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41–374 2008

SUBPRIME MORTGAGE CRISIS 

AND AMERICA’S VETERANS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC OPPORTUNITY 

OF THE

COMMITTEE ON VETERANS’ AFFAIRS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

FEBRUARY 28, 2008 

Serial No. 110–74 

Printed for the use of the Committee on Veterans’ Affairs 

( 

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COMMITTEE ON VETERANS’ AFFAIRS 

BOB FILNER, California, Chairman 

CORRINE BROWN, Florida 

VIC SNYDER, Arkansas 

MICHAEL H. MICHAUD, Maine 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

HARRY E. MITCHELL, Arizona 

JOHN J. HALL, New York 

PHIL HARE, Illinois 

MICHAEL F. DOYLE, Pennsylvania 

SHELLEY BERKLEY, Nevada 

JOHN T. SALAZAR, Colorado 

CIRO D. RODRIGUEZ, Texas 

JOE DONNELLY, Indiana 

JERRY MCNERNEY, California 

ZACHARY T. SPACE, Ohio 

TIMOTHY J. WALZ, Minnesota 

STEVE BUYER, Indiana, Ranking 

CLIFF STEARNS, Florida 

JERRY MORAN, Kansas 

HENRY E. BROWN, JR., South Carolina 

JEFF MILLER, Florida 

JOHN BOOZMAN, Arkansas 

GINNY BROWN-WAITE, Florida 

MICHAEL R. TURNER, Ohio 

BRIAN P. BILBRAY, California 

DOUG LAMBORN, Colorado 

GUS M. BILIRAKIS, Florida 

VERN BUCHANAN, Florida 

VACANT 

Malcom A. Shorter, Staff Director 

SUBCOMMITTEE ON ECONOMIC OPPORTUNITY 

STEPHANIE HERSETH SANDLIN, South Dakota, Chairwoman 

JOE DONNELLY, Indiana 

JERRY MCNERNEY, California 

JOHN J. HALL, New York 

JOHN BOOZMAN, Arkansas, Ranking 

JERRY MORAN, Kansas 

VACANT 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Veterans’ Affairs are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

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C O N T E N T S 

February 28, 2008 

Page 

Subprime Mortgage Crisis and America’s Veterans ............................................. 1 

OPENING STATEMENTS 

Chairwoman Stephanie Herseth Sandlin .............................................................. 1 

Prepared statement of Chairwoman Herseth Sandlin .................................. 33 

Hon. John Boozman, Ranking Republican Member ............................................. 2 

Prepared statement of Congressman Boozman ............................................. 33 

WITNESSES 

U.S. Department of Veterans Affairs, Judith A. Caden, Director, Loan Guaranty Service, Veterans Benefits Administration ............................................... 29 

Prepared statement of Ms. Caden ................................................................... 59 

Center for Responsible Lending, Ellen Harnick, Senior Policy Counsel ............. 19 

Prepared statement of Ms. Harnick ................................................................ 45 

Freddie Mac, Donald J. Bisenius, Senior Vice President, Credit Policy and 

Portfolio Management .......................................................................................... 5 

Prepared statement of Mr. Bisenius ............................................................... 37 

HOPE NOW Alliance, Larry Gilmore, Deputy Director ....................................... 21 

Prepared statement of Mr. Gilmore ................................................................ 51 

NATIONAL ASSOCIATION OF REALTORS®, Anthony Agurs, ABR, CRS, 

Member, Board of Directors, and REALTOR®, Agurs Group, El Cajon, 

CA .......................................................................................................................... 17

Prepared statement of Mr. Agurs ................................................................... 40 

UniCredit Markets and Investment Banking, Roger M. Kubarych, Chief U.S. 

Economist, and Henry Kaufman Adjunct Senior Fellow for International 

Economics and Finance, Council on Foreign Relations .................................... 4 

Prepared statement of Mr. Kubarych ............................................................. 34 

SUBMISSIONS FOR THE RECORD 

Iraq and Afghanistan Veterans of America, Todd Bowers, Director of Government Affairs, statement ....................................................................................... 62 

Mortgage Bankers Association, Kieran P. Quinn, CMB, Chairman, statement 62 

Veterans of Foreign Wars of the United States, Justin M. Brown, Legislative 

Associate, National Legislative Service, statement ........................................... 71 

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(1) 

SUBPRIME MORTGAGE CRISIS 

AND AMERICA’S VETERANS 

THURSDAY, FEBRUARY 28, 2008 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ECONOMIC OPPORTUNITY, 

COMMITTEE ON VETERANS’ AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:00 p.m., in Room 

334, Cannon House Office Building, Hon. Stephanie Herseth 

Sandlin [Chairwoman of the Subcommittee] presiding. 

Present: Representatives Herseth Sandlin, Donnelly, McNerney, 

and Boozman. 

OPENING STATEMENT OF CHAIRWOMAN HERSETH SANDLIN 

Ms. HERSETH SANDLIN. Good afternoon, ladies and gentlemen. 

The Committee on Veterans’ Affairs Subcommittee on Economic 

Opportunity hearing on the subprime mortgage crisis and America’s veterans will come to order. 

I would like to call attention to the fact at the outset that the 

Iraq and Afghanistan Veterans of America and Mortgage Bankers 

Association have asked to submit written statements for the hearing record, I ask for unanimous consent that their statements be 

entered for the record. Hearing no objection, so entered. 

[The statements of Iraq and Afghanistan Veterans of America 

and the Mortgage Bankers Association appear on p. 62.] 

Ms. HERSETH SANDLIN. In July 1943, President Franklin Delano 

Roosevelt recognized the need to invest in our Nation’s troops after 

their service to our country by highlighting that, ‘‘The members of 

the Armed Forces have been compelled to make greater economic 

sacrifice and every other kind of sacrifice than the rest of us and 

they are entitled to definite action to help take care of their special 

problems.’’ 

One year after this speech, President Roosevelt signed the 

‘‘Servicemembers Readjustment Act 1944,’’ which included readjustment benefits to help our veterans with education, housing, and 

employment opportunities. 

Sixty-four years later, we on this Subcommittee, find ourselves 

reevaluating that law and others to address the needs of today’s 

servicemembers, veterans, and their dependents. 

While we have held at least nine Subcommittee hearings on education and employment issues, today’s hearing gives us the opportunity to assess how the current housing market affects our veterans and determine if the U.S. Department of Veterans Affairs’ 

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(VA’s) Home Loan Programs have a role to play in addressing the 

foreclosures affecting our communities. 

This past Tuesday, Realty Track, an online retailer of foreclosed 

properties, released its January 2008 foreclosure report that highlights that the foreclosure rate has increased 57 percent when compared to the same month in 2007. 

It might be safe to say that no one on this Subcommittee has 

seen more recent foreclosure rates in his congressional district than 

Congressman Jerry McNerney in his metro area of Stockton, California, which had the second highest rate of foreclosures in 2007. 

As we will hear from our distinguished panelists today, data specific to veterans does not exist or is limited in scope leaving us with 

an incomplete puzzle. This makes it harder for us to get a good 

idea of how current mortgage problems are affecting our veterans. 

However, many of us have heard from returning servicemembers 

that we represent and veterans back home about the problems they 

have encountered. Problems such as that expressed by Mr. Marty 

DuBois, a veteran concerned about losing his home because he does 

not qualify for a VA home loan due to equity requirements. 

We have also heard several complaints from veterans residing in 

high-cost residential areas in which the current VA home loan is 

insufficient and this will effectively price them out of the market. 

As you can see on the television screen above, veterans have 

been caught in the mortgage crisis and some economic projections 

suggest that we should only expect the problem to worsen. 

The image of Mr. Hector Masas, a veteran emotional after telling 

Senator Hillary Clinton about the difficulty he has with paying his 

mortgage, was posted on yesterday’s Washington Post Express. Mr. 

Masas, and thousands of veterans like him throughout our country, 

deserve better and we must do better to ensure that they are afforded the protections they need as they adjust to life after their 

military service, which includes the stability and security of home 

ownership. 

I look forward to working with Ranking Member Boozman and 

Members of the Subcommittee to continue to improve readjustment 

benefits available to all servicemembers and veterans. 

I now recognize our distinguished Ranking Member, Mr. 

Boozman, for any opening remarks he may have. 

[The prepared statement of Chairwoman Sandlin appears on 

p. 33.] 

OPENING STATEMENT OF HON. JOHN BOOZMAN 

Mr. BOOZMAN. Thank you very much, Madam Chair. 

The topic that we are going to be discussing and hearing more 

about today certainly is a very timely topic for today’s hearing. 

Every day the media reminds us of the difficulties facing our national economy because of the subprime mortgage crisis. 

It is clear from reading today’s testimony that America’s veterans 

regardless of whether they have a subprime mortgage or not, 

whether they are current in their payments or not, will be affected 

in some way by this financial mess. 

It is also clear from our witnesses’ statements that there is plenty of blame to go around. It appears that every level of our national 

economic structure has played a role in allowing this to happen. 

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It would be easy to blame just the borrowers who fooled themselves into believing they would never be faced with increased payments or the lenders and brokers who encouraged such behavior 

with highly speculative mortgage products or big investors in Wall 

Street financial services giants who appear to have demanded increasingly risky transactions. I guess you could say there was 

enough greed to go around. 

So the question before us today is what can VA do to help veterans stuck in the mess that they are in. Under current law, their 

options are limited, but we must be careful here. The VA wisely 

has maintained its underwriting standards and as a result, taxpayers are not seeing their funds wasted. 

The VA Guaranty Program is solvent and does not reflect the difficulties in the subprime market. As we will hear from our witnesses, the mortgage business is very complex with multiple levels 

of markets, borrowers, lenders, and investors, and the potential for 

negative unintended consequences is significant. 

So we want to work hard, you know, to keep the VA program stable and financially viable so that tomorrow’s veterans will benefit 

just as yesterday’s and today’s have. 

So I look forward to any suggestions from our witnesses that 

they may have to ease the situation. 

Thank you, Madam Chair. 

[The prepared statement of Congressman Boozman appears on 

p. 33.] 

Ms. HERSETH SANDLIN. Thank you, Mr. Boozman. 

I would now like to welcome those on our panels today who are 

testifying before the Subcommittee for the first time. We appreciate 

your insights and the written statements that you have already 

submitted. 

I would like to remind all of our panelists that your complete 

written statement has been made part of the hearing record. Please 

limit your remarks to 5 minutes so that we have sufficient time to 

follow-up with questions we may have once everyone has had the 

opportunity to provide their initial and opening testimony. 

Joining us on the first panel, and I would like to invite them to 

the witness table as I introduce them, Mr. Roger Kubarych, Chief 

U.S. Economist for UniCredit Markets and Investment Banking, 

and Mr. Donald Bisenius, Senior Vice President of Credit Policy 

and Portfolio Management for Freddie Mac. 

Please let me know if I am not pronouncing your last name correctly. I appreciate both of you gentlemen being with us here today. 

We will start with you Mr.—— 

Mr. KUBARYCH. Kubarych. 

Ms. HERSETH SANDLIN. Kubarych. Okay. Very good. I have the 

emphasis wrong. Kubarych. Very good. Mr. Kubarych, thank you 

for being here. You are now recognized for 5 minutes. 

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STATEMENTS OF ROGER M. KUBARYCH, CHIEF U.S. ECONOMIST, UNICREDIT MARKETS AND INVESTMENT BANKING, 

AND HENRY KAUFMAN, ADJUNCT SENIOR FELLOW FOR 

INTERNATIONAL ECONOMICS AND FINANCE, COUNCIL ON 

FOREIGN RELATIONS; AND DONALD J. BISENIUS, SENIOR 

VICE PRESIDENT, CREDIT POLICY AND PORTFOLIO MANAGEMENT, FREDDIE MAC 

STATEMENT OF ROGER M. KUBARYCH 

Mr. KUBARYCH. Madam Chairwoman, thank you for inviting me 

and Members of the Subcommittee. 

Veterans are affected by the subprime mortgage crisis and the 

broadening financial turbulence that has developed in at least four 

ways. 

First, some veterans are directly involved because they bought 

homes financed by subprime mortgages which too often contained 

a raft of abusive terms and conditions and now they are unable to 

meet their obligations. Some may already be facing delinquency or 

even loss of their homes through foreclosure. 

Second, many more veterans are impacted indirectly as a result 

of persisting declines in home prices. One recent survey say they 

are down 9 percent over the last year. It is not good. So the equity 

they have in their homes is contracting and standards of living will 

take a hit. 

Third, all veterans are hurt by the diminished availability of 

credit because of the squeeze on banks and other financial institutions who made unwise investment decisions, suffered losses that 

are now straining to repair wounded balance sheets. 

And, fourth, veterans along with the rest of us are facing higher 

costs of energy and other imports as a result of the decline in the 

value of the dollar and the rise in commodity prices, both traceable 

in part to the erosion of confidence in our financial markets and 

our currency. These are big negative effects and they could lead to 

a business recession. 

I have been asked to try to give some historical perspective of 

how we got into this mess and I have just a few simple points that 

are not so simple. 

One, securitization of mortgages is not new. Securitization, the 

pooling of thousands of individual mortgage loans into mortgagebacked securities that can be sold to institutional investors in the 

marketplace, got started in the early 1980s. It was so good that 

within a few years, it had caught on so that over half of all mortgages were securitized. And since 1995, it has always been over a 

half. 

Secondly, securitization done prudently provides immense benefits to nearly everyone, especially borrowers. It is more efficient 

than traditional lending done as a single business when you separate out the business into three: origination of mortgages, loan 

servicing, and investing. That allows mortgage market participants 

to amass expertise, advanced technology, and to operate on a national, even global scale. 

Three, securitization could not have thrived without indispensable government support mainly from Ginnie Mae, Fannie Mae, 

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terprises (GSEs). They facilitated the bundling of loans into mortgage-backed securities by taking over the risk of loss or default of 

individual homeowners and setting high credit standards. 

Four, subprime mortgages represented an almost inconsequential 

part of the mortgage financing system until early in this decade. 

The pivotal event was when Fannie and Freddie, now stockholder 

owned and privately managed since the early nineties, lost control 

of their operations and were forced by Office of Federal Housing 

Enterprise Oversight (OFHEO) to shrink. 

Private mortgage banking stepped in, but not always prudently. 

And as a result, we saw a development of a lot of terms and conditions which on the face of it none of us would recommend our own 

children or family members would take, but people did in massive 

amounts. They were securitized and resecuritized into mortgagebacked securities, collateralized debt obligations, and other forms 

and by last year had reached 20 percent of all holdings of mortgage 

securities. 

Growth of these mortgage-related securities created a time bomb. 

We know what happened. It started last July and it has gotten 

worse. 

The next point is that the U.S. financial regulatory system was 

ill-equipped to deal with abusive lending practices of many financial institutions. Too many just fell through the regulatory cracks. 

Number eight, the rating agencies made poor judgments and 

they awarded high ratings with little or no evaluation of risk. 

Nine, institutional investors were lazy and cheap, lazy because 

they did not do their own due diligence, cheap because they did not 

hire other outside experts to help them. 

And, finally, many borrowers overextended themselves by assuming that the housing price boom would go on forever. 

What do we do next? I do not have any big program to recommend, but I do think that there is a role for specific government 

support over and above the voluntary programs that are now in 

place. 

[The statement of Mr. Kubarych appears on p. 34.] 

Ms. HERSETH SANDLIN. Thank you. 

Mr. Bisenius. 

STATEMENT OF DONALD J. BISENIUS 

Mr. BISENIUS. Thank you, Chairwoman Herseth Sandlin, Ranking Member Boozman, and Members of the Subcommittee. 

Good afternoon. My name is Don Bisenius and I am the Senior 

Vice President for Credit Policy and Portfolio Management at 

Freddie Mac. Thank you for the opportunity to address the Subcommittee today. 

Freddie Mac is a government sponsored enterprise or GSE created by Congress with a public mission, to bring liquidity, stability, 

and affordability to the Nation’s mortgage markets. 

Today’s conventional conforming market that is supported by the 

GSEs and the government market for mortgages backed by the 

Federal Housing Administration (FHA) and VA are the only wellfunctioning segments of the mortgage market. 

The GSEs like the VA do not originate mortgages. We do not control the loans that the primary market originates. What we can do, 

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however, is to define the mortgages we are willing to purchase and 

guarantee. And because of our size and continued presence in the 

marketplace, the GSEs can influence the primary market. 

Freddie Mac has participated in the subprime market as a responsible and prudent investor. We have not historically purchased 

or securitized subprime mortgages directly, but, instead, limited 

our participation to investing in the least risky segments of the 

subprime private label securities market. 

This participation reflects our charter objectives to bring additional liquidity to the market. It has also been an important contributor to our efforts to meet our U.S. Department of Housing and 

Urban Development (HUD) mandated affordable housing goals. 

In addition to providing liquidity, Freddie Mac has taken a leadership role in addressing some of the excesses of the subprime 

lending market. 

Last winter, we were the first to announce that we would restrict 

our subprime investments in securities backed by short-term, adjustable rate mortgages (ARMs) to those that have been underwritten to fully indexed, fully amortizing levels, meaning we limited our purchases of the 2/28s and 3/27 ARMs that were made to 

borrowers that were qualified at the highest interest rate for the 

full length of the loan. 

Last April, we also pledged to buy $20 billion in consumer-friendly mortgages that provide better choices for subprime borrowers. 

We have already exceeded that pledge. Since May of 2007, we have 

bought $42.5 billion of prime mortgages that financed borrowers 

whose credit profiles would have otherwise relegated them to the 

subprime market. That helped almost a quarter of a million families. 

As to the data related to veterans, we do not track whether mortgages we buy go to veterans. Further, I am not aware of any data 

that would tell us how many veterans have subprime loans. But I 

think it is fair to say that the impact of this crisis is at least as 

severe on veterans as it is on other borrowers. 

When the subprime crisis erupted as a national issue over a year 

ago, the conditional wisdom blamed the structure of the short-term 

2/28 and 3/27 subprime ARM, products where interest rates are 

fixed for the first 2 or 3 years and then adjust, the cause of the 

problem. 

The theory was that exploding interest rate resets caused large 

increases in payments and made mortgages unaffordable. We have 

come to understand that the resets are not the only, nor necessarily the most important, element of this story. 

More fundamentally, the subprime foreclosure crisis derives from 

a combination of looser lending underwriting standards and subsequent house price depreciation that makes it impossible or uneconomic for stretched borrowers either to sell or to refinance into new 

higher-balance loans as they might have in the past. 

Unfortunately, there are too many borrowers stuck in subprime 

loans who simply cannot qualify for prudent, sustainable mortgages. 

For example, as part of our subprime commitment, we developed 

our Safe Step subprime alternative product. But when we required 

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originators to validate the borrower’s income, the property’s value, 

and other information, borrowers simply could not qualify. 

At Freddie Mac, we spend a fair amount of time thinking about 

how to address this situation. And like almost everyone else, we 

have concluded that there is no silver bullet. 

Nevertheless, let me quickly suggest some things that can be 

done to mitigate its effects. Focus on servicing practices to keep 

borrowers in their homes whenever possible. At Freddie Mac, we 

have found that early intervention can help borrowers avoid foreclosure and last year, we helped nearly 47,000 borrowers keep their 

homes through early intervention. 

Help some borrowers refinance into more sustainable mortgages 

such as Freddie Mac Safe Step or the FHA Secure. 

Support community stabilization efforts of local and national 

nonprofits and State and local governments hard hit by the crisis. 

And, finally, help families transition to more affordable housing. 

Despite all of our efforts, not all borrowers can afford the house 

they are currently living in. 

The housing crisis is going to be painful and take time to resolve. 

Freddie Mac remains committed to working with Congress, the Administration, our lender partners, and other industry participants 

to find and implement effective solutions to this vexing problem. 

Thank you for the opportunity to appear, and I would be happy 

to answer any questions. 

[The prepared statement of Mr. Bisenius appears on p. 37.] 

Ms. HERSETH SANDLIN. Thank you, Mr. Bisenius. 

Let me start with a question to you both based on, Mr. 

Kubarych, what you said that we have to do something beyond just 

the voluntary steps that may be taken by certain lenders, certain 

banks. 

In each of your opinion, who is best equipped and in the best position to provide for loan modifications, for repayment plans, and 

any other foreclosure prevention initiatives? Some of which, Mr. 

Bisenius, you described as early intervention. Is it the lender? Is 

it a different entity? Should it be mandatory? What steps should 

we be taking in terms of an appropriate Federal Government response? 

Mr. KUBARYCH. So we started out with a program, basically voluntary work-outs which is affecting a relatively small proportion of 

those homeowners at risk. Until we stop the rise in delinquencies, 

there will be continued downward pressure on housing prices, particularly in those parts of the country where subprime was particularly, let us say, overused, California, Florida, Detroit, northern 

Ohio, and so on. 

Now, we can identify quite easily the people who are most at 

risk. And my simple suggestion is the U.S. Government is now borrowing money in the markets for 5 years for about 3 percent. And 

the same people, if they had to borrow on their own 5-year money, 

it would be about 12 percent. There is a big spread there. 

If the U.S. Government utilizing existing agencies, FHA, VA, and 

so on, were simply to set up a program to extend loans to individuals so they could take the money and repay abusive mortgages, 

they would be in a position to retain their houses and to maintain 

the debt service on those new loans. 

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And the taxpayer would be a beneficiary of two things. One, less 

downward pressure on everybody’s home prices, which will otherwise suppress the economy a lot, and, two, there will be a reward 

to the taxpayer from the operation of such a system. It is not as 

extensive as what we did in the depression. That was much more 

elaborate and I do not think we need that much. 

But in that expanded role, for the U.S. Government would take 

a voluntary program, add a specific government lending program 

to it that would be tailored for low- and medium-income people for 

the houses that they are living in, not for speculative or second 

homes, and all it would require is the ability to prepay those abusive mortgages. 

Mr. BISENIUS. I have maybe just two additional thoughts to his 

comments. One is what makes this problem particularly challenging is the nature of the market. Historically, with Freddie Mac 

and Fannie Mae being the two largest participants in the overall 

market, we were very capable of being able to define servicing 

standards, foreclosure prevention standards that effectively became 

adapted as an industry standard. 

In the private-label securities market, where most of the 

subprime mortgages exist, there is not one entity. There are a collection of investors who each have to independently decide what 

they want done with the loans that they have invested in. 

What we have observed is that many of the private-label security 

investors are actually suggesting, and at times requiring, that their 

servicer follow the standards set out by Freddie Mac and Fannie 

Mae. So in some sense, they are migrating to adapt our servicing 

standards both because they have observed that they have been 

pretty effective at loss mitigation and at helping homeowners stay 

in their mortgages. 

So there is not one entity that can dictate in the private-label securities market, but we are at least seeing a migration of people 

adopting Freddie and Fannie type standards. 

Ms. HERSETH SANDLIN. Thank you both for your insights. 

Mr. Boozman, do you have questions? 

Mr. BOOZMAN. Yes. 

Mr. Kubarych, could you comment on a statement that the GSEs 

lost control of their operations. I think you mentioned that and it 

was in your written testimony. 

Mr. KUBARYCH. When they first started out, they basically were 

facilitating securitization and providing comfort to investors to buy 

those securities. 

They got involved in buying their own paper and investing in 

mortgages and they got to the point where they were one of the 

biggest mortgage holders in the country. Some years, they were 

buying more than half of the product that they were generating 

and holding it themselves. They would finance that quite readily 

because they had almost as good a credit rating in the capital markets as the U.S. Government. 

But this exposed them to enormous market risk, the technical 

term is convexity risk, which has to do with the fact that you cannot really predict the repayment rates of the mortgages that they 

were holding. And they became one of the world’s biggest users of 

financial derivatives. 

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Now, that is a very tough business and they got involved in accounting problems that led to a couple of Chief Executive Officers 

leaving, a couple of Chief Financial Officers being fired, and fines 

and other constraints by the regulator, OFHEO. And that is how 

they lost control. 

And only yesterday those handcuffs have been taken off. So now 

they are viewed to have made tremendous progress toward putting 

their houses in order. 

While they were under these handcuffs, that was a great opportunity for good institutions and bad to rush into the mortgage market and do all kinds of lending which probably would not have met 

their high standards and led to this problem. 

Mr. BOOZMAN. How do you respond to that, Mr. Bisenius? In 

your testimony, to me, you did not seem to acknowledge any blame 

at all. 

Mr. BISENIUS. What I do is I separate out the phenomenon that 

was described and suggest that while it is true that the operating 

systems of Freddie Mac were not sufficient to be able to properly 

account for the nature of the business that we were taking on, that 

actually had little to do with the developments that went on in the 

subprime market. In fact, what we observed was that there were 

investors who were willing to take on loans that were riskier and 

underwritten to looser standards than what we historically would 

buy. 

That market developed outside of us and even if we had perfect 

financial books and been able to have been active, our standards 

would have been ignored over the last 3 or 4 years as other market 

participants either thought they understood the risk better or who 

were willing to put capital at risk more aggressively than we were. 

What we have seen over the last year is as those investors have 

lost money, more and more have come back to say we now want 

to originate to the standards of Freddie and Fannie. 

So I do not believe the accounting issues that Freddie and 

Fannie had are directly correlated nor causal of what went on in 

the subprime market. 

Mr. BOOZMAN. Mr. Kubarych, you mentioned regulated and unregulated financial institutions. Can you give us some examples of 

each one of those? 

Mr. KUBARYCH. Well, one example is New Century Financial. 

Based in California, but operating in many markets, it went bust 

a year ago in February. And if you were to ask who is the regulator 

of New Century Financial, I think that around the main banking 

regulatory organizations a year ago, they would have scratched 

their head and eventually maybe said that there must be somebody 

in California that was the primary regulator, but nobody really 

knew. 

That was one example. There were many others. There have 

been about 200 failures of mortgage banks of varying size not all 

of which had any regulator and some who had regulators that were 

unskilled in dealing with the kind of rapid growth in the business 

they represented. 

Now, Mr. Bernanke, Chairman Bernanke, has testified, and I 

have listened in on a number of them, where he has pointed out 

that the Federal Reserve had the responsibility for setting certain 

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rules for consumer protections and other rules of the game, guidelines for mortgage activities and abusive tactics and so on, but they 

do not have the enforcement powers. And, you know, basically nobody really wanted to take the initiative to say we want enforcement powers. 

Mr. BOOZMAN. Thank you, Madam Chair. 

Ms. HERSETH SANDLIN. Thank you, Mr. Boozman. 

Mr. McNerney. 

Mr. MCNERNEY. Thank you, Madam Chair. I want to thank you 

specifically for holding this hearing and for bringing to light the severity of the problem in my own district. 

Mr. Kubarych, I am going to follow-up on Mr. Boozman’s question a little bit concerning how we got into this situation. 

You mentioned that there was a change in behavior at Fannie 

Mae and Freddie Mac. What caused that change in behavior? Were 

there new products out there? Was there a different economic theory or was there a loosening of regulation on the Federal level? 

What caused these managers to start making those kinds of investments? 

Mr. KUBARYCH. I think that they underestimated the risks and 

they thought that they could earn higher rates of return for their 

shareholders and get bigger bonuses. I mean, I think that is what 

led them to be putting more and more of their own product on their 

own balance sheets. And I think they were kind of caught by surprise, blind-sided by just how risky it is. 

I have been managing, off and on, mortgage portfolios a good 

part of my career. It is very tough, very, very tough. It is one of 

the hardest things in the fixed-income markets to do. And they did 

it very well for periods of time. But then as the volatility in the 

markets increased in this decade, it became very difficult for them 

to do it as well as they should have. 

So I think that has been cured, but it was not easy and it has 

taken a long time. 

Mr. MCNERNEY. So it is just a difference in philosophy? I mean, 

maybe new managers came in and saw that there was some—— 

Mr. KUBARYCH. I think a difference of incentives. I think we were 

in a period where the incentives were to take more risk because the 

shareholders wanted you to carve out rates of return on equity that 

would drive the stock price up. 

Mr. MCNERNEY. Thank you. 

Mr. Bisenius, you said that you did not track veterans that are 

using the services. Is there some reason that is not done? Do you 

think it is a good idea and if it is a good idea, what are the obstacles to doing that? 

Mr. BISENIUS. I do not have a strong view on whether it is a good 

or bad idea. We have never been asked to in the past. We have not. 

The only obstacles would be whether the originator in creating the 

loan captures that as a data field and is able to deliver it into the 

delivery systems. 

Mr. MCNERNEY. So you do not have any specific ideas on that? 

Do you have any specific ideas on how we can help veterans specifically that are caught in this kind of a foreclosure situation? 

Mr. BISENIUS. Well, I think it is twofold. The good news is we 

do not differentiate either and as such we are helping all the peorfrederick on PROD1PC67 with HEARING

11 

ple who take out loans that Freddie Mac invested in, veterans as 

well as nonveterans. And, therefore, we make available to them all 

the loss mitigation efforts that I described in my testimony. 

My understanding is that the VA does similar types of loss mitigation, foreclosure prevention type efforts. So I think both the VA 

themselves, as well as Freddie Mac and Fannie Mae, are taking 

similar actions with veterans as they are with other borrowers in 

the products that we invest in and guarantee. Whether those same 

activities are occurring for veterans who are part of subprime or 

private label mortgage securities, I do not know for sure. 

Mr. MCNERNEY. Thank you. 

One more question. How helpful do you think it would be to help 

families transition to more affordable housing or to get them out 

of their expensive homes? 

Mr. BISENIUS. How helpful would it be? 

Mr. MCNERNEY. Yes. 

Mr. BISENIUS. I think it would be tremendously helpful. 

Mr. MCNERNEY. That is basically the goal? 

Mr. BISENIUS. Right. When we look at the underlying homes and 

the incomes of the borrowers who are facing some of these foreclosure situations, there is no way they have the income with almost any amount of modification to be able to afford the house that 

they are currently in. 

Mr. MCNERNEY. So we might look at that in terms of veterans 

as a part of our Committee. 

Thank you, Madam Chairwoman. 

Ms. HERSETH SANDLIN. Thank you, Mr. McNerney. 

Mr. Donnelly. 

Mr. DONNELLY. Thank you, Madam Chairwoman. 

This first question, if you could just give me a quick answer to. 

We are into this process now of working through these loans. How 

much longer do you think this process is going to go? 

Mr. KUBARYCH. You want my guess? 

Mr. DONNELLY. Yes. 

Mr. KUBARYCH. Two years. Yeah. I would bet somewhere between 2 to 5 years. 

Mr. DONNELLY. You figure we are about 25 percent into it right 

now, 20, 25 percent? When you figure the overall total is, we are 

going to hit about a $1.5 trillion of loans on this or about $1 trillion 

and that we are about $300 billion into it right now? 

Mr. KUBARYCH. Well, I figure there’s $2 trillion in loans that are 

at risk, that delinquency rates will get in the 20 to 30 percent 

range. So take 30 percent of $2 trillion. 

Mr. DONNELLY. Okay. 

Mr. KUBARYCH. Of those that go delinquent, not all of them will 

end up in foreclosure. And I think the number that seems to be a 

good one is about a third. 

Mr. DONNELLY. Okay. 

Mr. KUBARYCH. So a third times 30 percent times $2 trillion. 

Then take 50 percent of that because about half the value of the 

house is erased in a foreclosure and there are costs and all that 

kind of nonsense. And that will give you an estimate of the dead 

weight loss on the economy, but that gets multiplied through all 

the leverage in the collateralized debt obligations (CDOs). 

rfrederick on PROD1PC67 with HEARING

12 

Mr. DONNELLY. Right. The next question is, you had mentioned 

a concept, and forgive me if I phrase it wrong, but you are here 

to correct me, the government is borrowing about 3 percent. 

Mr. KUBARYCH. Yes. 

Mr. DONNELLY. Some of these loans are at about 12 percent. 

Mr. KUBARYCH. That is where they are going. 

Mr. DONNELLY. That is where they are going? 

Mr. KUBARYCH. Yes. 

Mr. DONNELLY. Your idea is let us use some of this government 

lending or borrowing power—— 

Mr. KUBARYCH. Right. 

Mr. DONNELLY [continuing]. To try to get reduced rates for the 

homeowners? 

Mr. KUBARYCH. That is right. 

Mr. DONNELLY. Okay. Now—— 

Mr. KUBARYCH. I put strings attached on the loan. 

Mr. DONNELLY. Right. And what I was wondering is, I have so 

many questions, I am trying to get them into my time here, what 

are some of those strings and then would the government continue 

to handle all the loans as well or would we have private servicers 

who handle it for us? What is your vision on that? 

Mr. KUBARYCH. I think the government is perfectly well-equipped 

to service the loans. 

Mr. DONNELLY. Okay. 

Mr. KUBARYCH. That is the least of our problem. I am sure there 

are many servicers that would be delighted to bid for the right to 

actually do the computer work. The strings are very simple. Limits 

on the ability of the homeowners that do this to borrow on their 

credit cards or entertain other kind of debt. 

It really is very similar to what we are familiar with in debtorin-possession lending. 

Mr. DONNELLY. Okay. And what that would do is some of these 

people who are going to bounce from 5-percent ARMs to 12 percent 

will be able to keep their homes? 

Mr. KUBARYCH. Yes. That is the idea. I do not know what to do 

about people that are so under water that they have huge negative 

equity. That is beyond the scope of my limited idea. 

Mr. DONNELLY. What you are looking at is a process where there 

is equity, where you look and you go this person with this income 

can handle this house—— 

Mr. KUBARYCH. They can carry the 5 percent, but they cannot 

carry the 12. 

Mr. DONNELLY. Right. Okay. Next thing I wanted to ask you 

about is, or this is almost a statement, one of the things, Madam 

Chairwoman, that is so disturbing to me in this past year or two 

is in disability claims that veterans make. 

We have a lot of vets coming back from Iraq and Afghanistan 

who wind up making a disability claim who are injured and cannot 

go back to their jobs and find themselves in this ARM situation—— 

Mr. KUBARYCH. Yeah. 

Mr. DONNELLY [continuing]. Where they have this going off in 

the next 4 or 5 months and they cannot get a hearing on their disability claim for another 7, 8 months. So they do not even have 

money to pay against where they are now and they have this ARM 

rfrederick on PROD1PC67 with HEARING

13 

going off. And it is almost a hopeless situation that these vets are 

put in in some proportion because of the disability situation that 

we face. 

Mr. KUBARYCH. As a taxpayer, I just think it is a waste of my 

taxes not to be doing that for them. 

Mr. DONNELLY. It is approximately 188 days now, I think, that 

it takes. So you can come back injured from Iraq or Afghanistan, 

not be able physically to handle your old job, and then you do not 

even have the money to make present payments on your ARM as 

opposed to the time bomb that is coming down the road. 

And then just as an aside, I wanted to mention that we had veterans in my district who are losing their jobs this June at a 

Citicorp statement processing center. And the reason they are losing their jobs is because this statement processing center is closing 

down, one of the most efficient operations in the country, extraordinary productivity, they hit all their targets, hit all their goals, because of what Citicorp did in this subprime situation. They said, 

well, sorry. We screwed up here on Wall Street in New York and 

we are closing down your 200-person processing center in South 

Bend, Indiana. You guys did a good job. You are out of luck. 

And so it is not only homeowners. It is the regular folks all 

throughout the country who have been working hard and have 

been devastated. As you said, what I see more than anything is the 

chase for a bonus. It is a chase if I can catch a couple extra points 

on return, we will get more in, my bonus will be bigger. 

Mr. KUBARYCH. Yeah. 

Mr. DONNELLY. Twenty million dollars is not enough. I need a $30 million bonus. I think that is what we are dealing with. 

Thank you, Madam Chairwoman. 

Ms. HERSETH SANDLIN. Thank you, Mr. Donnelly. 

Mr. Boozman, did you have any further questions? 

Mr. BOOZMAN. No thank you. 

Ms. HERSETH SANDLIN. If I could just pursue this a little bit further, I appreciate your willingness to give us your estimates. 

Mr. Kubarych, when you said, okay, if we could have a specific 

government lending program, 5 percent, borrow that at 5 percent 

versus the twelve. I know Mr. Donnelly probed some of the same 

questions I had, but I take it then that you think that there are 

a certain number of these borrowers, maybe a third of the 30 percent of the $2 trillion that is at risk, that are not necessarily in 

homes they cannot afford, but they just got a bad loan. 

Mr. KUBARYCH. Right. 

Ms. HERSETH SANDLIN. Do you have—— 

Mr. KUBARYCH. I cannot put it as precisely as a third. I would 

say somewhere between a quarter and a half are in loans that are 

defective—— 

Ms. HERSETH SANDLIN. Okay. 

Mr. KUBARYCH [continuing]. With abusive conditions—— 

Ms. HERSETH SANDLIN. Okay. 

Mr. KUBARYCH [continuing]. Exploding ARMs, misstatement of 

terms, many of the things that you heard of before. 

Ms. HERSETH SANDLIN. Okay. 

Mr. DONNELLY. Madame Chairwoman. 

Ms. HERSETH SANDLIN. Mr. Donnelly. 

rfrederick on PROD1PC67 with HEARING

14 

Mr. DONNELLY. This is to either of you and this follows up on the 

Chairwoman’s question. How many of these loans, what percent 

would you say, are simply you look at it and even if we fix it, the 

income just will not be able to carry it? 

Mr. BISENIUS. My best guess it would be at least a half. 

Mr. DONNELLY. So it is about half one way, half the other way? 

Mr. BISENIUS. Right. 

Mr. DONNELLY. Okay. 

Mr. BISENIUS. Actually, a point relative to the earlier comment 

is, one, with all of the recent rate cuts, the amount of payment 

shock many borrowers are going to face has actually gone down 

pretty significantly. They will still face some, but the amount of 

shock that they are going to face today is actually less than it 

would have been, say, a year ago when rates were higher. 

The challenge you have is many of these borrowers and the lenders working with them created loans where they could barely afford 

the payment at the start rate and, therefore, it is not just the 

shock. It is they could not hardly afford what they had and were 

hoping for house price appreciation to allow them to either refinance or extract equity. In the absence of that, they are now struggling just to make the payment itself. 

Mr. DONNELLY. Do you figure that in terms of the housing market and housing values that it will stay either stagnant or fall more 

until we work through this $2 trillion? 

Mr. KUBARYCH. The average will fall more. But the concentration 

of declines will still be greatest in those areas that have the disproportionate portion of subprime mortgages. 

In other words, in South Bend, Indiana, my friend John 

Brademas used to be the Congressman from South Bend. 

Mr. DONNELLY. Well, I have been blessed to follow him. And—— 

Mr. KUBARYCH. He is a wonderful—— 

Mr. DONNELLY. He set an extraordinary record. 

Mr. KUBARYCH. He is an extraordinary man. Anyway, the volatility of housing prices in most of Indiana is much less than in the 

Miami area, or in Phoenix, or Las Vegas, or Los Angeles. There is 

no doubt about it. 

But we are looking at a distribution. And there will still be parts 

of your district in which prices will go down 10 or 15 percent, even 

though the average only goes down 1 or 2 percent. 

And that is the key point here. We have a spectrum of outcomes, 

which leave a noticeable percentage of people disproportionately 

hurt. And my guess is a lot of veterans are living in those kinds 

of neighborhoods. 

Mr. DONNELLY. Thank you, Madam Chairwoman. 

Ms. HERSETH SANDLIN. Mr. Boozman. 

Mr. BOOZMAN. Again, I apologize. I had to run outside for a second for a call. But the people that were making these loans, was 

it more in an effort to figure out a product where they could make 

loans to make money, or were the people that were making them 

not devious enough to, I guess, in the sense of figuring out a product so that people could qualify, make the loan, so that you could 

do business that way, and never really feel like the ARM would 

come into play like it is now? Or is it more that they were just derfrederick on PROD1PC67 with HEARING

15 

vious, and really felt well, I am going to jack this person around 

down the line? 

But to me that really doesn’t make any sense, because that does 

have the potential of getting us in the—— 

Mr. KUBARYCH. They were in business to earn commissions. It 

was a commission-based business. They wanted to push out as 

much product as possible, because they were getting paid basically 

piece work. 

Now what happened to the mortgages that they created was that 

they were getting securitized, but not with the oversight of a 

Fannie or Freddie with the strong credit standards. 

They were being securitized. And then those securities themselves were not being sold. They became mortgage pass through securities. But no institutional investor was particularly interested in 

them, because they were—they were defective. 

But then they were repackaged. Wall Street repackaged the 

mortgage-backed securities into collateralized debt obligations. 

They were able, with rating agencies’ advice and judgment, to 

package them in such a way that trenches, in other words, parts 

of the CDOs were judged to be triple A. And other parts were 

judged to be single A. 

And lots of lazy investors, the world over and some very, very 

big, you know, well-heeled institutional investors in Asia and the 

Middle East and so on, were buying these tranches, because they 

were rated triple A without any due diligence of their own. They 

trusted the ratings. They trusted the salesforce of the Wall Street 

firms that were presenting them to them. Everybody told them this 

was a great deal. 

And so nobody checked on the base. But it goes right back down 

on the ability of the individual homeowner to keep making the 

mortgage payments. And nobody asked that question. 

And once they couldn’t make the payments, the cash flows that 

were supposed to go into the mortgaged-backed securities, which 

went into the CDOs, they evaporated. And then everybody asked: 

Gee wiz, does my CDO have bad loans in it too? Sell. 

And so then you had the normal market response to go to the 

other extreme. And that led to these fantastic losses. The Congressman, Mr. Donnelly, mentioned one institution involved in it. And 

that is why we had this gargantuan losses. 

Mr. BOOZMAN. We have seen that there is a portion of that market that was actually stretching. I would say stretching for housing, right? There were consumers who were at the fringe. And you 

were trying to figure out how do I get them into the house, because 

every year I wait, house prices were going up. And they weren’t 

able to get in. So the scenario that has been described clearly existed. There was also a subset of these borrowers who it was 

stretching for housing with kind of a hope that they could grow 

into the mortgage. And that hope got burst. 

Mr. KUBARYCH. By the way, these people had an incentive not 

to qualify people for prime loans. 

Mr. BOOZMAN. Yeah. 

Mr. KUBARYCH. Their incentive was to put them into subprime 

loans with the higher commissions. Even for people who could have 

qualified for the prime loans, had they been encouraged to do 

rfrederick on PROD1PC67 with HEARING

16 

things like give the W2 form, provide information on their bank accounts, etc. They were encouraged to say you don’t have to give me 

any proof of your income and your assets. And I will be able to 

make your decision in a day. You don’t have to wait a month or 

two. Lots of encouragement for people. 

And, you know, obviously, you know, I have friends who say, 

‘‘Well, it is the fault of the borrower. They didn’t do enough work 

on it.’’ But, all right, that is easy to say. We have to deal with the 

reality of the fact that people maybe they should have done more 

careful due diligence. But we are dealing with ordinary people not 

experts. And this was set up in a way with a lot of advertising and 

Internet support and so on. 

Mr. BISENIUS. It is—— 

Mr. KUBARYCH. It is a very—it is a very sad and shameful part 

of our financial history. 

Mr. BISENIUS. It is a portion of those borrowers that has just 

been described are the ones that I mentioned in my testimony that 

we have been able to refinance into prime mortgages. They probably would have qualified before. They fortunately still qualified 

today. 

Mr. KUBARYCH. Yes. 

Mr. BISENIUS. And we were able to get them into a prime—— 

Mr. KUBARYCH. Yeah. And we would like to see more of that happen. 

Mr. BISENIUS. Yeah. 

Mr. BOOZMAN. Thank you, both of you very much. That is very 

helpful. 

Mr. BISENIUS. Okay. 

Mr. KUBARYCH. Thank you. 

Ms. HERSETH SANDLIN. Yes. We all appreciate the insights and 

the expertise that you have brought to the table. I don’t want to 

make any assumptions about what your response would be, so let 

me ask just one final question. 

Do you think that there should be government intervention of 

some kind in regulating the market going forward to ensure that 

those who would qualify for a prime loan are always given the option, through disclosure requirements, that they would qualify, that 

they go through the steps to determine whether or not they are eligible for a prime loan? 

Mr. KUBARYCH. I believe that if we go back to time-tested common sense banking principles, we can solve this problem. And government can really help get us on that route. 

Mr. BISENIUS. I probably share the view that to the extent consumers could qualify for a prime mortgage, a GSE-eligible mortgage, it is in their best interest. And we ought to do everything we 

can to encourage that. 

Ms. HERSETH SANDLIN. Okay. I think that is along the lines of 

yes. Right. I think what you are identifying is that we have had 

some actors in an unregulated environment whereby they are not 

only operating without a regulator. But they are also seemingly operating outside of the sphere of the self regulation within the industry in terms of what the best practices have been, either on 

servicing or on disclosure. Also in some of the—— 

Mr. KUBARYCH. Right. 

rfrederick on PROD1PC67 with HEARING

17 

Ms. HERSETH SANDLIN [continuing]. You said the core principles 

in banking. 

Mr. KUBARYCH. You are right. 

Ms. HERSETH SANDLIN. Whereby some government intervention 

may be necessary at this point. 

Mr. KUBARYCH. Yeah. And we don’t want to leave it just to the 

courts. That is not an efficient way to do it. 

Ms. HERSETH SANDLIN. Thank you. Thank you very much. 

Mr. KUBARYCH. Thank you. 

Ms. HERSETH SANDLIN. We appreciate your time and testimony. 

We look forward to working with you in the future as we explore 

some of the proposals for further consideration. 

Joining us on our second panel is Mr. Anthony Agurs, member 

of the Board of Directors for the NATIONAL ASSOCIATION OF 

REALTORS® (NAR); Ms. Ellen Harnick, Senior Policy Counsel for 

the Center for Responsible Lending; and Mr. Larry Gilmore, Deputy Director, for HOPE NOW Alliance. 

Welcome to all three of you. Thank you for joining us here today 

and providing your written statements. We will go ahead. Again, 

if you could keep your opening comments to 5 minutes, as you can 

tell we have some questions. We will give you other opportunities 

after your opening statement to add further comments to questions 

that are posed or other testimony that is offered. 

Mr. Agurs, we will go ahead and begin with your testimony, you 

are recognized for 5 minutes. 

STATEMENTS OF ANTHONY AGURS, ABR, CRS, MEMBER, 

BOARD OF DIRECTORS, NATIONAL ASSOCIATION OF REALTORS®, AND REALTOR®, AGURS GROUP, EL CAJON, CA; 

ELLEN HARNICK, SENIOR POLICY COUNSEL, CENTER FOR 

RESPONSIBLE LENDING; AND LARRY GILMORE, DEPUTY DIRECTOR, HOPE NOW ALLIANCE 

STATEMENT OF ANTHONY AGURS 

Mr. AGURS. Madam Chairwoman and Members of the Subcommittee, thank you for inviting me to testify on behalf of the NATIONAL ASSOCIATION OF REALTORS®. 

My name is Tony Agurs. I am a 21-year veteran of the United 

States Marine Corps and a REALTOR® with the Agurs Group in 

El Cajon, California. 

The NATIONAL ASSOCIATION OF REALTORS® is a strong 

supporter of housing opportunities for veterans. We commend the 

Subcommittee for its attention to this important issues. I passionately believe that the American dream of home ownership is for 

anyone who desires to achieve that goal for themselves and their 

families. But especially for the soldiers, sailors, Airmen, and Marines of our Armed Forces who sacrificed so much in defense of the 

American way of life, yet we ask for so very little in return. 

Unfortunately, like many Americans, our military families have 

been hit hard by the subprime mortgage crisis. These homeowners 

are in financial crisis and need our help, because no veteran in 

high-cost areas can use their VA Home Loan Guarantee. 

We believe the Veterans Home Loan Guarantee is a valuable 

asset to help our Nation’s veterans achieve the dream of home ownrfrederick on PROD1PC67 with HEARING

18 

ership in a way that is safe, fair, and affordable. The VA Home 

Loan Guarantee Program is designed to provide veterans who are 

unable to qualify for a conventional loan with favorable terms. And 

I will go even further to say every veteran would rather use a VA 

Home Loan than a convention loan anyway. 

A study conducted in 2004 found the program did just that. The 

percentage of VA borrowers who could not qualify for a conventional loan was 82 percent for first-time home buyers, 78 percent 

for repeat borrowers. 

And in addition, the typical VA borrower could not qualify for an 

FHA loan. Sixty-one percent of VA first-time borrowers could not 

meet either the down payment or maximum debt-to-income ratio 

required to obtain an FHA loan. The VA program, therefore, offers 

unique and important benefits for helping our military families, 

veterans, and retirees achieve the dream of home ownership. 

Despite offering borrowers a zero-downpayment loan, one of the 

hallmarks of the VA Home Loan Program, the delinquency rate is 

extremely low. And according to the most delinquency rates survey 

published by the Mortgage Bankers Association, the rate was 6.58 

percent, foreclosures was 1.03 percent. In contrast, subprime delinquency rates, which were a staggering 16.31 percent and foreclosures 6.89. 

Part of the real reason is we are proud, we are disciplined, and 

we do what we are expected to do. In addition, the VA Home Loan 

Program offers protection for borrowers when financial difficulties 

occur by offering a variety of supplemental loan servicing programs 

that help military families avoid foreclosures. 

In 2007, VA accomplished more than 8,400 successful interven- tions, which translated into saving the government over $181 million in claims avoided. 

However, without reforms, this program has not served many 

veterans who could use its benefits. We urge the following three 

enhancements to the VA program. 

Increase the VA Loan Limits in high cost areas. The current VA 

loan limit is equal to $417,000. States with the largest veteran populations are California, Florida, Texas, Pennsylvania, New York, 

and Ohio. Twenty-five million veterans live in 60 percent of the 

urban areas. Thirty-six percent of them live in these high-cost 

areas out of the—four of the six States. Veterans in these areas 

should not be penalized for geographic differences in the housing 

market. NAR supports legislative efforts to increase the VA limits 

to 150 percent of the conforming loan limit. 

Ease refinancing for veterans. Some veteran homeowners, a lot 

of veteran homeowners, have risky sub-prime mortgage loans, because they couldn’t afford to use their VA eligibility. 

Veterans are required to have at least 10-percent equity in a 

home in order to refinancing it. We believe that Congress should 

reduce that down to 5 percent. 

FHA has a component that allows 3-percent equity only in order 

to refinance. In addition, the law limits the guaranty that can be 

used for a typical VA refinance loan to $36,000. 

As a result, refinancing loans of more than $144,000 will result 

in a lender not receiving the 25-percent backing from the VA. And 

as a result, probably will not do the loan. We urge Congress to 

rfrederick on PROD1PC67 with HEARING

19 

eliminate this refinancing restriction and make the maximum VA 

guaranty applicable to all VA loans. 

Permanently authorize ARMS. I know ARMS are a bad terminology in a convention sense. But for what the VA does with them, 

it makes perfect sense. And there is no prepaid penalty, because 

we know servicemembers have an escalating rate of promotion. 

And they actually get promoted on a regular basis, which helps 

them afford those programs. 

And finally, you ought to do this because of the promise that you 

made. 

I would like thank the Subcommittee for allowing me to present 

here today. The NATIONAL ASSOCIATION OF REALTORS®

strongly support housing opportunities for our Nation’s veterans 

and active-duty military professionals. 

It is our hope that the Subcommittee will support our recommendations for enhancing and improving the VA home loan 

guarantee program, so it may be a real benefit to those who have 

so bravely served our country. 

[The prepared statement of Mr. Agurs appears on p. 40.] 

Ms. HERSETH SANDLIN. Thank you very much. Ms. Harnick, you 

are recognized. 

STATEMENT OF ELLEN HARNICK 

Ms. HARNICK. Well thank you very much. I am very pleased to 

be here today. Much of what I was prepared to say was said previously by Mr. Kubarych and others. 

So rather than repeat, I think I want to pick up on two points 

that were made during the first panel. One was the point that Mr. 

Kubarych said—made that many of these loans are loans that none 

of us would encourage a family member to make. They were structured in a way that were abusive in the sense that they were designed to fail. 

And this relates to a second point that came up on the first 

panel, which is the problem that we have borrowers who are getting homes that they simply could not afford, or is the problem fundamentally caused by people getting loans that were unsustainable 

when sustainable loans were available? 

And the unfortunate and very tragic aspect of this particular crisis is that most of the borrowers who received these unsustainable 

loans, qualified for loans that would have been sustainable for 

them. 

And part of it relates to a point that was made on the first panel. 

That a number of these borrowers who received these subprime 

loans actually did qualify for prime. The Wall Street Journal did 

a study released a couple of months ago looking at loans originated 

in 2005 and 2006. These are subprime loans. And in each of those 

years, over 50 percent of the people who received these subprime 

loans actually had credit scores that would have qualified them for 

prime loans. 

And what that means in very practical terms, is that these people could have had 30-year fixed rate loans at below the cost of that 

introductory rate on the adjustable rate mortgage they got. 

And a second point worth noting is that for even—for the minority of borrowers who didn’t have the credit scores that would have 

rfrederick on PROD1PC67 with HEARING

20 

qualified them for prime, they could have gotten, even in the 

subprime market, a 30-year fixed-rate loan at a relatively nominal 

cost above the introductory rate they got, on average for an additional 65 basis points, which means, you know, there are 100 basis 

points to a percentage. So less than 1 percentage point higher than 

the introductory rate would have gotten these people 30-year fixed 

rate loans. And so a lot of the problems we are seeing now would 

not have happened. 

And it is certainly true, the comment that was made on the first 

panel, that—by Mr. Bisenius that a lot of these people, because of 

LIBOR being reduced, will face payment shock that is less than the 

payment shock that people who are currently in default—currently 

in foreclosure have faced. 

Nevertheless, they are going to face payment shock. And the 

point he made is very well taken. These loans were underwritten 

so people could just afford them at that starter rate, but just. 

And so an interest—you know, an interest rate increase of even 

just a percentage point or 1.5 percent was going to push those into 

the realm of being unaffordable. 

So that is the real tragedy here. To put numbers on what we are 

talking about, in the subprime—on these subprime mortgage loans 

alone, the expectation is that two million families will lose their 

homes to foreclosure on these unsustainable loans over the next 

few years. 

And to put a number on the sort of spillover effect that people 

have been talking about, 40 million other families who are repaying their loans on time, will suffer the consequences of their home 

prices diminishing as a result of these foreclosures. 

And I think you all are aware that there are other quality of life 

issues that become implicated. Boarded up homes on a block are 

not merely an eyesore, which would be bad enough, but they are 

also a magnet for crime which puts, you know, burdens on police 

departments. 

Children are moved from one school district to another. It puts 

burdens on the school districts. And all this happens at a time 

when the tax base is declining. 

There is one solution out there that has passed through the 

House Judiciary Committee with bipartisan support. A compromised bill was passed out of the Committee. And to get the bipartisan support, it was narrowed very much to make sure that it 

would relate only to those loans that will end in foreclosure. 

It guarantees the lender at least what they would recover from 

a foreclosure sale. And it is all done under the supervision of the 

courts in an existing system under the bankruptcy court system. 

This is H.R. 3609. And I would urge you to look at this. Although 

it would help everyone, not vets alone, it will help everyone including vets. 

And I do believe—well, we will hear about some voluntary efforts 

that have been underway. There have been many programs since 

May of 2007 and most recently the Hope Now Program. These are 

good programs. They will help some people. But they are not going 

to address the problems sufficiently. 

Foreclosures are outstripping loan modifications by 13 to 1 on 

these loans we really need to see modified. 

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Thank you. 

[The prepared statement of Ms. Harnick appears on p. 45.] 

Ms. HERSETH SANDLIN. Thank you very much for your testimony. 

Mr. Gilmore, you are recognized. 

STATEMENT OF LARRY GILMORE 

Mr. GILMORE. Madam Herseth Sandlin and Ranking Member 

Boozman, thank you for the opportunity to testify today. 

My name is Larry Gilmore. And I want to tell you how the 

HOPE NOW Alliance is making real progress to reach at-risk 

homeowners, including veterans and active personnel to find solutions to prevent foreclosures. 

The HOPE NOW Alliance is made up of a very diverse group of 

organizations, which includes counselors, lenders, investors, other 

mortgage market participants as well as key trade associations. All 

focused on at-risk homeowners with the goal to provide solutions 

to avoid foreclosure. 

We now have a total of 27 loan servicers who are active participants that make up over 90 percent of all subprime service loans 

and a good portion of prime service loans. 

We also have a strong group of counseling organizations that are 

active participants. That includes NeighborWorks, which represents over 240 on-the-ground grass-roots committee organizations, as well as the Home Ownership Preservation Foundation, 

which serves to facilitate all the calls that come through our national HOPE Hotline. 

The members of HOPE NOW are committed to producing results. 

Loan servicers who join HOPE NOW commit to a statement of 

principles, which includes assisting distressed homeowners to remain in their homes. 

My written testimony contains those principles, which include 

contacting and assisting at-risk borrowers 120 days prior to any adjustable rate mortgage resetting. That also includes servicers working to provide counseling agencies toll-free 1–800 numbers, fax 

numbers, and email addresses to increase communication with 

servicers. 

We are also publicizing a list of phone numbers of HOPE NOW 

servicers that consumers can call to receive help. In fact, Financial 

Services Committee Chairman Frank and Ranking Member Bachus 

recently sent a ‘‘Dear Colleague’’ letter to House Members to alert 

them of these numbers. 

The major challenge is that borrowers in trouble are reluctant to 

ask for assistance. It has been stated that over 50 percent of borrowers who go into foreclosure have very little to no interaction 

with their servicer. We are attempting to make a difference in that 

space. 

HOPE NOW has an aggressive monthly direct mail outreach 

campaign to at-risk borrowers. This effort is in addition to thousands of letters and telephone calls that servicers make on their 

own to customers. 

We have seen major results with this campaign. This campaign 

has been in place since November of 2007. And to date, we have 

sent out over 100—excuse me, over one million letters to borrowers 

who are 60-plus days delinquent. In November, we experienced a 

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22 

response rate of 16 percent, in December a response rate of 21 percent. And this response rate is a lot higher than the typical response rate servicers receive on their own of 2–3 percent to letters. 

And so we are increasing contact we are having with borrowers 

who are most at risk of going into default. HOPE NOW is actively 

reaching out to borrowers and providing counseling services, mainly through our national HOPE NOW—excuse me, HOPE Hotline, 

888–995–HOPE. This hotline is managed by the Home Ownership 

Preservation Foundation. We are currently averaging over 4,500 

calls per day that go into this counseling hotline. 

And we have over 400 counselors who are ready to assist borrowers 24 hours a day, 7 days a week, providing counseling services in English as well as in Spanish. 

To date, the HOPE Hotline has received over 456,000 calls, 

which led to counseling for over 165,000 homeowners. The call volume has increased nearly ten fold between the first quarter of 2007 

and the fourth quarter of 2007. More homeowners with adjustable 

rate mortgages are also calling. Forty-eight percent of callers in the 

fourth quarter of 2007 compared to only 34 percent the first quarter of 2007. 

The Home Ownership Preservation Foundation also has an exciting partnership with the USA Cares to assist families of activeduty military personnel. To date, they have assisted 154 families 

by making back mortgage payments. And 130 loans have been reinstated and 24 are in repayment plans. I provided a few of these examples in my written testimony. 

The Bush Administration, during his State of the Union Address, 

spoke directly about the HOPE NOW Alliance initiative as well as 

Secretary Paulson with the Department of the Treasury. And Secretary of HUD Jackson also speaks to encourage borrowers to use 

this hotline. 

We strongly encourage Members of Congress to continue to encourage borrowers to call this hotline to ask for assistance. 

NeighborWorks also worked with the Ad Council on anational 

television, radio, and print advertisement campaign to encourage 

homeowners to also call this hotline. In addition to these efforts, 

we have other efforts where we are directly targeting borrowers on 

the ground, providing assistance. 

Over the next 4 months, we are going to be in multiple markets 

across the country where we are focused on providing assistance to 

assist borrowers through having our servicers meet with borrowers 

face to face on the ground. And we are starting this campaign in 

California next week, on March 3rd, in Riverside. And then we are 

moving to Anaheim on March 5th and concluding in Stockton, California. And we are working directly with local non-profit agencies 

on the ground in our servicing community. 

With that said, I will conclude my comments. Again, we appreciate you allowing HOPE NOW the opportunity to speak. And we 

can talk a little bit later hopefully in regards to data results. 

[The prepared statement of Mr. Gilmore appears on p. 51.] 

Mr. DONNELLY. Thank you very much. And I would like to turn 

it over to Ranking Member Boozman. 

Mr. BOOZMAN. Thank you very much. Ms. Harnick, you note the 

need for policy action to realign the interest of people who buy 

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23 

homes, institutions that provide the loans, and the entities that invest in the mortgages. 

What would be the central feature of the policy that you are talking about? How do we do that? 

Ms. HARNICK. Well, in order to address that issue, what we need 

to do is when we say ‘‘misaligned incentives,’’ what we are speaking of is a state of play now. What Mr. Kubarych was saying the 

broker is—just has an incentive to just make a commission. 

And the Wall Street investor has an incentive to get the most return on the loan. And all of this operates without regard to whether you are putting the borrower into a loan that is going to be sustainable over the long term. 

And so for the aspect of the policy that we are referring to there, 

what you need is to mandate sensible underwriting standards, ensure that borrowers are put into loans that they can actually afford 

to remain in over the long term, and make sure that responsibility 

for that translates to all the market actors who would have an incentive to either behave consistent with that or not. 

Mr. AGURS. Mr. Boozman, there is another part to that. Being 

one of the guys who is on the ground with the borrower, with the 

home buyer, driving them around in my car, and looking at homes 

and everything else, people are desperate for home ownership. 

But on the other side, when the prime and conventional lenders 

disenfranchise whole segments of a population, people have to go 

someplace, because they want the dream of home ownership. When 

the prime lenders block them out and disenfranchise them, and 

when they—when they—when the FHA and the VA programs are 

so low that they can’t even use those tools that are designed to help 

those segments of the population, people have no choice but to fall 

to the subprime market. 

So part of everything that is going to help solve that problem, let 

us not forget about how people are being disenfranchised. The 

prime and conventional lenders also are going to have to look at 

that to open up their window a lot more to allow these people who 

are desperate for home ownership all across America achieve that 

dream as well. 

Mr. BOOZMAN. How do you respond to that, Ms. Harnick? I guess 

what you are saying is that because the prime standard is too 

high? 

Mr. AGURS. Yes, sir. 

Ms. HARNICK. Well I am not sure. I wouldn’t diagnose the problem that way. I mean, I think the two fundamental problems we 

face today are one, how do we ensure that the kinds of loans that 

have been made don’t get made going forward. 

And, two, how do we deal with the people who are in those loans 

today? 

Mr. BOOZMAN. Right. No. I think what he was saying was that 

in the future we have got the problem that we are dealing with 

now. 

Ms. HARNICK. Yes. 

Mr. BOOZMAN. And I think you have addressed that well. On the 

other hand, he is saying that there, and again, I am not putting 

words in your mouth. But my understanding was there is such 

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24 

pressure from people that don’t quite qualify for the prime qualifications. 

Ms. HARNICK. Mm-hmm. 

Mr. BOOZMAN. What do you do about those people in the future? 

Ms. HARNICK. Well you can make responsible subprime loans. 

You can lend to people who don’t qualify for prime loans. It is just 

that you need to ensure that the terms of those loans are not going 

to doom them to fail. 

Mr. BOOZMAN. Right. I agree. That is very good. Thank you. 

Ms. HERSETH SANDLIN. Mr. Donnelly. 

Mr. DONNELLY. Thank you, Madam Chairwoman. In regards to 

H.R. 3609, it would be good for the borrowers, good for the lenders 

too? 

Ms. HARNICK. Is that the question? Yes. 

Mr. DONNELLY. Yeah, that is the question. 

Ms. HARNICK. Yes, Mr. Donnelly. 

Mr. DONNELLY. Does it work for both ends? 

Ms. HARNICK. I think that is absolutely right. The way the bill 

has been narrowed to get the bipartisan support it needed in Committee, the bill will only apply—the only loans that will be subject 

to modification are those loans that would end in foreclosure. 

And the way they accomplish that is you have to pass—the borrower has to pass a means test. So you look at the homeowner’s 

monthly income. And then you make a deduction for modest living 

expenses set by the IRS. And if the homeowner has enough money 

left over to pay the mortgage, they have to pay the mortgage. They 

can’t benefit from this help. 

The help is available only for those families who will lose the 

home in foreclosure without modifying the loan. And so what the 

bill does is it says we will guarantee that the modification is structured in a way that the lender will get at least as much as they 

would get from the foreclosure sale. 

Mr. DONNELLY. So why would a lender object to that? 

Ms. HARNICK. Well—— 

Mr. DONNELLY. If there is any reason. 

Ms. HARNICK. I mean, I think—— 

Mr. DONNELLY. If they are going to come out with a decent loan 

as opposed to one that goes underwater and sinks. 

Ms. HARNICK. I think it is very difficult frankly to articulate a 

reason why this outcome is not good for the lender. That is all I 

can say. 

I know that there are different—servicers sometimes have different incentives. And that is part of the problem. But there is not 

a good reason. 

And, in fact, what I think everyone recognizes is that the only 

way to avoid these foreclosures is to modify these loans so that 

they are sustainable. 

And everyone recognizes that to go to foreclosure sale, where a 

lender gets liquidation value at best after incurring substantial 

costs, often having to maintain the property for the 2 years it could 

take to complete the foreclosure, it is very difficult to see why guaranteeing market value paid back at a rate that is above prime— 

it is prime plus a risk premium to account for the fact that this 

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25 

is a risky borrower, it is very difficult to see why that is not at 

least as good an alternative to a liquidation sale. 

Mr. DONNELLY. Okay. And, Mr. Agurs, in my home State of Indiana, in 2003, there were about 8,000 VA loans made. 

Mr. AGURS. Mm-hmm. 

Mr. DONNELLY. In 2007, 2,000, about 25 percent of what there 

was just 3 or 4 years earlier. Is that because you think a lot of 

these vets were steered into some of these loans, or how would you 

explain that kind of a drop? 

Mr. AGURS. Mr. Donnelly, I will use California as an example. 

Mr. DONNELLY. That would be great. 

Mr. AGURS. That is the State that I am in. Our median home 

price in California is $588,000. The maximum loan amount on a 

VA loan is $417,000. 

Mr. DONNELLY. So they can’t be used. 

Mr. AGURS. It can’t be used. And even if we roll that back a few 

years, when the VA loan guarantee was $240,000, the only way for 

somebody to own a home that was a veteran who had a VA certificate of eligibility—and I will say that is one of the most important 

things that we as veterans look to is that VA guarantee, is to go 

outside of that arena. And one of the hallmarks is the 100-percent 

financing on the VA dollar down ability to purchase a home. 

Most of our active-duty servicemembers and veterans don’t have 

3-percent, 5-percent, 10-percent, or 20-percent downpayment to become a homeowner. But because of the promise, because of the 

guarantee, we absolutely believe that the VA—the VA home loan 

guarantee is a very best bet. But because of the low limits, not only 

can they not afford it, and to a great degree a lot of the lenders 

don’t even understand the VA program. 

And I will say as a result of that, they send them somewhere else 

where they would find it an easier fit to help them achieve the 

dream of home ownership, yet there is ramifications on the backside of it, which is what we are seeing right now. 

Mr. DONNELLY. So do you think it is a fair statement to say that 

with a lot of the vets, the price of the homes just start to get so 

much that they couldn’t stay in the game? 

Mr. AGURS. Absolutely. 

Mr. DONNELLY. And that is probably—do you see that as one of 

the main reasons for the drop? 

Mr. AGURS. I see it as one of the main reasons for the drop. And 

the other reason for the drop, if you look on part of it, bottom line 

it is more profitable for lenders to do a conventional or FHA loan 

than it is to do a VA loan. 

Mr. DONNELLY. Okay. And then, Mr. Gilmore, in regards to the 

HOPE NOW, and we appreciate everything that has been done in 

regards to that and everybody who is participating. 

With servicers, we talked about starting 60 days before. Do you 

think it would help even more if they started contacting these 

homeowners 6 months before the ARM goes off to get in touch with 

them and say, okay, what product can we work with? What is a 

price point for you, as opposed to 60 days? I know 60 days may 

sound like a lot to some. But to others when you have four kids 

running around and you have other bills you are working on, that 

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26 

can sometimes be a very short time frame for the largest investment you will ever make in your life. 

Mr. GILMORE. Yeah, definitely, the earlier the better. And actually in our statement of principles, all of the servicers agree to contact borrowers who are in adjustable rate mortgages 120 days prior 

to loan reset. And so that is close to 6 months. 

But the earlier they can contact that borrower to inform them 

that that rate is going to change, they can better prepare that borrower to either refinance into another product or change the situation where they can prepare for the loan resetting. 

Mr. DONNELLY. You know, I am fortunate enough to also be on 

the Financial Services Committee. And I can tell you that a large 

number of the Members of that Committee look at that 6-month 

timeframe as the timeframe that really provides both the lender, 

or the servicer rather, and the homeowner with the time to get in 

contact with the homeowner, who is probably nervous and scared 

anyhow, and hears from the bank, or hears the bank’s name, and 

wants to put the phone under the bed and pretend it didn’t ring. 

Mr. GILMORE. Right. 

Mr. DONNELLY. And so you have to spend some time just talking 

just to get them to talk to you. And so many of us look at that 6- 

month timeframe as one that provides an appropriate time to start 

working on these things. 

Mr. GILMORE. That is good to know. The good thing about the 

HOPE NOW Alliance, what we are attempting to do is really set 

the floor for the servicing industry. And the good thing is many 

servicers have established their own best practices. But we have a 

number of members who are participating. And that is something 

we could take back as a potential option for the Alliance members 

to consider. 

Mr. DONNELLY. If you would—I would appreciate it, because it 

doesn’t cost you anything more. You just have to get engaged a little bit earlier. Thank you, sir. Thank you, Madam Chairwoman. 

Ms. HERSETH SANDLIN. Thank you, Mr. Donnelly. 

This may have been mentioned while I had to step out. Mr. 

Agurs, I think you will be happy to know, and you maybe already 

know, that there have been bills introduced already including from 

Chairman Bob Filner and Ranking Member Buyer of the full Committee that include some of the provisions that you have identified 

and recommended as improvements to the VA Home Loan Guarantee Program. We appreciate the recommendations that you have 

made today. 

I would like to pursue a little bit further, separate from what 

H.R. 3609 includes, Ms. Harnick, do you think that we need to approach the problems that we are seeing in a way that makes a distinction between those who are in trouble that would have qualified 

for a prime loan and those who wouldn’t have? 

For example, what is your response to the idea of a specific government lending program that gets us away from the 12-percent 

interest versus the 5 percent? Should we target that to the people 

who wouldn’t have qualified for a prime loan? Do we require the 

lenders to refinance and do loan modifications with those that 

would have been eligible for a prime loan? What are your thoughts 

on that? 

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Ms. HARNICK. The distinction between someone who would have 

qualified for prime and not, we should also remember that there 

are those who would have qualified and could have afforded a 30- 

year fixed rate subprime loan as well. But I don’t know that that’s 

the key distinction. To answer the question about this idea of refinancing, having a refinancing option, I think it is certainly very 

much worth looking at. I think as we said on the first panel, it is 

an option that makes sense for borrowers who have equity in their 

homes. If you tried applying that option to borrowers who were upside down, as they say, where they owe more than the home is 

worth, then what you have is the taxpayers transferring money to 

the lenders to pay them the fair market value on a loan that is 

only secured, pay them more than the fair market value on the 

loan. 

So I think it is a solution that is definitely worth thinking about 

for people whose problem is not that their loan is worth more than 

their home. I think that for people whose loan is worth more than 

their home, I think what you want to see is a modification of that 

loan that would get the lender what they would get if it was sold 

at foreclosure, which is the option, get them at least that. But you 

may as well get that for them in a way that keeps the family in 

the home because not only does it benefit that family, but it helps 

avoid the decline in the rest of the neighborhood. 

Ms. HERSETH SANDLIN. Mr. Hall. We have been joined by Mr. 

Hall from New York, also another Subcommittee Chairman. Did 

you have questions for witnesses? 

Mr. HALL. Thank you, Madam Chair, and Ranking Member 

Boozman. And I apologize to both of you and to the witnesses for 

being late. I am, as are many of us, double and triple booked. And 

I just had one question I guess, and forgive me if it’s already been 

asked. But I guess first for Mr. Gilmore, are the problems affecting 

active-duty veterans who are returning soldiers different from 

those affecting the Guard and Reserve? 

Mr. GILMORE. That is a good question that I really do not have 

an answer for. Our effort is really designed to assist all borrowers 

who are in delinquency and who are headed to foreclosure. And we 

have not done any specific analysis to separate how veterans and 

active-duty workers are assisted compared to all borrowers, all of 

those borrowers who are headed toward delinquency. 

Mr. HALL. Anybody else, Ms. Harnick? 

Ms. HARNICK. You know, I—— 

Mr. HALL. I am just curious because in my, well, in all of our districts, but in my district in particular there is a deployment, redeployment, redeployment of Guard and Reserve, as if they were active duty. And many of these soldiers live in very different circumstances from active-duty people who are on a base. And I think 

they are, you know, leaving jobs and homes that they did not think 

they were going to be taken away from for a year or two at a time. 

And their families are under financial and other stress that I 

would imagine it would translate into the danger of foreclosure. 

But—— 

Ms. HARNICK. Well the one thing I could say is that some of the, 

the way these loans were structured that was so dangerous, some 

of those aspects are particularly problematic for servicemembers, or 

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28 

people who are called up in the Reserves. So that for instance, the 

prepayment penalty, the loans are structured so that if you pay the 

loan off before the rate jumps up you have to pay a fine for that. 

And that is hard for anybody. But I would, anecdotally, what I 

have heard from veterans is that it is particularly difficult for people who have a military career because they move so much. They 

are often called upon to move before the rate resets, which means 

they are going to have to pay a prepayment penalty. And it is, 

these are pretty expensive. In fact, they are so expensive that typically people pay them, in the subprime market anyway, pay them 

by increasing their loan balance to cover the new fine they have to 

pay on top of repaying the loan. So things like that I think are particularly problematic for people who are called upon to move. Particularly when they move on short notice. 

Mr. GILMORE. Mr. Hall, I can give you a more specific answer to 

that as well. In regard to active duty, plus the Guard and Reserve 

who are called to active duty, I think that if you look at using a 

more judicious use of the Soldiers, Sailors, and Airmen’s Relief Act 

it will have a lot more teeth in it that will help our active duty and 

Reserve folks who are in these issues right now. And I do not think 

that has really been explored, using that effectively. 

Mr. HALL. So it seems that as with other issues that we try to 

help veterans deal and help the VA deal with, that information and 

outreach is probably one of the key components to make sure that, 

that the veterans or soldiers, servicemen and women are educated 

as much as possible about the options that are open to them, or the 

ones they shouldn’t take. And also, that we probably should be 

doing more to educate lenders about their responsibility, or their 

patriotic responsibility, I think, to treat our veterans or our soldiers 

fairly in this regard. Some of it is bully pulpit and education, as 

well as—— 

Mr. GILMORE. When the Servicemembers Civil Relief Act is specifically designed to help active duty and Reserve component 

servicemembers specifically for situations like this. 

Mr. HALL. Thank you very much, Madam Chair. 

Ms. HERSETH SANDLIN. Mr. Boozman, did you have any further 

questions? I have one follow-up in terms of the distinction, in terms 

of where the problems become more manifest, active-duty servicemembers versus National Guard and Reserve. I know, Ms. 

Harnick, you talked about some of the anecdotal evidence you are 

hearing in terms of the number of times that active-duty personnel 

move. Are any of you aware of any type of evidence similar to what 

we were hearing a couple of years ago in the payday loan industry? 

An unregulated area where servicemembers were the targets of 

some predatory lending? There are allegations about that in terms 

of where they were setting up right outside of bases. Do we have 

any evidence to suggest this? I know we have heard different testimony today in terms of how we got to this problem. Servicemembers and their families were being identified by some of those 

operating in the unregulated sphere of pushing the product in 

terms of the adjustable rate mortgages for those higher commissions. Is there any evidence? 

Ms. HARNICK. Well I can say this, and again it is going to be just 

anecdotal evidence. But I know, I have a vet who works with me 

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29 

and he is constantly getting mailings that are aimed at veterans 

that are, you know, come from subprime lenders. And I have seen 

some of the ads for some of the subprime lenders that specifically 

target, you know, they call them patriot loans or things like this, 

and that meant to particularly target veterans. But this is simply 

anecdotal. 

Ms. HERSETH SANDLIN. Is that for people who have separated 

from service? Or? 

Ms. HARNICK. I am sorry, I cannot answer that. 

Ms. HERSETH SANDLIN. Well, I appreciate your testimony and responses to our questions. There may be some follow up in written 

form, but thank you again for being here before the Subcommittee. 

We appreciate the good work that you’re doing in the industry and 

the insights that you have offered to us here today. Thank you. 

I would now like to invite panel three to the witness table. We 

have one final witness here on our third panel today. We invite her 

back to the Subcommittee, Ms. Judith Caden, Director of Loan 

Guaranty Service for the U.S. Department of Veterans Affairs. 

Thank you for being here. Thank you for your written statement, 

and you are recognized for 5 minutes. 

STATEMENT OF JUDITH A. CADEN, DIRECTOR, LOAN GUARANTY SERVICE, VETERANS BENEFITS ADMINISTRATION, U.S. 

DEPARTMENT OF VETERANS AFFAIRS 

Ms. CADEN. Thank you for the opportunity to appear here today 

to discuss the subprime mortgage crisis and America’s veterans. As 

we have been hearing, subprime is a generic term to describe mortgage loans with interest rates higher than prime rates. The 

subprime loans that are causing the current crisis usually have 

several layers of risk associated with them. These layers of risk are 

generated by a combination of one or more factors, such as lack of 

income verification, lack of asset verification, lack of underwriting, 

low borrower credit scores, large margins, low teaser rates, etc. VA 

Guaranty Loans, on the other hand, have none of these characteristics and have carried an average borrower Fair Isaac Corporation 

(FICO) credit rating of around 680 as opposed to the subprime average of below 620. 

Credit losses mounted from the record setting losses of the 

subprime loans made in 2000 and since, and secondary market investors recognize this risk and have priced the potential losing 

money on future investments to the point where originators of 

subprime mortgage loans could no longer afford to sell them. This 

lack of liquidity in the secondary market has had a tremendous impact on the ability and desire of lenders to originate subprime 

loans. 

Again, VA guaranteed home loans are not subprime products. VA 

guaranteed home loans must be written and made in accordance 

with our credit underwriting standards. Lenders underwriting VA 

loans must ensure that the contemplated terms of repayment bear 

a proper relation to the veteran’s present and anticipated income 

and expenses, and that the veteran is a satisfactory credit risk. The 

VA program has faired well in recent years with regard to foreclosure rates. According to data from the Mortgage Bankers Association, between the third quarter of 2005 and the third quarter of 

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30 

2007, VA’s serious default rate declined while all other mortgage 

types, including prime loans, rose. 

That said, we do operate in the broader mortgage marketplace 

and will be collaterally affected by the subprime turmoil currently 

affecting the market. This collateral effect will generally be the result of declining housing prices. With additional foreclosed homes 

on the market, a glut of new construction available, and weak demand, the inventory of unsold homes has risen. Concurrently, credit has tightened as investors withdraw funds from the mortgage 

market, causing even some well qualified buyers to experience difficulties in obtaining new mortgages. With supply now exceeding 

demand, prices for homes have naturally declined. In the current 

marketplace there are fewer borrowers able or choosing to purchase 

homes and therefore fewer opportunities to sell homes. We expect 

that the deflation in house prices will eliminate certain foreclosure 

avoidance tools that were previously available to us, especially the 

ability to sell a property to prevent foreclosure, with the net result 

being more foreclosures. 

For veterans who have obtained a VA guaranteed home loan we 

can offer supplemental servicing assistance during times of financial hardship and default. When we receive notice that a veteran 

borrower has become seriously delinquent we take an active role in 

working to avoid foreclosure. We intercede on his or her behalf 

with the loan holder. And we work to make them get mortgage 

payments that they can handle. There are other alternatives that 

we also work on. I think it was already mentioned that we were 

able to intervene in over 8,000 instances. We kept those veterans 

in their homes. For a veteran or servicemember who has obtained 

a subprime loan we can offer general advice and guidance through 

our nine regional loan centers, and they have been getting some 

calls. But there really is nothing we can do on their behalf with a 

lender. Regrettably, there are veterans who have subprime mortgages who will be adversely affected by the subprime crisis. We are 

authorized to guarantee refinancing loans, however I think, as you 

have already heard, there are limits on those loans and what we 

can do. There has to be an equity position and they are effectively 

limited to $144,000. 

We are proud of the success of the VA Home Loan Program in 

helping veterans obtain and retain homes. While we have expanded 

and modified over the years we have retained sound underwriting 

criteria. 

Madam Chairwoman, that concludes my testimony and I look 

forward to answering any questions you or the Committee may 

have. 

[The prepared statement of Ms. Caden appears on p. 59.] 

Ms. HERSETH SANDLIN. Thank you, Ms. Caden. The Home Mortgage Disclosure Act does not require veteran status to be collected 

as part of the applicant’s data. What are your thoughts? Do you 

think we should, in light of some of what we heard in some of the 

earlier panels, relating to going forward with making sure that if 

we make any modifications to the VA Home Loan Guaranty Program that they are well-informed changes that can be sustained in 

light of what else is happening in the current housing market? 

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What are your thoughts? Do you think it is worthwhile to collect 

that data? 

Ms. CADEN. I think that would be very helpful. We have been 

asked, just like many others, about how many veterans are affected 

by what is going on right now. We cannot answer that question, 

and really no one can because that is not a demographic that is collected. So I certainly think it would be helpful. 

Ms. HERSETH SANDLIN. Do you think it would be helpful to respond to some of the questions we are getting about how many veterans are affected? Also, perhaps upon application, if a particular 

veteran is either denied a prime loan or moves and is looking to 

finance another home? An application that would give you data to 

access to be able to outreach and share information about the VA 

Home Loan Program? 

Ms. CADEN. I think it would. We could certainly be more communicative with veterans because we would know who they are, where 

they are, and what they are doing. The education and the outreach 

are very important. We work mostly through the lenders and the 

real estate agents to inform veterans of the VA program and make 

sure they are aware of it. Certainly if they are asking that question 

and it is being disclosed up front, that is an opening to start to talk 

about the Home Loan Program. 

Ms. HERSETH SANDLIN. Mr. Boozman. 

Mr. BOOZMAN. In follow up, if you did that would that help you 

with knowing if veterans were being targeted? 

Ms. CADEN. I would think it would. We would be looking at what 

types of loans they are getting and also at the denial rates. 

Mr. BOOZMAN. Yeah, I think that would be very helpful. 

Ms. CADEN. I think it would. 

Mr. BOOZMAN. All of our witnesses have done a very good job of 

telling us and really helping me understand a lot more about the 

problem as to why we are there and things. The reality is that we 

are there. If, in your opinion, what kind of a PAYGO problem 

would we run into if we authorized VA to refinance loans for properties with a 10, 15 percent negative equity as long as they were 

current on their payment? Would that be a big PAYGO problem or 

not? 

Ms. CADEN. I do not believe it would, especially if there were certain parameters of how much VA’s payment would be, and also if 

we were still underwriting the loans and making sure the veterans 

qualify. And I think we would. 

Mr. BOOZMAN. Do you have any opinion as to whether or not that 

would be a worthwhile thing to do, or? 

Ms. CADEN. In my personal opinion, looking at what is happening right now, I think it would be worth looking into. 

Mr. BOOZMAN. Mm-hmm, very good. That is really all the questions that I have, Madam Chair. 

Ms. HERSETH SANDLIN. Thank you, Mr. Boozman. In light of 

what we heard from Mr. Donnelly, and I think you were here during his questions, and when we see the data and the fewer number 

of not only foreclosures, which is a good thing, but of the guarantees. Is the number too low? You know that there have been bills 

introduced, and we may be having a legislative hearing to get your 

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32 

troduced. Is your sense that in light of what has been happening 

in the current housing market, particularly in the States that were 

cited earlier that have a very high veteran population, where those 

home values have been and the trend upward that we have been 

seeing until the current housing crisis in those communities, is it 

too low? Do we need some more flexibility as it relates to the equity 

restrictions or the total amount that can be guaranteed? 

Ms. CADEN. Well, certainly in the area of the regular refinancing loans because those are limited to the $144,000 and require an equity position. In today’s market, that’s probably not realistic, in my 

opinion. Even with the $417,000 effective loan cap, I think there 

are areas where veterans are not able to utilize their earned benefit because of that. 

Ms. HERSETH SANDLIN. Okay. I think that is the only question 

that I have for now as well. Again we look forward to working with 

you as we work toward addressing some of the proposals that we 

have heard today, and some of the bills that have been introduced, 

as we take a closer look at those. The Subcommittee is interested 

in your insights, in addition to what we heard from Mr. Bisenius 

with what some of the GSEs have done in terms of the servicing 

standards. It is clear here, as well in terms of what the VA has 

done in intervening on behalf of the borrower with the lender as 

well as some of the suggestions that were made with regard to 

FHA and other programs that have been very useful to many borrowers, that there is a way that we can find different mechanisms 

that do not overreach. Rather, working with existing programs, 

working with the mortgage industry, to find a way to help borrowers in different situations. 

Mr. Donnelly made a very good point earlier about the fact that 

many of our veterans are in this discrete subgroup that are waiting 

for disability ratings and compensation. That would help alleviate 

some of their problems in the short term. One of the recommendations of Ms. Harnick in her written testimony was protection for a 

year for veterans, perhaps, or at least for some period of time. We 

have addressed some of that in the Subcommittee previously. We 

appreciate your expertise and the information that you consistently 

provide to the Subcommittee and members of our staff. I thank you 

for joining us and for your testimony, and I look forward to working with you. 

I do want to commend, in particular, all of the staff at the VA 

for being such staunch advocates for our veterans on a whole host 

of issues, but particularly with how they are getting caught in the 

mortgage crisis that the entire country is experiencing right now. 

We value everyone’s expertise and insights that they offered, and 

interest in today’s topic. Thank you, Ms. Caden, we look forward 

to seeing you again soon. Thank you to all of our panelists today. 

The hearing stands adjourned. 

[Whereupon, at 3:45 p.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

Prepared Statement of Hon. Stephanie Herseth Sandlin, Chairwoman, 

Subcommittee on Economic Opportunity 

In July 1943, President Franklin Delano Roosevelt recognized the need to invest 

in our Nation’s troops after their service to our country by highlighting that ‘‘the 

members of the armed forces have been compelled to make greater economic sacrifice and every other kind of sacrifice than the rest of us, and they are entitled to 

definite action to help take care of their special problems.’’ One year after this 

speech, President Roosevelt signed the Servicemember’s Readjustment Act of 1944, 

which included readjustment benefits to help our veterans with education, housing, 

and employment opportunities. 

Sixty-four years later, we in this Subcommittee find ourselves reevaluating that 

law and others to address the needs of today’s servicemembers, veterans and their 

dependents. While we have held at least nine Subcommittee hearings on education 

and employment issues, today’s hearing gives us the opportunity to assess how the 

current housing market affects our veterans and determine if the VA’s home loan 

programs have a role to play in the closures affecting our communities. 

This past Tuesday, RealtyTrac, an online retailer of foreclosed properties, released 

its January 2008 foreclosure report that highlights that the foreclosure rate has increased 57 percent when compared to the same month in 2007. It might be safe to 

say that no one in this Subcommittee has seen more recent foreclosure rates in his 

Congressional district than Congressman Jerry McNerney where his metro area of 

Stockton, California, was ranked the second highest rate of foreclosures in 2007. 

As we will hear from our distinguished panelists, data specific to veterans does 

not exist, or is limited in scope, leaving us with an incomplete puzzle that makes 

it harder for us to get a good idea of how current mortgages are affecting our veterans. Fortunately, many of us have heard from our returning servicemembers and 

veterans back home about the problems they have encountered. Problems such as 

that expressed by Mr. Marty Dubois, a veteran, concerned about losing his home 

because he does not qualify for a VA home loan due to the equity requirements. We 

have also heard several complaints from veterans residing in high-cost residential 

areas in which the current VA home loan is insufficient, and this will effectively 

price them out of the market. 

As you can see on the television screen above, veterans are still being caught-up 

in the mortgage crisis and we should only expect this problem to worsen. The image 

of Mr. Hector Mesas, a veteran crying after telling Senator Hillary Clinton about 

the difficulty he has with paying his mortgage, was posted on yesterday’s Washington Post Express paper. Mr. Mesas, and the thousands of veterans throughout 

our country deserve better, and we must do better to ensure they are afforded the 

protections they need as they adjust to life after their military service. 

I look forward to working with Ranking Member Boozman and Members of this 

Subcommittee to continue to improve readjustment benefits available to all servicemembers and veterans. I now recognize Mr. Boozman for any opening remarks he 

may have. 

f 

Prepared Statement of Hon. John Boozman, Ranking Republican Member, 

Subcommittee on Economic Opportunity 

Good afternoon. Madame Chairwoman, you have chosen an especially timely topic 

for today’s hearing. 

Every day, the media reminds us of the difficulties facing our national economy 

because of the subprime mortgage crisis. It is clear from reading today’s testimony 

that America’s veterans, regardless of whether they have a subprime mortgage or 

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not, whether they are current in their payments or not, will be affected in some way 

by this financial mess. 

It is also clear from our witnesses’ statements that there is plenty of blame to 

go around. It appears that every level of our national economic structure has played 

a role in allowing this to happen. It would be too easy to blame just the borrowers 

who fooled themselves into believing they would never be faced with increased payments. Or the lenders and brokers who encouraged such behavior with highly speculative mortgage products. Or big investors and Wall Street financial services giants 

who appear to have demanded increasingly risky transactions. I guess you could say 

there was enough greed to go around. 

So, the question before us today is what can VA do to help veterans stuck in this 

mess? Under current law, their options are limited. But we must be careful here. 

VA wisely has maintained its underwriting standards and as a result, taxpayers are 

not seeing their funds wasted. The VA guaranty program is solvent and does not 

reflect the difficulties in the subprime market. As we will hear from our witnesses, 

the mortgage business is very complex, with multiple levels of markets, borrowers, 

lenders and investors and the potential for negative unintended consequences is significant. I want to work with you to keep the VA program stable and financially 

viable so that tomorrow’s veterans will benefit just as yesterday’s and today’s have. 

I look forward to any suggestions our witnesses may have to ease this situation. 

f 

Prepared Statement of Roger M. Kubarych, Chief U.S. Economist, 

UniCredit Markets and Investment Banking, and Henry Kaufman 

Adjunct Senior Fellow for International Economics and Finance, 

Council on Foreign Relations 

Madame Chairwoman, members of the Subcommittee: 

Thank you for inviting me to testify on the important topic ‘‘Subprime Mortgage 

Crisis and America’s Veterans.’’ As a financial-sector economist trying to make 

sense for UniCredit management and clients of what has gone wrong in the U.S. 

mortgage market, and as a part-time scholar with the Council on Foreign Relations 

engaged in a multi-year project assessing the strengths and deficiencies of what I’ve 

called ‘‘Americanization of Finance,’’ I am still stunned by the severity of the developments that have taken place. From an unsustainable boom in U.S. housing markets, we have watched a massive contraction in activity since 2006, evidenced by 

plunging housing starts, sales and prices. The consequences have been truly painful 

for many. Numerous homeowners are struggling with mortgages they cannot afford. 

Major banking and other financial institutions here and abroad have suffered enormous losses, and their ability to conduct normal lending activities is impaired. And 

the whole sorry episode has contributed to diminished respect internationally for the 

integrity of the U.S. financial system and its guardians, perhaps most conspicuous 

in the decline in the value of the dollar in foreign currency markets since the crisis 

broke out last summer and a worrisome escalation of commodity prices, not least 

crude oil. 

Veterans are affected by the subprime mortgage crisis and the broadening financial turbulence that developed in its wake in at least four ways: 

First, some veterans are directly involved because they bought homes financed by 

subprime mortgages, which too often contained a raft of unfriendly or outright abusive terms and conditions, and are now unable to stay current on their debt-servicing obligations. Some portion of these veterans may be already facing delinquency 

or even loss of their homes through foreclosure. 

Second, many other veterans are impacted indirectly, as a result of the widespread decline in the value of houses throughout much of the United States. The 

current values of their homes are caught in the overall housing slump, and their 

personal net worth is or will be contracting. Not all will be impacted equally. Those 

veterans who bought their homes years ago probably still have substantial unrealized capital gains, despite the recent moderate declines in average home prices. But 

any recent veterans who bought houses near the peak in the housing boom are 

going to lose a good portion, maybe all, of the equity they had in their homes. The 

standards of living of many veterans will take a hit. 

Third, all veterans, just like every American, are hurt by the diminished availability of credit because of the squeeze on many banks and other financial institutions who made unwise investment decisions, suffered losses, and are now straining 

to repair wounded balance sheets. 

Fourth, veterans, along with the rest of us, are facing higher costs for energy and 

other imports as a result of the decline in the value of the dollar and the rise in 

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commodity prices, both traceable in part to the erosion in confidence in our financial 

markets and our currency. 

These are big negative effects. That’s why it’s understandable why so many economists, whether in the private sector, in the Federal Reserve or in the U.S. Government, are either predicting a business recession or raising the odds that a recession 

might develop. 

Before making a few suggestions about what might be done to ameliorate the adverse effects on veterans and other homeowners with these radioactive subprime 

mortgages, let me make a few points—highly abbreviated to save time—that might 

help put the current mess in some perspective. 

1. Securitization of mortgages is not new. Securitization—that is, the pooling together hundreds or thousands of individual mortgage loans into a mortgagebacked security, MBS, that can be sold to institutional investors much like 

a traditional corporate bond—got started in the early eighties. That was a 

time when high inflation and correspondingly high interest rates were making 

it almost impossible for many commercial banks and savings & loan associations to offer mortgages. Within a few years, the useful innovation had caught 

on to such an extent that over half of all outstanding mortgages were 

securitized (the rest were held mostly by banks and thrifts). Here’s some useful data, drawn from the Fed’s Flow of Funds accounts, showing quickly and 

pervasively mortgage securitization caught on: 

Mortgage Securitization: 

From Humble Beginnings to Central Part of the System 

1975 1980 1985 1990 1995 2000 

Total mortgages $ trillion 0.46 0.96 1.52 2.62 3.46 5.13 

Percent securitized 5.3 11.1 25.2 39.9 50.2 54.8 

Source: Federal Reserve Board, Flow of Funds. 

[I left out the more recent data until later: since 2000 the market has had a new 

element: explosive growth in subprime mortgages and a different way of securitizing 

them, but I will come back to that shortly.] 

2. Securitization done prudently provides immense benefits to nearly everyone: 

borrowers, investors, and the banks who engineer the process. From humble 

beginnings, securitization blossomed because it is a superior way of doing the 

business. Its inventors recognized that the traditional business practiced by 

banks and thrift institutions of originating mortgage loans, doing the servicing of those loans in-house, and holding them on their balance sheets posed 

enormous problems. Those problems were especially nasty when short-term 

interest rates were elevated or when individual cities and towns encountered 

localized economic distress. It was far more efficient to divide the single business model into three parts, with specialization in origination of mortgages, 

loan servicing, and investing. By this separation, large mortgage-market participants could amass expertise and advanced technology. And they could do 

it on a national playing field, reducing the risk of undiversifiable geographic 

lending concentrations that were often the bane of many local banks and 

thrifts. 

3. Securitization couldn’t have thrived without indispensable government support. Mainly that came from GNMA, FNMA, and FHLMC, commonly referred 

to as Ginnie Mae, Fannie Mae, and Freddie Mac. These government-sponsored enterprises, GSEs, facilitated the bundling of loans into MBSs, most importantly by taking over the risk of loss through default by individual homeowners on their mortgages and by setting high standards on the quality of 

the mortgages that they were prepared to guarantee (called ‘‘conforming’’ 

mortgages). That meant that buyers of pass-through securities (the simplest 

kind of MBS) didn’t have to worry about credit risk so they could focus on 

the very difficult, but manageable, exposure to market risk that they took 

when investing in mortgage-backed securities. The private markets couldn’t 

do it alone, but didn’t have to, because of the integral role of the GSEs in the 

financial system. 

4. Until the early 2000s, subprime mortgages represented a modest, almost inconsequential, part of the mortgage financing system. But by about 2002, 

things were changing rapidly. What happened? First, Fannie and Freddie, 

stockholder-owned and privately managed since the early nineties, lost control 

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of their operations. They got in the habit of doing more than absorbing credit 

risk and facilitating securitization but instead began to hold more and more 

mortgages in their own portfolios, financed through borrowing (relatively 

cheaply because of an implied U.S. Government safety net) in the capital markets. Some market professionals thought of them as running the biggest 

hedge funds in town. But in so doing they were taking huge market risks and 

relied on massive transactions in financial derivatives in order to try to hedge 

the risks they were taking. They handled this badly and for years their financial accounts have been a mess. CEOs and CFOs were replaced, fines were 

paid, and their overseer, OFHEO, essentially put limits on their growth until 

they got their financial houses in order. 

5. This opened the door for major players in the private sector to move into the 

home mortgage financing business in a major way. And that included pushing 

the envelope on creditworthiness of borrowers. Long-tested rules of thumb on 

what once constituted sound banking practices went out the window. By 2006, 

upward of 40% of all new mortgages being originated were subprime or Alt 

A, i.e. deficient in some ways. It created a time-bomb when these loans were 

securitized through privately issued MBS or then recombined into 

collateralized debt obligations, CDOs. These are complex securities comprised 

of a variety of MBSs and other financial instruments, often involving substantial leverage. Last summer, they became almost unmarketable when buyers 

realized the potential for loss was far greater than they had ever imagined. 

6. The growth in mortgage-related securities by what the Fed calls ‘‘asset-backed 

securities issuers’’ was stupendous. The data are in the chart below. From a 

relatively modest level, private securitization, increasingly involving subprime 

mortgages in the 2002–2007 period, has taken on an increasing and probably 

inordinate share of overall mortgage financing business: 

Mortgage Securitization in This Decade, End of Period 

2000 2002 2003 2004 2005 2006 Q3 2007 

Total home mortgages $ trillion 5.13 6.44 7.23 8.28 9.34 10.42 11.03 

Total percent securitized 54.8 56.1 53.6 52.1 53.5 55.4 57.0 

Percent securitized privately 7.5 8.5 9.2 12.7 16.7 19.7 19.8 

Source: Federal Reserve Board, Flow of Funds. 

7. The U.S. financial regulatory system was ill-equipped to deal with abusive 

lending practices of financial institutions not under the formal supervisory 

authority of the Fed or other traditional bank regulators. The majority of 

mortgage banks fell between the cracks. That was dangerous once their role 

in the mortgage financing suddenly escalated. As the housing boom fueled 

soaring home prices, large numbers of potential home buyers were eager to 

get in on the action. Many were not creditworthy under normal standards. 

But the mortgage bankers developed variations on conventional loans to allow 

them to borrow. Subprime mortgage products offered low teaser rates to attract customers. They let applicants lie about their incomes and put up small 

or even zero downpayments. But those borrowers would have to accept stiff 

prepayment penalties, a sharp break from normal U.S. customs, and agree to 

pay sharply higher interest rates when their initial low rates were adjusted 

in a year or two. A more responsive regulatory system would have stepped 

in to catch the most abusive tactics before thousands were trapped in loans 

they would likely not be able to carry. 

8. The ratings agencies made poor judgments and were subject to intense conflicts of interest, since their compensation was paid by the issuers. They 

awarded high ratings evidently with little or no evaluation of the likelihood 

of default should house prices fall back. 

9. Institutional investors were lazy and cheap: lazy, because they relied almost 

entirely on credit ratings rather than performing their own due diligence; 

cheap, because they didn’t pay outside experts to ‘‘stress test’’ the conclusions 

of the ratings agencies under differing scenarios. 

10. And many borrowers cynically got themselves into trouble by assuming that 

the housing price boom would go on forever. Instead they chased the dream 

of becoming mini-real estate speculators, while subjecting themselves to high 

and escalating interest rates in return for not having to tell the truth about 

their incomes and not having to put up sizable downpayments. 

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In short, there is more than enough blame to go around. What can be done, now 

that the situation has gone beyond the danger point? 

While I don’t have a formal policy proposal to offer, I do have four observations 

with which to conclude: 

First, every first-year economics student comes across the concept of 

‘‘externalities’’ or what are also described as ‘‘neighborhood effects.’’ What this 

means is there is a market failure. And when there is market failure there is a 

strong case for public policy to counteract the negative effects. Foreclosures present 

an especially brutal externality as the adverse neighborhood effects are visible to 

everyone: who wants to live next door to a boarded up home taken over by a lender? 

Isn’t it obvious that the value of every house in such a neighborhood is going to be 

undermined, to some extent or perhaps a lot, by foreclosures? So isn’t there a strong 

public policy case for preventing them? Yes, and President Bush himself acknowledged such a case in his remarks of early September 2007. The sad thing is that 

the administration was agonizingly slow in following up on his call for a program 

to assist troubled borrowers so as to minimize foreclosures. Subsequent efforts, from 

Hope Now to the latest iteration announced by the Treasury Secretary a few days 

ago, are useful but insufficient. 

Second, the case for a public policy response is further strengthened by another 

example of market failure: the provision of flood insurance. Everybody knows that 

private insurance companies have no interest whatsoever in offering flood insurance. Most homeowners are not at risk and wouldn’t buy it. Only those who live 

in familiar exposed areas, along the Gulf Coast, or the Ohio River system, or similar 

spots, desperately need coverage but couldn’t afford what a private insurance company would have to charge in order to provide such coverage profitably. So government has to step in, and even then not everybody who would benefit bothers to buy 

the affordable coverage government provides. Analogous arguments can be made for 

credit risk insurance. 

Third, now that hundreds of thousands of homeowners, including veterans, are at 

risk of becoming delinquent and possibly losing their homes, the voluntary program 

for individual loan work-outs that is in place needs to be supplemented by something more comprehensive. The simplest approach would be for the government to 

offer affordable medium-term loans to low- and middle-income individuals to allow 

them to repay abusive subprime mortgages on their primary residences. That may 

require legislation to override particular terms in mortgage contracts that impose 

stiff prepayment penalties, a feature that was almost unheard of in American mortgages before the subprime mortgage explosion. 

Finally, the financial regulatory system governing mortgage financing and 

securitization, by far the largest part of the credit markets and easily the most important for the vast majority of Americans, has to be fundamentally upgraded. The 

administration has put its emphasis on FHA and the GSEs. That is their prerogative. But other key elements of the system failed to function in the public interest. 

Appropriate implementation of the Banking Holding Company Act by the Federal 

Reserve has been spotty. The SEC has been slow in recognizing its enormous mistake in giving special pride of place to credit ratings agencies, thereby nurturing an 

unwarranted complacency among investors that somehow the SEC stands behind 

their methods and the ratings themselves. 

America’s veterans have served this country with skill and valor. They have a 

right to expect that the economy and financial system of this country is similarly 

managed in the national interest, even if that sometimes means that certain participants in financial markets must accept restraints on their activities. No one should 

be proud of what has happened in the field of mortgage financing in the past five 

years. And it shouldn’t be allowed to get worse. 

f 

Prepared Statement of Donald J. Bisenius, Senior Vice President, 

Credit Policy and Portfolio Management, Freddie Mac 

Chairwoman Herseth Sandlin, Ranking Member Boozman, members of the Committee: 

Good afternoon. My name is Don Bisenius, and I am the Senior Vice President 

of Credit Policy and Portfolio Management at Freddie Mac. Thank you for the opportunity to address the subcommittee today, and to offer some of our thoughts on 

the subprime mortgages crisis and the effects it may be having on America’s veterans. 

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Freddie Mac’s Role in the Mortgage Market 

Freddie Mac is a government-sponsored enterprise, or GSE, created by Congress 

with a public mission to bring liquidity, stability and affordability to the Nation’s 

residential single and multifamily mortgage markets. Unlike the Federal Housing 

Administration or the Department of Veterans Affairs, we are not part of the federal 

government. We are a shareholder-owned corporation, capitalized entirely by private-sector money. We currently guarantee about $1.75 trillion of mortgage-backed 

securities, providing home ownership opportunities for nearly 11 million families. 

Historically, Freddie Mac has guaranteed mortgages in the conventional conforming segment of the mortgage market—so-called ‘‘prime’’ mortgages for no more 

than the ‘‘conforming’’ limit, currently $417,000. Today, the conventional conforming 

market, supported by Freddie Mac and Fannie Mae, and the government market for 

mortgages insured by FHA or guaranteed by the VA, are the only well-functioning 

segments of the mortgage market. Long-term fixed-rate mortgages are widely available and rates are low. The market shares of the GSEs, the FHA and the VA all 

grew significantly in 2007, especially in the second half of the year, as the supply 

of funds from other investors disappeared. We are doing the job that Congress assigned us: helping to maintain stability by providing liquidity to the markets that 

we were created to serve. 

The GSEs, like the VA, do not originate mortgages. We do not control what loans 

the primary market originates. What we can do is define what mortgages we are 

willing to purchase and guarantee. Because of our size and constant presence in the 

marketplace, in most economic environments the GSEs can influence what loans the 

primary market chooses to originate. Over the past 3 or 4 years, however, our influence waned as subprime originators found investors who were willing to assume 

more risk than we felt was prudent. 

We do not track whether mortgages we buy are made to veterans, so I cannot tell 

you how many veterans’ homes we have financed over the years. I am not aware 

of any data that would tell us how many veterans have subprime loans, but it is 

reasonable to assume that the impact of the crisis is at least as severe on veterans 

as it is on other borrowers. 

We do offer mortgage products that help active-duty servicemembers and recent 

veterans buy homes. In 2006, we extended our flexible Home Possible® Neighborhood Solutions affordable mortgage products (originally targeted at teachers, police, 

fire and other public sector employees) to members of the Armed Forces and recently separated and retired military and military reservists. These are prime mortgages that permit eligible families with limited credit or downpayment savings to 

finance up to 100% of the value of their new home. Together with our lender customers, we have specific initiatives for military communities at Fort Benning, Fort 

Riley, Fort Drum and the naval installations in the Virginia Tidewater that focus 

on financial literacy and home ownership opportunities for active-duty servicemembers. Deployed servicemembers qualify for capped interest rates on mortgages 

sold to Freddie Mac under the Servicemembers Civil Relief Act. 

The Subprime Issue 

When the subprime crisis erupted as a national issue about a year ago, the conventional wisdom blamed the structure of short-term 2/28 and 3/27 subprime adjustable-rate mortgages (ARMs), in which interest rates are fixed for the first two or 

three years of the loan, and then adjust periodically. The theory was that ‘‘exploding’’ interest-rate resets caused large increases in monthly payments that made 

mortgages unaffordable for many families, and public policy responses focused on 

blunting the effects of payment shock. This remains a concern, but the Federal Reserve Board’s continuing cuts in short-term interest rates will help avert ‘‘payment 

shock’’ for recent subprime borrowers by significantly lowering upcoming increases 

in their monthly payments. 

We have come to understand that resets are not the only or necessarily the most 

important element of the story. More fundamentally, the subprime foreclosure crisis 

derives from a combination of (1) looser lender underwriting standards, especially 

with recent originations, that allowed speculation and may have put families into 

homes they could not afford to keep without continued house price appreciation; and 

(2) subsequent house price depreciation that makes it impossible or uneconomic for 

stretched borrowers either to sell or to refinance into new higher-balance loans as 

they might have in the past. 

This does not mean that subprime mortgages are intrinsically bad; many 

subprime loans perform as agreed, even in today’s market. Historically, they have 

helped families with weak credit become homeowners, in return for a higher interest 

rate to compensate the lender for the higher risk of default these loans pose. 

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Freddie Mac has participated in the subprime market as a responsible and prudent investor. We have not historically purchased or securitized subprime mortgages 

directly, and instead have limited our participation to investing in the highest-rated, 

least risky segment of the subprime mortgage securities market (also known as the 

subprime ‘‘private label’’ market). This participation reflects our charter objectives 

to bring additional liquidity to the mortgage market. It has also been an important 

contributor to our efforts to meet our HUD-mandated affordable housing purchase 

goals. In fact, by carefully tailoring our securities purchases, nearly 80% of the units 

financed by our 2007 subprime purchases met one or more of our three affordable 

goals—the low- and moderate-income goal, the special affordable (or deeply targeted) goal, and the underserved areas goal. This approach has proven to be very 

prudent, given the losses others are taking in this market. 

In addition to providing liquidity, Freddie Mac has taken a leadership role in addressing some of the excesses of subprime lending. As an investor in the least risky 

subprime securities, we have a limited ability to influence the market’s practices. 

Nevertheless, last winter we were the first to announce that we would restrict our 

subprime investments in securities backed by short-term ARMs to those that have 

been underwritten to a fully indexed, fully amortizing level. We also restricted the 

use of stated income in lieu of more traditional documentation standards and encouraged subprime lenders to escrow borrower funds for taxes and insurance. Last April, we pledged to buy $20 billion in consumer-friendly mortgages that provide better choices for subprime borrowers. We have already exceeded that pledge. 

Since May 1, 2007, we have bought about $42.5 billion of prime mortgages that financed borrowers whose credit profiles might have otherwise relegated them to the 

subprime market. These purchases have helped nearly a quarter of a million families. 

As part of this commitment, we created our SafeStepSM subprime alternative 

product, introduced in July and designed to give subprime borrowers more sustainable alternatives. But through the end of 2007, we have bought only $207 million 

of these mortgages. It is not that our credit parameters on the product are particularly conservative, but we did require originators to validate borrowers’ incomes, 

property values and other information, and most borrowers simply could not qualify. 

This illustrates a dilemma that we all face in trying to clean up the subprime 

mess—that there are too many borrowers stuck in subprime loans who simply cannot qualify for prudent, sustainable mortgages. 

This dilemma is greatly compounded by the significant decline of house prices in 

many areas. Many families bought a home over the last couple of years that are 

now worth less than they borrowed to buy it. If this family can afford the monthly 

payment and does not need to sell the house, this may not pose an immediate problem. It can be a problem, however, if the payments are too high or the family wants 

to move or sell for some other reason. It is difficult for even a creditworthy borrower 

to refinance or sell when the house is worth less than the total of the outstanding 

mortgage debt. 

Thinking About Solutions 

At Freddie Mac, we spend a lot of time thinking about how to address this situation. Like almost everybody else, we have concluded that there is no silver bullet, 

and that, unfortunately, things are going to get worse before they get better. For 

the moment, the combination of lack of borrower capacity and falling house prices 

demonstrates that there are no easy solutions to this problem. 

Nevertheless, let me suggest some things that can be done to mitigate its effects: 

• Focus servicing practices on keeping borrowers in their home whenever possible. Loan modifications, repayment plans and other foreclosure prevention initiatives are important. The Hope Now subprime loan modification program and 

the related Project Lifeline project fall into this category. At Freddie Mac, we 

have found that early intervention can help some borrowers avoid foreclosure, 

and last year helped nearly 47,000 borrowers keep their homes. I understand 

that the VA uses a similar approach. • Help some borrowers refinance into innovative mortgages like SafeSteps and 

FHASecure. It may be appropriate to consider other approaches that take house 

price declines into account. But unless the borrower has the capacity to afford 

the monthly payments, a refinance simply sets up both the lender and the borrower for a repeat of the earlier failure. 

• Support, with the participation of the public and private sectors, community 

stabilization efforts of local and national non-profits and state and local governments hard-hit by the crisis. In many communities, such as Las Vegas, we have 

to deal with the problem of foreclosures on investment properties. While no one 

wants to ‘‘help’’ speculators, a foreclosed investment property is just as damrfrederick on PROD1PC67 with HEARING

40 

aging to a community as a foreclosed family home. Moreover, foreclosures on 

investment properties often throws tenants out of their homes and cuts the supply of affordable rental housing. 

• Help families transition to more affordable housing. Despite all our efforts, not 

all borrowers can afford the house they are now living in. For these families, 

short sales and deeds-in-lieu of foreclosure can help make the transition 

smoother. We should consider ways to help these families buy less expensive 

homes or shift into affordable rental housing. 

I wish I could be more sanguine, but the housing crisis is going to be painful and 

take time to resolve. Freddie Mac is committed to working with Congress, the Administration, our customers and other industry participants to find and implement 

effective solutions to this very difficult problem. 

Thank you for the opportunity to appear today, and I will be happy to answer 

your questions. 

f 

Prepared Statement of Anthony Agurs, ABR, CRS, Member, 

Board of Directors, NATIONAL ASSOCIATION OF REALTORS®, and, 

REALTOR®, Agurs Group, El Cajon, CA 

Executive Summary 

The NATIONAL ASSOCIATION OF REALTORS® is a strong supporter of housing opportunities for veterans. We commend the Subcommittee for its attention to 

issues impacting American veterans. Many veterans, like other Americans, were seduced by the low payments promised by abusive subprime lenders. However, military families seem to be an especially attractive group for those wishing to prey on 

people with less than perfect credit. 

We believe the Veterans Home Loan Guaranty Service can be a valuable asset 

to help our Nation’s veterans achieve the dream of home ownership in a way that 

is safe, fair, and affordable. This program, created under the GI bill, encourages private lenders to offer favorable home loan terms to qualified veterans. However, 

without reforms, this program has not served many veterans who could use its benefits. We urge the following enhancements to the VA program to assure all our military families have the opportunity to reach the American dream of home ownership. 

• Increasing the VA Loan Limits in High Cost Areas—The current VA loan 

limit is equal to $417,000. States with the largest veteran population are CA, 

FL, TX, PA, NY and OH, respectively. Four of these states include areas where 

the median home price is well above the national average and above the current 

loan cap of $417,000. Veterans in these areas should not be penalized for geographic differences in the housing market. NAR supports legislative efforts to 

increase the VA limits to 150% of the conforming limit in high cost areas. 

• Easing Refinancing for Veterans—Some veteran homeowners have a risky 

sub-prime loan that they will not be able to afford when the interest rate or 

loan terms reset. But current law makes it nearly impossible for veterans to refinance into a VA home loan. 

• VA requires veterans to have at least 10% equity in a home prior to refinancing. This limitation makes it impossible for many veterans in risky subprime loans to refinance into a safer, more affordable VA loan. We urge Congress to revisit this provision of law to reduce to 5% the equity required to 

refinance a home. 

• In addition, law limits the guaranty that can be used for a typical VA refinance loan to $36,000. As a result, refinance loans of more than $144,000 will 

result in the lender not receiving 25 percent backing from VA and, as a result, probably not making the loan. We urge Congress to eliminate this refinancing restriction and making the maximum VA guaranty applicable for all 

VA-guaranteed loans. 

• Permanently Authorize ARMS—While the vast majority of VA loan guarantees are for fixed term loans, VA does have authority to guaranty adjustablerate mortgages (ARMs) and hybrid ARMs through September 30, 2008. We urge 

Congress to make these programs permanent and continue to provide VA with 

the flexibility to serve all America’s veterans. 

I thank the Subcommittee for this opportunity to share the views of NAR regarding veterans housing. The NATIONAL ASSOCIATION OF REALTORS® strongly 

supports housing opportunities for our Nation’s veterans and active duty military 

professionals. It is our hope that the Subcommittee will support our recommendarfrederick on PROD1PC67 with HEARING

41 

1 Vital Mission: Ending Homelessness Among Veterans, Homelessness Research Institute (November 2007). 

tions for enhancing and improving the VA home loan guarantee program, so it may 

be a real benefit to those who have so bravely served our country. 

As a veteran and a REALTOR® thank you for inviting me to testify on the 

Subprime Mortgage Crisis and its impact on American veterans. My name is Anthony Agurs, and I am a REALTOR® with the Agurs Group in El Cajon, CA. I am 

proud to say I served 21 years in the United States Marine Corps and have now 

been in real estate for nearly 14 years. 

I am here on behalf of 2008 NAR President Dick Gaylord and the 1.3 million 

members of the NATIONAL ASSOCIATION OF REALTORS® representing a wide 

variety of housing industry professionals committed to the development and preservation of the Nation’s housing stock and making it available to the widest range 

of potential home buyers. 

The NATIONAL ASSOCIATION OF REALTORS® is a strong supporter of housing opportunities for veterans. We commend the Subcommittee for its attention to 

issues impacting American veterans. Military veterans represent more than 25 percent of the U.S. homeless population, although they comprise only 11 percent of the 

civilian adult population.1 Men and women who have served this country deserve 

better. As NAR Past President Pat V. Combs said at a press conference on VA home 

loans last year, ‘‘The homelessness rate among our veterans is unacceptable to REALTORS®, who believe in building safe, healthy communities. . . . Many of our 

members are veterans and active service personnel who know firsthand the struggles and sacrifices faced by those who have fought to protect our safety and freedom.’’ 

REALTORS® across the country are also doing their part to help our veterans. 

In November, NAR presented a 2007 Good Neighbor award to Phil Landis. Chosen 

from over 320 REALTOR® nominees nationwide, Phil is a REALTOR®, a Vietnam 

vet, and since 2001 has been Chairman of the Veterans Village of San Diego 

(VVSD). VVSD provides food, clothing, housing, substance abuse treatment, mental 

health counseling, and job training and placement services to homeless veterans. 

Since becoming active in the organization, Phil has utilized his real estate acumen 

to improve the financial standing of the VVSD, growing its net worth from $1.5 million to almost $16 million. Today, VVSD has 100 employees, a five-acre site with 

127 treatment beds and a new 112-bed facility scheduled to open in 2008. Phil has 

been in real estate for 21 years and currently is a sales associate with RE/MAX 

Ranch & Beach in San Diego. 

In addition, NAR has partnered with U.S. Vets, an organization serving the homeless veteran population. U.S. Vets works to break the cycle of homelessness by fostering individual responsibility. NAR sponsored its inaugural U.S. Veterans Day 

Golf Tournament in Washington, DC. All proceeds from the event went to U.S. VetsDC. In addition, as part of our Annual Convention in 2007, NAR President-elect 

Charles McMillan and First Vice President Vicki Cox Golder visited the Las Vegas 

office of U.S. Vets on Veteran’s Day and presented a donation to help the more than 

5,000 homeless veterans living in Clark County, Nevada. 

I passionately believe in the American Dream of Home Ownership for anyone who 

desires to achieve that goal for themselves and their families especially the Soldiers, 

Sailors, Airmen, and Marines of our Armed Forces who sacrifice so much in defense 

of the American way of life, yet ask for so very little in return. Unfortunately, like 

many Americans, our military families have been hit hard by the subprime mortgage crisis. These homeowners are in financial crisis and need our help. 

Subprime Mortgage Crisis 

Irresponsible and abusive lending practices are a major problem for all of our Nation’s communities. While responsible subprime lenders have played an important 

role in helping millions of consumers achieve homeownership, abusive lending occurs much too often in subprime markets. Unfortunately, some lenders have abused 

their role and taken advantage of some borrowers, including veterans, by charging 

extremely high interest rates and loan fees unrelated to risk, using aggressive sales 

tactics to steer consumers into unnecessarily expensive or inappropriate loan products, advertising ‘‘teaser’’ interest rates (like the 2/28 or 3/27 adjustable rate mortgage) that steeply increase after the first few years of the loan and basing their 

lending on artificially high appraisals. Real estate professionals have a strong stake 

in preventing abusive lending because: 

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2Subprime Spillover: Foreclosures Cost Neighbors $404 Billion; 40.6 Million Homes Lose $5,000 on Average, Center for Responsible Lending (January 2008). 3The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas, Global Insight for 

the United States Conference of Mayors and the Council for the New American City (November 

2007). 4T.W. Farnam, As Foreclosures Rise, Mayors Brace for Fallout, Wall Street Journal (January 

28, 2008). 5 ‘‘In Harms Way—At Home: Consumer Scams and the Direct Targeting of America’s Military 

and Veterans’’, National Consumer Law Center (May 2003). 

• Abusive lending erodes confidence in the Nation’s housing system. 

• Legislative and regulatory responses to lending abuses that go too far can inadvertently limit the availability of reasonable credit for prime as well as 

subprime borrowers in a credit-driven economy. When responses to abusive 

lending constrain the ability of the secondary mortgage market to provide liquidity for home finance, consumers will find it more difficult and expensive to 

buy a home. 

• Citizens of communities, including real estate professionals, are harmed whenever abusive lending strips equity from homeowners. This is especially the case 

when irresponsible lenders concentrate their activities in certain neighborhoods 

and create a downward cycle of economic deterioration. 

Just last month, the Center for Responsible Lending (CRL), which more than a 

year ago warned Congress about the more than 2 million American families projected to lose their homes to foreclosure, released startling research on the spillover 

effect on our Nation’s communities and neighborhoods. Specifically, CRL estimates: 

• More than 40 million neighboring homes will suffer a decline in property values 

because of foreclosures in their neighborhood; 

• Homeowners living near a foreclosed home will see their property value reduced 

by about $5,000; and 

• The total decline in property values and reduced tax base from foreclosures will 

total $202 billion.2

Recently, the U.S. Conference of Mayors 3 commissioned a report on the economic 

and fiscal impact of foreclosures. The findings were largely consistent with the CRL 

report and concluded that 2008 will bring more foreclosures, curtailed consumer 

spending and significant financial stresses for state and local government budgets. 

NAR research shows that due to the housing market contraction, the U.S. economy 

expanded only 2% in 2007. A further weakening of the housing market has the potential to tip the economy into recession in 2008. 

State and local governments will immediately feel the impact of the reduced property tax revenue, which goes to fund important county/city services we depend on 

every day (police protection and fire rescue services, schools, social services, public 

transportation etc.). Some have already begun to cut back or curtail funding for critical programs that help the homeless. Furthermore, what many people do not realize is that foreclosures actually require local governments to spend money ‘‘for inspections, court actions, extra law enforcement, visits from city utilities and sometimes demolition.’’ 4

Someone once said that foreclosures are like mold—once it starts, it’s difficult to 

rid a community of it. Families struggling to make mortgage payments and living 

in a neighborhood where homes have already been lost to foreclosure will find it difficult to refinance or sell due to declines in neighborhood home values. Far too often 

these financially stressed families will end up losing their home and feeding the vicious cycle of foreclosures. 

Impact on Veterans 

Many veterans, like other Americans, were seduced by the low payments promised by abusive subprime lenders. However, military families seem to be an especially attractive target for those wishing to prey on people with less than perfect 

credit. A report by the National Consumer Law Center found the following: 

‘‘Military personnel are ripe targets for consumer predators because many are 

low-income (always the most targeted group) but have a far longer list of economically attractive qualities than most low-income people. Periods of deployment like 

those for the recent war in Iraq are especially vulnerable times. And military conduct codes that stress the need for orderly personal lives, including orderly finances, 

may inadvertently be driving service people toward the quick fixes many consumer 

predators offer.’’ 5

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6 Hon. Bob Filner, ‘‘Filner Introduces Legislative Package to Help Veterans Survive the 

Subprime Mortgage Crisis’’, Press Release, December 19, 2007. 7 Evaluation of VA’s Home Loan Guarantee Program, Final Report. Economic Systems Inc.; 

ORC Macro; The Hay Group; Department of Veterans Affairs, July 2004. 8 National Delinquency Survey, Mortgage Bankers Association, Q307 (December 2007). 

Veterans are more likely to have lower credit scores due to their service to our 

country. Sporadic civilian work due to calls to service and low military pay lead 

some military families into financial difficulties. 

Committee Chairman Filner recently stated, ‘‘For many of our returning servicemembers and veterans, the stress of what they have gone through in war is still 

prevalent when they return home. Unfortunately, for many of these heroes, 

subprime loans are the only option when they do not have the best credit score, and 

more often than not, their low credit score is a direct result of their service to our 

country.’’ 6

VA Home Loan Guarantee Program 

We believe the Veterans Home Loan Guaranty Service can be a valuable asset 

to help our nation’s veterans achieve the dream of homeownership in a way that 

is safe, fair, and affordable. This program, created under the GI bill, encourages private lenders to offer favorable home loan terms to qualified veterans. The VA home 

loan guarantee program made its first loan for a home in Washington, DC in 1944. 

Today, the VA has guaranteed well over 18 million loans to American veterans. We 

believe this program is a vital homeownership tool that provides veterans with a 

centralized, affordable, and accessible method of purchasing homes as a benefit for 

their service to our nation. 

The VA home loan guarantee program is designed to provide veterans who are 

unable to qualify for a conventional loan with favorable loan terms. A study conducted in 2004 found the program did just that. The percentage of VA borrowers 

who could not qualify for a conventional loan was 82% for first-time home buyers, 

and 78% for repeat borrowers. In addition, the typical VA borrower could also not 

qualify for an FHA loan. Sixty-one percent (61%) of VA first-time borrowers could 

not meet either the downpayment and/or maximum debt-to-income ratios required 

to obtain an FHA loan.7 The VA program, therefore, offers unique and important 

benefits for helping our military families achieve the dream of home ownership. 

Despite offering borrowers a zero-downpayment loan, VA’s delinquency rate is 

low. According to the most recent delinquency survey published by the Mortgage 

Bankers Association, VA’s delinquency rate was 6.58%, and the foreclosure rate was 

1.03%. In contrast, sub-prime delinquency rates were a staggering 16.31%, and foreclosure rates were 6.89%.8

In addition, the VA home loan program offers protections for borrowers when financial difficulties occur by offering a variety of supplemental loan servicing programs to help military families avoid foreclosure. VA offers financial counseling and 

can serve as a conduit between the veterans and the private lender holding the loan. 

VA will try and negotiate repayment terms for borrowers in financial difficulty. 

Under some specific conditions, VA may also purchase the loan and allow the borrower to make payments directly to the VA at a reduced interest rate. 

These interventions not only help the veteran retain their home, but save the VA 

money by avoiding the payment of a guarantee claim. In 2007, VA accomplished 

more than 8,453 successful interventions, which translated into a savings to the 

government of $181.3 million in claims avoided. 

The VA home loan program has a proven record for promoting homeownership 

amongst our nation’s veterans. However, with the increasing costs of housing, and 

abuse in the subprime market, we believe additional enhancements are needed to 

improve the program’s usefulness and position it as a viable homeownership vehicle 

in this changing world. We are pleased to note the bills introduced by Rep. Murphy 

and Chairman Filner (H.R. 2385 and H.R. 4884 respectively) which will implement 

some of these changes. NAR strongly supports these bills, and urges the Veterans’ 

Affairs Committee to move them to markup. 

Increasing the VA Loan Limits in High Cost Areas 

The VA loan guaranty limit is currently set at 100% of the conforming loan limit. 

Despite recent increases to the conforming loan limit included in the Economic 

Stimulus Act of 2008, it does not appear that the VA loan guaranty will increase 

above the current $417,000 loan limit. This is unfair to our military personnel and 

veterans who live in high cost communities where FHA and conventional limits will 

exceed $417,000 but will be excluded from homeownership and refinancing opporturfrederick on PROD1PC67 with HEARING

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9On a standard loan the VA limit goes to $104,250, or 25% of $417,000. 

nities that would be available to them if the VA loan limit were allowed to move 

in concert with the conforming loan limit for those communities. 

Of the 25 million veterans currently alive, sixty percent (60%) live in urban areas. 

States with the largest veteran population are California, Florida, Texas, Pennsylvania, New York and Ohio, respectively. These six states account for about 36% of 

the total veteran population. Of these, California, Florida, Pennsylvania and New 

York all include areas where the median price of homes are well above the national 

average, and above the current loan cap of $417,000. Veterans in these areas should 

not be penalized for geographic differences in the housing market. 

NAR supports legislative efforts to increase the VA limits to 150% of the conforming limit in high cost areas. The VA loan guarantee is a critical entitlement for 

our men and women in uniform, providing them a safe, affordable, and accessible 

method of purchasing homes in return for their service to our nation. In light of 

risky and sometimes predatory alternative loan products being marketed, the veteran’s loan guarantee needs to serve all veterans, regardless of where they live. 

Easing Refinancing for Veterans 

Some veteran homeowners are certainly among those who are currently in a risky 

sub-prime loan that they will not be able to afford when the interest rate or loan 

terms reset. But current law makes it nearly impossible for veterans to refinance 

into a VA home loan. 

VA requires veterans to have at least 10% equity in a home prior to refinancing. 

This limitation would make it impossible for many veterans in risky sub-prime 

loans to refinance into a safer, more affordable VA loan. We urge Congress to revisit 

this provision of law to reduce to 5% the equity required to refinance a home. Increasing the cap from 90% to 95% will provide more opportunities for veterans to 

refinance. In light of the high number of non-VA adjustable rate mortgages that will 

reset in the coming months, allowing veterans the opportunity to use the loan guarantee is critical. The highly touted FHASecure program permits refinance loans 

with only 3% equity. Veterans should be afforded the same type of opportunity that 

FHASecure provides other homeowners. 

In addition, current law limits the guaranty that can be used for a typical VA refinance loan to $36,000. As a result, refinance loans of more than $144,000 will result 

in the lender not receiving 25 percent backing from VA and, as a result, probably 

not making the loan.9 We recommend eliminating this refinancing restriction and 

making the maximum VA guaranty—25% of the Freddie Mac conforming loan limit 

applicable for all VA-guaranteed loans—be they purchase or refinance. 

Raising the guarantee on VA refinancing loans and reducing the loan-to-value 

ratio will allow more qualified veterans to refinance their loans and save their 

homes. In light of the high number of non-VA adjustable rate mortgages that will 

reset in the coming months, allowing veterans the opportunity to use the loan guarantee will save many from foreclosure. 

Permanently Authorize ARMS 

The Veterans Benefits Improvement Act of 2004, which was signed into law by 

President Bush as Public Law 108–454 on December 10, 2004, extended the VA’s 

authority to guaranty adjustable-rate mortgages (ARMs) and hybrid ARMs through 

September 30, 2008. In addition, the law indexed the VA guaranty to the Freddie 

Mac conforming loan limit. 

The bulk of the VA’s guaranty activity is in fixed-rate mortgage loans and this 

trend is likely to continue even if Congress reauthorizes the VA to guaranty 

adjustable- and hybrid adjustable-rate mortgage loans. However, these adjustableand hybrid adjustable-rate loans provide the VA with additional flexibility to better 

meet the needs of the nation’s veterans, service members and reservists. 

ARMs are especially useful for active duty military. These soldiers can purchase 

a home with a low interest ARM, and will likely get orders to relocate prior to the 

first rate adjustment. Since military families tend to move often, an ARM or hybrid 

ARM can be a very good choice. In addition, many military families can anticipate 

promotions or salary increases, making payments on the adjusted interest on an 

ARM possible. The VA does not allow lenders to charge borrowers a prepayment 

penalty, and so the risk is low for the veterans if they move or chose to refinance. 

We encourage Congress to authorize these products permanently. 

Education and Outreach 

NAR strongly believes the private sector has an obligation to help educate homebuyers about today’s mortgage products. Starting in 2005, NAR worked with the 

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1Testimony of Mark Zandi, ‘‘The Looming Foreclosure Crisis: How to Help Families Save 

Their Homes,’’ before the U.S. Senate Committee on the Judiciary (December 5, 2007). 

Center for Responsible Lending (CRL) to produce a series of brochures that describe 

the pros and cons of conventional loans and nontraditional mortgages, give consumers tips on how to avoid predatory loans. In May of 2007, NAR partnered with 

CRL and NeighborWorks on a brochure that focuses on helping financially stressed 

homeowners understand their options and offers tips on how to avoid foreclosure. 

Shortly after the brochure was released, NAR’s President sent an e-mail to over 1.3 

million REALTORS® informing them of the foreclosure prevention brochure and encouraging REALTORS® to put the brochure into the hands of every consumer they 

help to become a homeowner. 

In 2006, NAR partnered with the Department of Housing and Urban Development 

to produce a brochure promoting FHA home loans. Shopping for a Mortgage? 

FHA Improvements Benefit You has been a valuable resource for REALTORS®

and their clients. 

NAR is now in discussions with the Department of Veterans Affairs to work together on a similar brochure promoting the VA Home Loan Guarantee Program. 

Getting the word out about VA loans and steps veteran homeowners should take 

when loan trouble is on the horizon is a critical way to prevent additional military 

families from falling prey to abusive or predatory lending. 

Conclusion 

I thank the Subcommittee for this opportunity to share the views of NAR regarding veterans housing. The NATIONAL ASSOCIATION OF REALTORS® strongly 

supports housing opportunities for our Nation’s veterans and active duty military 

professionals. It is our hope that the Subcommittee will support our recommendations for enhancing and improving the VA home loan guarantee program, so it may 

be a real benefit to those who have so bravely served our country. 

f 

Prepared Statement of Ellen Harnick, Senior Policy Counsel, 

Center for Responsible Lending 

Chairwoman Sandlin, Ranking Member Boozman, and members of the Subcommittee, thank you for holding this hearing to examine the foreclosure crisis, a 

problem that is affecting many veterans. We appreciate the opportunity to speak 

today. 

I offer this testimony as Senior Policy Counsel of the Center for Responsible Lending (CRL) (www.responsiblelending.org), a not-for-profit, non-partisan research and 

policy organization dedicated to protecting homeownership and family wealth by 

working to eliminate abusive financial practices. We are affiliated with a community 

development lender, Self Help, which provides carefully underwritten subprime 

loans to people who have been under-served by other lenders. Self Help has provided over $5 billion of financing to 55,000 low-wealth families, small businesses, 

and nonprofit organizations, and our loan losses have been less than one percent 

per year. 

EXECUTIVE SUMMARY 

It is difficult to overstate the magnitude of today’s foreclosure crisis. According to 

Moody’s Economy.com, America’s ‘‘housing and mortgage markets are suffering an 

unprecedented downturn,’’ and unless policymakers take significant action, home 

losses due to unsustainable loans will continue to rise through the rest of this decade.1 A significant number of the families who lose their homes will be men and 

women who have served our country. 

This crisis, which has not been confined to the housing market but has impacted 

the entire economy, has brought our Nation to the brink of recession. In the past, 

families typically experienced foreclosures due to an unexpected personal crisis, 

such as job loss, illness, divorce, or death. Now, however, the leading cause of foreclosure is the nature of the mortgage loans themselves. This crisis was caused by 

a number of factors, including the following: 

• Dangerous loan products. 

• Reckless underwriting. 

• No escrow for taxes and insurance. 

• Risk layering. 

• Broker abuses. 

• Wall Street demand for more, riskier loans. 

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2See CRL Issue Brief, ‘‘Subprime Spillover: Foreclosures Cost Neighbors $202 Billion; 40.6 

Million Homes Lose $5,000 on Average,’’ rev. January 18, 2008. 3See ‘‘Report On Predatory Lending Practices Directed at Members of the Armed Forces and 

Their Dependents,’’August 9, 2006, which can be found at http://www.defenselink.mil/pubs/pdfs/ 

Report_to_Congress_final.pdf. 4Dick Gordon radio broadcast, ‘‘The Story,’’ American Public Media (June 12, 2007). See also, 

Karen Springen, ‘‘This is Not My Beautiful House,’’ Newsweek web exclusive (March 28, 2007). 

• Lack of oversight and regulation. 

Today, we offer a number of policy recommendations aimed at cushioning the impact of the foreclosure crisis on veterans. The first two items relate to all homeowners, while the final three items relate specifically to veterans. 

1. Permit bankruptcy judges to fix distressed home loans. 

2. Establish common-sense standards for sustainable mortgage origination. 

3. Expand the VA home loan program to address the current situation. 

4. Assist veterans who are seeking loan modifications. 

5. Consider extending period of post-service foreclosure protection. 

Below, we describe both the causes and the policy recommendations in more detail. 

BACKGROUND 

A year ago this month, our organization appeared before the Senate Banking 

Committee to sound an alarm about the subprime market. At that time, we had just 

released new research predicting that due to predatory and unsustainable lending 

practices, 2.2 million families were likely to lose their homes to foreclosure. We 

knew that those lending practices would cause a crisis in the housing market; indeed, the subprime fiasco is causing the largest disaster in the housing market since 

the Great Depression. 

What we did not anticipate is how extensive a spillover effect the housing crisis 

would have on the global economy, nor did we anticipate the effects on the prime 

mortgage market. Irresponsible lending, fueled by Wall Street demand for highly 

risky loans, has pushed our Nation to the brink of recession. Part of the reason for 

the spillover is that the impact of foreclosure is not confined to the families who 

lose their homes. In addition, 40 million Americans who pay their mortgage on time 

also are poised to experience drastic drops in their property value as a direct result 

of subprime foreclosures.2 The consequent pullback in spending by homeowners 

whose properties have lost value is further fueling a downward economic spiral. 

The housing crisis is hitting veterans especially hard. As a recent Pentagon study 

has shown, military personnel are particularly vulnerable to predatory lending, 3

and the financial stresses for many military families have been well documented. 

Although military personnel on active duty receive some protections related to their 

mortgages, these protections are phased out when they separate from service. 

Illustrative stories are not hard to come by. One case, reported by Newsweek as 

well as other sources, involved an Iraq war veteran from Kentucky, a man named 

Shawn Howell.4 Mr. Howell bought a home for his wife and four children shortly 

before he was deployed. He felt good about having a secure place for his family 

while he served his country. Following the advice of his mortgage broker, the Howells took out two adjustable-rate mortgages. The interest rate started at 5.4%, but— 

just after Howell returned from a difficult and dangerous year in Iraq—the rate shot 

up to 9.9%. The increase was completely unmanageable, especially since Mr. Howell 

was no longer receiving combat pay. He took on two jobs and made numerous attempts to contact the lender to find a way to avoid foreclosure. In spite of Mr. Howell’s best efforts, the lender, Countrywide Financial, refused to modify the terms of 

the loan. The Howells weren’t able to sell their home, and the lender foreclosed. 

Today, they live in a trailer. 

Another veteran who received an abusive loan testified at a field hearing held by 

Chairman Filner last November, Air Force veteran Nellie Cooper. Ms. Cooper refinanced her home loan into an adjustable-rate loan. Her mortgage payments 

ballooned while local property values dropped, which has prevented her from refinancing into a more secure, fixed-rate loan. She testified, ‘‘Nobody will finance 92 

percent value of a house, and I am getting more in arrears.’’ Cooper, who lives in 

Oceanside, Calif., was not able to get help from the VA, because right now, except 

in very rare cases, VA does not refinance mortgages it didn’t make originally. She 

didn’t initially buy the house through VA because she was told repeatedly by real 

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5 ‘‘Mortgage Crisis Hits Home for Troops, Vets,’’ Army Times, December 2, 2007. 

6See, e.g., Vikas Bajaj and Christine Haughney, ‘‘Tremors at the Door—More People with 

Weak Credit are Defaulting on Mortgages,’’ The New York Times, citing Inside Mortgage Finance (January 26, 2007). 7See Structured Finance, note 21, p. 4. 8Partnership Lessons and Results: Three Year Final Report, p. 31 Home Ownership Preservation Initiative, (July 17, 2006) at www.nhschicago.org/downloads/82HOPI3YearReport_Jul17- 

06.pdf. 9See Interagency Guidance on Nontraditional Mortgage Product Risks, note 42. 

estate professionals and brokers that she didn’t qualify and the paperwork was ‘‘too 

cumbersome.’’ 5

What Caused the Foreclosure Crisis? 

The foreclosures faced by these veterans are not just the typical foreclosures of 

years past, such as those precipitated by catastrophic and unforeseen events such 

as job loss, divorce, illness or death. In many cases, these foreclosures are due to 

the unsustainability of the mortgage itself, even without any changes in the families’ situation, and even where the family qualified for, but was not offered, a loan 

that would have been sustainable. Moreover, while significant losses so far have 

been concentrated in the subprime market, it is becoming increasingly evident that 

the problems are spreading to the Alt-A and even prime markets. 

This crisis has been created by a matrix of factors. I have outlined each of these 

factors below. 

Dangerous products. Subprime lenders flooded the market with high-risk loans, 

making them appealing to borrowers by marketing low monthly payments based on 

low introductory teaser rates. The most well known of these products is the hybrid 

adjustable-rate mortgage (ARM), often known as a 2/28 or 3/27. This type of loan 

begins with a fixed interest rate for either two or three years, then converts to a 

higher interest rate pegged to an index such as LIBOR. The loan then continues 

to adjust every six months, which can be as much as 30–50% more than the original 

rate. 

Another complex product that has put many low-income families at risk is the 

payment option adjustable-rate mortgage (POARM). This product allows people to 

make monthly payments that do not cover principal and interest, which means that 

the home experiences ‘‘negative amortization’’—that is, the principal balance of the 

loan grows larger—during the period that the minimum payment is being made. 

Unfortunately, lenders like Countrywide offered these loans to borrowers for whom 

they were not suited, structured the products so that the payments substantially increase in five years or less when they hit their negative amortization cap, used excessive teaser rates, and failed to document income. Unlike 2/28s, the POARMs that 

were poorly underwritten are largely Alt-A mortgages as opposed to subprime. 

Reckless underwriting. It is widely recognized today, even within the mortgage 

industry, that lenders became far too lax in qualifying applicants for subprime 

loans.6 They underwrote ARMs only to the initial rate, which means they did not 

even consider how homeowners would be able to pay their loans once the payment 

adjusted upward, even with rates constant in the economy. Even worse, many lenders qualified borrowers without any verification of income at all, using so-called 

‘‘stated-income’’ or ‘‘no-doc’’ loans. Fitch recently noted that ‘‘loans underwritten 

using less than full documentation standards comprise more than 50 percent of the 

subprime sector’’.7

No escrow. Subprime lenders also didn’t escrow for taxes and insurance as prime 

lenders do, which left many families reeling when those bills came due. This deceptive practice gives the borrower the impression that the payment is affordable when, 

in fact, there are significant additional costs. A study by the Home Ownership Preservation Initiative in Chicago found that for as many as one in seven low-income 

borrowers facing difficulty in managing their mortgage payments, the lack of escrow 

of tax and insurance payments were a contributing factor.8

Risk layering. In many cases, lenders combined multiple risk elements in one 

loan, such as hybrid ARM products with no documentation of income and no escrow. 

Regulators have expressed concern about this practice, stating that ‘‘risk-layering 

features in loans to subprime borrowers may significantly increase risks for both the 

. . . [lender] and the borrower.’’ 9

Broker abuses. Mortgage brokers are individuals or firms who find customers 

for lenders and assist with the loan process. Brokers provide a way for mortgage 

lenders to increase their business without incurring the expense involved with employing sales staff directly. Brokers also play a key role in today’s mortgage market: 

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10See MBA Research Data Notes, ‘‘Residential Mortgage Origination Channels,’’ September 

2006. 11See Subprime Debacle Traps Even Credit-Worthy, Wall Street Journal, December 3, 2007 12 ‘‘The Oracle Reveals All,’’ Newsweek (Sept. 24, 2007) pp. 32, 33. 13The New York Times, January 27, 2007. 14 ‘‘Subprime Loans Defaulting Even Before Resets,’’ CNNMoney.com, February 20, 2008. 

According to the Mortgage Bankers Association, in 2006, mortgage brokers originated 45 percent of all mortgages, and 71 percent of subprime loans.10

Unfortunately, given the way the current market operates, abuses by mortgage 

brokers are not surprising. First, mortgage brokers hold themselves out to consumers as trusted advisors for navigating the complex mortgage market: that is the 

service they sell, and it is the service consumers assume they are buying. Yet, for 

the most part, brokers deny that they have any legal or ethical responsibility to refrain from selling inappropriate, unaffordable loans, to avoid benefiting personally 

at the expense of their borrowers, or even to offer homeowners the best loan they 

qualified for. 

Second, the market as it is structured today gives brokers strong incentives to ignore the best interests of homeowners. In the majority of subprime transactions, 

brokers are paid more by lenders if they deliver mortgages with rates higher than 

those for which the borrower qualifies. This payment is called a ‘‘yield spread premium.’’ Not all loans with yield-spread premiums are abusive, but because they 

have become so common, and because they are easy to hide or downplay in loan 

transactions, unscrupulous brokers can make excessive profits without adding any 

real value. A related problem is racially discriminatory steering, in which lenders 

or brokers ‘‘upsell’’ minority borrowers into loans more expensive than those for 

which they qualify. The Wall Street Journal recently commissioned a study that 

found of those receiving subprime loans originated in 2005, more than half would 

have qualified for prime loans—in fact, for loans originated in 2006, that number 

was as high as 61%.11

Wall Street demand for more, riskier loans. Wall Street’s appetite for risky 

mortgages encouraged lax underwriting and the marketing of unaffordable loans. 

Demand from Wall Street for subprime loans was so intense that it encouraged 

subprime lenders to abandon reasonable qualifying standards, to forget about standard documentation requirements, and to ignore whether borrowers could actually afford the loan. As Alan Greenspan told Newsweek, ‘‘The big demand was not so much 

on the part of the borrowers as it was on the part of the suppliers who were giving 

loans which really most people couldn’t afford. We created something which was 

unsustainable. And it eventually broke. If it weren’t for securitization, the subprime 

loan market would have been very significantly less than it is in size.’’ 12

Market participants readily admit that they were motivated by the increased profits offered by Wall Street in return for risky loans. After filing for bankruptcy, the 

CEO of one mortgage lender explained it this way to the New York Times, ‘‘The 

market is paying me to do a no-income-verification loan more than it is paying me 

to do the full documentation loans,’’ he said. ‘‘What would you do?’’ 13 Even the chief 

economist of the Mortgage Bankers Association, when asked why lenders made so 

many loans that they knew were unsustainable, replied, ‘‘Because investors continued to buy the loans.’’ 14

Lack of oversight and regulation. Policymakers have long recognized that the 

primary federal law governing predatory lending (HOEPA) is inadequate and outdated. Although the Federal Reserve Board has long had the authority to step in 

and strengthen relevant rules since the legislation’s passage, they completely failed 

to do so until this crisis had already unfolded, and now, their proposed rules are 

significantly weaker than would be necessary to prevent this crisis from occurring 

again. As for other regulators, not only have most bank regulators taken a handsoff approach until recently, but many of the most egregious abuses were perpetrated 

by non-bank financial institutions that were largely unregulated. For the majority 

of subprime mortgage providers, there were no regulatory consequences for making 

abusive or reckless home loans. 

The Crisis is Only Growing 

It is important to recognize that while the rate of subprime foreclosures is alarming today, the worst is still ahead. Many additional homeowners will find themselves in trouble due to rate resets on their hybrid ARM, payment option ARM, and 

interest-only Alt-A loans. Given the slowdown in housing prices, these homeowners 

will not have the option to refinance or sell that they may have had in the past, 

increasing the likelihood of foreclosure. As the chart below shows, a large majority 

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49 

15See Credit Suisse, Fixed Income Research, October 23, 2006. 16See http://www.mortgagebankers.org/NewsandMedia/PressCenter/59454.htm. 17Gretchen Morgenson, ‘‘Can These Mortgages be Saved?’’ New York Times (September 30, 

2007). 

of these hybrid ARM rate resets will occur throughout 2008, peaking in October, followed by spikes in payment option ARM resets in 2009, 2010, and 2011.15

Even worse, we are beginning to see many mortgages originated after 2005 beginning to fail even before the reset date. The laxity in underwriting for these loans 

was so dramatic that many homeowners cannot even afford the initial monthly payments. 

What Can We Do To Help? 

While it would be ideal if lenders voluntarily stepped in to rescue homeowners 

who were given dangerous and abusive loans, such voluntary efforts do not appear 

to be happening on a scale commensurate to the problem. The Mortgage Bankers 

Association—after denying for months that a foreclosure crisis even existed—now 

insists that lenders are making significant efforts to prevent foreclosure, but the 

numbers belie that claim. During the third quarter of 2007, mortgage lenders started about 213,000 foreclosures on subprime loans, but offered meaningful fixes (‘‘loan 

modifications’’) for only 28,000.16

While we welcome the Treasury Department’s Hope Now initiative, which has 

brought together a coalition of lenders and servicers to encourage voluntary loan 

modifications, we fear that the portion of the program designed to permit servicers 

to modify loans without engaging in a case-by-case analysis—the ‘‘ASF fast track 

modification’’—will not help enough homeowners. Only 3% of subprime ARM borrowers are likely to receive streamlined permanent modification under its terms. Repayment plans, which require a subprime ARM borrower to pay the full often 12% 

interest rate while catching up on delinquent payments at the same time, are ineffective. In the absence of detailed reporting, it is not even clear that the few modifications that have occurred are sustainable. Countrywide has acknowledged that 

most of its modifications ‘‘involved deferring overdue interest or adding the past due 

amount to a loan,’’ not reducing interest rates or principal balances on subprime 

ARMs.17

To step into this breach, there are a number of actions that Congress can take 

to help veterans at risk for foreclosure. 

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1. Permit judges to fix distressed home loans. The best solution to the current mortgage crisis is a small change to the bankruptcy code that would allow 

courts to make limited modifications to a mortgage loan when the borrower is 

facing foreclosure, ensuring that the borrower stays in their home and the 

lender continues to receive a payment stream. This change, H.R. 3609, has 

passed the House Judiciary Committee in a bipartisan compromise struck by 

Chairman Conyers and Representative Chabot. 

This change does not implicate the 2005 Bankruptcy Code changes, but rather relates to an older provision of the law. Right now, wealthy investors and 

speculators may receive loan modifications in bankruptcy proceedings for the 

debt they owe on their yachts, vacation homes and investor properties. Yet 

current law bars middle-class homeowners from receiving a loan modification 

to save the roof over their heads. Permitting bankruptcy judges to modify 

loans on primary residences could prevent as many as 600,000 foreclosures. (In 

reality, this remedy will accomplish its objective even without requiring most 

of these families to actually file for bankruptcy. Changing the Code will provide a template for modification and will give servicers the precedent and protection they need from lawsuits by tranches of investors who might otherwise 

object.) 

Making this small fix to the bankruptcy code will be a win-win for homeowners, lenders, neighbors, taxpayers and the economy as a whole. Homeowners can stay in their homes. Lenders will be guaranteed the fair market 

value of their house, which is more than they would receive at foreclosure sale, 

and without the lengthy delays and expenses associated with foreclosure. And 

loans can be modified quickly and effectively. 

2. Establish common-sense standards for sustainable mortgage origination. Any solution to the foreclosure crisis also requires that we prevent such 

abuses from happening again, especially since so many people will need to refinance their current mortgages. In the fall, the House passed H.R. 3915 to do 

just that. While that legislation is a good start, it did not adequately hold Wall 

Street accountable for its role in this mess. To restore the world’s confidence 

in our markets and recover a reasonable expectation of integrity to our mortgage financing system, we need policy action to realign the interests of people 

who buy homes, institutions that provide the loans, and the entities that invest 

in those mortgages. 

3. Expand the VA home loan program to address the current situation. 

Right now, the VA typically does not refinance loans that were not originated 

as VA loans. It would be extremely useful to consider whether the FHASecure 

program, aimed at providing rescue loans to homeowners in trouble on their 

mortgages, could be replicated by the VA. To be most useful, this program 

would need to permit some level of delinquency on a current mortgage and to 

limit equity requirements. Furthermore, to encourage more veterans to use VA 

loans, Congress might consider capping loan fees at 1%, as proposed by Representative Filner in H.R. 4884. 

4. Assist veterans who are seeking loan modifications. The VA occasionally 

assists veterans in negotiating with their lenders to modify a VA-backed loan. 

Policymakers in several federal and state venues have recognized the need for 

additional counseling and legal resources to assist homeowners facing foreclosure who seek modifications from the lenders. Congress should consider how 

the VA can expand its efforts to support veterans in working with private lenders as well. 

5. Consider extending period of post-service foreclosure protection. Currently, under the Servicemembers Civil Relief Act, if a lender moves to foreclose on a servicemember’s home during the term of service or within 90 days 

thereafter, a judge may stay the proceedings. Chairman Filner has introduced 

legislation (H.R. 4883) that would extend this period to a full year. Recent experience with loan modification suggests that 90 days may be insufficient for 

veterans to get their financial affairs in order and to explore options for saving 

their homes, especially as they often have many other pressing matters to attend to upon returning home. Congress should consider extending this period 

of protection. 

Conclusion 

The subprime lending system has failed our Nation’s veterans along with millions 

of other middle-class families. Veterans put their lives on the line to protect our 

country’s security and our way of life. Now, their families are on the verge of losing 

their homes and financial security, and we all will be worse off as a result. 

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1 After a mortgage is made, the lender will often sell the loan to investors. A loan servicer 

acts as the intermediary between the borrower and the investor. The servicer’s role is to collect 

payments, handle escrow accounts, forward principal and interest payments to the investor and 

deal with issues that arise from delinquency and foreclosure. A servicer is typically compensated 

25 basis points (0.25%) of the loan balance for performing this service, or $250 on a $100,000 

loan balance. 

As outlined here, policymakers have a number of tools at their disposal to mitigate the harm caused by this situation and prevent it from happening again in the 

future. We greatly appreciate the Subcommittee’s interest in the foreclosure crisis, 

and we look forward to working with you to explore and implement the recommendations that we and others have suggested. 

f 

Prepared Statement of Larry Gilmore, Deputy Director, 

HOPE NOW Alliance 

Madam Chairwoman, Ranking Member Boozman and Members of the Subcommittee, I am Larry Gilmore, Deputy Director of the HOPE NOW Alliance. I appreciate the opportunity to appear before you today on behalf of HOPE NOW to talk 

about the efforts to help veterans and all at-risk homeowners stay in their homes 

during this time of serious challenges in the housing market. 

The HOPE NOW Alliance is a broad-based collaboration between credit and home 

ownership counselors, lenders, investors, mortgage market participants and trade 

associations. Since last October, the HOPE NOW Alliance has worked to dramatically expand and coordinate the efforts that individual companies and non-profits 

are making to help homeowners in difficulty. HOPE NOW has been strongly encouraged by Treasury Secretary Paulson and Housing & Urban Development Secretary 

Jackson and by Members of Congress and other leaders. HOPE NOW has established and is expanding a coordinated, national approach among servicers, investors, 1 non-profit housing counselors and other industry participants to enhance our 

ability to reach out to borrowers who may have or expect to have difficulty making 

their mortgage payments and to offer them workable options to avoid foreclosure. 

The HOPE NOW Alliance is achieving real results in reaching more at-risk borrowers and in providing positive solutions that avoid foreclosure. 

Progress in Helping Struggling Homeowners 

The members of the HOPE NOW Alliance recognize the urgency of this issue, and 

we are working to reach new milestones on a weekly basis. I am pleased to have 

the opportunity to share our progress with you, including our most recent data results. 

First, the Alliance is continuing to expand and add companies and organizations 

who commit to specific efforts to reach and assist borrowers. As of February 25th, 

we have 27 loan servicers in the Alliance who represent over 90 percent of the 

subprime market. In addition, we have strong participation from respected non-profits, led by NeighborWorks America, the Homeownership Preservation Foundation, 

and the Housing Partnership Network, with their networks of trained counselors. 

We are continuing to expand our network of non-profits. 

One of the Alliance’s first steps was to demonstrate our commitment to results 

by adopting a Statement of Principles on helping distressed homeowners stay in 

their homes. These principles are helping ensure that all borrowers receive quality 

service and assistance when they contact their lender/servicer in the Alliance. 

The following are the principles embraced by HOPE NOW servicers, which are 

consistent with calls for the industry to expedite solutions for borrower: 

• HOPE NOW members agree to attempt to contact at-risk borrowers 120 days, 

at a minimum, prior to the initial Adjustable Rate Mortgage (ARM) reset on all 

2/28 and 3/27 ARM loan products; 

• HOPE NOW members agree to inform borrowers of the potential increase in 

payment and terms of the loan, in an effort to determine if the borrower may 

face financial difficulty in keeping their mortgage current; 

• HOPE NOW members agree to establish a single port of entry for all participating counselors to use; and 

• HOPE NOW members agree to make available dedicated e-mail and fax connections to support counselor and consumer contacts. 

By establishing these principles, HOPE NOW members are improving the infrastructure needed to help more borrowers on a much larger scale. In addition to imrfrederick on PROD1PC67 with HEARING

52 

2http://www.freddiemac.com/news/archives/corporate/2008/20080131_07ropersurvey.html. 

proving lender/servicer systems for working with counselors and borrowers, we are 

redoubling our efforts to reach out to at-risk borrowers. 

One of the most significant on-going challenges we face in helping consumers is 

a persistent reluctance of struggling borrowers to contact their servicer for help. 

Historically, evidence has shown that about half of borrowers who go into foreclosure never contacted their servicer for help. Freddie Mac reported at the end of 

January that 57 percent of the Nation’s late-paying borrowers still don’t know that 

their lenders may offer alternatives to help avoid foreclosure.2 We are working to 

drastically reduce that number and help as many troubled homeowners as possible 

avoid foreclosure. 

In November, HOPE NOW servicer participants began a monthly direct mail outreach campaign to at-risk borrowers. This direct mail effort—on the HOPE NOW 

letterhead—is in addition to the thousands of letters and telephone contacts made 

by individual servicers to their own customers. 

In our first direct mail effort in November, HOPE NOW members sent 232,850 

letters to borrowers who are behind on their mortgage payments and who have not 

had contact with their servicer. The November letter provided a dedicated phone 

number for the individual borrower to use to call their own servicer for help. As a 

result of these letters, more than 16 percent of borrowers contacted their servicer, 

far more than the typical 2–3 percent response rate to a letter. 

In December, HOPE NOW sent a second wave of direct mail outreach letters to 

259,633 at-risk homeowners, providing individual servicer hotlines as well as the 

888–995–HOPE Hotline provided by the Homeownership Preservation Foundation. 

As a result of these letters, more than 21 percent of borrowers contacted their 

servicer. The monthly direct mail efforts continued in January and February of this 

year, and to date, over one million letters have been sent to at-risk borrowers. We 

will report more results as data are compiled. 

The Homeowner’s HOPE Hotline is a key component of the outreach and assistance effort for at-risk homeowners. The hotline directly connects homeowners with 

trained counselors at non-profit counseling agencies that have been certified by the 

Department of Housing and Urban Development (HUD). This counseling service is 

completely free to borrowers and is offered in English and Spanish. The counselors 

have direct access to the lender/servicers through improved single points of entry 

that all HOPE NOW Alliance members have agreed to create. 

The Homeowner’s HOPE Hotline is having a dramatic and positive impact for atrisk homeowners. The HOPE NOW Alliance will continue to expand the Hotline’s 

capacity and promote it to reach more at-risk borrowers. 

• To date, the Homeownership Preservation Foundation Homeowner’s HOPE Hotline has received 456,243 calls, with over 245,000 calls in 2007 alone; 

• Calls are increasing monthly. In December 2007, there were 93,794 calls to the 

Hotline that produced 15,462 counseling sessions; 

• 165,755 homeowners received counseling after calling the Hotline, 83,000 of 

which occurred in 2007; 

• In January 2008, there were 82,569 calls that produced 19,558 counseling sessions. 

• The Counseling sessions produce results. Through October 26, 2007, more than 

half of all homeowners counseled have been connected with their lender for assistance, and one quarter of all homeowners counseled in the fourth quarter of 

2007 were referred to their lender for a recommended workout; 

• Counseling sessions are rapidly increasing. Call volume has increased nearly 

10fold between first quarter 2007 and fourth quarter 2007; 

• Lender/servicers are urging borrowers to call for counseling. Homeowners primarily hear about the Homeowner’s HOPE hotline from their lender; 

• More homeowners with ARMs are calling—49 percent of callers in the fourth 

quarter of 2007 were ARM borrowers, up from 34 percent in the first quarter. 

Publicity for the Homeowner’s HOPE Hotline continues to increase and we hope 

more homeowners will learn about it. We are proud that the Homeowner’s HOPE 

Hotline provides a resource for free, non-profit counseling to any homeowner, anywhere in the country. President Bush, Treasury Secretary Paulson and HUD Secretary Jackson have mentioned the Homeowner’s HOPE Hotline several times and 

they have urged homeowners in trouble to seek help. Members of Congress have 

also highlighted the hotline. Thirty-eight Mayors from across the country recently 

created public service announcements for their local media markets urging borrowers to use the hotline. Anytime the Homeowner’s HOPE Hotline is mentioned 

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by public officials or on television, calls to the hotline increase dramatically. We welcome that support and are continuing to work to expand the counseling network for 

the hotline. 

Members of Congress, in an effort to help their constituents avoid foreclosure, 

have asked us on many occasions what they could do to help. The single most important thing Members and other community leaders can do to help people stay out 

of foreclosure is to urge homeowners to seek help and publicize HOPE NOW efforts, 

particularly the Homeowner’s HOPE Hotline, 888–995–HOPE. We would like to 

work with the Veterans Affairs Committee to ensure that more veterans are aware 

of the HOPE hotline and other assistance from the HOPE NOW Alliance. 

The Homeownership Preservation Foundation, the HOPE NOW Alliance member 

managing the telephone network, is continuing to add trained, experienced counselors to the program to handle the increasing call volume from concerned homeowners. Tremendous progress has been made in just the last few months. The hotline now has 400 trained counselors assisting borrowers, up from 64 at the beginning of 2007. The agencies providing counseling include Auriton Solutions, CCCS 

Atlanta, CCCS San Francisco, Novadebt, Springboard and Money Management 

International. 

NeighborWorks America, known formally as the Neighborhood Reinvestment Corporation, is a Congressionally chartered non-profit organization with a national network of more than 240 community-based organizations in 50 states. NeighborWorks 

is a leader in the HOPE NOW Alliance, and with its partners, is actively providing 

in-person counseling services to consumers across the country. NeighborWorks has 

also been the leader in working with the Ad Council on the national advertising 

campaign for the Homeowners’ HOPE hotline, which includes television, radio and 

print materials. 

HOPE NOW is working to add more non-profit agencies to the effort. HOPE NOW 

is working with HUD and HUD counseling intermediaries to review ways to include 

additional grass-roots counseling groups. We are working to broaden the HOPE 

NOW effort to ensure it is a model that works broadly for industry, non-profits and 

consumers to maximize the ability to reach troubled borrowers. 

Servicers’ ability to reach borrowers, either directly or through an intermediary 

is the key to helping them stay in their homes. The solutions will vary with the 

circumstances of the borrower. Prudent and responsible loan modifications, repayment plans and other types of workout options are solutions that can both help borrowers keep their homes and minimize losses to investors. The HOPE NOW Alliance 

is committed to pursuing all viable solutions to help people stay in their homes. 

HOPE NOW Multi-City Outreach Events 

In addition to the direct mail campaign and promotion of the HOPE hotline to 

reach at-risk borrowers, HOPE NOW is initiating a series of events across the country to reach more at-risk borrowers and provide them with an opportunity to meet 

with their loan servicer and find solutions. The first HOPE NOW outreach events 

are next week in California: March 3rd in Riverside, March 5th in Anaheim, and 

March 7th in Stockton. The purpose of these events is to enable more borrowers to 

meet with their servicer or a certified home ownership counselor face-to-face to develop a workout solution that helps the borrowers stay in their home. 

Tools for Helping Struggling Borrowers 

The HOPE NOW mortgage servicers recognize that it makes good economic sense 

to help borrowers who are in trouble. Borrowers who are not able to stay current 

on their loans are very costly to the servicer, who must forward principal and interest payments to investors as well as remit taxes and insurance payments, even if 

borrowers are not paying them. In addition, significant staff resources must be employed to contact the borrower, assess the situation, work on repayment plans and 

other loss mitigation solutions, and if these efforts do not resolve the situation, initiate and manage the foreclosure process. 

Informal forbearance and repayment plans are generally the first tool servicers 

employ to help borrowers. Servicers allow mortgagors to miss a payment, with the 

explicit understanding the payment(s) will be made up some time soon. If the situation is more involved than a short-term cash crunch due to temporary unemployment or illness, a servicer may turn to a special forbearance plan, which will typically combine a period of postponed or reduced payments followed by repayment of 

the arrearage over an extended timeframe, but within the original term of the loan. 

Loan modifications are the next level of loss mitigation options. A loan modification is a change in the underlying loan document. It might extend the term of the 

loan, change the interest rate, change repayment terms or make other alterations. 

Similarly, a servicer may attempt to refinance the delinquent borrower into a new 

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loan. Loan modifications are one solution for borrowers who have an ability to repay 

a loan, and have the desire to keep their home, but may need some help in meeting 

this goal because the current loan terms are not sustainable for that borrower. 

HOPE NOW members have worked aggressively to make all of the available tools 

as efficient as possible. The American Securitization Forum (ASF) has created a 

framework that allows servicers to more readily modify certain at-risk loans that 

are securitized in the secondary market. This effort has received the backing of the 

Departments of the Treasury and HUD, many Members of Congress, the federal 

banking agencies and state and local officials. 

The focus of the ASF framework is to identify categories of current subprime hybrid ARM borrowers who can be streamlined into refinance or modifications. We believe that the ASF-established framework will add to existing efforts to assist distressed borrowers. The key is to find solutions which help borrowers but do not violate the agreements with investors who now own the securities containing these 

loans. 

The ASF has worked with servicers and investors to create and implement a process which identifies, in advance of loan resets, borrowers who would qualify for refinancing, loan modifications or other workout options. To ensure that investors accept and support far-reaching loan modification and other workout solutions, this 

process cannot violate pooling and servicing agreements with investors. The goal is 

to minimize the risk of legal action by investors against servicers who help borrowers. The ASF framework covers securitized subprime adjustable rate mortgage loans, 

the so-called 2/28’s and 3/27’s that were originated between January 1, 2005 and 

July 31, 2007 with an initial interest rate that resets between January 1, 2008 and 

July 31, 2010. In other words, the framework is for loans that have just begun to 

adjust. The ASF framework will help provide solutions for homeowners with these 

subprime hybrid ARMs who qualify for three different types of help: refinancing, 

modification and other loss mitigation efforts. 

• Refinancing: One segment of borrowers is comprised of those who are current, 

likely to remain current even after reset, or likely to be able to refinance into 

available mortgage products, including the Federal Housing Administration 

(FHA), FHA Secure or industry products. Generally, the servicer will determine 

whether loans may be eligible for refinancing into various available products 

based on readily available data such as LTV, loan amount, FICO and payment 

history. The servicer will facilitate a refinance in a manner that avoids the imposition of prepayment penalties whenever feasible. HOPE NOW will continue 

to work with the alliance to ensure that all servicers have access to products 

and programs generally available in the market to refinance eligible borrowers. • Loan Modifications: A second segment of borrowers is comprised of those with 

good payment records who will not qualify for refinancing for any variety of reasons, such as a drop in home equity or insufficient credit score. These borrowers 

will be targeted for streamlined loan modifications if the loan is a primary residence (i.e., not an investment or vacation property) and meets additional criteria. Borrowers in this category will be offered a loan modification under which 

the interest rate will be kept at the existing rate of the loan for five years. This 

fast track option does not in any way preclude a servicer from conducting a 

more individual in-depth review, analysis and unique modification for a borrower to determine if a longer term modification would be appropriate. 

The fast track framework allows the servicer to make these decisions: 

• Whether the borrower is unable to pay under the original loan terms after 

the upcoming reset and default is reasonably foreseeable, based on the size 

of the payment increase, and the current income if the borrower did not pass 

the FICO improvement test; 

• Whether the borrower will be able to pay a modified loan based on payment 

history prior to the reset date; 

• Whether the borrower is willing to pay a modified loan; and 

• Whether the modification will maximize the net present value of recoveries 

to the securitization trust and is in the best interests of investors in the aggregate, because refinancing opportunities are not available and the borrower 

is able and willing to pay under the modified terms. 

• Loss Mitigation: This third segment of borrowers is comprised of those for whom 

the loan is not current and who will not be able to refinance into any available 

product. These borrowers are significantly behind in their payments before the 

loan resets and their situations need to be evaluated individually. It is especially important for us to reach this group of borrowers through efforts such as 

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the HOPE NOW direct mail campaign and through the national advertising 

campaign for the Homeowner’s HOPE hotline. For loans in this category, the 

servicer will determine the appropriate workout and loss mitigation approach 

on a loan-by-loan basis. Referrals from counselors if the borrowers contact the 

Homeowners’ HOPE hotline will also be important. Approaches for these borrowers may include loan modification (including longer term rate reductions, 

capitalization of arrearages and term extensions), forbearance, short sale, deeds 

in lieu of foreclosure or foreclosure. Because these borrowers are already behind 

in their payments, and may face challenges such as a loss of income or other 

issues, they require a more intensive analysis, including current debt and income analysis, to determine the appropriate loss mitigation approach. 

Servicers, however, can only help borrowers who come forward for help. Borrowers 

must respond to servicers’ notices and phone calls. That is why the outreach effort 

is so important. If borrowers do not respond, at some point the servicer has to assume the homeowner has no intention of paying off the obligation. It is also important to note that the options for helping borrowers who purchased homes as investments are limited. During the housing boom of the last several years, there were 

many speculators and investors looking to profit from price appreciation. The 

strength of our economy relies on the willingness of people to take risks, but risk 

means that you do not always win. During this time, a majority of these properties 

were purchased to try to capitalize on appreciating home values or to use rents as 

a source of investment income, or some combination of both. With the downturn in 

the housing market, a number of these investors are walking away from their properties and defaulting on their loans. According to data by the Mortgage Bankers Association, in the third quarter of 2007, 18 percent of foreclosure actions started was 

on non-owner occupied properties. Foreclosure starts for the same period for nonowner occupied properties in Arizona, Florida, Nevada and Ohio were at 22 percent. 

HOPE NOW is seeking to help all borrowers at risk, not just subprime ARM borrowers eligible for fast track refinance or modifications. The ASF framework for a 

streamlined, scalable solution for current borrowers facing a reset allows servicers 

to give more detailed attention to at-risk, hard-to-reach, delinquent borrowers. 

Servicers will be able to work closely with credit counselors and/or homeowners to 

ensure all options are explored to avoid foreclosures. The scalable outreach and 

modification effort in no way precludes on-going workout solutions for the highest 

risk delinquent borrowers. By having this framework in place, human capital and 

other resources are able to focus on the cases that require the most attention. 

Project Lifeline 

HOPE NOW members are continuing to work to develop new methods and programs to assist at-risk homeowners. Project Lifeline is the latest effort to help the 

most at-risk borrowers—those borrowers who are 90 days or more late on their 

mortgage and face the greatest risk of losing their home. No later than March 31, 

all HOPE NOW servicers will adopt the principles of this effort to reach most at 

risk borrowers (90-day plus delinquent), work with agreed upon steps with borrowers and if appropriate, put a 30-day ‘‘pause’’ on foreclosures. The program will 

begin by servicers sending a letter to seriously delinquent homeowners. This program reaches most loans, Prime, Alt-A, Subprime, and second liens. The servicers 

will reach out to homeowners with the following straightforward steps that may 

qualify them for a loan modification: 

1. Call your mortgage servicer. 

2. Tell the servicer you received a letter, you want to stay in your home and you 

are willing to seek counseling, if necessary. 

3. Provide updated financial information so the servicer can explore a suitable solution. 

4. If appropriate, any pending foreclosure will be ‘paused’ for up to 30 days during 

the review process until a formal decision is made and a plan is created. 

5. If a workout plan is established and the homeowner follows the plan for three 

consecutive months, their loan will be formally modified as they have demonstrated their ability to meet their requirements. 

Measuring Our Results 

The members of HOPE NOW recognize that results are the key to this national 

effort to assist at-risk homeowners. I am pleased to share with you the latest results 

from HOPE NOW servicers on their efforts in the second half of 2007. This latest 

HOPE NOW data, released on February 6th, shows that significantly more homeowners received assistance than previously estimated. 

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Fourteen HOPE NOW servicers responsible for more than 33.3 millions home 

loans (about 62 percent of both prime and subprime loans outstanding nationwide), 

as of September 2007, provided the data. The latest report shows that an estimated 

869,000 homeowners were helped in the second half of 2007 through either a formal 

repayment plan (652,000) or a loan modification (217,000). 

During the same period, 283,000 foreclosure sales were completed. Based on 

1,446,000 average monthly delinquencies of 60 days or more past due during the 

second half of 2007, 45.3 percent received a formal repayment plan, 14.8 percent received a modification and 19.7 percent resulted in a completed foreclosure sale. 

The data for the second half of 2007 reveal 324,000 prime borrowers and 545,000 

subprime borrowers were helped: 

• 20.7 percent of prime borrowers helped received a modification; • 27.5 percent of subprime borrowers helped received a modification; and • 34.8 percent of subprime borrowers helped during the fourth quarter received 

a modification; and • 49.8% of those helped in January 2008 received a loan modification indicating 

a rapid increase in the use of modifications as a loss mitigation solution. 

In addition, the study also collected information on foreclosure activity and trends. 

These data are revealing. While there appears to be a large number of foreclosures 

initiated by servicers, less than half of those initiated actually result in a completed 

sale. Frequently borrowers do not respond to their servicer’s attempts to contact 

them until they receive their first legal action notice. HOPE NOW’s borrower outreach initiatives are already increasing the number of borrowers who respond before 

a foreclosure action is initiated. 

In addition to aggregate nationwide data, the report includes quarterly data for 

the 50 states and the District of Columbia. 

The latest state level data from HOPE NOW servicers show that efforts to help 

borrowers are rapidly increasing. The trend in formal repayment plans is up in all 

states but more so in the states that experienced rapid and substantial increases 

in home prices. That is to be expected because of the more rapid increase in delinquencies in the states that experienced a rapid increase and then decline in housing 

prices. However, it is clear in all states that the upward trend in loan modifications 

completed is much greater than the upward trends in delinquencies and in formal 

repayment plans, which clearly indicates that servicers increasingly are working 

with borrowers to modify the terms of their loans. The upward trend in loan modifications is much more pronounced in the states that had substantial increases in 

home prices. 

We believe the upward trend in loan modifications and repayment plans will continue and more homeowners will receive the help they need to stay in their homes. 

We are tracking and measuring outcomes through HOPE NOW and other efforts. 

In addition to the data reported here, we are measuring trends in delinquencies and 

resolution outcomes (i.e. reinstatement, repayment plans, modifications, short sales, 

deeds in lieu of foreclosure, partial claims and foreclosure). We want to provide consistent and informative data reports based on common definitions and to provide information that provides insights into the nature and extent of the current mortgage 

crisis that will help in the development of workable solutions that avoid foreclosure 

whenever possible. 

As we promised at the start of HOPE NOW, as our data collection initiatives mature and the data are validated, we are providing more detailed information nationally and on a state by state basis. As I noted, our alliance is growing weekly. Our 

participating servicers have been engaged in developing standard definitions for key 

loss mitigation data. The data collection effort is an enormous undertaking, which 

will take time to develop fully and perfectly. We are confident, however, that we will 

be able to deliver systematic information at the state level that will help measure 

what servicers are doing to resolve difficult situations and to assist homeowners. 

Assisting Veterans and Military Personnel 

HOPE NOW members are committed to assisting all homeowners in need. Any 

homeowner who is concerned about their mortgage situation can call the national 

HOPE hotline to speak to a non-profit counselor. We also urge homeowners to call 

their servicer directly and ask for assistance. In addition to the HOPE hotline, we 

are publicizing the 800-numbers for the customers of all our servicers. 

HOPE NOW member organizations and companies are also involved in other specific programs to assist veterans and active duty military personnel. 

The Homeownership Preservation Foundation, which manages the HOPE hotline, 

has supported U.S.A. Cares in assisting 154 families of active duty military personnel. They have made back mortgage payments to avoid foreclosure, and 130 

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loans have been reinstated and 24 are in repayment plans. For example, through 

this partnership, a member of the National Guard who went onto active duty in November and whose wife and father both fell ill within two months of each other leading to becoming 6 months behind in his mortgage payments, was able to secure 

funds from USA Cares and has fully reinstated his mortgage. Similarly, a retired 

Army veteran who suffered from Post Traumatic Stress Disorder had difficulties 

finding a job after returning home and who has a wife and a very young child, received assistance from USA Cares to become current on his mortgage and Veterans’ 

Affairs was also able to help him secure a job. 

Countrywide Financial is a corporate founding sponsor of Serving Those Who 

Serve. Working with Rebuilding Together, they rehabilitate homes for injured Iraq 

War veterans to make them more accessible for their particular disability. Their 

work focuses on helping veterans who suffer from one or any combination of four 

injuries including: loss of sight, loss of hearing, mobility impairments, and Traumatic Brain Injury. 

Conclusion 

The HOPE NOW Alliance and those working with it are committed to enhanced 

and on-going efforts to contact at-risk homeowners and to offer workable solutions. 

Our top priority is to keep people in their homes and to avoid foreclosures whenever 

possible. As I reported today, 869,000 homeowners were helped through modifications or work-outs in the second half of 2007 and the rate of loan modifications continues to increase. We are working to help many more at-risk homeowners. 

We need the active involvement of all Members of Congress to alert constituents 

that help is available when they contact either their lender/servicers or a non-profit 

counselor through the Homeowner’s HOPE Hotline. 

The HOPE NOW Alliance will continue its work until the problems in the housing 

and mortgage markets abate. My testimony today includes initial, but real and significant results on the number of homeowners who have been helped. We will provide updates on our progress to Congress and other concerned policymakers in the 

coming weeks. 

We want to work with the Committee and the Department of Veterans Affairs to 

ensure that veterans are aware of and can take advantage of the assistance offered 

by HOPE NOW. 

Thank you for this opportunity to share this information on our efforts with the 

Subcommittee. 

HOPE NOW Membership 

Counselors 

• ACORN Housing Corporation 

• Catholic Charities USA 

• Citizens’ Housing and Planning Association, Inc. 

• Consumer Credit Counseling Service of Atlanta 

• HomeFree—USA 

• Homeownership Preservation Foundation 

• Housing Partnership Network 

• Mission of Peace 

• Mississippi Homebuyer Education Center—Initiative 

• Mon Valley Initiative 

• Money Management International, Inc. 

• National Association of Real Estate Brokers—Investment Division, Inc. 

• National Council of La Raza 

• National Credit Union Foundation 

• National Foundation for Credit Counseling, Inc. 

• National Urban League 

• NeighborWorks America 

• Rural Community Assistance Co. 

• Structured Employment Economic Development Co. 

• West Tennessee Legal Services, Inc. 

Servicers/Lenders/Mortgage Market Participants 

• Assurant, Inc. 

• Aurora Loan Services 

• Avelo Mortgage, LLC. 

• Bank of America 

• Carrington Mortgage Services 

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• Chase • Citigroup, Inc. • Countrywide Financial Corporation • EMC Mortgage, Inc. • Fannie Mae • First Horizon Home Loans and First Tennessee Home Loans • Freddie Mac • GMAC ResCap • Home Loan Services, Inc. (d/b/a First Franklin Loan Services & NationPoint 

Loan Services) • HomEq Servicing • HSBC Finance • Indymac Bank • Litton Loan Servicing • LoanCare Servicing Center, Inc. • MERS • National City Mortgage Corporation • Nationstar Mortgage, LLC. • Ocwen Loan Servicing, LLC. • Option One Mortgage Corporation • PMI Mortgage Insurance Co. • Saxon Mortgage Services • Select Portfolio Servicing, Inc. • State Farm Insurance Companies • Strategic Recovery Group, LLC. • SunTrust Mortgage, Inc. • Washington Mutual, Inc. 

• Wells Fargo & Company 

• Wilshire Credit Corporation 

Trade Associations 

• American Bankers Association 

• American Financial Services Association 

• American Securitization Forum 

• Consumer Bankers Association 

• Consumer Mortgage Coalition 

• The Financial Services Roundtable 

• The Housing Policy Council 

• Mortgage Bankers Association 

• Securities Industry and Financial Markets Association 

Servicer Contact Numbers for Homeowners 

Below are the customer contact telephone numbers of HOPE NOW servicer members. If you are a homeowner having trouble with your mortgage, please call your 

servicer’s hotline for assistance (please have your account number ready when calling). 

If you would like to talk to a HUD-approved home ownership counselor, please 

call the Homeowner’s HOPE Hotline, 888–995–HOPE, operated by the Homeownership Preservation Foundation. Free counseling is available 24 hours a day, 7 days 

a week. You can also visit www.995hope.com for more assistance. 

Servicer and Hotline 

Aurora Loan Services—800–550–0509 

Avelo Mortgage, LLC.—866–992–8356 

Bank of America—800–846–2222 

Carrington Mortgage Services—800–790–9502 

CitiFinancial/Citi Trust Bank—800–422–1498 

CitiMortgage/Loss Mitigation—866–272–4749 

CitiResidential Customer Care—800–430–5262 

Countrywide Home Loans—800–669–6650 

EMC Mortgage, Inc.—877–362–6631 

First Horizon Home Loans—800–364–7662 

GMAC/Homecomings/ResCap—800–799–9250 

Home Loan Services, Inc. (d/b/a First Franklin Loan Services and NationPoint Loan 

Services)—800–500–5022 

HomEq Servicing—888–270–6663 

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HSBC Consumer Lending—800–333–5848 

HSBC Mortgage Services—800–365–6730 

HSBC Mortgage Corporation—888–648–3124 

Indymac Bank—800–880–6848 

JPMorgan Chase Prime Loans—800–446–8939 

JPMorgan Chase Non-Prime—877–838–1882 

JPMorgan Chase Home Equity—866–582–5208 

JPMorgan Chase Default HPO Help Line—866–345–4676 

Litton Loan Servicing—800–999–8501 

National City Mortgage Corporation—800–523–8654 

Nationstar Mortgage, LLC.—888–480–2432 

Ocwen Loan Servicing, LLC.—877–596–8580 

Option One Mortgage Corporation—888–275–2648 

Saxon Mortgage Services—888–325–3502 

Select Portfolio Servicing—888–818–6032 

SunTrust Mortgage, Inc.—800–443–1032 

Washington Mutual, Inc.—866–926–8937 

Wells Fargo Home Mortgage—877–216–8448 

Wells Fargo Financial—800–275–9254 

Wilshire Credit Corporation—888–917–1050 

HOPE NOW: Results in Helping Homeowners 

As of February 25, 2008 

• An estimated 869,000 homeowners were helped to avoid foreclosure in 

3rd and 4th quarters of 2007. 

• This includes an estimated 652,000 formal repayment plans and an estimated 

217,000 modifications. 

• Subprime modifications doubled in 4th quarter 2007 from 3rd quarter 

2007. 

• Since November 2007, HOPE NOW servicers have sent over one million 

outreach letters to at-risk borrowers who have not previously been in 

contact with their servicer. 

• 16% responded in November. 

• 21% responded in December. 

• When servicers send similar letters to their borrowers, the normal response 

rate is 2–3%. 

• Prior to these letters, these borrowers had not responded to any outreach efforts. 

• 27 servicers part of HOPE NOW as of February 2008. 

• American Securitization Forum (ASF) guidance—member companies 

are adopting and implementing the ASF framework for loan modifications. 

• Project Lifeline—Member companies are adopting the principles of this effort to reach most at risk borrowers (90-day plus delinquent), work with agreed 

upon steps with borrower and if appropriate, put a 30-day ‘‘pause’’ on foreclosures. 

• Homeowner calls have increased to 4,500 per day through the Homeownership Preservation Foundation’s Homeowner’s HOPE Hotline. 

• Over 37,000 counseling sessions completed through the Homeowner’s 

HOPE Hotline in 4th quarter 2007. 

• To date, the HOPE Hotline has received 456,243 calls which led to counseling 

for 165,755 homeowners. Nearly half of those counseled have avoided foreclosure by working out new loan terms or by selling their home. 

• As of February 2008, increased response capacity to 400 home ownership counselors through the Homeownership Preservation Foundation 

and intermediaries, 24 hours a day, 7 days a week. 

f 

Prepared Statement of Judith A. Caden, Director, Loan Guaranty Service, 

Veterans Benefits Administration, U.S. Department of Veterans Affairs 

Madam Chairwoman and members of the Committee, I appreciate the opportunity 

to appear before you today to discuss the subprime mortgage crisis and America’s 

veterans. 

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The Subprime Crisis 

‘‘Subprime’’ is a generic term used to describe mortgage loans with interest rates 

higher than prime rates. The subprime loans that are causing the current crisis 

usually have several layers of risk associated with them. These layers of risk are 

generated by a combination of one or more factors, such as lack of income 

verification, lack of asset verification, lack of underwriting at a fully indexed rate, 

low borrower credit scores, large margins, low teaser rates, interest only payments, 

borrower option payments, and secondary liens. (Note: Industry often labels loans 

with some of these characteristics as Alt-A rather than subprime if borrowers have 

high credit scores.) VA guaranteed loans, on the other hand, have none of these 

characteristics and have carried an average borrower FICO credit rating of around 

680, as compared to the subprime average of below 620. 

In 2000, loans characterized as subprime represented a low percentage of all 

mortgage originations, and were made mostly to borrowers with low credit scores 

and small loan balances. By comparison, in 2006, subprime originations represented 

more than 20 percent of all mortgage originations, and borrowers, despite having 

slightly higher credit scores, carried much higher loan balances and much higher 

loan-to-value ratios. 

Credit losses mounted from the record-setting losses of the subprime loans made 

in 2000. Secondary market investors recognized this risk and priced the potential 

of losing money on future investments to the point where originators of subprime 

mortgage loans could no longer afford to sell them. This lack of liquidity in the secondary market has had a tremendous impact on the ability and desire of lenders 

to originate subprime loans. It is the primary reason few institutions are willing to 

make them. 

The VA-Guaranteed Home Loan Program 

It is important to understand that the VA-guaranteed home loan program is not 

a part of the subprime mortgage market. VA-guaranteed home loans are not 

subprime products. Additionally, the average borrower using the VA-guaranteed 

home loan program does not have what would be considered a subprime credit score. 

To date, VA has not been affected by the current subprime turmoil as dramatically 

as lenders that have all or even some percentage of their portfolios concentrated in 

subprime loans. 

The laws governing our program provide that VA-guaranteed home loans must be 

made in accordance with VA’s credit underwriting standards, which are promulgated in VA regulations. Lenders underwriting VA loans must ensure that the contemplated terms of repayment bear a proper relation to the veteran’s present and 

anticipated income and expenses, and that the veteran is a satisfactory credit risk. 

VA’s credit standards employ the use of debt-to-income ratios and residual income 

guidelines in determining the adequacy of the veteran’s income. When evaluating 

borrower creditworthiness, however, VA’s standards require lenders to evaluate all 

of the borrower’s available credit data. In marginal cases, VA seeks to give veterans 

the benefit of the doubt with regard to credit and instructs lenders to examine compensating factors like the veteran’s cash reserves, level of consumer debt, etc., when 

making an underwriting decision. 

The VA program has fared well in recent years with regard to foreclosure rates. 

According to data from the Mortgage Bankers Association, between the third quarter of 2005 and the third quarter of 2007, VA’s serious default rate declined, while 

all other mortgage types, including prime loans, rose. 

That said, VA does operate in the broader mortgage marketplace and will be collaterally affected by the subprime turmoil currently affecting that market. This collateral effect will generally be the result of declining house prices. 

Impact of Subprime Turmoil on VA Home Loan Borrowers 

With additional foreclosed homes on the market and a glut of new construction 

available and weak demand, the inventory of unsold homes has risen. Concurrently, 

credit has tightened as investors, fearing the quality of subprime loans, withdraw 

funds from the mortgage market, causing even some well qualified buyers to experience difficulties in obtaining new mortgages. With supply now exceeding demand, 

prices have naturally declined. 

In the current marketplace, there are fewer borrowers able or choosing to purchase homes and, therefore, fewer opportunities to sell homes. VA expects that its 

robust supplemental servicing program, which offers hope to many veterans with 

delinquent VA-guaranteed home loans, will be hampered by this situation. Most notably, the deflation in house prices eliminates certain foreclosure-avoidance tools 

that were previously available to us. The net result will be more foreclosures. 

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VA-Guaranteed Home Loan Protections 

For veterans who obtained a VA-guaranteed home loan, VA can offer supplemental servicing assistance during times of financial hardship and default. 

VA-guaranteed home loans are subject to certain regulatory requirements that 

allow us to help veterans retain ownership of their homes. The following briefly describes VA’s supplemental servicing assistance to veterans in default on their VAguaranteed home loans and the impact thereof. 

VA Supplemental Servicing and Loss Mitigation 

When VA receives notice that a veteran borrower has become seriously delinquent 

on his/her home loan, we take an active role in working to avoid foreclosure. VA’s 

efforts include pursuing various options to cure the default, thereby allowing the 

veteran to retain ownership of his/her home. VA can intercede with the loan holder 

on the veteran’s behalf. In the event the borrower can no longer maintain mortgage 

payments, VA encourages other alternatives to foreclosure to help mitigate the negative impact on the borrower. 

In FY 2007, due in part to VA’s loan servicing intervention efforts, foreclosure was 

avoided for more than 57 percent of the VA loans in serious default. Additionally, 

VA was able to intervene in 8,453 instances that resulted in successful loan reinstatement. As a result, VA avoided claim payments estimated at more than $181 

million. 

However, VA’s supplemental servicing efforts will be significantly hampered by 

the effects of the depressed state of the subprime market and tight credit. 

Specifically, house price deflation in certain areas will limit the options available 

to veterans hoping to avoid foreclosure. 

During the most recent housing boom, house prices were such that a sale often 

netted the borrower an amount which would satisfy any outstanding mortgage debt. 

But in the current environment, house prices are deflated and many borrowers find 

themselves unable to sell at a price which would net an amount to satisfy the outstanding mortgage debt in time to avoid foreclosure. Secondly, as house prices and 

values decrease, so does a borrower’s home equity. In many areas, borrowers now 

have less equity or no equity against which to borrow. In many areas home equity 

values have declined so substantially that this option is altogether eliminated. 

VA Assistance for Veterans with Subprime Loans 

For a veteran (or servicemember) who may have obtained a subprime loan, VA 

can offer general advice and guidance through our nine Regional Loan Centers. 

However, unlike the case of a veteran with a VA-guaranteed home loan, VA has no 

legal authority or standing to intervene on the subprime borrower’s behalf. 

Because VA only maintains home loan data on veterans who have taken advantage of the VA loan benefit, we are not aware of how many veterans may have mortgages that would be categorized as subprime. The Home Mortgage Disclosure Act 

does not require ‘veteran status’ to be collected as part of the loan applicant’s data. 

Regrettably, there are veterans who have subprime mortgages and who will be 

adversely affected by the subprime crisis. VA is prepared to offer as much assistance 

as possible to help veterans in this situation. Our VA Regional Loan Centers have 

Loan Service Representatives who can offer advice to all veterans who are experiencing home loan repayment difficulties, not just those veterans with VA-guaranteed loans. 

VA is authorized to guarantee refinancing loans to veterans. However, if a veteran 

wishes to use his/her home loan benefit to refinance a subprime loan, the resulting 

loan-to-value ratio could not exceed 90 percent and the total dollar guaranty is limited to $36,000. This means that a veteran with no equity would be able to obtain 

a refinance loan for only 90 percent of the home’s appraised value, and the maximum loan he/she could effectively obtain is $144,000. 

VA Program Revisions with Safeguards 

We are proud of the success of the VA home loan guaranty program in helping 

veterans obtain and retain homes. While the program has been expanded and modified over the years, it retains sound underwriting criteria. 

Conclusion 

VA expects that our program loan volume will increase. The lack of availability 

of mortgage credit, especially subprime products, in the conventional market will encourage veterans to obtain VA guaranteed loans. However, VA also expects that the 

supply glut in the marketplace and the resultant house price decreases will have 

a collateral effect on VA borrowers in default and that the number of foreclosures 

in our program will increase. VA stands ready to aid veterans in any way possible. 

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1The Mortgage Bankers Association (MBA) is the national association representing the real 

estate finance industry, an industry that employs more than 400,000 people in virtually every 

community in the country. Headquartered in Washington, D.C., the association works to ensure 

the continued strength of the Nation’s residential and commercial real estate markets; to expand 

home ownership and extend access to affordable housing to all Americans. MBA promotes fair 

and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 3,000 companies includes all elements of real estate finance: mortgage companies, 

mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and 

others in the mortgage lending field. For additional information, visit MBA’s Web site: 

www.mortgagebankers.org. 

Madam Chairwoman, this concludes my testimony. I look forward to answering 

any questions you or the Committee members may have. 

f 

Statement of Todd Bowers, Director of Government Affairs, 

Iraq and Afghanistan Veterans of America 

Madam Chairwoman, ranking member and distinguished members of the committee, on behalf of Iraq and Afghanistan Veterans of America, I thank you for the 

opportunity to testify today regarding the Subprime Mortgage Crisis and America’s 

veterans. I respectfully request that my testimony today be submitted for the record. 

I also ask that the Committee note that my testimony today is in my civilian capacity as the Director of Government Affairs for Iraq and Afghanistan Veterans of 

America and does not necessarily represent the views of the United States Marine 

Corps Reserve. 

In World War Two, it was the dream of millions of veterans to own their own 

homes. The veteran home-loan program made this possible for thousands of them. 

Today’s combat veterans have the same dream, and the VA is still here to help 

them. The VA currently guarantees 2.2 million home loans, totaling $243 billion dollars. They guarantee about 11,109 new home loans every month, over half of which 

go to first-time home buyers. Simply put, the VA’s home loan protections are still 

helping veterans achieve the American dream. 

Like all Americans, however, today’s veterans have been affected by the downturn 

in the economy and the mortgage crisis. According to a VA-commissioned 2007 

study, 18% of the veterans who sought jobs within three years of discharge were 

unemployed. A quarter of those who did find jobs were earning less than $22,000 

a year. In addition, the VA has already seen 1,500 homeless Iraq and Afghanistan 

veterans. 

These statistics are shocking, and without quick action, we can expect them to 

worsen. I am pleased to see that Congress has taken initial steps to appropriately 

address this issue. We believe that the following two pieces of legislation will aid 

veterans in their transition: 

H.R. 4884, The Veteran Home Loan Guaranty Improvement Act of 2008, will 

make home loans more accessible to veterans by easing restrictions on the home 

loan guaranty programs administered by the Department of Veterans Affairs (VA). 

The bill eliminates the equity requirements for refinancing in response to the declining home values which prohibit many veterans from qualifying for the benefit. The 

bill also reduces the VA guaranteed home loan funding fees to one percent and 

eliminates the funding fees for veterans seeking to refinance a home loan, among 

other things. 

H.R. 4883 will prohibit foreclosure of property owned by a servicemember for one 

year following a period of military service. 

I thank you for providing me the opportunity to testify before you this afternoon. 

I hope that the information I have provided you will effectively lay the ground work 

for the committee make significant changes to the current obstacles that our nation’s newest veterans are facing. 

f 

Statement of Kieran P. Quinn, CMB, Chairman, 

Mortgage Bankers Association 

Madam Chairwoman, Ranking Member Boozman and Members of the Subcommittee, I am Kieran P. Quinn, Chairman of the Mortgage Bankers Association 

(MBA).1 I am pleased to have the opportunity to discuss the effects of the subprime 

mortgage situation on America’s veterans, how we can work together to stabilize the 

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mortgage market, help borrowers in trouble and prevent some of the current problems from occurring again. 

MBA shares your concerns for helping veterans achieve the dream of home ownership in responsible and sustainable ways. While we at MBA do not have access to 

specific statistics about how the subprime market transition is impacting servicemembers or veterans, we believe it is valuable for you to know what the situation 

is in the market today and what mortgage companies are doing to address the needs 

of all consumers. 

Current Market Conditions 

Fundamentally, the demand for housing is driven by household formation and job 

creation. The single most important step Congress can take to support the housing 

market is to encourage long-term economic growth through sound fiscal and tax policy. Members of Congress should also recognize that housing and mortgage delinquencies react to economic conditions and are not a key driver of those conditions. 

States such as Ohio and Michigan have seen an exodus of jobs and population, 

stranding a significant amount of housing stock and lowering home prices in the region. States such as California, Florida, Arizona and Nevada experienced speculative home purchases that far outpaced the rate of household growth, causing home 

prices to retreat to levels of about two years ago. As long as economic growth continues, these Sunbelt states should be able to grow out of their problems. Other sections of the country face more long-term and intractable problems. 

It is significant to note that subprime lending has already essentially stopped, due 

entirely to the reaction of the world capital markets to how these loans are performing. While quarterly originations of subprime loans hit a high of $177 billion 

in the third quarter of 2005, and were as high as $165 billion as recently as the 

fourth quarter of 2006, one year later they were down to $14 billion in the fourth 

quarter of 2007, according to the publication, ‘‘Inside B&C Lending.’’ This is a 92- 

percent decline. As a percent of total mortgage originations, subprime loans were 

36 percent of MBA’s estimated total origination in the fourth quarter of 2006, and 

were 2 percent of mortgage originations by the end of 2007. 

Historically, the major cause of delinquencies and foreclosures is job-related, as 

can be seen in the upper Midwest. However, in the last year, delinquency and foreclosure rates have increased due to upward rate adjustments on Adjustable Rate 

Mortgages (ARMs) combined with falling home prices. With the recent decline in interest rates, more homeowners are receiving favorable mortgage rates, either 

through lessening the burden on ARM adjustments or more favorable refinance opportunities. However, housing price declines make it harder for borrowers to qualify 

for certain mortgages, such as a loan taken out with a 10 percent downpayment (90 

percent loan-to-value, or LTV), for example, may now be a 100 percent LTV loan 

due to a 10 percent house price decrease. 

Given increased delinquency and foreclosure rates, lenders are taking significant 

action to help borrowers. 

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HOPE NOW: Progress in Helping Struggling Homeowners 

The HOPE NOW Alliance is a broad-based collaboration between credit and home 

ownership counselors, lenders, investors, mortgage market participants and trade 

associations, including MBA. The Secretaries of the U.S. Departments of the Treasury and Housing and Urban Development encouraged MBA to build on the efforts 

Members of Congress, State and local leaders and federal regulators urged us to undertake. HOPE NOW has established a coordinated, national approach among 

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41374A.002 41374A.003
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2 After a mortgage is made, the lender will often sell the loan to investors. A loan servicer 

acts as the intermediary between the borrower and the investor. The servicer’s role is to collect 

payments, handle escrow accounts, forward principal and interest payments to the investor and 

deal with issues that arise from delinquency and foreclosure. A servicer is typically compensated 

25 basis points (0.25%) of the loan balance for performing this service, or $250 on a $100,000 

loan balance. 3http://www.freddiemac.com/news/archives/corporate/2008/20080131_07ropersurvey.html 

servicers, investors, 2 non-profit housing counselors and other industry participants 

to enhance our ability to reach out to borrowers who may have or expect to have 

difficulty making their mortgage payments and to offer them workable options to 

avoid foreclosure. The HOPE NOW Alliance is achieving real results in reaching atrisk borrowers and in providing positive solutions that avoid foreclosure. 

The Alliance is continuing to expand and add members who commit to specific efforts to reach and assist borrowers. As of February 25th, 27 loan servicers, representing over 90 percent of the subprime market, were in the Alliance. In addition, 

we have strong participation from respected non-profits, led by NeighborWorks 

America and the Homeownership Preservation Foundation, with its network of 

trained telephone counselors. We are also expanding our network of non-profits 

every day. 

One of the Alliance’s first steps was to demonstrate a commitment to results by 

adopting a Statement of Principles to help distressed homeowners stay in their 

homes. These principles will help ensure all borrowers receive quality service and 

assistance when they contact their lender/servicer in the Alliance. 

The following are the principles embraced by HOPE NOW servicers, which are 

consistent with calls for the industry to expedite solutions for borrowers: 

• HOPE NOW members agree to attempt to contact at-risk borrowers 120 days, 

at a minimum, prior to the initial ARM reset on all 2/28 and 3/27 ARM loan 

products; 

• HOPE NOW members agree to inform borrowers of the potential increase in 

payment and terms of the loan, in an effort to determine if the borrower may 

face financial difficulty in keeping their mortgage current; 

• HOPE NOW members agree to establish a single port of entry for all participating counselors to use; and 

• HOPE NOW members agree to make available dedicated e-mail and fax connections to support counselor and consumer contacts. 

By establishing these principles, HOPE NOW members are improving the infrastructure needed to help more borrowers on a much larger scale. In addition to improving lender/servicer systems for working with counselors and borrowers, we must 

continue to increase our efforts to reach out to at-risk borrowers. 

The most significant barrier to helping consumers is a persistent reluctance of 

struggling borrowers to respond to servicers’ efforts to offer help. Historically, about 

half of borrowers who go into foreclosure never contact their servicer for help or 

reply to outreach efforts. Freddie Mac reported at the end of January that 57 percent of the Nation’s late-paying borrowers still do not know their lenders may offer 

alternatives to help avoid foreclosure.3 MBA is working to drastically reduce that 

percentage and help as many troubled homeowners as possible avoid foreclosure. 

In November, HOPE NOW servicer participants began a monthly direct mail outreach campaign to at-risk borrowers. This direct mail effort—on the HOPE NOW 

letterhead—is in addition to the thousands of letters and telephone contacts made 

by individual servicers to their own customers. In the first direct mail effort in November, HOPE NOW members sent more than 215,000 letters to borrowers who are 

behind on their mortgage payments and who have not had contact with their 

servicer. The November letter provided a dedicated phone number for the individual 

borrower to use to call their own servicer for help. As a result of these letters, more 

than 16 percent of borrowers contacted their servicer, far more than the normal 2– 

3 percent. 

In December, HOPE NOW began a second wave of direct mail outreach to 250,000 

at-risk homeowners, providing individual servicer hotlines as well as the 888–995– 

HOPE Hotline hosted by the Homeownership Preservation Foundation. A third direct mail effort was launched on January 22nd. HOPE NOW will report the results 

as data are compiled. 

The Homeowner’s HOPE Hotline is a key component of the outreach and assistance effort for at-risk homeowners. The hotline directly connects homeowners with 

trained counselors at U.S. Department of Housing and Urban Development (HUD)- 

certified non-profit counseling agencies. This counseling service is completely free 

and is offered in English and Spanish. The counselors have direct access to the lendrfrederick on PROD1PC67 with HEARING

66 

er/servicers through improved single points of entry all HOPE NOW Alliance members agreed to create. 

The Homeowner’s HOPE Hotline is having a dramatic and positive impact for atrisk homeowners. The HOPE NOW Alliance will continue to expand the Hotline’s 

capacity and promote it to reach more at-risk borrowers. Some basic statistics about 

Hotline activity in recent months includes: 

• Since the Homeowner’s HOPE Hotline’s inception in 2003, it has received over 

323,904 calls, over 245,000 calls received in 2007; 

• 124,357 homeowners received counseling after calling the Hotline, 83,000 occurred in 2007 and almost 20,000 in January 2008; 

• Calls are increasing monthly. In December 2007, there were 93,794 calls to the 

Hotline that produced 15,462 counseling sessions; 

• In January 2008, there were 82,569 calls that produced 19,558 counseling sessions; 

• The counseling sessions produced results. Through October 26, 2007, more than 

half of all homeowners counseled have been connected with their lender for assistance, and one quarter of all homeowners counseled in the fourth quarter of 

2007 were referred to their lender for a recommended workout; 

• Counseling sessions are rapidly increasing. Call volume increased nearly 10-fold 

between first quarter 2007 and fourth quarter 2007; 

• Lenders/servicers are urging borrowers to call for counseling. Homeowners primarily hear about the Homeowner’s HOPE hotline from their lender; 

• More homeowners with ARMs are calling—49 percent of callers in the fourth 

quarter of 2007 were ARM borrowers, up from 34 percent in the first quarter. 

Publicity for the Homeowner’s HOPE Hotline continues to increase. We are proud 

that the Homeowner’s HOPE Hotline provides a resource for free, non-profit counseling to any homeowner, anywhere in the country. President Bush, Treasury Secretary Paulson and HUD Secretary Jackson have mentioned the Homeowner’s 

HOPE Hotline several times in public statements and have urged homeowners in 

trouble to seek help. Members of Congress have also highlighted the hotline. Thirtyeight Mayors from across the country recently created public service announcements 

for their local media markets urging borrowers to use the hotline. NeighborWorks 

is also working with the Ad Council on the national advertising campaign for the 

Homeowners’ HOPE hotline, which includes television, radio and print materials. 

Any time the Homeowner’s HOPE Hotline is mentioned by public officials or on television, calls to the hotline increase dramatically. MBA welcomes that support and 

continues to work to expand the counseling network for the hotline. 

Members of Congress, in an effort to help their constituents avoid foreclosure, 

have asked on many occasions what they could do to help. The single most important thing Members and other community leaders can do to help people stay out 

of foreclosure is to publicize the HOPE NOW efforts, particularly the Homeowner’s 

HOPE Hotline, 888–995–HOPE. 

The Homeownership Preservation Foundation, the HOPE NOW Alliance member 

managing the telephone network, continues to add trained, experienced counselors 

to the program to handle the increasing call volume from concerned homeowners. 

Tremendous progress has been made in just the last few months. The hotline now 

has 400 trained counselors assisting borrowers, up from 64 at the beginning of 2007. 

NeighborWorks America, known formally as the Neighborhood Reinvestment Corporation, is a Congressionally chartered non-profit organization with a national network of more than 240 community-based organizations in 50 states. NeighborWorks 

is a leader in the HOPE NOW Alliance, and with its partners, is actively providing 

in-person counseling services to consumers across the country. 

HOPE NOW is working to add more non-profit agencies to the effort. In December, NeighborWorks and other HOPE NOW Alliance members met with HUD and 

other HUD counseling intermediaries to review ways to include additional grassroots counseling groups. MBA is working to broaden the HOPE NOW effort to ensure it is a model that works broadly for consumers, industry and non-profits to 

maximize the ability to reach troubled borrowers. 

Servicers’ ability to reach borrowers, either directly or through an intermediary, 

is the key to helping them stay in their homes. The solutions will vary with each 

individual borrower’s circumstances. Prudent and responsible loan modifications, repayment plans and other types of workout options are solutions to help borrowers 

keep their homes and minimize losses to investors. The HOPE NOW Alliance is 

committed to pursuing all viable solutions to help people stay in their homes. 

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Tools for Helping Struggling Borrowers 

It makes good economic sense for mortgage servicers to help borrowers who are 

in trouble. Borrowers who are not able to stay current on their loans are very costly 

to the servicer. Servicers must forward principal and interest payments to investors 

as well as remit taxes and insurance payments, even if borrowers are not paying 

them. In addition, significant staff resources must be employed to contact borrowers, 

assess the situation, work on repayment plans and other loss mitigation solutions, 

and if these efforts do not resolve the situation, initiate and manage the foreclosure 

process. 

Informal forbearance plans are generally the first tool servicers employ to help 

borrowers. Servicers allow mortgagors to miss a payment, with the explicit understanding the payment(s) will be made up some time soon. If the situation is more 

involved than a short-term cash crunch due to temporary unemployment or illness, 

a servicer may turn to a special forbearance plan, which will typically combine a 

period of postponed or reduced payments followed by repayment of the arrearage 

over an extended timeframe. 

Loan modifications are the next level of loss mitigation options. A loan modification is a change in the underlying loan document. It might extend the course of the 

loan, change the rate, change repayment terms or make other alterations. Similarly, 

a servicer may attempt to refinance the delinquent borrower into a new loan. Loan 

modifications are one solution for borrowers who have an ability to repay a loan, 

and have the desire to keep their home, but may need some help in meeting this 

goal because the current loan terms are not sustainable for that borrower. 

HOPE NOW members have worked aggressively to make all of the available tools 

as efficient as possible. Lenders and servicers worked diligently with the American 

Securitization Forum (ASF) to create a framework to more readily modify certain 

at-risk loans securitized in the secondary market. This effort has received the backing of the U.S. Departments of the Treasury and HUD, many Members of Congress, 

the federal banking agencies and state and local officials. 

The focus of the effort has been to identify categories of current subprime hybrid 

ARM borrowers who can be streamlined into refinance or modifications. MBA believes the ASF-established framework will add to existing efforts to assist distressed 

borrowers. The key is to find solutions which help borrowers but do not violate the 

agreements with investors who now own the securities containing these loans. 

The ASF has worked with servicers and investors to implement a system which 

identifies, in advance of loan resets, borrowers who would qualify for refinancing, 

loan modifications or other workout options. To ensure investors accept and support 

far-reaching loan modification and other workout solutions, this system cannot violate pooling and servicing agreements with investors. The goal is to minimize the 

risk of legal action by investors against servicers who help borrowers. 

The ASF framework covers securitized subprime adjustable rate mortgage loans, 

the 2/28’s and 3/27’s originated between January 1, 2005 and July 31, 2007 with 

an initial interest rate that resets between January 1, 2008 and July 31, 2010. In 

other words, the framework is for loans that have just begun to adjust. The ASF 

framework will help provide solutions for homeowners with these subprime hybrid 

ARMs who qualify for three different types of help: refinancing, modification and 

other loss mitigation efforts. 

• Refinancing: One segment of borrowers is comprised of those who are current, 

likely to remain current even after reset, or likely to be able to refinance into 

available mortgage products, including the Federal Housing Administration 

(FHA), FHA Secure or industry products. Generally, the servicer will determine 

whether loans may be eligible for refinancing into various available products 

based on readily available data such as LTV, loan amount, credit score and payment history. The servicer will facilitate a refinance in a manner that avoids 

the imposition of prepayment penalties whenever feasible. HOPE NOW will 

continue to work with the alliance to ensure all servicers have access to products and programs generally available in the market to refinance eligible borrowers. 

• Loan Modifications: A second segment of borrowers is comprised of those with 

good payment records who will not qualify for refinancing for any variety of reasons, such as a drop in home equity or insufficient credit score. These borrowers 

will be targeted for streamlined loan modifications if the loan is a primary residence (i.e., not an investment or vacation property) and meets additional criteria. Borrowers in this category will be offered a loan modification under which 

the interest rate will be kept at the existing rate of the loan for five years. This 

fast track option does not in any way preclude a servicer from conducting a 

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more individual in-depth review, analysis and unique modification for a borrower to determine if a longer term modification would be appropriate. 

The fast track framework allows the servicer to make these decisions: 

• Whether the borrower is unable to pay under the original loan terms after 

the upcoming reset and default is reasonably foreseeable, based on the size 

of the payment increase, and the current income if the borrower did not pass 

the credit score improvement test; • Whether the borrower will be able to pay a modified loan based on payment 

history prior to the reset date; • Whether the borrower is willing to pay a modified loan; and • Whether the modification will maximize the net present value of recoveries 

to the securitization trust and is in the best interests of investors in the aggregate, because refinancing opportunities are not available and the borrower 

is able and willing to pay under the modified terms. 

• Loss Mitigation: This third segment of borrowers is comprised of those for whom 

the loan is not current and will be unable to refinance into any available product. These borrowers are significantly behind in their payments before the loan 

resets and their situations need to be individually evaluated. It is especially important for us to reach this group of borrowers through efforts such as the 

HOPE NOW direct mail campaign and through the national advertising campaign for the Homeowner’s HOPE hotline. For loans in this category, the 

servicer will determine the appropriate workout and loss mitigation approach 

on a loan-by-loan basis. Referrals from counselors if the borrowers contact the 

Homeowners’ HOPE Hotline will also be important. Approaches for these borrowers may include loan modification (including longer term-rate reductions, 

capitalization of arrearages and term extensions), forbearance, short sale, deeds 

in lieu of foreclosure or foreclosure. Because these borrowers are already behind 

in their payments, and may face challenges such as a loss of income or other 

issues, they require a more intensive analysis, including current debt and income analysis, to determine the appropriate loss mitigation approach. 

Servicers, however, can only help borrowers who come forward for help. Borrowers 

must respond to servicers’ notices and phone calls. At some point, the servicer has 

to assume the homeowner has no intention of paying off the obligation. It is also 

important to note the options for helping borrowers who purchased homes as investments are limited. During the housing boom of the last several years, there were 

many speculators and investors looking to profit from price appreciation. The 

strength of the American economy relies on the willingness of people to take risks, 

but risk means you do not always win. During this time, a majority of these properties were purchased to try to capitalize on appreciating home values or to use 

rents as a source of investment income, or some combination of both. With the 

downturn in the housing market, a number of these investors are walking away 

from their properties and defaulting on their loans. In the third quarter of 2007, 

18 percent of foreclosure actions started were on non-owner occupied properties. 

Foreclosure starts for the same period for non-owner occupied properties in Arizona, 

Florida, Nevada and Ohio were at 22 percent. 

HOPE NOW helps all borrowers, not just subprime ARM borrowers eligible for 

fast track refinance or modifications. The ASF framework for a streamlined, scalable 

solution for current borrowers facing a reset allows servicers to give more detailed 

attention to at-risk, hard-to-reach, delinquent borrowers. Servicers will be able to 

work closely with credit counselors and/or homeowners to ensure all options are explored to avoid foreclosures. The scalable outreach and modification effort in no way 

precludes on-going workout solutions for the highest risk delinquent borrowers. By 

having this framework in place, human capital and other resources are able to focus 

on the cases that require the most attention. 

Measuring Results 

MBA recognizes results are the key to this national effort to assist at-risk homeowners. The latest results from HOPE NOW servicers on their foreclosure prevention efforts in the second half of 2007 are attached. This latest HOPE NOW data, 

released on February 6th, shows significantly more homeowners received assistance 

than previously estimated. 

Fourteen HOPE NOW servicers responsible for more than 33.3 million home loans 

(about 62 percent of both prime and subprime loans outstanding nationwide), as of 

September 2007, provided the data. The latest report shows an estimated 869,000 

homeowners were helped in the second half of 2007 through either formal repayment plans (652,000) or loan modifications (217,000). 

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4 Various groups have used the 3.5 percent figure as a political rally cry despite the fact that 

this admittedly flawed indicator represents a tripling of loan modification activity since the September report. 

During the same period, 283,000 foreclosure sales were completed. Based on 

1,446,000 average monthly delinquencies of 60 days or more past due during the 

second half of 2007, 45.3 percent received a formal repayment plan, 14.8 percent received a modification and 19.7 percent resulted in a completed foreclosure sale. 

The data for the second half of 2007 reveal 324,000 prime borrowers and 545,000 

subprime borrowers were helped: 

• 20.7 percent of prime borrowers received a modification; • 27.5 percent of subprime borrowers received a modification; and • 34.8 percent of subprime borrowers, during the fourth quarter, received a modification, indicating a rapid increase in the use of modifications as a loss mitigation solution. 

In addition, information was collected on foreclosure activity and trends. These 

statistics are revealing. While there appears to be a large number of foreclosures 

initiated by servicers, only one-third of foreclosures initiated actually result in a 

completed sale. Frequently, borrowers do not respond to servicers’ attempts to contact them until they receive their first legal action notice. HOPE NOW’s borrower 

outreach initiatives are already increasing the number of borrowers who respond before a foreclosure action is initiated. 

The latest state-level data from HOPE NOW servicers show that efforts to help 

borrowers are rapidly increasing. The trend in formal repayment plans is up in all 

states but more so in the states that experienced rapid and substantial increases, 

and now declines, in home prices. That is to be expected because of the more rapid 

increase in delinquencies in those states. However, it is clear in all states the upward trend in loan modifications completed is much greater than the upward trends 

in delinquencies and in formal repayment plans, which clearly indicates servicers 

increasingly are working with borrowers to modify the terms of their loans. The upward trend in loan modifications is much more pronounced in the states with substantial increases in home prices. We believe the upward trend in loan modifications 

and repayment plans will continue and more homeowners will receive the help they 

need to stay in their homes. 

As you can see, we are tracking and measuring outcomes through HOPE NOW 

and other efforts. In addition to the data reported here, we are measuring trends 

in delinquencies and resolution outcomes (i.e. reinstatement, repayment plans, 

modifications, short sales, deeds in lieu of foreclosure, partial claims and foreclosure). We want to provide consistent and informative data reports based on common definitions and to provide insights into the nature and extent of the current 

mortgage crisis that will help in the development of workable solutions that avoid 

foreclosure whenever possible. 

As promised at the start of HOPE NOW, as data collection initiatives mature and 

the data are validated, MBA is providing more detailed information nationally and 

on a state-by-state basis. As noted, the Alliance is growing weekly. Participating 

servicers have been engaged in developing standard definitions for key loss mitigation data. The data collection effort is an enormous undertaking, which will take 

time to fully develop and perfect. We are confident, however, to be able to deliver 

information at the state level to help measure what servicers are doing to resolve 

difficult situations and to assist homeowners. 

Misinterpretation of Key Report Fuels Public Concern 

On January 17, MBA released a study of actions lenders took to assist borrowers 

in the third quarter of 2007. The paper also discussed something known in the industry as the ‘‘Moody’s 1% Number.’’ In September 2007, Moody’s released a study 

suggesting the mortgage industry had only assisted one percent of the people who 

needed help. A later report in December showed an increase of this number to 3.5 

percent.4 In that same report Moody’s made a much-overlooked but critical statement: ‘‘The ratio of loans that were modified or on a workout plan as a percentage 

of seriously delinquent loans active as of September 30th (60+ days), a meaningful 

barometer of the extent to which servicers are undertaking loss mitigation activity, 

was 24 percent.’’ Servicers had undertaken loss mitigation activity for nearly one 

in four distressed borrowers and this was before any of the streamlined modifications had begun or the HOPE NOW efforts had really expanded. 

Despite this important statement, some continue to focus on the 3.5 percent number when Moody’s itself has made it clear the 24 percent number is the ‘‘meaningful’’ indicator. This is the case because not every subprime ARM borrower needs 

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70 

5 50 U.S.C. App. 501 et seq. 

help; in the third quarter of 2007, according to MBA’s National Delinquency Survey, 

approximately 70 percent of subprime ARM borrowers were paying on time. The December 2007 Moody’s report itself reveals that more than half of the loans evaluated 

prepaid or refinanced before resets occurred. This population does not need loss 

mitigation assistance. Unfortunately this important fact is often overlooked and consistently underreported by the media. 

Efforts to Serve and Assist Veterans and Servicemembers 

Qualifying veterans and servicemembers have access to favorable loan terms 

through the Department of Veterans Affairs (VA) loan program. This program offers 

veterans and servicemembers 100 percent financing in exchange for a small funding 

fee (e.g. guaranty fee) which can be financed into the mortgage. The federal government provides this help to veterans and servicemembers not by actually making the 

loan, but by providing a guarantee that protects the lender against losses in the 

event of foreclosure. The guarantee is a form of credit enhancement that allows 

lenders to provide 100 percent financing. 

Servicemembers who are in active duty status also have critical protections available to them under the Servicemembers Civil Relief Act (SCRA).5 In particular, interest rates for mortgages taken out prior to active duty status are reduced or 

capped at six percent while the servicemember is on active duty. The interest rate 

differential between the note rate and the six percent cap is not deferred, but forgiven. 

Moreover, SCRA prohibits foreclosure and eviction actions during the servicemember’s period of active duty plus an additional three months. These are significant protections that recognize the importance of our servicemembers’ efforts in defending our country. These benefits are unique to active duty military personnel. 

Legislative Efforts to Address Market Conditions 

Congress has acted robustly to address challenges in the mortgage market. This 

hearing, along with over a dozen others in various Committees, has illuminated how 

the mortgage market works, recent failings in market operations and how Congress 

can address the issues. Congress has also worked with the Executive branch and 

industry in creating and supporting the HOPE NOW initiative, which I discussed 

earlier. 

MBA continues to believe transparency in the mortgage process needs to be improved to help borrowers understand, shop for and choose the loan to best meet 

their needs. We also believe a uniform national mortgage consumer protection 

standard for all home buyers will simplify the process for borrowers and protect 

them, facilitate better enforcement against predatory practices and assist the 

smooth flow of global capital into the mortgage market. 

Since last February, it has become clear that industry participants and policy 

makers needed to respond to the credit crunch and market conditions. In December, 

Congress passed important legislation extending the mortgage insurance deduction 

and providing tax relief for forgiven mortgage debt. Also last year, HUD launched 

the FHASecure program to help borrowers who have made their payments before 

a rate reset refinance into a FHA-insured loan. 

Fiscal and monetary policy must also respond to the current weakness in the 

overall economy. Congress recently passed an economic stimulus which will help the 

market in two ways. First, it will stimulate the economy directly through payments 

to consumers and indirectly through tax changes. It will also help by temporarily 

raising the loan limits for investment by Fannie Mae, Freddie Mac and for FHA 

loans. This will result in a more stable housing system, particularly addressing the 

situation in high-cost states like California. Further, Congress should make clear 

what the rules of the game are, so the current market upheaval is not exacerbated 

by a rapid change in regulation. These include passage of a uniform national mortgage lending standard, regulatory reform of the housing government sponsored enterprises (Fannie Mae and Freddie Mac) and FHA modernization. 

Efforts that would serve to increase prices or push market participants out of the 

housing finance system, such as efforts to encourage more consumers to file for 

bankruptcy, should be avoided. In order for the market to change course, certainty 

must be realized by consumers, lenders and investors. With the possibility of major 

investor liability still on the horizon, secondary market participants and mortgage 

lenders will remain apprehensive of lending to all but borrowers with perfect credit. 

The longer these fears remain, the longer the national housing market will take to 

rebound. 

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Conclusions 

MBA is pleased to have this opportunity to discuss the situation in the mortgage 

market and how we can help stabilize the market, assist those who are in trouble 

and how we can prevent today’s problems from recurring. 

In the midst of the concern for the market, it is important to keep in mind the 

benefits of home ownership. Homeownership makes American communities stronger, by giving families ownership interest in what is happening around them. Crime 

goes down and educational achievement increases. Owning your own home is still 

the best way to build, grow and maintain wealth in America today. As Congress 

wrestles with ways to address the market, we ask that the goal be to increase home 

ownership—in responsible and sustainable ways—and that Congress refrain from 

efforts that will make it harder for American families to achieve the dream of home 

ownership. 

Thank you for the opportunity to present our testimony on this important issue. 

f 

Statement of Justin M. Brown, Legislative Associate, 

National Legislative Service, Veterans of Foreign Wars of the United States 

MADAM CHAIRWOMAN AND MEMBERS OF THIS SUBCOMMITTEE: 

On behalf of the 2.3 million members of the Veterans of Foreign Wars of the 

United States and our Auxiliaries, I would like to thank you for the opportunity to 

testify before this distinguished body. The subprime mortgage crisis is an issue that 

is affecting the entirety of our Nation. We appreciate this Committee’s rigor in recognizing the affects it will have upon American veterans. The thought of America’s 

heroes in the streets due to their use of a bad financial tool makes us all shudder. 

It is of the utmost importance, that if nothing else, we learn from our mistakes and 

insure this never happens again. 

Unfortunately, we have no veteran specific information on veterans’ exposure to 

the subprime mortgage market because it is not tracked. It is important to note that 

Department of Veterans Affairs (VA) home loan guarantees did not apply to 

subprime loans and are not being directly affected by the subprime mortgage crisis. 

However, veterans have used multiple financial tools to purchase their homes, including subprime mortgages. We do have some opinions as to why some veterans 

may be finding themselves faced with a subprime mortgage foreclosure: the veteran 

was working with predatory lenders, the veteran did not have access to prime loans, 

the veteran lacked knowledge or qualification for a VA home loan, the veteran lived 

in a large urban area in which housing averages exceeded the VA home loan cap, 

or the veteran had a bad or lower credit score due to deployments, or any combination of the above. 

The VA home loan process is very lengthy, and costly, to both lenders and veterans. This bureaucratic red-tape may have become an incentive for lenders and 

real-estate agents to discourage VA home loans and may have led to veterans using 

subprime mortgages. Also, VA home loans are capped at a level cost prohibitive to 

certain geographic regions. The unreasonable VA loan cap in expensive urban districts may have led several veterans to subprime loans in those areas. In comparison to VA home loan guarantees, Federal Housing Authority home loan caps vary 

by state and county allowing prospective mortgagees more flexibility. 

We strongly recommend that measures be introduced to strengthen and expand 

the use of the VA home loan guarantee program for veterans. In the housing market 

crunch, veterans are likely to rely more heavily on VA home loans as access to capital becomes more difficult and guaranteed loans become more attractive to lenders. 

Our primary recommendations for the VA home loan guarantee program are: 

raise the maximum cap of VA home loans specific to the needs and averages of individual communities, decrease the completion time of a VA guaranteed home loan 

(thereby decreasing the likelihood of lenders to encourage alternative less attractive 

mortgage options), repeal the funding fee to obtain a VA loan guarantee, and increase outreach and access to VA home loan specific information. 

The Veterans of Foreign Wars are appalled that there are individuals in our country who targeted veterans and others for substandard loans knowing they would 

likely default after the initial rates were raised. Those individuals have done their 

country, and the men and women who served it so proudly, a great disservice. 

Let us all work hard for our future and those affected by this terrible tragedy. 

We are a great Nation and our people deserve better. 

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Madam Chairwoman, Ranking Member Boozman, and members of this Subcommittee I thank you for the opportunity to testify and am happy to answer any 

questions you may have. 

Æ 

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