater receptivity to loan modifications than before. 


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I am enclosing a copy of a just released publication by the American Securitization Forum, a trade organization of various participants in the U.S. securitization market, entitled, ‘‘Statement of 

Principles, Recommendations and Guidelines for the Modification 

of Securitized Subprime Residential Mortgage Loans.’’ The purpose 

of this paper is to push for ‘‘wider and more effective use of loan 

modifications in appropriate circumstances’’ by establishing ‘‘a common framework relating to the structure and interpretation of loan 

modification provisions in securitization transactions, thereby promoting greater uniformity, clarity and certainty of application of 

these provisions throughout the industry.’’ 

Q.3. Please describe the workout options that allow homeowners 

facing difficulties to remain in their homes. Can you provide hypothetical examples of how this modification process works? What are 

the limitations placed on a servicer’s ability to modify a loan by investors or others involved in the securitization of mortgage loans? 

A.3. Both of these topics—the contents of a typical modification 

agreement and the limitations, both real and imagined, of a 

servicer’s ability to modify a loan—are discussed at length in the 

enclosed paper from the American Securitization Forum. As described in that paper, customary work-outs include a) loan modifications that include rate reductions, either permanent or temporary, forgiveness of principal, capitalizing of arrearages or maturity extensions and b) other loss mitigation techniques such as forbearance plans and short pay-offs. My experience is that some 

servicers are very receptive to doing work-outs, while others resist 

doing so, often claiming to be constrained by their investors. The 

ASF paper confirms this, and suggests that in-house interpretations of what is, for the most part, similar contractual language in 

securitization agreements accounts for this divergence in attitude 

and practice. For that reason, ASF is calling for the adoption of 

standardized industry practices and documentation that acknowledge and support the importance of broad servicer work-out authority, including loan modification. 


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‘NO MONEY DOWN’ FALLS FLAT

The Washington Post, Wednesday, March 14, 2007 

By Steven Pearlstein 

Today’s pop quiz involves some potentially exciting new products that mortgage 

bankers have come up with to make homeownership a reality for cash-strapped 

first-time buyers. 

Here goes: Which of these products do you think makes sense? 

(a) The ‘‘balloon mortgage,’’ in which the borrower pays only interest for 10 years 

before a big lump-sum payment is due. 

(b) The ‘‘liar loan,’’ in which the borrower is asked merely to state his annual income, without presenting any documentation. 

(c) The ‘‘option ARM’’ loan, in which the borrower can pay less than the agreedupon interest and principal payment, simply by adding to the outstanding balance 

of the loan. 

(d) The ‘‘piggyback loan,’’ in which a combination of a first and second mortgage 

eliminates the need for any down payment. 

(e) The ‘‘teaser loan,’’ which qualifies a borrower for a loan based on an artificially 

low initial interest rate, even though he or she doesn’t have sufficient income to 

make the monthly payments when the interest rate is reset in two years. 

(f) The ‘‘stretch loan,’’ in which the borrower has to commit more than 50 percent 

of gross income to make the monthly payments. 

(g) All of the above. 

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker 

and a bank regulator. 

No, folks, I’m not making this up. Not only has the industry embraced these ‘‘innovations,’’ but it has also begun to combine various features into a single loan and 

offer it to high-risk borrowers. One cheeky lender went so far as to advertise what 

it dubbed its ‘‘NINJA’’ loan—NINJA standing for ‘‘No Income, No Job and No Assets.’’ 

In fact, these innovative products are now so commonplace, they have been the 

driving force in the boom in the housing industry at least since 2005. They are a 

big reason why homeownership has increased from 65 percent of households to a 

record 69 percent. They help explain why outstanding mortgage debt has increased 

by $9.5 trillion in the past four years. And they are, unquestionably, a big factor 

behind the incredible run-up in home prices. 

Now they are also a major reason the subprime mortgage market is melting down, 

why 1.5 million Americans may lose their homes to foreclosure and why hundreds 

of thousands of homes could be dumped on an already glutted market. They also 

represent a huge cloud hanging over Wall Street investment houses, which packaged and sold these mortgages to investors around the world. 

How did we get to this point? 

It began years ago when Lewis Ranieri, an investment banker at the old Salomon 

Brothers, dreamed up the idea of buying mortgages from bank lenders, bundling 

them and issuing bonds with the bundles as collateral. The monthly payments from 

homeowners were used to pay interest on the bonds, and principal was repaid once 

all the mortgages had been paid down or refinanced. 

Thanks to Ranieri and his successors, almost anyone can originate a mortgage 

loan—not just banks and big mortgage lenders, but any mortgage broker with a 

Web site and a phone. Some banks still keep the mortgages they write. But most 

other originators sell them to investment banks that package and ‘‘securitize’’ them. 

And because the originators make their money from fees and from selling the loans, 

they don’t have much at risk if borrowers can’t keep up with their payments. 

And therein lies the problem: an incentive structure that encourages originators 

to write risky loans, collect the big fees and let someone else suffer the consequences. 

This ‘‘moral hazard,’’ as economists call it, has been magnified by another innovation in the capital markets. Instead of packaging entire mortgages, Wall Street 

came up with the idea of dividing them into ‘‘tranches.’’ The safest tranche, which 

offers investors a relatively low interest rate, will be the first to be paid off if too 

many borrowers default and their houses are sold at foreclosure auction. The owners 

of the riskiest tranche, in contrast, will be the last to be paid, and thus have the 

biggest risk if too many houses are auctioned for less than the value of their loans. 

In return for this risk, their bonds offer the highest yield. 

It was this ability to chop packages of mortgages into different risk tranches that 

really enabled the mortgage industry to rush headlong into all those new products 


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and new markets—in particular, the subprime market for borrowers with sketchy 

credit histories. Selling the safe tranches was easy, while the riskiest tranches appealed to the booming hedge-fund industry and other investors like pension funds 

desperate for anything offering a higher yield. So eager were global investors for 

these securities that when the housing market began to slow, they practically invited the mortgage bankers to keep generating new loans even if it meant they were 

riskier. The mortgage bankers were only too happy to oblige. 

By the spring of 2005, the deterioration of lending standards was pretty clear. 

They were the subject of numerous eye-popping articles in The Post by my colleague 

Kirstin Downey. Regulators began to warn publicly of the problem, among them Fed 

Chairman Alan Greenspan. Several members of Congress called for a clampdown. 

Mortgage insurers and numerous independent analysts warned of a gathering crisis. 

But it wasn’t until December 2005 that the four bank regulatory agencies were 

able to hash out their differences and offer for public comment some ‘‘guidance’’ for 

what they politely called ‘‘nontraditional mortgages.’’ Months ensued as the mortgage bankers fought the proposed rules with all the usual bogus arguments, accusing the agencies of ‘‘regulatory overreach,’’ ‘‘stifling innovation’’ and substituting the 

judgment of bureaucrats for the collective wisdom of thousands of experienced lenders and millions of sophisticated investors. And they warned that any tightening of 

standards would trigger a credit crunch and burst the housing bubble that their 

loosey-goosey lending had helped spawn. 

The industry campaign didn’t sway the regulators, but it did delay final implementation of the guidance until September 2006, both by federal and many state 

regulators. And even now, with the market for subprime mortgages collapsing 

around them, the mortgage bankers and their highly paid enablers on Wall Street 

continue to deny there is a serious problem, or that they have any responsibility 

for it. In substance and tone, they sound almost exactly like the accounting firms 

and investment banks back when Enron and WorldCom were crashing around them. 

What we have here is a failure of common sense. With occasional exceptions, 

bankers shouldn’t make—or be allowed to make—mortgage loans that require no 

money down and no documentation of income to people who won’t be able to afford 

the monthly payments if interest rates rise, house prices fall or the roof springs a 

leak. It’s not a whole lot more complicated than that. 

Steven Pearlstein will host a Web discussion today at 11 a.m. at 

washingtonpost.com. He can be reached at pearlsteins@washpost.com. 

CRISIS LOOMS IN MORTGAGES

The New York Times, Sunday, March 11, 2007 

By Gretchen Morgenson 

NEWS ANALYSIS 

On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on 

a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three 

weeks. 

What happened next seems all too familiar to investors who bought technology 

stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New 

Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21. 

The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar 

ring to investors who watched the technology stock bubble burst precisely seven 

years ago. 

Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. 

Now, as then, bullish stock and credit analysts for some of those same Wall Street 

firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, 

regulators stood by as the mania churned, fed by lax standards and anything-goes 

lending. 

Investment manias are nothing new, of course. But the demise of this one has 

been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage 

securities market, which is larger even than the United States treasury market. 


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Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it 

more difficult to get credit, while hundreds of thousands of homes will go up for sale 

as borrowers default, further swamping a stalled market. 

‘‘The regulators are trying to figure out how to work around it, but the Hill is 

going to be in for one big surprise,’’ said Josh Rosner, a managing director at 

Graham-Fisher & Company, an independent investment research firm in New York, 

and an expert on mortgage securities. ‘‘This is far more dramatic than what led to 

Sarbanes-Oxley,’’ he added, referring to the legislation that followed the WorldCom 

and Enron scandals, ‘‘both in conflicts and in terms of absolute economic impact.’’ 

While real estate prices were rising, the market for home loans operated like a 

well-oiled machine, providing ready money to borrowers and high returns to investors like pension funds, insurance companies, hedge funds and other institutions. 

Now this enormous and important machine is sputtering, and the effects are reverberating throughout Main Street, Wall Street and Washington. 

Already, more than two dozen mortgage lenders have failed or closed their doors, 

and shares of big companies in the mortgage industry have declined significantly. 

Delinquencies on loans made to less creditworthy borrowers—known as subprime 

mortgages—recently reached 12.6 percent. Some banks have reported rising problems among borrowers that were deemed more creditworthy as well. 

Traders and investors who watch this world say the major participants—Wall 

Street firms, credit rating agencies, lenders and investors—are holding their collective breath and hoping that the spring season for home sales will reinstate what 

had been a go-go market for mortgage securities. Many Wall Street firms saw their 

own stock prices decline over their exposure to the turmoil. 

‘‘I guess we are a bit surprised at how fast this has unraveled,’’ said Tom Zimmerman, head of asset-backed securities research at UBS, in a recent conference call 

with investors. 

Even now the tone accentuates the positive. In a recent presentation to investors, 

UBS Securities discussed the potential for losses among some mortgage securities 

in a variety of housing markets. None of the models showed flat or falling home 

prices, however. 

The Bear Stearns analyst who upgraded New Century, Scott R. Coren, wrote in 

a research note that the company’s stock price reflected the risks in its industry, 

and that the downside risk was about $10 in a ‘‘rescue-sale scenario.’’ According to 

New Century, Bear Stearns is among the firms with a ‘‘longstanding’’ relationship 

financing its mortgage operation. Mr. Coren, through a spokeswoman, declined to 

comment. 

Others who follow the industry have voiced more caution. Thomas A. Lawler, 

founder of Lawler Economic and Housing Consulting, said: ‘‘It’s not that the mortgage industry is collapsing, it’s just that the mortgage industry went wild and there 

are consequences of going wild. 

‘‘I think there is no doubt that home sales are going to be weaker than most anybody who was forecasting the market just two months ago thought. For those areas 

where the housing market was already not too great, where inventories were at historically high levels and it finally looked like things were stabilizing, this is going 

to be unpleasant.’’ 

Like worms that surface after a torrential rain, revelations that emerge when an 

asset bubble bursts are often unattractive, involving dubious industry practices and 

even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how 

hard to value these opaque securities are and how easy their values are to prop up. 

Owners of mortgage securities that have been pooled, for example, do not have 

to reflect the prevailing market prices of those securities each day, as stockholders 

do. Only when a security is downgraded by a rating agency do investors have to 

mark their holdings to the market value. As a result, traders say, many investors 

are reporting the values of their holdings at inflated prices. 

‘‘How these things are valued for portfolio purposes is exposed to management 

judgment, which is potentially arbitrary,’’ Mr. Rosner said. 

At the heart of the turmoil is the subprime mortgage market, which developed 

to give loans to shaky borrowers or to those with little cash to put down as collateral. Some 35 percent of all mortgage securities issued last year were in that category, up from 13 percent in 2003. 

Looking to expand their reach and their profits, lenders were far too willing to 

lend, as evidenced by the creation of new types of mortgages—known as ‘‘affordability products’’—that required little or no down payment and little or no documentation of a borrower’s income. Loans with 40-year or even 50-year terms were 

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ceedingly low ‘‘teaser’’ rates that move up rapidly in later years were another feature of the new loans. 

The rapid rise in the amount borrowed against a property’s value shows how willing lenders were to stretch. In 2000, according to Banc of America Securities, the 

average loan to a subprime lender was 48 percent of the value of the underlying 

property. By 2006, that figure reached 82 percent. 

Mortgages requiring little or no documentation became known colloquially as ‘‘liar 

loans.’’ An April 2006 report by the Mortgage Asset Research Institute, a consulting 

concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated 

their incomes, and then looked at documents those borrowers had filed with the 

I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers 

overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half. 

A Deutsche Bank report said liar loans accounted for 40 percent of the subprime 

mortgage issuance last year, up from 25 percent in 2001. Securities backed by home 

mortgages have been traded since the 1970s, but it has been only since 2002 or so 

that investors, including pension funds, insurance companies, hedge funds and other 

institutions, have shown such an appetite for them. 

Wall Street, of course, was happy to help refashion mortgages from arcane and 

illiquid securities into ubiquitous and frequently traded ones. Its reward is that it 

now dominates the market. While commercial banks and savings banks had long 

been the biggest lenders to home buyers, by 2006, Wall Street had a commanding 

share—60 percent—of the mortgage financing market, Federal Reserve data show. 

The big firms in the business are Lehman Brothers, Bear Stearns, Merrill Lynch, 

Morgan Stanley, Deutsche Bank and UBS. They buy mortgages from issuers, put 

thousands of them into pools to spread out the risks and then divide them into 

slices, known as tranches, based on quality. Then they sell them. 

The profits from packaging these securities and trading them for customers and 

their own accounts have been phenomenal. At Lehman Brothers, for example, mortgage-related businesses contributed directly to record revenue and income over the 

last three years. 

The issuance of mortgage-related securities, which include those backed by home- equity loans, peaked in 2003 at more than $3 trillion, according to data from the 

Bond Market Association. Last year’s issuance, reflecting a slowdown in home price 

appreciation, was $1.93 trillion, a slight decline from 2005. 

In addition to enviable growth, the mortgage securities market has undergone 

other changes in recent years. In the 1990s, buyers of mortgage securities spread 

out their risk by combining those securities with loans backed by other assets, like 

credit card receivables and automobile loans. But in 2001, investor preferences 

changed, focusing on specific types of loans. Mortgages quickly became the favorite. 

Another change in the market involves its trading characteristics. Years ago, 

mortgage-backed securities appealed to a buy-and-hold crowd, who kept the securities on their books until the loans were paid off. ‘‘You used to think of mortgages 

as slow moving,’’ said Glenn T. Costello, managing director of structured finance 

residential mortgage at Fitch Ratings. ‘‘Now it has become much more of a trading 

market, with a mark-to-market bent.’’ 

The average daily trading volume of mortgage securities issued by government 

agencies like Fannie Mae and Freddie Mac, for example, exceeded $250 billion last 

year. That’s up from about $60 billion in 2000. 

Wall Street became so enamored of the profits in mortgages that it began to expand its reach, buying companies that make loans to consumers to supplement its 

packaging and sales operations. In August 2006, Morgan Stanley bought Saxon, a 

$6.5 billion subprime mortgage underwriter, for $706 million. And last September, 

Merrill Lynch paid $1.3 billion to buy First Franklin Financial, a home lender in 

San Jose, Calif. At the time, Merrill said it expected First Franklin to add to its 

earnings in 2007. Now analysts expect Merrill to take a large loss on the purchase. 

Indeed, on Feb. 28, as the first fiscal quarter ended for many big investment 

banks, Wall Street buzzed with speculation that the firms had slashed the value of 

their numerous mortgage holdings, recording significant losses. 

As prevailing interest rates remained low over the last several years, the appetite 

for these securities only rose. In the ever-present search for high yields, buyers 

clamored for securities that contained subprime mortgages, which carry interest 

rates that are typically one to two percentage points higher than traditional loans. 

Mortgage securities participants say increasingly lax lending standards in these 

loans became almost an invitation to commit mortgage fraud. It is too early to tell 

how significant a role mortgage fraud played in the rocketing delinquency rates— 

12.6 percent among subprime borrowers. Delinquency rates among all mortgages 

stood at 4.7 percent in the third quarter of 2006. 


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For years, investors cared little about risks in mortgage holdings. That is changing. 

‘‘I would not be surprised if between now and the end of the year at least 20 percent of BBB and BBB- bonds that are backed by subprime loans originated in 2006 

will be downgraded,’’ Mr. Lawler said. 

Still, the rating agencies have yet to downgrade large numbers of mortgage securities to reflect the market turmoil. Standard & Poor’s has put 2 percent of the 

subprime loans it rates on watch for a downgrade, and Moody’s said it has downgraded 1 percent to 2 percent of such mortgages that were issued in 2005 and 2006. 

Fitch appears to be the most proactive, having downgraded 3.7 percent of 

subprime mortgages in the period. 

The agencies say that they are confident that their ratings reflect reality in the 

mortgages they have analyzed and that they have required managers of mortgage 

pools with risky loans in them to increase the collateral. A spokesman for S.& P. 

said the firm made its ratings requirements more stringent for subprime issuers 

last summer and that they shored up the loans as a result. 

Meeting with Wall Street analysts last week, Terry McGraw, chief executive of 

McGraw-Hill, the parent of S.& P., said the firm does not believe that loans made 

in 2006 will perform ‘‘as badly as some have suggested.’’ 

Nevertheless, some investors wonder whether the rating agencies have the stomach to downgrade these securities because of the selling stampede that would follow. 

Many mortgage buyers cannot hold securities that are rated below investment 

grade—insurance companies are an example. So if the securities were downgraded, 

forced selling would ensue, further pressuring an already beleaguered market. 

Another consideration is the profits in mortgage ratings. Some 6.5 percent of 

Moody’s 2006 revenue was related to the subprime market. 

Brian Clarkson, Moody’s co-chief operating officer, denied that the company hesitates to cut ratings. ‘‘We made assumptions early on that we were going to have 

worse performance in subprime mortgages, which is the reason we haven’t seen that 

many downgrades,’’ he said. ‘‘If we have something that is investment grade that 

we need to take below investment grade, we will do it.’’ 

Interestingly, accounting conventions in mortgage securities require an investor 

to mark his holdings to market only when they get downgraded. So investors may 

be assigning higher values to their positions than they would receive if they had 

to go into the market and find a buyer. That delays the reckoning, some analysts 

say. 

‘‘There are delayed triggers in many of these investment vehicles and that is delaying the recognition of losses,’’ Charles Peabody, founder of Portales Partners, an 

independent research boutique in New York, said. ‘‘I do think the unwind is just 

starting. The moment of truth is not yet here.’’ 

On March 2, reacting to the distress in the mortgage market, a throng of regulators, including the Federal Reserve Board, asked lenders to tighten their policies 

on lending to those with questionable credit. Late last week, WMC Mortgage, General Electric’s subprime mortgage arm, said it would no longer make loans with no 

down payments. 

Meanwhile, investors wait to see whether the spring home selling season will 

shore up the mortgage market. If home prices do not appreciate or if they fall, defaults will rise, and pension funds and others that embraced the mortgage securities 

market will have to record losses. And they will likely retreat from the market, analysts said, affecting consumers and the overall economy. 

A paper published last month by Mr. Rosner and Joseph R. Mason, an associate 

professor of finance at Drexel University’s LeBow College of Business, assessed the 

potential problems associated with disruptions in the mortgage securities market. 

They wrote: ‘‘Decreased funding for residential mortgage-backed securities could set 

off a downward spiral in credit availability that can deprive individuals of home 

ownership and substantially hurt the U.S. economy.’’ 

Correction: March 20, 2007, Tuesday—A chart with a front-page news analysis article on March 11 about a looming crisis in the mortgage market mislabeled the size 

of the market that trades mortgage-backed securities. It trades in hundreds of billions of dollars a day, not hundreds of millions. 


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HOMEOWNERS AT RISK

The New York Times, Thursday, March 15, 2007 

Editorial 

So far, the housing bust has been mainly about subprime lenders going broke, 

bankers and investors trying to avoid the fallout, and regulators rousing—too late, 

apparently—from hibernation. The story yet to unfold involves the millions of American families who are in danger of losing their homes. 

Last December, the nonpartisan Center for Responsible Lending estimated that 

1.7 million homeowners were in harm’s way. Fresh evidence of a meltdown—from 

the Mortgage Bankers Association—suggests that estimate may be too low. The association reported this week that the share of mortgages entering the foreclosure 

process in the last quarter of 2006 was at its highest level since the group began 

keeping track 37 years ago. Borrowers with subprime loans have been hardest hit, 

but all major loan types have been affected, as the housing market weakens amid 

upward adjustments in monthly payments on many mortgages. 

The personal tragedy is only the start. Borrowers presently faced with losing their homes stand to lose $164 billion of wealth in the process. Whole communities pay 

the price. Foreclosures tend to cluster in neighborhoods, leading to sharp declines 

in property values, business investment and tax revenues. 

Responding to the mortgage bankers’ grim report, Senator Christopher Dodd, 

chairman of the Banking Committee and a presidential hopeful, broached the possibility of federal help for struggling homeowners. The most plausible relief measures—detailed in a new report by the Center for American Progress, a liberal research and advocacy group—involve federal boosts to existing state and local programs. Those include counseling to help strapped families plan for rising monthly 

payments and renegotiate their loans, legal aid and short-term loans for eligible borrowers. One study shows that a federal grant of $25 million could replicate proven 

local programs in other areas now experiencing spikes in foreclosures. 

Mr. Dodd and his fellow lawmakers could be particularly effective at this stage 

in framing the case for federal help. Relief would be a cost-effective, humane response to homeowners trapped by complex, unmanageable—and, in a growing number of cases, seemingly predatory—loans. Time and resources to renegotiate those 

loans or sell an unaffordable property could save many families and communities 

from calamity. 

SUBPRIME LENDING WORRIES HIT HOME

Chicago Tribune, Sunday, March 18, 2007 

By Becky Yerak and Sharon Stangenes, Tribune staff reporters 

The national subprime lending calamity first reached the South Side graystone 

on Greenwood Avenue in November. 

That was when the homeowner, a 67-year-old widow named Georgia Rhone, first missed payment on a mortgage that jumped from $974 a month in 2004 to $1,850 

a month last year. 

Her lender now has begun foreclosure procedures as a result of a deal she realizes 

she never quite understood but has her in a vise: a mortgage charging 11.625 percent after being refinanced twice in two years. 

Across the country, bad news is mounting in the subprime mortgage business. 

Once thriving by making loans to millions of spotty-credited consumers who otherwise wouldn’t be able to realize the American dream of home ownership, the industry has seen an estimated 30 lenders close shop since late 2006, amid a rise in delinquency and foreclosure rates, felled by their own lax underwriting or by borrowers 

unable to keep up with mortgage payments from 2 points to 5 points above prime. 

In Illinois, the percentage of subprime loans in foreclosure at the end of 2006 was 

6.22 percent, up from 5.04 percent a year ago, according to the Mortgage Bankers 

Association. 

And the pain might ripple beyond the subprime lenders or borrowers. 

The larger real estate industry could have reason to worry, particularly in an already sputtering market, as subprime mortgages have grown to 16 percent of total 

U.S. mortgage originations, up from less than 5 percent in 1994. 

When loans go bad, the spillover effect on housing prices can be significant. 

‘‘With delinquency and foreclosure rates continuing to rise, this will result in more 

supply hitting the market throughout the year,’’ said a report by Credit Suisse. It 

estimates that the National Association of Realtors’ property inventory figures could 

jump 20 percent when homes now in the foreclosure pipeline hit the resale market. 


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‘‘These head winds will be felt throughout the entire market,’’ Credit Suisse said. 

The impact begins with next-door neighbors. 

In Chicago, a foreclosure started on a home lowered the price of nearby singlefamily homes, on average, by 0.9 percent, according to a 2006 study by the Fannie 

Mae Foundation, cited in a recent report from the Center for Responsible Lending. 

And each additional foreclosure started on the block cut values another 0.9 percent. 

The impact was highest in lower-income neighborhoods, where each foreclosure 

dropped home values an average of 1.44 percent. 

One housing watcher blames overzealous lenders for the rise in foreclosures. 

‘‘Lenders are so scared about losing market share,’’ said Malcolm Bush, president 

of the Woodstock Institute, a Chicago non-profit that studies housing. 

Their subprime underwriting has become so ‘‘appalling,’’ he said, that some borrowers are defaulting on adjustable-rate mortgages even before the rates change for 

the first time. 

In Chicago, more than 56,000 high-cost mortgages were originated in 2005, double 

the number in 2004, according to figures that will be released next month in Woodstock’s 2007 community lending fact book. 

Adds Jeff Metcalf, whose Kaneville-based Record Information Services Inc. tracks 

foreclosures: ‘‘We see instances where people aren’t even in their homes for a year.’’ 

Rhone is in danger of losing her home after years of caring for her parents and 

raising two grandchildren. 

Because of a financial crunch, she refinanced into a subprime loan in 2005, and 

had to refinance it again to keep ahead of spiraling payments. 

Rhone said she told her broker the monthly payment on the most recent deal he 

brought her was ‘‘very, very steep for my budget.’’ 

‘‘They said, ‘This is the best deal’ available and that we would refinance in a few 

months,’’ she said. 

The South Side widow cared for her parents in the house on Greenwood Avenue, 

where she is now raising her daughter’s children, 10 and 17. 

Having trusted her broker and signed for a loan she says she didn’t understand, 

Rhone is one of a growing number of owners trying to hang on to her home. 

‘‘More clients are contacting us because they are in foreclosure,’’ said John 

Groene, associate director for Neighborhood Housing Services of Chicago, a non-profit working for neighborhood revitalization. 

NHS’ mission has been building and rehabbing properties in struggling Chicago 

neighborhoods and educating first-time home buyers. But foreclosure prevention 

now eats up about 40 percent of its time. 

Groene supervises NHS programs in eight Chicago foreclosure hot spots: Auburn 

Gresham, Back of the Yards, Chicago Lawn-Gage Park, North Lawndale, Roseland, 

South Chicago, West Humboldt Park and West Englewood. Their foreclosure rates 

average seven times the national figure. 

Interest rates on subprime adjustable-rate mortgages often start at 8.99 percent, 

Groene said. Many have one- and two-year fixed rates that reset to 10.5 percent or 

higher. The higher rate or a family crisis often leads to a refinance, where the interest rates are higher yet. ‘‘They are refinancing two or three times,’’ he said. ‘‘Their 

interest rate is going up each time,’’ often on yet another adjustable-rate mortgage. 

But it’s not just struggling neighborhoods seeing escalating foreclosures. 

‘‘We are seeing it across the board’’ in all price ranges and in all types of communities, said Jim Rossi, who with his wife, Sue, owns ReMax 2000 in Crete, about 

25 miles south of Chicago. 

‘‘A lot of lenders who came into business in the last five years applied the wrong 

product to the wrong buyers,’’ Rossi said. Buyers were ‘‘stretched into larger monthly payments than they should have had.’’ 

Lending practices ‘‘were so loose that it drove prices up,’’ he said. That, in turn, 

created a ‘‘snowball effect.’’ As prices rose, buyers needed larger mortgages to buy 

the house, and lenders eased standards to do the deals. 

‘‘It was keeping up with the Joneses,’’ said Rossi, who expects foreclosures to keep 

rising based on the paperwork crossing his desk. 

Meanwhile, lenders and appraisers are tightening standards and more closely 

scrutinizing buyers, which, in turn, contributes to slowing sales, he said. 

Owners with mortgage problems during the recent housing boom were able to sell 

a home before losing it, Sue Rossi said. 

But, ‘‘with the market being down the last 14 to 15 months and with market 

times lengthening, a lot of people who would have been able to sell haven’t been 

able to sell,’’ she said. 

In the past, even as interest rates rose, appreciating home prices could help rescue borderline borrowers, making it easier for them to refinance. But as the housing 


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market lost steam, slowing price appreciation, the increased equity of a home isn’t 

there, reducing refinancing options. 

‘‘Weakness in loan underwriting is being exposed by softening housing markets,’’ 

explained Keith Ernst, senior policy counsel for the Center for Responsible Lending, 

a non-profit watchdog of the financial-services industry. 

More than 19 percent of subprime loans originated in Illinois in 2006 will result 

in the home being lost to foreclosure, the center estimates. That’s up from 13.3 percent of Illinois subprime loans originated from 1998 to 2001 in which the home is 

expected to be lost. 

Some consumers are taking steps now to keep themselves from slipping into the 

ranks of the delinquent. Take Chicago semi-retiree Charlene Snow, 69, who pays $1,150 a month for the 

loan on her Trumbull Avenue home and is working with NHS to refinance her mortgage at a fixed rate. It currently carries a 10.75 percent interest rate and she is 

worried about it going higher. 

‘‘I had refinanced, and it was a fixed rate for two years. And after two years, they 

said it would be adjustable, but at the time I didn’t understand what that meant,’’ 

said Snow, whose two children and granddaughter live with her. 

The broker also told her that they would eventually refinance the mortgage, which started at about $125,000. 

Says Snow: ‘‘You don’t know what tomorrow will bring, so I’d like to be at a fixed 

rate so I know what I’ll have to pay instead of guessing what it might be.’’ 

Tips for homeowners facing foreclosure 

Ask for help as soon as possible. The longer you wait, the harder it can be to fix 

the problem. 

Beware of anyone who promises to ‘‘keep you in your home’’ or says they’ll take care 

of everything. 

Ask for everything in writing. When you get it on paper, have a lawyer, loan counselor or someone you trust look it over and make sure the deal is what you were 

promised. 

The Illinois attorney general’s office suggests those falling behind on mortgage payments should: 

Look at ‘‘Predatory Home Loans: A Guide to Prevention and Rescue Resources,’’ at 

www.illinoisattorneygeneral.gov. The Web site also lists names of reputable mortgage foreclosure counselors. 

Call the 311 Homeownership Preservation Campaign, developed by the City of Chicago, Neighborhood Housing Services of Chicago and lender partners. The 311 operator connects you with an accredited housing counselor. Counseling is done over the 

phone, is confidential and takes about 45 minutes. 

——Tribune staff 

HISPANICS’ AMERICAN DREAM HIT BY MORTGAGE CRISIS

Reuters, Sunday, March 18, 2007 

By Adriana Garcia 

WASHINGTON, March 18 (Reuters)—Hispanic immigrants across the United 

States are being hit hard by the subprime mortgage crisis, with many risking their 

life savings in a failed bet on the American dream of owning their own homes. 

Hispanics hold up to 40 percent of mortgages in the troubled subprime loan market, where higher interest rates are charged to buyers with a damaged credit history or little borrowing experience. 

Often new to the country and with limited English, many say they were misled 

by mortgage brokers and never expected their payments to be so high. 

‘‘If we took that loan it was because we didn’t understand it,’’ said Maria, a 39- 

year-old Mexican mother of three who recently lost her home in Kansas City. 

She and her husband Francisco, both illegal immigrants, sold a $20,000 home and 

bought a $114,000 property with the kitchen of her dreams. ‘‘This new house had 

four bedrooms and a bigger kitchen, and that’s what interested me, because I like 

cooking.’’ 

Two years later, with interest rates higher, they were missing their monthly payments. Unable to refinance the loan or sell to cover their debts in a depressed market, they gave up and moved to a two bedroom rented apartment in October. 

‘‘If we had known, we would never have signed the papers,’’ she said. 


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About 1.5 million homeowners will face foreclosure this year, an increase of at 

least 20 percent from 2006, according to housing research firm RealtyTrac.Some 

mortgage brokers were too aggressive in persuading people to buy homes they could 

not afford, and Hispanics were especially vulnerable because immigrants have little 

credit history and are natural customers for subprime loans. 

‘‘Their lack of financial education and their overwhelming desire to buy a home 

makes them the perfect victims of predatory lenders,’’ said Gregory Cahn, from La 

Fuerza Unida Inc., a housing counseling agency in Long Island, New York. 

‘CHEATED’ 

‘‘People call me from all over the country to tell how they’ve been cheated. There 

are from 350 to 400 types of loans in the market, but brokers just sell what’s convenient for them,’’ said Aracely Panameno, director for Latino issues at the Center 

for Responsible Lending, a consumer advocacy group. 

The Hispanic population in the United States stands at around 42 million, and 

Latinos also account for most of the country’s estimated 12 million illegal immigrants. 

Although some brokers went too far, the rapid growth of subprime loans in recent 

years gave many immigrants a chance to buy homes for the first time. As lenders 

now abandon the sector, even worthy Hispanic borrowers could now see loans shut 

off to them again. 

Experts say many Hispanics trapped with expensive subprime mortgages are 

looking for second jobs or renting rooms in their homes to keep up payments. 

‘‘You will have families that are working multiple jobs to buy this house,’’ said 

Janis Bowdler of the National Council of La Raza, a prominent Latino civil rights 

group. ‘‘It’s their dream, so they will do everything they can to pay that bill.’’ 

Maricela Vargas, a Mexican-American woman in Visalia, California, lives with one of her sons in a three bedroom house she bought for $261,000. When she signed 

the papers, she was worried about the monthly payment of around $1,600. 

‘‘I trusted this woman. She told me I’d be able to refinance after a month, but 

it didn’t happen,’’ Vargas said. Earning only $1,800 a month, Vargas has already spent more than $40,000 of her 

savings to pay the mortgage, and she rents a room to a friend. She is also now looking for a second job. 

‘‘I didn’t want to move because I felt I would lose everything, my identity,’’ she 

said, explaining why she is trying everything to hold on to her home. ‘‘I don’t want 

to think about what could happen.’’ 

FED, OCC PUBLICLY CHASTISED FEW LENDERS DURING BOOM

Bloomberg.com, Wednesday, March 15, 2007 

By Craig Torres and Alison Vekshin 

March 14 (Bloomberg)—The Federal Reserve and the Office of the Comptroller of the Currency took little action in public to police the $2.8 trillion boom in the U.S. 

mortgage market—whose bust now risks worsening the housing recession. 

The Fed, which is responsible for the stability of the banking system, didn’t publicly rebuke any firm for failing to follow up warnings on home-lending practices between 2004 and 2006. The OCC, which supervises 1,793 national banks, took only 

three public mortgage-related consumer-protection enforcement actions over the 

same period. 

Consumer advocates and former government officials say the regulators, by acting 

behind the scenes rather than openly advertising the shortcomings of some firms, 

failed to discipline an industry that loaned too much money to borrowers who 

couldn’t repay it. 

Now, more lenders are being forced to shut and foreclosures are rising, threatening to scuttle any chance of an early recovery in housing. 

‘‘There was tension between the responsibilities not to mess up some banks’ businesses and the responsibility to consumers,’’ said Edward Gramlich, a Fed governor 

from 1997 to 2005 who is writing a book about the mortgage market at the Urban 

Institute in Washington. The result, he said, is that ‘‘we could have real carnage 

for low-income borrowers.’’ 

Private Actions 

Officials at the Fed and OCC say their examination process was rigorous and resulted in private enforcement and correction of abuses. 

The agencies say they aren’t allowed to disclose how many non-public actions they 

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loan abuses. Private enforcement action ‘‘contains confidential supervisory information,’’ said Susan Stawick, a Fed spokeswoman in Washington. The OCC considers 

the information ‘‘proprietary and confidential,’’ said Kevin Mukri, a spokesman in 

Washington. 

‘‘Making sure people understand what they’re getting into is very important,’’ Fed 

Chairman Ben S. Bernanke said in Stanford, California, on March 2. ‘‘We’ve issued 

several guidances. We hope that they’ll be helpful.’’ 

Mortgage delinquencies rose to 4.95 percent in the fourth quarter, the Mortgage 

Bankers Association said yesterday; that’s the highest level since the second quarter 

of 2003. The trade group said 13.33 percent of ‘‘subprime’’ borrowers—those with 

poor or limited credit histories—were behind on payments, the highest rate since 

the third quarter of 2002. 

Because borrowers are having difficulty paying in a time of economic expansion 

and low unemployment, Congress and consumer advocates want to know how regulators allowed lenders to write loans borrowers would never be able to repay. 

Prodded by Dodd 

After being rebuked for foot-dragging by Senator Christopher Dodd, a Connecticut 

Democrat who chairs the Senate Banking Committee, federal regulators issued proposed guidelines aimed at subprime lending on March 2. 

‘‘We ought to let businesses decide how to price their products,’’ said William 

Isaac, who oversaw the largest rescue of bank depositors in American history as 

chairman of the Federal Deposit Insurance Corp. from 1978 to 1986. Still, he said, 

‘‘if you are putting a whole bunch of teaser loans out there and people aren’t going 

to be able to afford them when they pop up in three years, the government has the 

responsibility to look into these institutions and say, ‘What are you going to do?’ ’’ 

The subprime industry’s woes have their roots in the tenure of former Fed Chairman Alan Greenspan. The Greenspan-led Fed cut its benchmark rate to 1 percent 

in 2003 and kept it there for a year, helping foster a housing bubble. 

Philosophically Opposed 

At the same time, Greenspan was philosophically opposed to heavy-handed intervention or rule-writing, and favored self- regulation and the primacy of markets. 

The former chairman declined to comment. 

As Wall Street’s appetite for high-yielding mortgage bonds drove demand for high- risk loans, lending standards declined. Subprime mortgages almost doubled to $640 

billion in 2006 from $332 billion in 2003, according to the newsletter Inside B&C 

Lending. 

In response, the Fed and other regulators issued non- enforceable warnings, advising bankers and federal examiners about best practices in mortgage lending. 

Agencies issued guidelines defining unfair and deceptive practices in 2004, on homeequity lending in 2005, and on non-traditional mortgages in 2006. 

Shared Responsibilities 

While the Fed and OCC regulate the largest banks, some responsibilities are 

shared with three other federal agencies: the FDIC, the Office of Thrift Supervision 

and the National Credit Union Administration. 

Federal bank regulators say their authority is limited to the institutions they 

oversee and doesn’t extend to the state- chartered mortgage brokers that represent 

a large share of the industry. 

Consumer advocates say the Fed has expansive authority and could have stopped 

abuses. The Truth in Lending Act gives the Fed rule-writing authority over disclosures for consumer credit among all financial institutions. The Home Ownership 

and Equity Protection Act of 1994 also gave the Fed a role in preventing predatory 

lending, according to consumer advocates. 

In addition, federally regulated banks and Wall Street firms are often the financiers standing behind state-regulated mortgage lenders. New Century Financial 

Corp., the nation’s second-biggest subprime lender, includes Morgan Stanley, 

Citigroup Inc., and Goldman Sachs Group Inc.—all regulated by federal agencies— 

among its creditors. Gramlich says the Fed should seek an expansion of its authority to supervise mortgage subsidiaries of bank holding companies. 

‘Systematic Fraud’ 

‘‘There is no question that mortgage brokers are on the street committing systematic fraud on the American homeowner,’’ said Irv Ackelsberg, a Philadelphia attorney who testified at a Fed hearing last year in the city. He said there is a ‘‘lack 

of will’’ on the part of the Fed to use its power to stop abuses. 

Fed officials defend their approach, saying that over-zealous regulation might cut 

off credit to people who need it most. 


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‘‘There is going to be a fraction of people that get the wrong product and that is 

regrettable,’’ Richmond Fed President Jeffrey Lacker said in an interview. ‘‘Should 

we do something to limit that probability? Well, we could, but it would also limit 

credit to people for whom that is the right product.’’ 

Fed and OCC officials say their routine bank examinations, which aren’t disclosed, have enabled them to intercept trouble as they find it. Together, the organizations oversee financial institutions with more than $8.2 trillion in assets. 

‘Process Is Working’ 

‘‘The problem is normally addressed through non-public supervisory and informal 

actions, and only rarely reaches the point where a formal action is necessary,’’ said 

the OCC’s Mukri. ‘‘In fact, the relatively low number of formal actions is an indication that the supervisory process is working.’’ 

The Fed’s Stawick said the central bank ‘‘has in place a rigorous supervision and 

examination program and routinely examines the institutions it supervises for compliance with all consumer protection requirements.’’ 

While no enforcement actions resulting from the Fed’s consumer-loan guidelines 

have been disclosed, ‘‘non-public action has been taken,’’ Stawick added. 

Total OCC enforcement actions against banks, both public and private and omitting so-called affiliated parties, averaged 81 a year between 2004 and 2006. Fed 

banks completed 102 non- public enforcement actions in 2004 and 95 in 2005, including those against affiliated parties. Data for 2006 aren’t yet available. 

The Right to a Remedy 

Critics say the regulators’ private responses harm consumers by depriving them 

of information they might need to take action on their own behalf. ‘‘Borrowers hurt 

by an abusive practice have the right to a remedy,’’ said Alys Cohen, a staff attorney 

at the National Consumer Law Center in Washington. 

The Fed has published some large enforcement orders. CitiFinancial Credit Company of Baltimore, a subsidiary of Citigroup Inc., paid a fine and restitution to customers that totaled $70 million or more under a 2004 order, according to the Fed. 

The disciplinary action was related to home and personal lending between 2000 and 

2001, prior to the mid-decade surge in mortgage lending. 

Fed officials last year held lengthy hearings on home lending in four cities, where 

they were warned about predatory lending and given specific examples of abuses by 

witnesses. 

One witness at a June 9 hearing in Philadelphia was Ackelsberg, who received 

a 2001 award from that city’s bar association for his work for the public interest. 

‘Fundamentally Broken’ 

Ackelsberg told former Fed Governor Mark Olson and Consumer Affairs Director 

Sandra Braunstein that the subprime market was ‘‘fundamentally broken,’’ and presented an example of a loan that left a Social Security recipient with about $10 a 

day to live on after she paid her mortgage. 

He and other critics say the lack of public action is symptomatic of a too-cozy relationship between the overseers and the overseen, with consumers and the U.S. economy paying the price. ‘‘We have regulators almost competing with one another to 

be clients of the industry,’’ said David Berenbaum, executive vice president for the 

National Community Reinvestment Coalition in Washington ‘‘What we need is for 

regulators to be competing to offer consumer protection.’’ 

To contact the reporters on this story: Craig Torres in Washington at 

ctorres3@bloomberg.net; Alison Vekshin in Washington at avekshin@bloomberg.net. 

Last Updated: March 14, 2007 11:06 EDT 


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