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THE EFFECTS OF THE FORECLOSURE CRISIS 

ON NEIGHBORHOODS IN CALIFORNIA’S 

CENTRAL VALLEY: CHALLENGES AND SOLUTIONS 

FIELD HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 6, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–136 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 6, 2008 ............................................................................................ 1 

Appendix: 

September 6, 2008 ............................................................................................ 57 

WITNESSES 

SATURDAY, SEPTEMBER 6, 2008 

Amador, Patty, President, Ambeck Mortgage Associates ..................................... 43 

Bates, Joseph C., Director, Santa Ana Homeownership Center, U.S. Department of Housing and Urban Development ......................................................... 18 

Canada, Pam, Chief Executive Officer, NeighborWorks Home Ownership Center, Sacramento Region ....................................................................................... 40 

Duarte, George, CMC, Horizon Financial Associates, on behalf of the California Association of Mortgage Brokers ............................................................. 31 

Gutierrez, Hon. Steven, Supervisor, San Joaquin County Board of Supervisors ..................................................................................................................... 12 

Machado, Hon. Michael, California State Senator, 5th District .......................... 7 

Ornelas, Carol, Chief Executive Officer, Visionary Home Builders of California ..................................................................................................................... 36 

Peters, Heather, Deputy Secretary for Business Regulation and Housing, 

Business, Transportation and Housing Agency, State of California ................ 14 

Wooten, Hon. Ellie, Mayor, Merced, California ..................................................... 10 

APPENDIX 

Prepared statements: 

Amador, Patty ................................................................................................... 58 

Bates, Joseph C. ............................................................................................... 62 

Canada, Pam ..................................................................................................... 66 

Duarte, George .................................................................................................. 75 

Gutierrez, Hon. Steven ..................................................................................... 83 

Machado, Hon. Michael .................................................................................... 86 

Ornelas, Carol ................................................................................................... 92 

Peters, Heather ................................................................................................. 100 

Wooten, Hon. Ellie ............................................................................................ 127 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Cardoza, Hon. Dennis and McNerney, Hon. Jerry: 

List of items submitted for the record, copies of which are available 

in committee files .......................................................................................... 130 

Wooten, Hon. Ellie: 

Additional items submitted for the record ..................................................... 132 

(1) 

THE EFFECTS OF THE FORECLOSURE 

CRISIS ON NEIGHBORHOODS IN 

CALIFORNIA’S CENTRAL VALLEY: 

CHALLENGES AND SOLUTIONS 

Saturday, September 6, 2008 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 12 p.m., in the Stockton Arena, 248 West Fremont Street, Stockton, California, Hon. 

Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank and Speier. 

Also present: Representatives Cardoza and McNerney. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services on the question of the foreclosure crisis will now come to 

order. 

I apologize for the delay in starting the hearing, and I appreciate 

your coming here. Some of you probably know—all of you probably 

know—that the Federal Government is about to make some very 

drastic moves regarding Fannie Mae and Freddie Mac, and I had 

to deal with some of the media about that. So the delay was my 

fault, and I apologize. 

This hearing has been called at the request of our host, Member 

of Congress Jerry McNerney, strongly supported by his neighbor, 

and our colleague, Dennis Cardoza, because for a variety of reasons, none the fault of individuals, just because of economic circumstance, this area, as you all know, has been hurt worse by the 

foreclosure crisis than almost any other place in the country. 

The hearing has several purposes. First, particularly with some 

of the officials we have here from both the State and the municipalities, to make the point that when we think about trying to diminish foreclosures, we aren’t simply trying to help individuals, although that shouldn’t be considered a bad thing. 

But the foreclosure crisis, particularly when it takes on the dimensions it has taken on here, becomes a problem for more than 

just the individual. It hurts the neighborhoods. It hurts the cities. 

It hurts the whole economy. The foreclosure crisis is the single biggest cause of the economic problems we are facing. 

Second, we passed legislation which offers to those who hold the 

loans—the servicers, the lenders, the banks—an opportunity to 

help us avoid foreclosure, but, by law, that is voluntary because we 

could not simply abrogate existing contracts. 

2 

One message we want those who hold the loans to get is this: If 

you tell us that you cannot cooperate with public authorities, advocacy groups and others, in diminishing the number of foreclosures—no one thinks we can get rid of all of them—if you tell 

us that you can’t do that because existing law ties your hands, then 

I guarantee you that law will look very different next year. 

So if people in the lending industry want to avoid some very severe, much more restrictive legislation, I think it would be in their 

interest to cooperate with us. Not out of a sense of vindictiveness, 

but we will be listening. If they say, look, we would like to help 

but we can’t, because of the way the law is, then it is our job to 

change the law. 

I am very appreciative to my colleagues from California, and we 

have also been joined by another Californian who is a member of 

our committee, Congresswoman Jackie Speier, and we look forward 

to the testimony and I can guarantee you that what we hear 

today—this hearing is actually a forerunner of a hearing we will 

have in Washington, in which a similar set of witnesses will be 

called, including a lot of the people from the lending industry. 

And on that, I want to say that I am disappointed that we don’t 

have better representation from those other servicers. Many of 

them chose not to come and that is a bad sign. We invited people; 

we urged them to come; my colleagues tried to get them to come; 

Dennis Cardoza did. 

I just want to say to those—and we will have another hearing. 

I want to say to those who are in the business of servicing the 

loans and making the decisions, if you do not have the time to 

come talk to us now as we deal with this, don’t be surprised if we 

don’t have the time to talk to you next year when we are passing 

new legislation. There has to be some reciprocity here. So, with 

that, I want to thank my California colleagues and their staff who 

did the work. 

I will tell you, one of the great bargains the American taxpayer 

gets, without being fully aware of it, is the congressional staff. 

There are people who work for all of us, in our individual capacities 

in the committee, almost all of whom could be making more money, 

with a lot less aggravation, in other contexts. The aggravation 

comes from two sources, by the way—us and you. 

So I am very grateful to them for the excellent job they have 

done in making this possible, and I now call on my colleague, who 

is the major force behind this hearing, Jerry McNerney. 

Mr. MCNERNEY. Thank you, Mr. Chairman. First of all, I want 

to welcome the witnesses and thank them for participating. I want 

to welcome everyone here that is going to be listening to this hearing. 

I especially want to thank the chairman for coming all the way 

here from Massachusetts, specifically because this area is impacted 

so hard by the foreclosure crisis. 

It is an opportunity for the chairman to see exactly what people 

in this area are thinking, what some of the solutions people have 

in mind are, so that we can discuss those, so that we can get a fair 

hearing, and so we can move toward whatever solutions might be 

appropriate in this case. 

3 

I want to echo the chairman’s comments. We passed a bill, the 

President even signed it in July, it is a good bill, and it offers a 

lot of opportunity for people who are in distressed properties to 

take advantage of what is being offered now. It is going to get 

worse before it gets better. 

We don’t want to have to move toward more draconian measures 

in January. So there is an opportunity, right now, please take advantage of it, talk to your lenders, find out what the problem is, 

work with your Members of Congress, we can help you, but this is 

a good offer. 

I want to thank Mr. Cardoza for working with me to make this 

happen. I want to thank Congresswoman Jackie Speier, a member 

of the committee, for coming out here and helping with our hearing 

today. 

Growth in the Central Valley exploded in recent years, thanks to 

readily available credit and home prices that were a complete bargain compared to nearby Bay area properties. 

As we know, the housing market collapse, coupled with an economic downturn, has had a devastating impact on families and 

homeowners throughout the region, particularly here in Stockton. 

More and more people are receiving notices of foreclosures, and 

families, the very foundation of our communities have been shaken, 

and are struggling to keep up their homes. 

In California, foreclosures have surged to a 20-year high; tens of 

thousands more people in the State have completely lost their 

homes. In addition to cornerstone property housing, Fannie Mae 

and Freddie Mac have recorded losses topping $100 billion. 

We know from the news this morning that there is a potential 

Government intervention in this problem. So the crisis is real, it 

is here, we are at the epicenter of it. Right here, in San Joaquin 

County, we have registered that an estimated 1 out of every 30 

homes is experiencing distress or foreclosure. 

From month to month, Stockton has occasionally risen to the top 

of the foreclosure list throughout the country. So we know that we 

are in one of the hardest-hit areas. But our City, Stockton, is a 

jewel and we will continue to expand businesses and homeownership here, and we will remind everyone that Stockton remains an 

all-American city, and with dedication and hard work, we will recover. 

However, for the time being, we continue to grapple with this 

problem of foreclosures, and the instability created both in our 

neighborhoods and in the financial markets. 

We all know that when houses are foreclosed, everybody loses— 

the house becomes more prone to crime, and attracts problems. It 

also is a burden on our local cities and communities. So we want 

to do everything we can to avoid additional foreclosures. 

Dennis Cardoza and I have held foreclosure workshops throughout the valley, and throughout my district, to help put people in 

distressed properties in contact with advisers, with lenders, to give 

them the best information they can and to give them an opportunity to stay in their homes. 

We are going to continue to do that and I hope that those workshops have been helpful, and if they are, again, we will continue 

to do those. 

4 

So I hope that this hearing today does shed some light on the 

problem, again showing us what some of the particular issues are 

facing our region, so that in Washington we can address those 

problems. 

I want to again thank the witnesses for coming. I know it is a 

Saturday, that it is a difficulty, and it is intimidating to testify in 

front of a congressional committee, but we are really here to learn 

from you, so I hope that you are open and honest with us, and we 

will go ahead and use your testimony. Thank you very much. 

I yield back. 

The CHAIRMAN. Thank you. Next, a member of the committee, 

Congresswoman Jackie Speier. We are particularly grateful to her 

for coming. Under House rules, two members of a committee are 

necessary for it to be an official hearing, and Congresswoman 

Speier has an interest in this and has been very active as a member, and her presence is really essential. 

Ms. Speier. 

Ms. SPEIER. Thank you, Mr. Chairman, and thank you for holding this hearing, and to my two colleagues, Congressmen Cardoza 

and McNerney, thank you for representing your district as you do. 

I am going to resist the temptation to try and do an autopsy of 

why we are here, and just speak, very briefly, on a couple of things. 

One is that those who have violated the law, either by encouraging consumers to misrepresent themselves on applications, appraisers who did not do appropriate appraisals, banks that turned 

their eyes—all of those individuals, in my view, need to be held accountable, and I believe we should encourage local DAs and U.S. 

attorneys, and attorneys general, to act to change what has been 

for most of the months that have passed, a situation where no one 

has been held accountable. I think all of us have to be held accountable. 

And I would echo the chairman’s comments, that it is not just 

the foreclosed property that is injured. It is the neighborhood, it is 

the community, it is the State. 

The lower property taxes means that the education in California 

is going to be reduced. We are now 46th in the Nation in what we 

spend per pupil on education, and we will drop to the bottom, and 

be more like a Third World country in the kind of education system 

we are providing to our kids, if we don’t fix this. 

So I think as we come up with fixes, which will include the financial institutions cooperating fully, and in my own district I have 

had many constituents who have indicated that they are getting no 

cooperation from their particular banks, they must, in my view, cooperate fully, and then we all need to recognize that any appreciation in these home values, to the extent that the Federal Government comes in, or the State government comes in to help sustain 

these loans, that we would all benefit as taxpayers in the appreciation. 

So I yield back my time, and thank, again, the chairman, for 

hosting this. 

The CHAIRMAN. Thank you. And then finally, one of the members 

who was most instrumental in having this hearing, and I will tell 

you also, by the way, you should know with regard to the FHA, 

Fannie Mae, and Freddie Mac, all of which have become even more 

5 

important in terms of what housing finance we can now get, a year 

ago, all of those entities had limits on the amount of loans they 

could deal with. That pretty much put people here out of business, 

and no one was a more ardent advocate than Representative 

Cardoza in those loan limits being raised to take account of the fact 

that house prices are variable and that a price that prevents you 

from financing luxury housing in Nebraska not only prevents you 

from financing luxury housing in California, it prevents you from 

financing dog houses in California. 

And thanks to Representative Cardoza, we didn’t get everything 

we wanted, but there were significant increases in those which 

means that going forward, as we being to work our way out of 

this—I notice Secretary Peters is here, she was a very powerful 

witness when she testified on specifically this issue, became a bipartisan issue. And you will find, going forward, that many of you 

will be able to get some help that you might not otherwise have 

gotten, and Representative Cardoza was a major force in that. 

Representative Cardoza. 

Mr. CARDOZA. Thank you, Chairman Frank. I very much appreciate you agreeing to do this hearing today, and I want to thank 

you for your leadership in the housing crisis. 

I sit on the leadership team in the House, these days, and I have 

been a front seat witness to what Chairman Frank has done on a 

daily basis, and the frustration that he has had to overcome in 

dealing with the other body, dealing with some other folks who 

didn’t want to agree. 

You know, all of your hard work and attention to this issue is 

so critical to my constituents, 17 percent of whom are Portuguese. 

Mr. Frank represents the largest Portuguese-American population 

in the country, bigger than this one, so he— 

The CHAIRMAN. [In Portuguese] 

Mr. CARDOZA. Congressman Costa and I say he is more Portuguese than we are sometimes. 

On a more serious note, though, I want to talk about the fact 

that Congressman McNerney and I, in this room, had over 500 citizens at our first Workout Conference, and we have had, I think, 

10 to 15 since then. Assemblywoman Galgiani has done the same. 

Mr. McNerney has gone on to do others. 

In fact, they used the model that we started, right here in this 

room in Stockton, to take across the country, and Members of Congress have been doing it for their constituents all over the country. 

When Congressman McNerney and I requested this hearing, we 

didn’t know that Fannie and Freddie were going to be in the situation that they are today, and that it would be so timely that we 

were having this meeting. But we took a tour before we came here, 

and you can see the devastation inside the community. 

When we came here, and we talked to the individuals, you see 

the devastation in the families. You see the individuals who are 

grieving. One lady sat about where Mayor Wooten is sitting right 

now. She was facing the other direction. She was telling me that 

she is 86 years old. She got a call one evening while she was 

watching Jeopardy, where the caller asked, ‘‘How long has it been 

since you have seen your children?’’ She said, ‘‘Well, I do have chilVerDate Aug 31 2005 17:45 Dec 09, 2008 Jkt 045620 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\45620.TXT TERRIE
6 

dren on the East Coast.’’ The caller then said, ‘‘Well, you know, 

your house is worth $200,000.’’ 

This lady was on Social Security, she later testified, making $960 

a month. The caller told her that she qualified for a loan up to 

$200,000. And, in fact, if she would just sign up tomorrow when 

she came down, they would give her a $200,000 loan on her house. 

She said her house was totally paid off. She was happy. She 

wasn’t bothering anybody. But she was convinced that this was almost like free money. She went down. She applied for the loan. She 

got the loan. Her payments were $260 a month. She figured she 

could do that for probably most of the rest of her life on the money 

that she had in the bank. Well, one thing and another happened, 

and 6 months later, it reset, and she was paying $1,500 a month 

on a $900 a month Social Security check, something to that degree. 

And so she was coming to us, trying to figure out how she could 

work out of it. She had prepayment penalties she was going to be 

stuck with. There were just a number of things. 

Now I am totally off the script that my staff has written for me 

for today, but as I sit here, it is just compelling to me to look out, 

and think about those individual cases. 

Sometimes people say, they should have known better, or they 

should have read the documents. Well, 53 percent of my population 

is Hispanic. A lot of them have limited speaking capability. English 

is not a first language. We have a lot of challenges. 

I don’t read all of those documents. I am a former Realtor. I 

know which ones I need to read and which ones are just 

boilerplate. But those folks who aren’t as sophisticated, aren’t 

Members of Congress, do not have a college education, are much 

more challenged in that process. 

And if they came up with folks, they got involved with folks who 

were less scrupulous, or even if they were, if they had a good Realtor, if they had a good mortgage banker, a lot of times it was what 

everybody was doing. They were refinancing. Everyone thought 

that this was the new normal, that housing prices were this cost 

and some people jumped in, thinking that if they didn’t get in right 

now, that they would be out of luck. 

And so it is devastating when you see the individual, it is devastating when you see a community, and it is devastating to know 

that up to 25 percent of my district is facing—either has been foreclosed on, is currently undergoing foreclosure, or could be foreclosed on by next July. Because that is what we see going forward, 

doing extrapolations based on data that my staff can provide you 

with, that I had in my testimony but I won’t go into right now. 

Mr. Chairman, you know that if 25 percent of any community 

would have been devastated at one time, we would have been voting to send in the National Guard and voting disaster assistance. 

But because it happened over a period of time, it is much like that 

old adage, that if you throw a frog into a pot of boiling water he 

immediately jumps out. 

But if you put a frog in a pot of cold water and turn up the heat, 

he will sit there and cook. And that is what is happening to our 

district right now. We have some devastating consequences, and it 

has gradually come upon us, but it doesn’t make the devastation 

7 

any less of a problem for those individuals who are being affected 

by it. 

So I am very grateful, and I know Congressman McNerney is 

also grateful that you are here. 

I am going to be quiet now and let you get to the testimony, but 

thank you, and I appreciate what you have done for us. 

The CHAIRMAN. Thank you. We will begin our testimony with 

State Senator Michael Machado. 

Without objection, any documents or complete written remarks 

that any of the witnesses wish to insert in the record, we will accept, and if there are people in the audience who would like to put 

something in—let me say this. If, after listening, there is something that occurs to you that you would like to send in, Gail Laster, 

who is here, is the deputy chief counsel of our committee, we will 

give you an address and you can send us material for up to a week 

from today, and it will be incorporated into the record. 

The CHAIRMAN. Senator. 

STATEMENT OF THE HONORABLE MICHAEL MACHADO, 

CALIFORNIA STATE SENATOR, 5TH DISTRICT 

Mr. MACHADO. Thank you very much, Mr. Chairman, and members of the House Financial Services Committee. Thank you for inviting me today, and welcome to California’s Central Valley, Chairman Frank, supplier of America’s fresh fruits and vegetables. 

The Central Valley—to put in context my remarks, I will give a 

brief description of the Central Valley. It is predominantly an agricultural region, with predominantly blue collar jobs; the median income in the Central Valley is about $51,000 compared to a statewide median income of $56,000, and over the past several years, 

the valley has experienced unprecedented urban growth, extending 

into the foothills of the Sierras. 

Rising home prices and seemingly low-cost mortgages attracted 

local buyers upgrading to larger homes, or first-time home buyers 

who were formerly renters, as well as attracting those migrating 

from the Bay Area in service of larger homes and larger lots. 

As has been mentioned, the Central Valley has been for foreclosures in both California and the Nation. In California, 1 in every 

182 households is in foreclosure. In the Central Valley, it is higher; 

1 in 73 in Merced, and 1 in every 82 in Stockton and Modesto, and 

these cities rank, two, three and four, nationally, and at times have 

ranked number 1, nationally. 

My written testimony which I have submitted to the committee 

summarizes the reasons I believe the Central Valley has been so 

hard hit. 

What I would like to talk today about is what we have done at 

a State level to try to address the problem. I would also like to talk 

about what we purposely haven’t done. I believe inappropriate action by government can be more harmful than helpful, and something I will focus on throughout the remainder of my testimony. 

The provisions of recently-enacted House Resolution 3221 will 

have a positive impact in the Central Valley communities, going 

forward. However, I believe that the actions of the local lenders 

and our State legislature are more likely to have a greater nearterm impact on homeowners. 

8 

The California Senate Banking, Finance and Insurance Committee, which I have chaired after a great teacher in the former 

chairwoman, Jackie Speier, since 2006, was the first State committee in the Nation to hold a hearing on the Federal interagency 

guidance in nontraditional mortgage product risk in January of 

2007. 

We subsequently held four hearings on subprime lending and 

foreclosure avoidance in both 2007 and 2008, and our participants 

included the Federal Reserve Board, FDIC, CSBS, State agencies, 

academics, and a variety of industry and consumer groups. 

And during that time I have also participated in five town hall 

forums, including one with Treasury Secretary Henry Paulson, 

here in Stockton. 

We learned about inappropriate activity by appraisers in collusion with real estate brokers to artificially set the value of homes, 

to be able to qualify for 100 percent financing; about actions of real 

estate brokers who also acted as mortgage brokers in the same 

transaction. These activities were taking advantage of unsophisticated buyers, and putting them in loans they could not afford. 

We introduced several pieces of legislation. The first one that became operative in 2007, prohibited improperly influencing an appraiser in connection with a mortgage loan transaction. This is 

similar to appraisal provisions of Regulation Z, which will not become effective until October of 2009. California enacted this in October of 2007. 

I also introduced and had passed SB 385, which was enacted in 

2007. It extended the Federal nontraditional and subprime lending 

guidance to State-regulated lenders and brokers. 

This was important because it leveled the playing field and prevented regulatory arbitrage among the regulated entities. Uneven 

application of rules regarding lending practices encourages regulatory arbitrage, a practice in which leaders choose their regulator 

in order to minimize the amount of regulatory oversight with which 

they are subject. 

Now, something I want to emphasize: There is a great risk, in 

California, of enacting laws that apply unequally to State and Federal lenders. Not only will the State drive lenders to Federal regulators and impose fewer restrictions on lending practices, but we 

will also send a message to secondary markets that there will be 

uncertainty with respect to their investments. 

I believe we should also avoid legislatively modifying existing 

mortgage contracts that can send additional signals of uncertainty 

to an investor market, causing interest rates to rise and limiting 

access to capital. 

Capricious action by well-meaning States, particularly by a State 

as large as California, can drive up liquidity, limiting capital available for mortgages, and a prime example of that is New York, 

where Fannie Mae and Freddie Mac refused to purchase loans that 

fall under New York’s new subprime lending law. 

In the past year, I have authored legislation that is now at the 

Governor’s desk, dealing with mortgage practices within the jurisdiction of the State. One of the primary examples was 1137, which 

requires lenders to communicate with borrowers before a notice of 

default can be issued. 

9 

This requires not only a notification, but an actual contact, and 

documented contact by the lenders with the borrowers. Oftentimes, 

people receive notices in the mail and they fail to acknowledge 

them; 1137 requires that before a notice of default can be filed, 

they would engage in actual conversation. 

We have also reformed brokering practice in California with 

greater accountability, and our informational hearings encourage 

action by our State regulators, in part due to our August meetings, 

where they initiated a partnership with State-licensed lenders who 

agreed to work with borrowers having trouble with affording their 

loans. 

This will also urge the Department of Corporations to collect information from our State, and from licensing people, and this was 

well before HOPE NOW was rolled out. 

But I don’t believe we are past the worst of our foreclosures. Individual neighborhoods, local governments, and State governments 

are going to continue to suffer the effects of crisis for more years. 

In the Central Valley, we expect to see another 2 years pass before housing prices hit bottom again, and begin to recover. And this 

is because in this area we have stagnant incomes, rising household 

costs, including gas, and additional exotic loan products such as 

payment option loans which will require fully amortized payments 

that are going to be coming due. 

The general state of the economy combined with the impact of 

declining retail sales will put additional pressures on traditional 

mortgage households because of reduced hours and job loss, and 

this is an expansion of the foreclosure from the exotic loan products. 

I believe foreclosure should be the last resort, but the industry 

right now has simply been unable, and at times unwilling, to meet 

the demands for loan modifications and forbearance. 

Without greater forbearance by the lending industry for problem 

loans, I believe there is little the Federal Government or the State 

can do with unaffordable loans. 

At the margin, I believe, as we continue forward, there will be 

some that will be helped, but in general, I think that the true observation is that the market will have to absorb the shock, reset 

and then go forward. 

I think we risk creating a moral hazard with government intervention to save those who would otherwise lose their homes, but 

rewarding risky behavior can only perpetuate the problem. Both 

the Federal Government and the States, I believe, should focus, in 

the short term, on ensuring that the legislation we have already 

enacted is implemented in a way that maximizes effectiveness. 

There needs to be continued accountability and oversight of lenders and the financial industry. We cannot allow ourselves to be inundated with products that neither lenders, nor borrowers, nor regulators, fully understood, which I think was the case of what happened with the exotic loan products of the past several years. 

We must continue to enforce lending and brokering practices that 

are fair to consumers and that provide transparency. 

But I want to emphasize that in doing this, this also creates a 

very uncomfortable paradox, and that is with increased scrutiny of 

mortgage market to protect borrowers, access to mortgages for traVerDate Aug 31 2005 17:45 Dec 09, 2008 Jkt 045620 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\45620.TXT TERRIE
10 

ditional housing will become more limited and the dream for homeownership for many will just remain that—a dream. 

Again, thank you for the opportunity to testify, and thank you 

for being here today. 

[The prepared statement of State Senator Machado can be found 

on page 86 of the appendix.] 

The CHAIRMAN. Our next witness is the Honorable Ellie Wooten, 

the Mayor of Merced. 

Madam Mayor. 

STATEMENT OF THE HONORABLE ELLIE WOOTEN, MAYOR, 

MERCED, CALIFORNIA 

Ms. WOOTEN. Thank you, and thank you for allowing me to be 

here. 

Depending on the month, Merced County is either 1, 2, or 3, 

leading in the foreclosure rates, and this has continued for a long 

time. I have had calls from television people as far away as Japan. 

I have been followed around by a reporter from The New York 

Times, and I don’t know how many calls I have had from TV or 

reporters, all because we are leading in this foreclosure rate. 

In August of 2006, the president of the Merced County Association of Realtors stated that 80 percent of the buyers in our area 

were speculators and they were coming in, many of them attracted 

by the opening of the UC campus. Speculators created the high per 

capita foreclosure rate, but when you add that to the subprime 

mortgage mess, the bad economy, and the foreclosure crisis, it compounded the situation for the local home buyers. 

More than a year ago, Merced took a proactive stance to try to 

help. We held workshops. We worked with our assembly people. I 

believe we have tried to work with Congressman Cardoza as much 

as possible. However, we have no real reason to think that this situation is going to be corrected immediately. 

Last year, the county assessor recorded 112 foreclosures in 

Merced County. As of July of this year, 524 were recorded, bringing 

the total of foreclosures for the year, to date, to 2,185; 1 in 20 

homes in Merced County are in foreclosure. 

In the second quarter of the year, loan default notices were sent 

out to 1,900 homes. That means nearly 1 in 10 homes in Merced 

County is in foreclosure or very near to it. 

The research firm, First American CoreLogic said that its statistics show that 15 percent of Merced County mortgages are delinquent by 90 days or more. The delinquency rate for the property 

taxes in Merced County is 8.3 percent this year. Last year it was 

5 percent. 

Because of the foreclosures, approximately 1 in 12 Merced County land owners are unable to pay their property taxes. There is 

$20.4 million in property taxes past due. That is a little more than 

8 percent of the total amount the county expected to collect. The 

county had to borrow $5 million to meet their Teeter Plan program, 

the obligations to transfer property tax collections to school districts, cities, and other agencies. And this was after the county 

went through their $13.7 million reserve. 

Due to the decrease in property values, 21,000 property owners 

will see their tax bills reduce this year. Assessed property values 

11 

dropped 2.4 percent over the last year. Last year, only 6,500 people 

saw their property taxes reduced. 

Foreclosures and the housing crisis have affected the CDF funds, 

or Mello-Roos. It is the same thing. We have frozen the positions 

of two firefighters, three police officers and two police dispatchers. 

They were all funded by CFDS funds. The economic slowdown and 

housing slump resulted in another 13 positions frozen in the City. 

The number of houses that received warnings to clean up overgrown yards—and I’m sure you have all seen the yellow lawns, and 

nuisances—was 3,758. This is almost double the number in 2006. 

The cost of the City weed abatement program doubled from 

$30,000 to $60,000. The increase is largely due to foreclosures. 

Calls to our code enforcement officers have increased, largely due 

to abandoned property calls. The City attorney’s office is working 

on a plan that would track properties before they become neglected, 

and work with the lenders to maintain them, if at all possible. 

The council regularly receives complaints from the public about 

abandoned homes in their neighborhoods. The foreclosure crisis has 

had a ripple effect throughout our local economy, and some examples are BMC-West, a company that has been in Merced for 21 

years. Due to the lack of construction, they have left Merced. 

Unemployment in Merced is double the national average at 11 

percent. In March, it peaked at 13.6 percent. Unemployed construction workers, along with title company employees, and other people 

in the housing field helped that number balloon. The development of Merced Passeo LLC took out a $9 million 

loan from County Bank in 2007. The developer now estimates the 

project has lost 90 percent of its value. County Bank, which has 

said the foreclosure crisis has affected business, has laid off 20 employees, just last Wednesday. It posted a fourth quarter loss of 

$14.2 million. 

We had to call the surety bonds on two developments in order 

to get the necessary infrastructure improvements completed. In one 

case, the developer buried an existing bike path before going out 

of business. 

There is one bright side to the foreclosure crisis. Currently, 48.6 

percent of the residents of Merced can afford a house. The median 

home in 2006 as $376,000. Today, it is now $155,000. But that also 

means the property values of most Merced residents has also 

dropped. 

The new Federal housing laws cannot address all of our problems 

but it will help more affordable housing in Merced. The new laws 

will bring stability to the mortgage market and help the community climb out of the financial hole they are in and try to reclaim 

the American Dream of truly owning a home and not see the bank 

repossessing a home. 

I will bring to your attention the article in The New York Times, 

‘‘Ruins of an America Dream,’’ and it begins with Merced County. 

Thank you. 

[The prepared statement of Mayor Wooten can be found on page 

127 of the appendix.] 

The CHAIRMAN. Thank you, Mayor, and your Congressman reminds me that the letter you gave us was very helpful and we appreciate that. 

12 

Next, we will hear from the Honorable Steven Gutierrez, a supervisor of San Joaquin County. 

STATEMENT OF THE HONORABLE STEVEN GUTIERREZ, SUPERVISOR, SAN JOAQUIN COUNTY BOARD OF SUPERVISORS 

Mr. GUTIERREZ. Thank you, Mr. Chairman, for this opportunity. 

We welcome you on behalf of the San Joaquin Board of Supervisors 

to San Joaquin County. 

I apologize that it is under these difficult times that we bring you 

here. But nevertheless, we hope that you will return and enjoy this 

all-American city. 

The CHAIRMAN. I never get to go anywhere where there is nice— 

Mr. GUTIERREZ. We apologize for that. 

The CHAIRMAN. I am in the grief business. I understand that. 

[Laughter] 

Mr. GUTIERREZ. If you stick around a little longer, we will take 

care of you. I want you to know that. 

Congressman Cardoza, we thank you very much for your leadership in making this happen today. On behalf of all of my colleagues, we appreciate your hard work, as well as the work that 

you have done in the past as our Representative. 

Jerry, Congressman McNerney, again thank you very much for 

making this happen. It is a very difficult time for us in San Joaquin County, for many of our families, many of our children, many 

of our young people who are living in uncertain times. 

Congresswoman Speier, it is nice to see you back again. 

Mr. Chairman, members of the committee, I would like to begin 

by thanking you for this opportunity to discuss the impacts of the 

recent foreclosures crisis in San Joaquin County. My name is Steve 

Gutierrez, and I have served as a member of the San Joaquin 

County Board of Supervisors for 12 years. Never in this time have 

I witnessed a crisis of this magnitude, of the current mortgage foreclosure crisis. 

Foreclosures impact families. The loss of a home and the subsequent uprooting of families is devastating. Foreclosures impact 

neighborhoods. A foreclosed home impacts neighborhood property, 

values, and invites crime, drug, and gang activity. 

Foreclosures impact communities, resulting in a reduction of the 

property tax base and an increased need for services such as law 

enforcement, counseling, and homeless assistance. 

The foreclosure crisis began a couple of years ago with a huge 

wave of resets in the subprime market. It has been the failure of 

these loans, coupled with decreasing home values, which has been 

responsible for much of the recent turmoil in our housing market. 

Mr. Chairman, my statement and my comments are submitted, 

as appropriate, for the record. 

I would like to focus on San Joaquin County. Here, in San Joaquin County, since January 2007, there have been more than 

12,000 foreclosures. Let me repeat that: More than 12,000 foreclosures in San Joaquin County; 2,850 foreclosures in my district 

alone. This is a significant increase in foreclosures when compared 

to historical levels. 

13 

As you can see by the chart up here before you, and in my submittal, foreclosure activity in San Joaquin County is on the increase, and there is no relief in sight. 

In these times of declining revenues and increased demand for 

services, counties and cities are taking steps to mitigate the damages from foreclosures. But Mr. Chairman, we can’t do it alone. 

For example, in 2007, county property tax revenues decreased by approximately 2 percent, or $4 million. It is estimated that county 

property tax revenues in the next year will decrease another 6 percent, approximately $13 million. 

In this light, the Federal Government has an important role in 

assisting counties, and assisting in saving our neighborhoods. The Housing and Economic Recovery Act of 2008, a $300 billion 

Federal Government initiative, was signed into legislation to assist 

400,000 homeowners facing foreclosure, and extends the life of the 

Fannie Mae and Freddie Mac secondary market loan purchasers. 

Initiative programs will begin October 1, 2008, and sunset September 30, 2011. Key provisions of this legislation are that it: Provides $4 billion in block grants directly to communities hit hardest 

by foreclosures; provides $180 million for pre-foreclosure counseling; develops an FHA refinance program for homeowners with 

problematic subprime loans; reforms FHA, the government insurer 

of loans, to make homeownership more accessible in the high-cost 

areas; requires a 3.5 percent downpayment and requires new 

homeowner counseling; establishes a $7,500 First-Time Home 

Buyer Tax Credit; provides for foreclosure protection for active duty 

soldiers and veterans; requires new mortgage disclosures; provides 

increased Low Income Housing Tax Credits to States; and establishes a new independent regulator for Fannie Mae and Freddie 

Mac. 

However, it remains to be seen what effect the Housing and Economic Recovery Act of 2008 will have on the mortgage foreclosure 

crisis. Certainly it is a step in the right direction. However, some 

feel that the legislation may be too little, too late, because potentially, 2.5 million homeowners could be facing foreclosure in 2008. 

And what about the hundreds of thousands of households who 

have already lost their homes to foreclosure? Some feel the legislation is inadequate and has several shortcomings. 

The delay from enactment and planned implementation is too 

long. Many will have lost their homes to foreclosure in the interim. 

There should have been a moratorium on foreclosures. 

The legislation should have included a provision that allowed 

bankruptcy courts to modify mortgage loan terms on primary residences, which would have prevented hundreds of thousands of foreclosures. 

Four billion of block grants hit hardest by the foreclosure crisis 

is a drop in the bucket when compared to the actual need. 

Off the top, 1⁄4 of the grant value is required to be allocated proportionately, 1⁄50 to each State. The question is: Is the problem proportionate? 

Lenders participation is voluntary. They have to agree to reduce 

loan amounts to 90 percent of the current home value. What happens if they don’t agree? There seems to be a good market for the 

sale of foreclosed properties right now. 

14 

There is no acknowledgement of the difficulty borrowers have 

finding the holder of their loan, and no remedy for this in the legislation. 

Only those homeowners without secondary debt on their homes, 

and whose revised house payment does not exceed 31 percent of the 

homeowner’s monthly income can participate in the refinance program. 

Gentlemen, Ms. Speier, the Housing and Economic Recovery Act 

of 2008 is a good first step in addressing the foreclosure crisis. 

Please don’t let this be the final step. Don’t let this crisis continue 

to devastate our families, our neighborhoods, and our communities. 

Mr. Chairman, this concludes my testimony, but I would like to 

just add one more item. I spent 2 years working with gang members in the City of Stockton at a particular high school, and one 

family itself is experiencing this problem directly. The father has 

turned to drinking. The son is turning around, running around 

with gangs again. The siblings are following in the footsteps of the 

older sibling. And the husband is now beating his wife. 

This situation is affecting families in a tremendous way, and 

with the diminishing returns in our property tax revenue and our 

general fund dollars, our county is not able to keep up with the 

need. Social services are overwhelmed. The City of Stockton is having huge challenges. 

This is—I hate to use the same analogy—but truly is another 

perfect storm. I don’t know how much more the County of San Joaquin and the citizens of the County of San Joaquin can take. 

Thank you very much for your time, and I submit all the documents as well as the maps for the record. There is also a map there 

of all the dots that you could see in San Joaquin County, of all the 

foreclosures, and if you look at the map behind it, it is practically 

all red. Thank you, Mr. Chairman. 

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

83 of the appendix.] 

The CHAIRMAN. I mentioned a return witness for us—who did a 

very useful job when we were dealing with loan limits—Heather 

Peters, the deputy secretary for business regulation and housing, 

of the Business, Transportation and Housing Agency of the State 

of California. 

Thank you, Ms. Peters. 

STATEMENT OF HEATHER PETERS, DEPUTY SECRETARY FOR 

BUSINESS REGULATION AND HOUSING, BUSINESS, TRANSPORTATION AND HOUSING AGENCY, STATE OF CALIFORNIA 

Ms. PETERS. Thank you, Chairman Frank. 

Good morning, members of the committee. I want to start off by 

thanking you all for coming here today. I know this is not an easy 

trip for you to make, and it is very important for you to see, firsthand, what is going on in California as well as what is going on 

here in Stockton. So thank you for making that effort. 

In my role as deputy secretary, I oversee all the departments 

that regulate real estate appraisals, financial institutions, and corporations, as well as the Housing Community Development Department, and I sit on the board of the CalHFA, California Home Bank 

15 

for Low and Moderate Income Lending. I also chair the Governor’s 

Task Force on Nontraditional Mortgages. 

In all those roles, I have had the great opportunity to testify, not 

only before this committee on two prior occasions, but also to work 

with Senator Machado, my fellow panelist here this morning, and 

I can’t thank both the chairman and Senator Machado enough for 

the work they have done, and the leadership they have exhibited 

in passing legislation that has been long overdue. 

There is no silver bullet. I have been asked here to comment on 

the State’s response to the foreclosure crisis, collaborative initiatives that are underway, future predictions for the housing market, 

mitigation of community destabilization, and benefits of the new 

Federal housing law, in 5 minutes or less. So I will do my best. 

But I want to draw your attention to the fact that I have submitted written testimony, and as part of that testimony there are 

a number of color slides that give you a great deal of detail about 

the current situation of the California housing market, and I have 

brought with me a 100 copies for the public to take home with 

them as well. 

There is no silver bullet. This is a multifaceted problem and we 

need multifaceted solutions. I started my job 2 days before Senator 

Machado had his first hearing on this subject, and we certainly hit 

the ground running. 

We created the Governor’s Task Force on Nontraditional Mortgages in early 2007. We have been working together collaboratively 

with not only the State legislature, but also local stakeholders, 

lenders, and servicers, as well as our Federal counterparts. The 

Governor and myself have met with President Bush, the Secretary 

of HUD, the Commissioner of HA, the Chairwoman of the FDIC, 

the Secretary of the Treasury, and also have worked with the National Governors Association on this problem. 

We have needed that breadth of experience and expertise to address this. As Senator Machado mentioned, thanks to his bill, we 

were able to enact emergency regulations in California in 2007, to 

implement the Federal guidance and the subprime statement on 

lending in to California’s regulatory structure at the Department of 

Corporations and the Department of Real Estate. So that in California now, it is an actual regulatory violation to make a loan without taking into account a borrower’s ability to repay that loan. 

Part of those regulations was also to implement a new disclosure 

form, because as Mr. Cardoza had mentioned, nobody reads those 

papers. I am a lawyer by trade, a real estate investor and a real 

estate broker, and when I get the papers, I don’t read them, I just 

flip to the page where it says, what’s my payment, just like everybody else in America. 

Our new form in California is a very simple grid that discloses 

3 days after the application, when you still have time to shop 

around, what not only the teaser rate payment is, but what the 

worst-case scenario payment would be if the interest rate adjusted 

to its full maximum. 

That disclosure is made not only on the loan that the broker 

wants to sell to the consumer, that makes the broker the most 

money, but also all other available loans that borrower may qualify 

for. 

16 

It also goes and does the math on what the borrower’s income 

is under each of those payments, and lets them know that in a 

worst-case scenario, this is what you’re going to have left to live off 

of, if you take out this loan. 

We are very proud of that. We have also signed a great deal of 

legislation, some of which the senator has commented on. We have 

additionally made it a crime in California to tie an appraiser’s income to his or her valuation of a property. We have, as the senator 

mentioned, required lenders to attempt to contact borrowers before 

a default notice is filed. 

We have a $1,000 a day fine for holders of REO properties who 

do not maintain those properties, and we require 60 days notice before an REO holder can evict a tenant in the property. 

Additionally, as the Chair mentioned, I have worked tirelessly, 

and the Governor has personally lobbied on behalf of California for 

the Federal Housing Bill. Many provisions of the Federal Housing 

Bill, it’s a good bill, we are happy it has passed, in particular the 

loan limits which I had the opportunity to testify on previously. 

We have spent a good deal of time and money on education in California. We have made $1.16 million in CDBG grant counseling 

available. We have received $8 million in Federal stimulus money 

to fund counseling in California and we also expect more under the 

new housing bill. We have launched a $1.2 million ad campaign at the Governor’s 

urging, to educate people to the fact that there are options to foreclosures, that it’s not a done deal, and they need to work with their 

lenders. We have also partnered with the HOPE NOW Initiative, 

and I had the honor of speaking with the Secretary of HUD, right 

here, at the homeownership event. By way of stimulus, we have received $5.6 million from the Federal Government to help the mortgage banking and industry employees who have been laid off in this crisis. 

California is a leader in a great many ways, some of which we 

are proud of, and some of which we are not. Unfortunately, many 

of the lenders that were writing these loans were based here in 

California and we have had significant job loss due to that. 

Additionally, the Governor has made a directive that we push 

out as much bond money as possible, as quickly as possible, to 

stimulate our housing economy, and help get some of our construction workers back to work. 

We have made $1.06 billion of bond awards since July of 2007 

under Prop 46 and Prop 1C. This will help more than 23,000 California families rent or purchase affordable housing. 

We have also made awards of over $72 million in Federal Home 

Investment Partnership Program funds, and have recently announced $30 million in CDBG awards, $7.2 million of which is coming right here to the Central Valley. 

One of the most innovative programs we have been able to implement here in California, under the CalFHA, is our Community Stabilization Home Loan Program. It is, at this point, a $200 million 

pilot program, where we have sat down with lenders who hold REO 

properties, we have sat down with counseling agencies who have 

willing and able first-time home buyers who have been 

precounseled on the value and the responsibility of homeownership, 

17 

and this alone provides very low interest loans, complete with 

downpayment assistance and closing cost assistance to first-time 

home buyers, at very low interest rates, to purchase properties that 

have been foreclosed when the lender has agreed to discount those 

properties of at least 12 percent below market value. 

So that is an ability to target some areas right now that desperately need to turn those foreclosures over, and we want to make 

sure they get into the hands of home buyers and not speculators. 

That program, thanks to H.R. 3221, will probably be able to be 

rolled out statewide due to the bond cap that was in that bill. So 

thank you very much for your work on that. 

What are my predictions for the future? Well, if we have learned 

anything, it is that the housing market is unpredictable. When the 

Congress was able to pass the recent bill giving the Treasury the 

authority to come in, and step in, and help Fannie and Freddie, we 

hoped that they would not be using it, and I woke up this morning 

to realize that, yes, in fact, they are. So it is good that they have 

that authority. 

But even on the smaller scale, you can’t predict what is happening. The mayor brought a newspaper with her. I brought one 

with me as well yesterday. I opened my door and the front page 

of The Los Angeles Times had an article titled, ‘‘Bobcats Jump On 

Vacancy.’’ And who would think we would be dealing with bobcats. 

Apparently there are some bobcats that found a koi pond to be 

a great place to have their kittens. There are all sorts of things we 

are dealing with that we can’t predict. Our median home price in California dipped below $500,000 for 

the first time in recent memory, in October 2007, and now it is 

down to just above $350,000. That has created a lot of problems 

with foreclosures, but the silver lining—and we do have to remember that real estate is cyclical, and we will come out of this some 

day, if we all continue to work together on it. 

The silver lining is that affordability is at 48 percent statewide, 

up from 24 percent last year. Here, in the San Joaquin Valley, affordability is up to 35.5 percent versus only 9.7 percent last year. 

Sales are starting to pick up. Inventory is down. Inventory is a 

very important measure to most economists. Inventory is down to 

6.7 months now, statewide, in California. That is versus 16.8 in 

January. So we are seeing a significant reduction in inventory. 

Interest rates are rising slightly but still had historic lows, which 

is good for the market. Unfortunately, though, our defaults are still 

astronomical. Statewide, we had 37,000 defaults and it has been 

hovering right around that level for several months now. 

The foreclosures also are climbing. We had 23,685 last month in 

the State of California. Stanislaus County, San Joaquin and Sacramento reported foreclosures in June of 851, 1155, and 1640. So 

the problem is clearly concentrated here as well as elsewhere in 

California. 

Another thing to be concerned about on the horizon is the resetting of the option ARMs. We have seen a softening in the prime 

market. We have seen a softening in the Alt-A market, and defaults rising in traditionally reliable credit scores. 

But the option ARMs are also on the horizon. There’s a slide, the 

last slide in my presentation will show the rest of those being conVerDate Aug 31 2005 17:45 Dec 09, 2008 Jkt 045620 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\45620.TXT TERRIE
18 

centrated in 2010 and 2011. Unfortunately, 53 percent of those 

loans nationwide are here in California. So we’re going to feel a significant impact in the outyears on that. 

Finally, I want to comment on the new Federal bill. The most important thing that I urge my colleague, my witness had left here 

from HUD, to take away from this today, is in allocating the $4 billion in emergency assistance for redevelopment of abandoned and 

foreclosed homes program, we need California to be seriously represented in that allocation. 

The funding guidelines that were put in the bill clearly support 

that California receive quite a bit of that money. California has 

27.14 percent of the foreclosed homes in the Nation, 13 percent of 

the subprime loans, 22 percent of the subprime debt, and 26.67 

percent of the homes in default or delinquency. So I look forward 

to working with our colleagues at HUD, and continuing to collaborate with them. The first week in October, Treasury, HUD, and 

myself and the NGA, are putting together a summit on this and 

we look forward to continuing to collaborate. Thank you for the opportunity. 

[The prepared statement of Ms. Peters can be found on page 100 

of the appendix.] 

The CHAIRMAN. Thank you. I take it you have the Secretary of 

HUD, whom I must say I have been very happy to work with. The 

new Secretary has shown a great deal of energy. He will be meeting with us, myself and the senior Republican on the committee, 

and we will be talking about this, and talking to me right up to 

that minute will be your California chairwoman of the Subcommittee on Housing, Maxine Waters, who has been the most ardent advocate of this, and a few others things, but particularly on 

the CBDG. So we will be very much aware of that. 

Ms. PETERS. Yes. 

The CHAIRMAN. And finally, we appreciate your attendance. 

Next, we have Joseph Bates, who is the Director of the Santa 

Ana Home Ownership Center of the Department of Housing and 

Urban Development. 

STATEMENT OF JOSEPH C. BATES, DIRECTOR, SANTA ANA 

HOMEOWNERSHIP CENTER, U.S. DEPARTMENT OF HOUSING 

AND URBAN DEVELOPMENT 

Mr. BATES. Good afternoon, Chairman Frank, and distinguished 

members of the committee. Thank you for the opportunity to testify 

today on the efforts made by the Department of Housing and 

Urban Development in the areas of foreclosure prevention and 

intervention. 

The Administration and Congress have taken several measures 

to address the housing crisis, which I will outline in my testimony. 

In response to the housing crisis, the Federal Housing Administration, FHA, expanded its programs to help more Americans facing 

foreclosure refinance into safer, more affordable mortgages. 

In August 2007, President Bush announced a new product called 

FHASecure for homeowners who fell behind on their mortgage payments after their initial interest rate reset. 

19 

Since the inception of FHASecure, more than 330,000 families 

have refinanced with FHA, and by the end of the year, we anticipate helping approximately 500,000 families. 

On July 14, 2008, HUD expanded FHASecure to provide additional assistance to borrowers with adjustable rate mortgages. 

FHASecure is now assisting families who have missed up to 3 

monthly mortgage payments over the previous 12 months, or have 

experienced temporary economic hardship such as loss of overtime 

or medical needs. 

The increased mortgage limits: In March of this year, as part of 

the bipartisan economic growth package, the President signed into 

law a temporary increase in FHA loan limits through the end of 

the year, enabling even more families to purchase or refinance 

their homes with an affordable mortgage. These temporary loan limits, which go as high as $729,750, are 

especially advantageous for high-cost areas such as California, 

where FHA’s traditional loan limit of $362,790 prevented FHA 

from being utilized. 

Thanks to the strong support of Chairman Frank, and many 

Members of the California Congressional Delegation, the recently 

enacted Housing and Economic Recovery Act makes permanent a 

new higher loan limit for high-cost areas of the country. Here, in 

California, that means FHA will now be able to ensure mortgages 

of up to $625,500. 

The Hope For Homeowners Program: In addition to higher FHA 

loans, the Housing and Economic Recovery Act further expands 

FHA’s ability to provide targeted mortgage assistance to homeowners. The New Hope For Homeowners Program will continue 

FHA’s existing and successful efforts to provide aid to struggling 

families trapped in mortgages they cannot afford. 

Under the program, certain borrowers facing difficulty with their 

mortgages will be eligible to refinance into FHA-insured mortgages, 

provided their lenders agree to write down a significant portion of 

their outstanding principal. 

While the program is still in its planning stage, and key details 

continue to be ironed out, I am pleased to report, Mr. Chairman, 

that the board of directors and staff of the four member agencies 

have been working around the clock on getting this program up 

and running, and we are on track to have it implemented by October 1st. 

I believe the Department will be in a position to discuss many 

of the key components to the program at the oversight hearing you 

have scheduled for September 17th. 

Emergency assistance for the redevelopment of abandoned and 

foreclosed homes: The Housing and Economic Recovery Act also authorized $3.92 billion in Block Grant funds to be spent on the redevelopment of abandoned and foreclosed homes, and residential 

properties. 

The funds will be allocated to States and local government using 

the following need-based criteria: One, the percentage of foreclosed 

homes; two, the percentage of homes financed by a subprime mortgage; and three, the percentage of loans in default or delinquent. 

HUD will announce each State’s allocation, including specific 

community allocations, in late September. While it is premature to 

20 

speculate how much the State of California and the communities 

in the Central Valley will receive, I think it is fair to assume, given 

the high rate of FHASecure in subprime mortgages, California 

stands to get a significant share of these funds. 

And housing counseling: Housing counseling is an essential part 

of any solution to the housing problem. Effective counseling can 

help existing homeowners stay in their homes, and help new homeowners stay out of trouble in the first place. 

Funding for HUD’s 2,300 approved housing counseling agencies has increased by 150 percent since 2001, and $50 million was approved for housing counselors in Fiscal Year 2008. Another $180 million went to the nonprofit NeighborWorks this 

year to help prevent foreclosures. The recently signed housing bill 

authorized an additional $100 million for NeighborWorks for foreclosure mitigation activities. 

Thank you. I appreciate the opportunity to appear today and discuss this very important issue. 

[The prepared statement of Mr. Bates can be found on page 62 

of the appendix.] 

The CHAIRMAN. We will begin the questioning with our host, Mr. 

McNerney. 

Mr. MCNERNEY. Thank you, Mr. Chairman. I want to thank all 

of the witnesses for your testimony today. 

First of all, I want to start with a question for Heather Peters, 

and I might want to sort of repeat the question for Senator 

Machado. 

You mentioned a number of legislative opportunities that took 

place in Sacramento, that will help in the foreclosure crisis. How 

do you see those working in conjunction with the Federal programs 

such as the $4 billion fund for communities to purchase homes? Is 

there any vision about how that might happen or about how we 

might coordinate efforts? 

Ms. PETERS. We are in the process of having all of our departments dig through the minute details of the bill. 

At this time, we believe that our Housing Community Development Department and our CalFHA have the authority they need 

to implement those programs, and as I mentioned, we are well on 

our way to implementing at least the bond cap. We have a program 

ready to put that into and the CBDG grants; we have plenty of experience with that. 

I don’t believe we need any additional State legislation on that. 

But I will pass the microphone to Senator Machado. 

Mr. MCNERNEY. Sure. Thank you. 

Mr. MACHADO. I concur with Heather Peters, and I want to say 

that her department has done, I think, an extraordinary job of 

picking up the pace and making the efforts to implement the Federal programs, and also State programs, to come back in and try 

to address the needs of the community. 

Mr. MCNERNEY. Thank you. Senator, from your perspective, 

what do you think we could do, that would best serve the State and 

the region? 

Mr. MACHADO. I think you have to divide this probably into two 

parts. One is what can the Federal Government do in terms of financial assistance to local government and local communities? And 

21 

I think we are seeing that, in part, with the recent House legislation that was enacted. 

The other part that I think is difficult is how do you get the financial community to respond. In my office, I am hearing of more 

and more people who have tried to call the lender or the servicer. 

There is no response, it is difficult to get access to, and even with 

the HOPE NOW lines, people often fail to get the response, if it is 

beyond help. Part of the problem, I believe, is that lending institutions are hiding behind the banner of contracts that servicers have, 

that oftentimes give the fiduciary responsibility to the lender or the 

investor, and not necessarily the latitude to be able to do the workout. 

If we are going to be using taxpayer dollars to bail out Bear 

Sterns, to shore up Freddie Mac and Fannie Mae, then I think the 

bully pulpit of Congress and State government ought to be used on 

the Bank of America’s, the Countrywide’s, the Wachovia’s, the 

Washington Mutual’s, and others, to be more responsive in terms 

of trying to do a workout. 

The workouts have to be the—and I understand that—on the 

ability to pay. When you have people who were made loans, what 

they called NINJAS, no income, no jobs, no assets, with no equity 

going into a home, they may not be helped. 

But there are others that, with a restructuring, who do have a 

legitimate—can demonstrate the ability to pay, that there ought to 

be an extraordinary effort on the part of those lenders to be able 

to do that, and at this point I think they are not, and part of it 

has to do with the complexity of the investor market, where you 

have bundled up these loans, you have separated them into separate tranches, and from a fiscal and investor perspective, it is often 

a higher—it is a minimal impact on the investment if they can dispose of it through a foreclosure than it is to try to work it out and 

carry it forward. 

And it is only going to take instilling on institutions a moral responsibility to be more proactive and to be willing to take the risk. 

But it has to come from the industry. As soon as we start trying 

to legislate that, we will create a degree of uncertainty in the secondary market, that I think will further exacerbate the capital 

availability, and as I mentioned in my comments, it creates an interesting paradox that could limit the accessibility of homeownership. 

Mr. MCNERNEY. Thank you, Senator. 

Supervisor Gutierrez, what is it about San Joaquin County and 

Stockton, that made this area so susceptible to this problem? 

What unique characteristics do we have, in your opinion? 

Mr. GUTIERREZ. Tremendous and unprecedented growth. In 

many cases, I will go out and say it—poor planning. The fact that 

we haven’t truly looked at the economic depression in our county 

and the ability for people to pay. Limited resources in terms of 

staffing in the county government. Those agencies that are established within county government to provide those supportive services are understaffed. 

It pretty much sets San Joaquin County into a position of being 

taken advantage of, and for a lot of people to fall into that same 

category. So many, many families in San Joaquin County wanted 

22 

the opportunity to have that dream, Jerry, and at any cost, because 

they are taught that once you own a home, you will have an education, you have the ability to provide an education for your children. Your children can go to college. So these folks were preyed 

upon. And now it is just getting further exacerbated. But San Joaquin County has had tremendous growth, and when you look at, 

for example, the City of Lathrop, was in real trouble, to throw this 

on their plate as well—devastating. 

Mr. MCNERNEY. So Supervisor, you have a list of shortcomings 

and inadequacies in the bill, and as I look at them, I say they 

would be nice to try and implement, but then, going along with 

what the senator said, those kind of draconian steps would cause 

instability in the marketplace and perhaps exacerbate the problem. 

Do you have any comment on that? 

Mr. GUTIERREZ. Now Mr. Congressman, I agree with the senator. 

I think the comments are accurate. However, albeit there is no silver bullet here, no question about that, and we are trying to make 

lemonade, but it is really bitter lemon and there is not enough 

sugar to go around. And there was a comment that Congresswoman Speier made about the district attorney’s office. I could not 

agree with you more. 

Our district attorney, Jim Willett, has made a commitment to 

prosecute, wherever he can, for those predators that took advantage, and try to work out a deal, if he can get those predators to 

compensate these families, so they can at least stay in their homes, 

try to make them whole. 

The problem is when you’re looking at diminishing revenues, to 

the tune of $4 million today, and $13 million next year, when the 

district attorney comes to our office and asks for those additional 

resources, for more prosecutors, it is not going to happen. 

Mr. MCNERNEY. I mean, do you think the fear of additional prosecution will have a positive impact? 

Mr. GUTIERREZ. Absolutely. I don’t know what other teeth you 

have. I mean, the fact of the matter is that a lot of these predatory 

lenders have absconded. They left. You had some folks working for 

some people, Congressman, and now they are gone. I have families 

who have come to me, who can’t get ahold of the people who processed their loans. They are gone. They are no longer working for 

the company. So who is responsible for those folks? 

I will tell you one thing. In a lot of these families, they don’t 

have the time or resources to go on a hunt. 

Mr. MCNERNEY. Well, but I mean after-the-fact prosecution assumes that you can identify and bring to justice the people who 

perpetrated the loans, as opposed to preventative measures beforehand, that keeps those loans from being offered in the first place. 

Mr. GUTIERREZ. Absolutely. There is no question about that. Congressman, I think what I am saying is that as the Federal Government is looking at, and the State is implementing measures to prevent this from happening again, you have a number of families out 

there who are creating another generation that is going to be built 

upon the inability now to send those children to college and large 

families. So yes, we have to implement measures to prevent this 

from happening again but what are we going to do about those 

families who are in the thick of it right now? That is my concern. 

23 

Mr. MCNERNEY. I think I have run out of time here, so I am 

going to yield back to the Chair. 

Ms. SPEIER. Thank you, Congressman. Congressman Cardoza. 

Mr. CARDOZA. Thank you, Congresswoman Speier. I want to first, 

if I could, I had 10 constituents who submitted testimony. We 

asked a number of the government officials, and officials that had 

knowledge of the industry to come speak to us today, but I also 

sent out a request to my constituents to put in writing some of 

their individual stories, and I would like to submit for inclusion in 

the record a list of 10 items that we will provide to the staff. 

Ms. SPEIER. Without objection, they will be included in the testimony. 

Mr. CARDOZA. Thank you. 

Also, Mr. Frank alluded to it, that Mayor Wooten, who is also a 

realtor in our community, had provided us with a redlining letter. 

Well, it was a letter from a lender, saying that our geographic area 

didn’t qualify for their criteria of loan making because it was a declining market. And we had been in contact with that lender, and 

they have changed their practice. 

But there is another, that she provided today. This is something 

that you worked on in the State legislature, as I recall, and on a 

little bit different topic. But I want to submit into the record another letter given to my by the mayor, that indicates another lender is perpetrating this practice. 

Now the reason why I bring this up is because if lenders start 

circulating territory and saying this is a bad area and we are no 

longer going to lend there, then this will cause the crisis that we 

are experiencing today to spiral out of control. It is already out of 

control, in my opinion, but it will just become that much deeper 

and that much worse. 

I am very concerned about that, and I would like the committee 

to take a look at it and see what we can do to preclude this kind 

of activity. 

Ms. SPEIER. It will be included in the record, without objection. 

Mr. CARDOZA. Thank you. 

I want to, before I forget gain, when I deviated, and I always do 

this, when I deviated from my staff’s prepared comments, I forgot 

two things that were very important, the first one being that—well, 

downpayment assistance is still critical in my area. 

We have low-income folks who have the ability to pay, especially 

at today’s housing prices, but they don’t have the ability to bring 

about a large downpayment. 

When I was a Realtor, I had hundreds of folks that I would talk 

to, who would tell me that that is how they got into their house, 

and those folks, for the most part, were always—well, not always— 

but they were good citizens, they paid off their mortgage, they are 

still in them. I was a Realtor about 10, 15 years ago, 15, 20 years 

ago maybe. Time flies. 

But a program in the recently-passed bill, through no fault of 

Chairman Frank, or Chairwoman Waters, or yourself, the Nehemiah Program was eliminated in this bill that we had to pass because of the negotiations with the Senate and the Administration. 

I have been in consultation with a number of my Realtors, and 

the question I have is to Mayor Wooten, because she deals with 

24 

this: How the Nehemiah Program’s elimination will devastate our 

area, or at least severely impact it. 

Mayor Wooten. 

Ms. WOOTEN. The Nehemiah Program was used heavily in 

Merced County, and many people were not out of the box when it 

was taken away. We are basically an agricultural community. 

There are solid people but many of them do not have a bank account with 20 percent down for this house. 

Nehemiah helped in such a manner that the seller came to the 

forefront to get them in. From that point on, they have their home, 

they made their payments, there was no monkey business. When 

the Nehemiah Program was knocked out, it knocked out quite a 

few very good qualified buyers, and it has hurt us. 

And the other thing I would kind of like to touch on—you were 

speaking about people calling their lender to try to get help and 

they could not get help. That is because many, many of these larger institutions no longer have underwriters. The underwriters commanded more money. Therefore, the underwriters left, if you will. 

The person answering the phone is generally a receptionist, and 

when you can get through them, which is highly unlikely, you get 

to someone who has 100 to 200 folders sitting on their desk. It is 

just not working, and I don’t know how you can bridge that gap. 

Mr. CARDOZA. Well, that actually brings me to my next point, 

and I will tell you, I have worked with you a long time, Senator 

Machado, and what you just told me you did in the legislation 

about requiring the lenders to make contact with borrowers—I forgot to mention that when Mr. McNerney and I had that housing 

workout forum here, in this room, you were part of that as well, 

and I think that is probably where you took back some of those 

ideas, because you heard, like we heard, our constituents saying 

that folks were not being responsive. 

I am very curious to know how your legislation is going to work, 

because I think it is a great idea to take back on the Federal level, 

is to require—obviously, foreclosures take place, for the most part, 

under State law, but when we’re guaranteeing loans, it certainly 

makes sense for us to require that the servicers of those loans have 

to make some kind of personal contact, and I would like to know 

how you anticipated working on a real life, real-time basis. 

Mr. MACHADO. Under the provisions of the bill that I co-authored, along with Senator Perata, and many others, it requires 

that before a notice of default is issued, the lender has to contact 

the borrower and let them know that they are in a situation in 

which there is going to be a default notice, it has to be done—there 

is a prescription that has to be done, both by mail and also by 

phone, and that contact has to be recorded. 

If there is no contact made, a notice of default is issued, and then 

you proceed into a foreclosure setting. There is recourse through 

the courts to—in this case, would be to set aside the default and 

the foreclosure until that situation is remedied. 

I think it is very important because of a couple of things. One, 

many borrowers who find themselves in a problem are often embarrassed. They tend to, as we all do, if we have a problem we put 

it at the bottom of the pile, and in this case you are trying to make 

sure they are notified of that, and also be made aware of the servVerDate Aug 31 2005 17:45 Dec 09, 2008 Jkt 045620 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\45620.TXT TERRIE
25 

ices that may help them in a counseling perspective, so that they 

can start working out of their particular circumstances in order to 

be able to avoid foreclosure. 

Mr. CARDOZA. Thank you. Supervisor Gutierrez, you were talking 

about the challenges that affect local government. I have said a 

number of times that I compare this crisis, the foreclosure crisis in 

California as the ‘‘Katrina of California,’’ because it has devastated 

that many housing units. It has affected so many families. It has 

caused so many people to move. 

And I had one constituent, the other day, who said, ‘‘But Congressman, it is not causing the physical harm to individuals that 

Katrina caused.’’ And I said: ‘‘But you are wrong, because it causes 

psychological damage.’’ We have seen the domestic violence cases 

go up, and you are on the front lines as a county supervisor dealing 

with those kinds of challenges. We have seen suicides. There have 

been a number of folks who have been impacted, and I would like 

you, from your personal experience, boots on the ground in the 

community, to share with us your feeling about that. 

Mr. GUTIERREZ. Thank you, Congressman. And we are still dealing with Katrina, with the redrawing of the flood plain maps in 

San Joaquin County. 

Mr. CARDOZA. That is a whole different issue, but that is a problem too. 

Mr. GUTIERREZ. I know. That is a meeting that should be in the 

next room. 

Mr. CARDOZA. Well, since you brought that up, could I just mention, I know we have been doing a lot of praising of Congressman 

Frank and what he has done, but I will tell you that he has specifically tried to assist me a number of times, and Mr. McNerney, with 

regard—you know, we were talking about Lathrop being devastated in this situation. 

Well, the whole San Joaquin County area being a delta, it has 

significant issues with levees, and communities that are being affected right now by this other crisis are now going to have to repair 

the levees because FEMA decertified the maps. 

And you layer on top of the foreclosure situation— 

Mr. GUTIERREZ. That is right. 

Mr. CARDOZA. On top of accelerating loan payments, because 

they are readjusting, flood insurance is going to be— 

Mr. GUTIERREZ. That is right. 

Mr. CARDOZA. That is just one more thing to push people over 

the edge. So Congressman Frank has really been sensitive to that. 

Congresswoman Waters has been very sensitive to that. And since 

you mentioned it, I just wanted to thank them about that. Go 

ahead. 

Mr. GUTIERREZ. Thank you very much. But that is exactly my 

point. So when we talk about San Joaquin County and we talk 

about the Central Valley and our senator knows full well the issues 

that we are facing in regards to water, a potential canal, and we 

can go on for days. So the politics is really interesting right now 

for San Joaquin County and the residents of San Joaquin County. 

But getting back to your question in regards to families, I have 

a family right now, the Ortiz family, who are sleeping in a garage 

because they invested everything that they had into this home for 

26 

their family, because they were told that if you have a home you 

can send your children to school. And they have three. 

And the young man, the young teenager, he is 16 years old, was 

involved in gangs, and he started to get away from gangs because 

their life turned around. They actually had a home. He had his 

own room, and the children had their own rooms. And now the 

predatory lending, somebody came by with a wonderful opportunity, not unlike the lady that you were talking about, they took 

this opportunity because they saw the ability to get a $100,000 

loan, and they were going to take that loan and they were going 

to fix up their home, and build their investment. 

And what happened? Well, they thought it was 5 years. It turned out to be two, it reset, and their home payment which was $1,200 

a month, went up to $2,200 a month, and it was a matter of 

months. Now they are in a garage and they are trying to find a 

place to rent, so they can put their children back in the home. 

The father has turned to alcohol. He is actually beating his wife. 

He doesn’t know what to do. He is the man of the house. He failed 

his family. His child is starting to go back into the gang, and the 

siblings are following suit. So that is one family. 

Carol Ornelas can tell you about families on top of families. Any 

real estate that is trying to work with a family to try to help them 

get a home, they can tell you the stories. There is so much beyond 

the finances. 

So to characterize this as different than Katrina, quite frankly, 

you are affecting a family, you are affecting a generation. Those 

young people who are now in that home, who are enduring this 

physical violence, seeing their mother and father traumatized, that 

is generational. That is going to move forward. So I think it is a 

mischaracterization to suggest that the folks who went through 

that are any worse than the folks who are going through this 

today, and although I am very pleased to see the Federal Government, who took their eye off the ball, now putting their eye back 

on the ball. 

And all I am saying is that we have to remember that while you 

are trying to fix it and figure out all the kinks, there is a whole 

plethora of people out there who are in the thick of this and have 

no way out, because you can’t bail them out. 

And San Joaquin County was approached with some wonderful 

ideas. This involved Carol as well. San Joaquin County, the board 

of supervisors, we haven’t done enough, we really haven’t, but we 

are asked the question from those people who have paid off their 

home, that didn’t go into risky ventures,and their question is this. 

Why should I, as a taxpayer, senior citizen, that I am living within 

my means, that I am having a hard time paying my medical bills, 

why should I, as a taxpayer, foot the bill to bail somebody else out, 

regardless of who they are? 

And I as a policymaker, front line, face to face with these voters, 

what do I say? You have a really good point. So, quite frankly, it 

is very challenging and my hat is off to the chairman and the committee, and you have a big job ahead of you. 

Mr. CARDOZA. In closing, Mr. Chairman, I think I have probably 

gone over my time, but I just want to draw on what Mr. Gutierrez 

said, and Ms. Wooten and Mr. Machado. You know, there were cerVerDate Aug 31 2005 17:45 Dec 09, 2008 Jkt 045620 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\45620.TXT TERRIE
27 

tainly bad actors in this. But there were certainly innocent victims 

as well. 

Eighteen months ago, 2 years ago, people were looking, if I don’t 

jump into a home right now, I’ll never be able to buy a home, cause 

prices were escalating at such a rate, that every one of the publications, every newspaper, every radio program, every TV report, were 

talking about how high the costs were going, and for those folks, 

if they saw a way to jump into the swimming pool, they were going 

to try to make that leap because they thought that they would 

never ever be able to afford a house, ever again, if they didn’t make 

the leap now because it was escalating so quickly. 

And so those folks who in good faith were just trying to take 

their part in the American Dream were struggling, in any way possible. These are good folks. These are not criminals. These are my 

constituents. They are my neighbors. They are my friends. They 

are my family. They are my staff who are trying to get houses. 

I had two of my staff this week tell me that they were upset that 

the Nehemiah Program was being taken away, because that is 

what they were going to use to get into a house. 

So these aren’t evil folks. I get really angry when I hear folks 

condemn everyone who is involved in this. There are certainly bad 

actors. There are certainly situations that have caused challenges. 

But there are a whole lot of good people who have been devastated 

by this, in much the same way as when a storm comes and affects 

everybody, rich and poor alike. So thank you. 

The CHAIRMAN. Ms. Speier. 

Ms. SPEIER. Thank you, Mr. Chairman. I am going to try and ask 

these questions very quickly, so that we can get on to the next 

panel. 

First, to you, Ms. Peters. You may recall that after 9/11 there 

were terrorism dollars made available across this country, and 

there was this equalizing that took place, where Wyoming got as 

much money as other jurisdictions, when the likelihood of having 

terrorist activities there was remote. 

In what we have done so far, a quarter of the dollars have gone 

across the country, so everyone got a little bit. I am concerned that 

this is ground zero for the foreclosure market, and I want to guarantee that this area, in particular, is getting the resources it needs. 

California is a donor State to the Federal Government to the 

tune of $50 billion a year, and it is things like these formulas that 

come up, that disadvantage us in ways that it should not. So I 

would ask you to look at that formula and compare it to other 

States, and then respond to the Chair and to the members of this 

committee, so we can assess whether or not we should be amending 

that particular formula for dollars to be had here in this region. 

To Senator Machado, you carried a number of bills to try and address the crisis. Having spent many years in that process with you, 

I know how bills get watered down. 

So I guess my question to you is what are some of the other elements that might have been in your bill, that got stricken from 

your bill because of opposition by various interests, that you believe 

would be important to include in any kind of reforms that we look 

at on a Federal level? 

28 

Mr. MACHADO. That is difficult to answer, because I don’t believe 

in any of my specific legislation, that we did take any major watering down. If anything, the major hurdle that we face is the resources for enforcement, and being able to have the staffing in the 

Department of Real Estate, in Department of Corporation, Department of Financial Institutions, to be able to carry out the law enforcement. 

There was subsequent legislation by others that had been 

changed substantially, and the biggest problem that we faced in 

California when taking a look at the proposals, was whether or not 

it was going to create an unlevel playing field and lead to regulatory arbitrage. 

And I have been very strong to make sure that we had a level 

playing field, so that State licensees and Federal licensees would 

be dealt with similarly, so that we would not see a migration to 

whatever area had the least level of enforcement. 

The other side of that is that many people have thought that 

they could come in and use private right of action for enforcement. 

I don’t think that gets to the real problem. I think it provides for 

some cathartic relief but it doesn’t necessarily get to the problem 

that we face. 

And I think we have to remember that many of the loans that 

were made, that are now problem loans, were made at a time when 

it was not illegal to do that, and what we found was because of the 

array of products that came up, that found State and Federal regulators asleep at the switch in terms of understanding what the 

problem was, going away from proper underwriting standards, 

moving away from disclosures, that we have come in to try to backfill. Part of that came in with the Federal guidelines, and employing that. But I think we have to—people were making legal loans. 

Were they upright? Was there a moral responsibility that should 

have been exercised? Probably so. 

But I think we have to look at this in terms of, how do you fix 

the problem, going forward? I think the State, in cooperation with 

this Administration, and my colleagues in the legislation, we have 

done that in a very strong way. 

Ms. SPEIER. Mr. Chairman, while you were out, Congressman 

Cardoza had provided the committee with documentation that 

Mayor Wooten also had available to her, that suggests that some 

of these banks are redlining and creating guidelines, so they will 

not come into certain areas, this area being one of them, and that 

documentation has been provided to the committee. 

I guess my question to those of you who are on the panel, and 

to our committee is, as we move forward with Fannie Mae and 

Freddie Mac, and now that we have, let’s suggest, a greater ability 

to direct them, whether or not we should mandate that some of 

these banks come into specifically the most hard-hit areas in the 

country, and start making loans in these areas, because otherwise, 

you can see that they could just come up with these guidelines that 

will have the effect of redlining. 

Mayor, do you have any comment on that? 

Ms. WOOTEN. I don’t know that you could do that. I certainly 

would like to see that, especially for the Central Valley. The other 

thing, which is a little off of this, that I would like to see, and I 

29 

don’t know if it is possible, in the world of mandates, I do not believe a licensed Realtor should also have the ability to be a licensed 

mortgage broker, and the ability to be a licensed insurance person. 

I think many—well, let’s just say quite a few of the problems 

could be stopped. I don’t like that idea, I never have liked that 

idea, and I wish there was something that, on a Federal level, 

could be done. 

Ms. SPEIER. Thank you. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. Well, let me begin with that. Maybe you are on 

the level, but you are on the wrong level. You have to talk to Ms. 

Peters about that, because all— 

Ms. WOOTEN. Sorry. Ms. Peters. 

The CHAIRMAN. —those licenses you talk about are today’s State 

licenses. Now we are trying to deal with a brokerage issue. Let me 

give a little history. I will respond here. In 1994, the Congress 

passed a bill called the Homeowners Equity Protection Act, which 

empowered the Federal Reserve Board to issue rules that would 

prevent subprime mortgages that were the wrong kind. 

Remember, we have two sets of mortgage originators in this 

country. We have banks and credit unions and thrifts, and frankly, 

if they were the only ones who had originated mortgages, we 

wouldn’t have the crisis, because they are subject to sensible regulation by your State bank commissioner, by the FDIC, by the Credit Union Administration, and by the Comptroller of the Currency. 

What grew up over the years was the origination of mortgages 

by people outside that regulated system. Now the banks aren’t entirely out of this, because many of them then bought some of these. 

But the banks, as buyers of other people’s mortgages, got into some 

trouble. 

Banks as originators did not. The Federal Reserve Board was 

given, in 1994, it was my predecessor, not me, who did this, a man 

named John LaFalce, when he was the senior Democrat, and told 

the Federal Reserve, please put some rules in so these kinds of 

mortgages can’t be made in the first place—the people with the 

$200,000 house with $960 in income. 

And Alan Greenspan said no, that is an interference with the 

market, the market knows better than I as a regulator, and refused 

to do it. 

Chairman Bernanke, a month ago, finally took the authority that 

that law gave him and you will not see the kinds of mortgages that 

have caused trouble in the future, almost certainly, because they 

are now forbidden. 

But as many of you have noted, it is one thing to stop something 

from happening in the future; we are in a different legal and constitutional position when we try to undo what is already done, especially when it was, as was noted, legal at the time. 

So going forward, we were somewhat more encouraged. Then 

people raised a question, well, what about people who were making 

$35-, $40-, $45,000, who are responsible? Are they going to be out 

of the market? No. One of the things we did in this bill was to empower the Federal Housing Administration, the FHA, to get back 

in the business, which it hadn’t been in before, of helping, and 

that’s where the loan limit that your Governor worked on with Ms. 

Peters, and Gary Miller worked on, Maxine, Dennis Cardoza 

30 

wouldn’t give me any peace until we got it done, and so you will 

now, going forward, have an FHA that will be able to give mortgage guarantees for most of California. 

Madam Speaker, I am sorry we couldn’t get to your level, but we 

got everywhere else. 

But that is part of the issue. Now to go beyond that, we didn’t 

know the Federal Reserve was going to do that. 

Last year, this committee that is now sitting before you passed 

a law which did restrict some of these practices, and did try to regulate things. The Senate hasn’t passed it yet and may not get to 

it. But the Federal Reserve did do that. But as far as the licensing 

you talk about, those are all—who gets to do what are State issues. 

But we do basically say that there are a couple of principles that 

the bank regulators had been using, very radical principles, and we 

apply them now to all mortgage originators. 

One, don’t lend people money if they can’t pay you back. I mean, 

look, if you were a bank, a thrift, and you made a loan like that, 

you would have your examiner saying, ‘‘What is the matter with 

you?’’ Two, don’t lend people more money than the property is 

worth. Now people couldn’t have anticipated the drop; but they still 

lent too much. 

A couple of other points on the foreclosed property. You should 

know that Maxine Waters was just very much the advocate there. 

The formula isn’t yet set in stone, and I would say, Ms. Peters, 

I would encourage you to work with us. It is up to HUD. In fact, 

Secretary Preston is coming to meet with me and the senior Republican on the committee to talk about this. 

We did pass a better bill in the House. It had $15 billion, half loans and half grants, not $4 billion. It had a formula that was tied 

to where the problem is. But we couldn’t get it through and the 

Senate did. So I can’t criticize them. 

You know, we had a wonderful bill that didn’t pass. They had a 

pretty good bill that passed. They win. So we deferred to them in 

the final piece. But the specifics aren’t there, and my instruction— 

Ms. Laster is outside doing the work, she is chief counsel for housing—our instruction to HUD is please use whatever flexibility is in 

that law to get the money where the problem is. 

And there are two kinds you have, by the way. Don’t understate 

your claims for a good chunk. One, you have more property. Two, 

your property is more expensive. In fact, even though foreclosed 

property doesn’t have its full value, foreclosed property here is still 

worth more than foreclosed property in many other States, and 

that has to be taken into account. 

We are going to be pressing, very much, for doing that. So I am 

more encouraged about the future. 

But now on Ms. Speier’s point about redlining, I mean the mayor’s right, we can’t completely mandate. On the other hand, one of 

the things we will be doing next year is having a serious look at 

revising the Community Reinvestment Act (CRA). 

The Community Reinvestment Act is a good thing but it was 

passed 31 years ago. A lot of the entities that now exist didn’t exist 

then, and aren’t covered by the Community Reinvestment Act. The 

Community Reinvestment Act did the banks, and it was all banks 

then; this was 1977. So we have to expand the coverage. 

31 

Secondly, we have to look at enforcement. Right now, the Community Reinvestment Act is only enforceable when there is a 

change in ownership and they need permission to change ownership. They get ratings but there’s no penalty for having a lousy rating, other than people make fun of you, and some people bear with 

being made fun of better than others. 

We are going to be looking at covering entities that are not now 

covered by the CRA and improving the enforcement. But as to the 

redlining piece, and Ms. Speier is right, it may well be that there 

is a greater Federal role in Fannie Mae and Freddie Mac, and I 

am hoping that out of what is happening now, there will be more 

protection for the housing mission. 

But we will look at it, and we will call in some of those banks, 

and Ms. Speier, I am sure, will be available to help us work on 

this, and ask them to come in, and the staff will be available, and 

we will deal with this at the outset, to make sure that they know 

how unhappy we will be if they do redlining. 

And the last thing I would say is this: Some of these things we 

cannot compel legally, or outlaw. There are things we would like 

some of the financial institutions to do and we can’t make them do 

them. 

I should also point out, however, that there are other things that 

the financial institutions would like us to do and they can’t make 

us do them. So if there are things we want them to do, and things 

they want us to do, you then get to the basic principle of legislating, and I am sure many of my colleagues understand that the 

ankle bone is connected to the shoulder bone, and we will proceed, 

have some conversations, so Ms. Speier will be able to take the 

lead on that as a member of the committee working with the others. 

I thank the panel. Remember, again, anything you want to submit, we will do that, and Ms. Peters, you might want to talk to Gail 

afterwards about coordinating her efforts with the Secretary, to 

make sure you get your rightful share. 

I will now call the next panel: Ms. Amador; Ms. Canada; Ms. 

Ornelas; and Mr. Duarte. 

Thank you, and we will begin where the microphone is; I am 

easy to get along with. We will begin with George Duarte, who is 

with the Horizon Financial Associates, and he is speaking on behalf of the California Association of Mortgage Brokers. 

Mr. Duarte. 

STATEMENT OF GEORGE DUARTE, CMC, HORIZON FINANCIAL 

ASSOCIATES, ON BEHALF OF THE CALIFORNIA ASSOCIATION 

OF MORTGAGE BROKERS (CAMB) 

Mr. DUARTE. Thank you. Mr. Chairman and distinguished members of the committee, we greatly appreciate the opportunity to 

speak today and present testimony on this local crisis. 

I am the vice chairman of the Government Affairs Committee of 

the State Association of Mortgage Brokers. 

I appreciate the opportunity to testify on behalf of CAMB and I 

would like to extend my gratitude to Congressman Cardoza and 

Congressman McNerney for the invitation to speak today and to 

share our observations and experiences about the challenges conVerDate Aug 31 2005 17:45 Dec 09, 2008 Jkt 045620 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\45620.TXT TERRIE
32 

sumers face as they seek to avoid the tragedy of foreclosure, and 

the impact of rising foreclosures in Central Valley. 

I commend the committee for traveling all this way here to what 

has been called our ground zero for the mortgage crisis that is facing our Nation, and to hear directly from those of us who are seeing the problems, firsthand, with our boots on the ground, so to 

speak. 

We are in the community assisting those who are faced with the 

tragedy of losing their homes, and witnessing the aftermath of the 

crisis and the dramatic impact on the local neighborhoods. 

The Association of Mortgage Brokers is a nonprofit professional 

trade organization comprised of licensed real estate brokers, salespersons, and affiliated lenders, whose primary business is assisting 

consumers in obtaining residential and commercial real estate financing and brokering conventional and government mortgage 

loans. 

Since its inception in 1990, CAMB has promoted the highest 

standards of professional and ethical conduct, among which our expert knowledge, accountability, fair dealing, and service to the consumer and to our community. The Association provides education, 

legislative and regulatory representation, and public relations for 

its members, while serving as a forum for the development of common business interests across the industry. 

CAMB has led the mortgage industry by being first in California 

and the country to define and combat predatory lending as well as 

creating a mortgage origination handbook of best practices, that 

has set the standard for best practices in the industry. 

At both the State and Federal levels, CAMB has advocated for 

and is dedicated to curbing predatory lending practices while ensuring the best products are available to help more and more 

Americans achieve and sustain the dream of homeownership. 

In California’s Central Valley, the number of homes in danger of 

foreclosure has more than doubled in the last year, and despite 

some reports to the contrary, the situation is getting worse. 

The Central Valley obviously has been most heavily impacted by 

the foreclosure crisis, and with San Joaquin County on track to 

have more than 16,000 homes foreclosed in this year alone, Central 

Valley continues to be at the center of this crisis. 

Stockton has experienced a 50 percent decrease in median home 

values or more in just the last 12 months, and our neighboring cities and counties are also experiencing similar declines. 

This dramatic decline in home values impacts the equity of 

homeowners who are not in trouble and has caused them to walk 

away from their properties, even when they can make the mortgage payment, because they owe more than the home is worth, further exacerbating the problems of vacant properties in our communities. 

Projections are that things will get far worse as the negative amortizing loans are scheduled to reset in the next 12 to 24 months, 

as has been stated previously. 

It is imperative to stop the downward spiral of people losing 

their homes, which is also causing the equity of other area homeowners to vanish. We commend the committee for its continued 

focus on finding ways to achieve stability in the housing markets, 

33 

to end the foreclosure crisis, and to stop the dramatic declines in 

home values. 

As part of CAMB’s efforts to assist in the crisis, we developed the 

Preserving Home Ownership Initiative. CAMB has been reaching 

out to community leaders in an effort to provide assistance to 

homeowners who are facing foreclosure through the CAMB Foundation, which is a 501(c)(3) nonprofit organization. Through its Preserving Home Ownership Initiative Program, CAMB Foundation 

provides free community-based forums that allow existing homeowners a one-on-one mortgage counseling session with a CAMB adviser. 

The initiative program began initially as a program to help 

homeowners to understand their loan documents, and to answer 

any questions regarding financing, credit, and homeownership. Due 

to the current market situation, the initiative has evolved into a 

program that offers counseling to homeowners about the loan modification process. 

These events take place at community locations, often in partnership with other local organizations and elected officials. The California Department of Consumer Affairs and the Business, Transportation and Housing Agency have partnered with the CAMB 

Foundation to offer the initiative program in town hall settings. In 

addition, the program has been facilitated by local television networks through telethon format, allowing us to reach thousands of 

consumers. 

Since January 2008, this year, we have convened more than 50 

events across the State of California as part of the Governor’s task 

force, working closely with Secretary Peters. 

In addition, in the last 10 months, we have held 10 telethons, 7 

in English and 2 in Spanish. The advisors of the initiative are experienced volunteers who are members of CAMB. The counseling 

service has provided the event as absolutely free of charge and volunteers are prohibited from engaging in self-promotion or soliciting 

business from participants. 

We are dedicated to ensuring that the initiative remain an educational event for consumers as opposed to a forum for advisers to 

generate leads. With that in mind, rules of conduct for advisers at 

the events are strictly enforced. Counselors provide advice to consumers about the loan modification process, and how to have successful interaction with a servicer. We provide phone numbers for 

lenders. We offer advice about what materials consumers should 

have in front of them before they call their servicer, and offer strategies for them to be successful in their call. 

For example, we advise consumers to immediately ask for the 

Loss Mitigation Department when they call their servicers. We also 

provide service and advice about how to complete the loan modification form. 

Further, we counsel consumers on what to expect in terms of 

how long they might be placed on hold, acceptable timeframes they 

might have to wait to receive the answer regarding the consideration of their loan modification request. 

The counselors try to provide homeowners with as much information as possible, so they can advocate for themselves when they 

contact their loan servicers. 

34 

Our most recent initiative telethon was held on August 8, 2008, 

in Sacramento, California, in which I personally participated. We 

partnered with channel 3, KCRA, an NBC affiliate, from 5 a.m. to 

7 p.m., to offer information and advice to individuals who called the 

hotline. Telephones were manned by 10 to 12 counselors who were 

also available to answer by e-mail. During the course of the day, 

we received over 1,000 calls and 400 e-mails from consumers in 

need of assistance. 

What we found—I would like to take this opportunity to share 

with the committee what we have learned through our initiative 

events about the problems many in danger of foreclosure are facing 

in seeking assistance from servicers to find a solution that would 

allow them to remain in their homes. 

Unfortunately, it is all too often that individuals feel they have 

nowhere to turn as a result of the responses they receive from loan 

servicers when they call a toll-free phone number that is printed 

on their monthly mortgage statements. 

While the program has been successful, it is apparent that much 

more must be done to reach all those who are in assistance in 

avoiding foreclosure. We have learned that consumers are confused 

and they do not know where to go for help. The misinformation 

they have received is unbelievable. 

The first logical step is to call a toll-free phone number, but for 

too many homeowners, this only leads to frustration and confusion. 

While lenders are reporting high levels of loan modifications, the 

efforts are clearly not enough, given the long lines of people coming 

to us for help, and the confusion that consumers express. 

What has happened to so many of our fellow Americans to get 

them into this situation is abhorrent. The stories that we have 

heard are heart-wrenching as well as mortgage professionals, we 

find them to be infuriating. Not only are we hearing about high 

incidences of mortgage fraud, but the majority of the time at initiative events participants are learning about their options for the 

first time and have been misinformed or misdirected by their 

servicer. 

We believe in order to stem the tide of foreclosures, it will be absolutely critical for servicers to make significant improvements to 

their loan modification processes, and to offer clear instructions 

and competent, trained, and compassionate individuals to work 

with their customers. 

Counseling entities do not have the ability to address the sheer 

volume of all those who need help. Without improvements to the 

operations, we will continue to see the high volume of people in 

need of assistance in getting the information and results from the 

servicers that they need. 

As a result of our experiences, I would like to offer some of the 

following observations and suggestions about the problems. 

We find that there is a significant lack of experience with loan 

servicers. This was mentioned earlier by a previous participant. 

The problem is that many individuals are not fully trained or appropriately qualified to assist consumers with the process. 

There is inconsistency in information. Time and again, we are 

told by consumers that they have received different information, instructions, or advice each time they call and speak to a different 

35 

person at their servicer. Because they are not always talking to the 

same person, or department, the terms and requirements for loan 

modification frequently change. 

We see that there is lack of coordination in servicing departments. Departments do not talk to one another or share information about a specific account. As a result, a consumer could be 

working hard with the Loss Mitigation Department for a loan 

modification, but because the Default or Trustee Department is not 

aware of this, the person’s home can be sold at a trustee sale in 

the middle of a loan modification process. 

Further, if the consumer is directed to the Collections Department, the focus is on collecting late payments rather than working 

on the loan modification. 

Time delays: Most of the servicers take between 90 and 120 days 

to let a consumer know if they are approved for a loan modification. Some take even longer. With some of the lenders, the consumer might send in the loan modification materials but it takes 

so long to process it that the package will expire and the lender 

will tell the consumer that they have to start over. 

Lack of consideration of individual hardship circumstances: Most 

servicers require a hardship letter to be included in the loan modification package. Unfortunately, it appears to us that these hardship letters are largely ignored. Instead, decisions are made by formulas as opposed to the individual’s personal circumstances that 

have caused the difficulty in making payments. Most people whom 

we see at our events have 2 or 3 years of excellent payment history. The problem arose for many when their minimum mortgage 

payment reset. If servicers would consider leaving payment where 

it was prior to the reset, this would help many avoid foreclosure. 

Which leads us to one of our main suggestions to help the crisis. 

In addition to the problems with the loan process in the aforementioned section, a significant drawback of the loans that have caused 

so much damage is the future that results in very high margins 

that begin after the initial period of 2 or 3 years. 

We have seen so many of the subprime loan programs, they were 

fine for 2 years or 3 years, and people then, they get reset, and the 

margins on some of these loans are 4, 5, 6, or even 7 percent over 

the rate. So they come into the double digits. 

One way to stop the rate of foreclosures is to place a temporary 

moratorium on the adjustment of adjustable rate mortgage loans, 

keeping them at their start rates for 3 to 5 years. 

Another option would be perhaps to place a temporary limit on 

the margins of ARM loans to more than 1.5 percent, which would 

have the impact of actually lowering the current rate from the initial start rate on many ARM loans. 

Many of these options are currently being utilized by lenders. 

The problem is that the loan modification process is bogged down 

with the ever-increasing numbers and lenders are falling behind. 

The second feature of our suggestion is saving neighborhoods impacted by the high foreclosure rates. The impact on neighborhoods 

is critical, as has been mentioned before by several of the presenters, and one of the reasons for that is because for closed properties, the appraisal value is done by comparable sales. So if the 

only activity in your neighborhood is foreclosed or short sales, and 

36 

the property values are so low, that negatively impacts and essentially equity strips the value— 

The CHAIRMAN. We need you to come to a close pretty soon. 

Mr. DUARTE. Yes, sir. Thank you. So we suggest to perhaps have 

a second class and delineate the appraisals of distressed properties 

separately from nondistressed properties; that may take the pressure off. 

In conclusion, I would like to thank the committee and the chairman for the opportunity to offer our suggestions and observations 

to the committee. Thank you very much. 

[The prepared statement of Mr. Duarte can be found on page 75 

of the appendix.] 

The CHAIRMAN. Thank you. Full written presentations, of course, 

are welcome. 

Next, we have Carol Ornelas, the chief executive officer of Visionary Home Builders of California. 

STATEMENT OF CAROL ORNELAS, CHIEF EXECUTIVE 

OFFICER, VISIONARY HOME BUILDERS OF CALIFORNIA 

Ms. ORNELAS. Hello, and good afternoon, Chairman Frank, and 

members of the committee. My name is Carol Ornelas and I am the 

CEO of Visionary Home Builders of California. We are a nonprofit 

affordable housing developer and a HUD-approved housing counseling agency here in Stockton. 

We also serve various communities throughout the Central Valley. We are here today to discuss with you the housing disaster 

that has hit our community. I can best describe this disaster by 

comparing it to Hurricane Katrina which hit New Orleans. The 

only difference is that Katrina was an act of nature while our housing crisis was manmade. 

In neighborhood after neighborhood throughout Stockton, you 

will find foreclosure signs, for-sale signs, and vacant and neglected 

properties. Today, you had the opportunity to view some of those 

neighborhoods. I can only tell you that you saw the better neighborhoods. There are far more serious neighborhoods suffering 

throughout the City of Stockton. 

Last December, Congressmen McNerney and Cardoza held a 

foreclosure event. Though December is usually a month of celebration, outside this event center, homeowners formed a line that 

wrapped around the building. When I walked into that event and 

took a look at the sea of people, I remember looking at my colleagues from the City of Stockton and saying, ‘‘There is a chill in 

this room. Take a look at this fine example of predatory lending.’’ 

Of the people who were there, 99 percent were Latinos, African 

Americans, Asians, and our senior citizens. 

By the end of the day, I knew this problem was huge because all 

of the families I worked with that day did not qualify for the initial 

loan and now their payments were going up and their incomes remained the same, and the housing prices had dropped substanially. 

How did we get here? The median income for the City of Stockton, for a family of four, is $61,300. We are primarily an agricultural-based community with few high-paying jobs. We have an influx of Bay Area residents who could not afford to live where they 

worked. 

37 

The Central Valley became a bedroom community for these folks. 

Housing was affordable and clearly they were able to get more 

home for less money in the valley. Builders stopped building for 

our residents and built housing for the Bay Area workers with Bay 

Area salaries. The demand was great and the building industry 

was flourishing. 

Today, we know that the Bay Area families did not qualify for 

their homes, just like the residents of the City of Stockton. They 

were lured in with high appreciation rates that had been occurring 

for the prior 4 years. They were also lured in with financially unsound loans which had low initial teaser rates which only lasted for 

2 or 3 years, or worse yet, option ARM loans. 

They are now victims of the subprime lending that hit our community, and the burst of the housing bubble. 

Home buyers in our Latino community often had unique characteristics that made them easy targets. For example, Latino families 

are more likely to have multiple sources of income. A lot of lenders 

and brokers didn’t want to take the time to qualify Latino families 

properly. 

Stated income loans were prevalent. In many cases, if these families would have sat down with a housing counselor, they would 

have gotten a prime product rather than a subprime loan. 

What is the effect on our neighborhoods and our community? 

There is a huge domino effect to this problem for us. Local governments are faced with lack of revenue from property taxes, construction, and sales taxes. 

We still need to provide services to our citizens. Our bond rating 

has fallen and the City is doing what they can to survive in tough 

times. We hope we won’t have to file bankruptcy like Vallejo was 

forced to do. The blight and vandalism in neighborhoods is evident 

throughout our communities with little or no signs of recovery. 

This will only add to the additional decreases in property value. 

The city of Stockton has passed an ordinance requiring banks 

and lenders to maintain their properties or they will be subject to 

code enforcement violations. We hope this will help some of the 

neighborhoods recover from the eerie feeling you get when you 

drive through the neighborhoods and see vacant home after vacant 

home. 

We must not forget that many of our investors who have bought 

homes and then rented them to families have lost their investment, 

and many of these renters have been caught off guard. Even 

though the rent may be paid, the mortgage may not have been 

paid. The sheriff knocks on the door and informs them that they 

must leave. 

These families are then left to deal with not receiving the rent 

back, or the deposit. Remember, this crisis affects everyone. If you 

take a minute and count how many jobs or services are affected by 

our foreclosure, it is many. 

We must remember the stress that has affected our families and 

our community. Domestic violence is up. There is a greater need 

for mental health services and medical attention for our families 

and our children. 

38 

Our efforts today, including those by the industry, are not working. My counselors face an uphill battle every time they work with 

a family struggling to keep their home. 

You have read the stories about our troops being sent to battle 

without proper equipment to fight the war. Our counselors have 

been sent into their own battle without much help either. We were 

told that banks and mortgage companies would work with us, yet 

somewhere along the way investors, servicers, and loan mitigation 

departments failed to come through. 

National foreclosure solutions are not a one-size-fits all. Northern 

California and the Central Valley have unique challenges. 

We need Congress to closely monitor the situations and be committed to continuous action over the years. For example, The Hope 

for Homeownership Act is a foreclosure rescue product that will 

run through FHA. In order to qualify, the borrowers’s loan must 

have originated prior to March 1, 2008. 

This program is slated to begin October 1st. Banks are telling us 

it is going to take months after that date to get ready. This program is voluntary, so banks and servicers may not choose to use 

the program. 

Here is how it will work in our community. The bank agrees to 

write down the principal of the loan to 90 percent of the current 

apprised value. They are allowed to go lower if it makes the loan 

more affordable for the borrower. The borrower is then refinanced 

into a fixed rate FHA loan program. 

The borrower has to share a set amount of the appreciation with 

FHA, which is understandable. But here is the catch. The homes 

in our area have lost so much value, and families are already so 

far underwater, that banks may not be willing to use the program. 

Here is an example. A house was purchased in 2006, valued at 

$400,000, and the loan amount is $375,000. In 2008, the home is 

now valued at $225,00 and the family still owes $375,000 because 

it was an interest-only loan; 90 percent of $225,000 is $202,500. 

That means the bank would have to write off $172,500 to get the 

LTV back down to 90 percent. Because of the incomes in the Central Valley, they may even have to go lower. 

We will need to take a further look into this bill, and hopefully 

amend the bill, to really help our communities that were hit the 

hardest. 

As with any disaster, we must begin the healing process. We believe that the stimulus bill will be good for our community. We 

must make sure that Stockton does receive adequate funds that 

will be allocated to the communities hit the hardest. 

I hope being number one will put us on the list of receiving the 

allocation that is so desperately needed. 

The $4 billion of CDBG funding that will go to the nonprofits to 

rehab foreclosed properties is so important to our community. As 

a nonprofit affordable housing provider, our mission has always 

been to provide safe and decent housing. The vandalism that has 

occurred in these foreclosed homes should not be passed on to the 

new homeowners. 

By purchasing these properties and renovating them, we will 

pass the keys on to homeowners to enjoy their new homes, instead 

39 

of having a homeowner who is worrying about unaffordable repairs 

needed for the home. 

In conclusion, there is much to be done in order for our community to bounce back from this disaster. I know our community is 

resourceful, but we must learn from this lesson and look to the future to avoid the pitfalls that may be lurking. 

Continuing homeownership education is crucial. Every homeowner should be required to attend the workshops and meet with 

a housing counselor to explore the options available to them. 

Every homeowner must be educated to understand exactly how 

much mortgage they can afford in order to keep their home for the 

long term, not just buying a home that they can only afford to live 

in for 2 years, and then lose their home in a traumatic foreclosure. 

We must rely on the Government for greater accountability in 

the mortgage servicing industry. Many of the efforts so far, especially at the Federal level, rely heavily on the voluntary participation of investors, lenders, and servicers. 

Mortgage servicers are the lifeline between the borrower and 

their rescue options. Yet our experience shows that many servicers 

aren’t willing to accept even basic modification requests. 

Others are slow to respond, leaving our clients to rack up high 

fees while they wait. On the other hand, where we have a servicer 

that is willing to work with us, it makes all the difference. This is 

how we are able to save families from foreclosures. We must take 

another look at our underwriting criteria if we are going to move 

these homes from foreclosure to homeownership. 

The Governor recently announced a pool of funds to be used in 

the hardest hit areas. To date, not one loan has closed. Why? I believe we went from extremely loose underwriting guidelines to very 

tightly regulated guidelines. 

There needs to be a middle ground. We did many FHA loans in 

the past, so let’s look at what worked and what didn’t work and 

find the middle ground. 

People are not perfect and sometimes there are bumps along the 

way. But that does not mean that they cannot be responsible for 

a mortgage loan. 

I just want to share with you one highlight, if there can be one 

in the midst of disaster. The City of Stockton has always had a 

downpayment assistance loan program and has made hundreds of 

loans to low-income buyers. All users of the downpayment assistance program must participate in a homebuyers education class 

provided by a HUD-certified housing counseling agency. Throughout this housing crisis, we can proudly say that out of hundreds of 

loans, there has been only one foreclosure. 

We can attribute that success rate to the requirement of housing 

counseling and the use of prime loans. And we must applaud these 

families because they were all low-income families. Maybe the market should take a look at this fine example. 

The task of cleaning up our neighborhoods will not be easy and 

will take time, but we must learn from our lessons and move on. 

We can bring back the dream of homeownership. Thank you. 

[The prepared statement of Ms. Ornelas can be found on page 92 

of the appendix.] 

40 

The CHAIRMAN. Next, we have Pam Canada, the chief executive 

officer of the NeighborWorks Home Ownership Center here in Sacramento. 

STATEMENT OF PAM CANADA, CHIEF EXECUTIVE OFFICER, 

NEIGHBORWORKS HOME OWNERSHIP CENTER, SACRAMENTO REGION 

Ms. CANADA. Thank you. I would like to begin by thanking 

Chairman Frank and Chairwoman Waters, and the entire Financial Services Committee, for their leadership in getting H.R. 3221 

passed. 

I would especially like to thank the committee for including the 

allocation of $3.9 billion in CDBG funds, known as the Neighborhood Stabilization Fund, to be allocated to communities for redevelopment of abandoned and foreclosed properties, investing in neighborhoods with measurable and lasting impact. And the additional 

funding for housing counseling through Neighborhood Reinvestment Corporation that will provide help to thousands more families 

that are struggling to preserve their homeownership. 

Welcome to Stockton for this important hearing to address the 

impact of the foreclosure crisis. 

NeighborWorks HomeOwnership Center is a premier member of 

the NeighborWorks network of not-for-profit organizations chartered by Neighborhood Reinvestment Corporation. And we carry 

out a mission of work to provide stable, sustainable homeownership. H.R. 3221 included funding to support foreclosure prevention 

counseling, and this meets a critical need for struggling homeowners in Stockton, the Sacramento region, the State of California, 

and across our Nation. 

The most recent numbers show us that 1,300 homes go into foreclosure every business day in California. Thank you for including 

counseling funding that will allow thousands more families to be 

served by qualified housing counseling agencies, and undoubtedly 

preserve homeownership for hundreds of people in the Central Valley. 

Stockton and the Central Valley have been particularly hard hit, 

as has been discussed here today, consistently listed in the top of 

national rankings for the number of foreclosures. 

There was a preponderance of subprime lending activity in 

Stockton and minimal prepurchase education was offered or available in the Central Valley to mitigate this predatory practice. 

Home buyers, up and down the Central Valley, and throughout 

our Sacramento region, were told they better buy now or they will 

miss out. So they grabbed the apparent opportunity to get that 

piece of the American Dream and bought a home that was not affordable for them. On the very first day they closed that loan and 

moved in. 

To get the home they wanted, buyers used available subprime 

loan products with teaser rates and exorbitant adjustments over a 

short timeframe. They got downpayment assistance funds that inflated the sales price, and they used Option ARMs that were affordable only for the first 6 months if they paid the minimum 

amount due. 

41 

Rising home prices in the Central Valley created a sense of urgency for new homebuyers and they were easy targets. 

If more of these new homebuyers had received quality, multilingual, nonbiased homebuyer education, such as that provided by 

NeighborWorks certified home counselors, they would have been 

equipped to make informed choices about their lender, their financing options, and their affordability. 

Prepurchase education is the ultimate foreclosure avoidance action for homebuyers. We encourage the committee to lend its support to this work. The challenge remains in Stockton and the Central Valley, and indeed, across the Nation, to create informed consumers and foreclosure-resistant borrowers. 

This is accomplished through quality prepurchase homeownership education. Funding for this counseling is minimal yet its impact is extraordinary and should be central to all housing programs. 

One of the first large foreclosure prevention workshops offered in 

the Central Valley was held here in the City of Stockton and sponsored by Congressman McNerney and Congressman Cardoza, along 

with State Senators Machado and Agazharian. 

NeighborWorks was pleased to provide several certified counselors to address the questions of some of the approximately 500 

people who attended that one workshop, and we have continued to 

participate in many more workshops of this type throughout our 

six county region. 

Another event in Stockton with the Governor and Secretary of 

Treasury Paulson, featuring one of th successful families that had 

come through foreclosure prevention counseling with our agency. 

In early 2007, in response to an overwhelming demand on our 

available capacity, we created a NeighborWorks Foreclose Prevention Workshop that we continue to hold every single week at our 

homeownership center, delivered in English and Spanish and Russian. To address the diversity of our region, we have partnered 

with another nonprofit to provide client referrals along with translation services, which now allow us to provide our education and 

counseling services in 10 different languages. 

Recently, we were an invited participant at a small gathering of 

servicers and counselors, hosted by Commissioner DuFuchard at 

the California Department of Corporations. This was an open and 

productive sharing of challenges and solutions between the represented companies, with everyone agreeing that regular meetings 

and open dialogue needed to continue, and the commissioner has 

offered to host quarterly meetings with solution-oriented agendas. 

We also met with HomEq Servicing, a large servicing company 

that has an office in the Sacramento region. We spent 4 hours at 

their shop discussing criteria for loan modification considerations, 

challenges of counselors, borrowers, servicers, and investor issues. 

And we have been collaborating with the California Bar Association for legal assistance. 

These examples of collaborative efforts with practical and realistic sharing of challenges and solutions among invested participants will help move us all forward towards diminishing the foreclosure numbers in the Central Valley and the State of California. 

42 

With respect to H.R. 3221, it is imperative that lenders participate in the Hope for Homeowners Program. From the very day this 

was announced, we began receiving many calls and inquiries from 

homeowners who are hoping they can be included in this program 

and keep their home. 

There are eligibility criteria for the borrowers, as Carol just mentioned, but it still comes down to the servicer and investor agreeing 

to accept a principal shortfall. If we can’t get them to agree now 

to a reasonable loan modification that preserves their principal, it 

seems unlikely there will be easy agreement when they are asked 

to accept a significantly reduced payoff. 

We urge the committee to keep the dialogue going with lenders 

and investors, as much as possible, so they can see the advantage 

of participating in this important program. 

The Neighborhood Stabilization Fund is an important component 

of the bill and represents a significant opportunity for the Central 

Valley and many other communities to take action in areas that 

are now blighted by foreclosed and abandoned homes. 

We ask that the Financial Services Committee members ensure 

that the best and most current data is used when developing the 

formulas for the CDBG funds. 

When thinking of solutions, one thing is clear. Homeowners, 

working with certified housing counselors, need more time to resolve these issues with their lenders. One such proposal in Congress now is H.R. 6076, the Home Retention and Economic Stabilization Act, sponsored by our local Congresswoman, Doris Matsui. 

It calls for a time out on foreclosure proceedings for those homeowners who are current in their payments, giving eligible borrowers a conditional deferment period and a window of opportunity 

to preserve their homeownership. We encourage you to continue to 

look at that bill and consider it positively. 

We request that you encourage lenders/servicers to participate in 

bulk REO discounts for sale to capable and experienced organizations such as NeighborWorks Sacramento and Visionary Home 

Builders in Stockton, that would refurbish and resell to low- and 

moderate-income families for homeownership. 

This would reduce the inventory held by the lender, build homeownership opportunities for low- and moderate-income families, 

and address the growing number of vacant properties that are lining our neighborhoods. 

The negative impacts of foreclosure on communities are farreaching. Not only are people losing homes, communities are suffering economically, physically, and socially. 

Communities suffer from increased crime; having multiple abandoned homes is proven to have a direct effect on the rise of crime 

in communities. Cities and counties are negatively affected, not 

only from the added services required, but also from the lower 

property values caused by foreclosed homes, that have led to a 

smaller tax base. 

Area youth are displaced. A hard-hit victim of foreclosure is the 

children. Parents’ stress seeps down to their children and manifests 

in many difficult ways, as was previously discussed by the earlier 

panel. 

43 

Communities are blighted by neglect. Properties and whole 

neighborhoods are deteriorating. These neighborhoods are struggling to hold on as the crisis continues to threaten to unwind their 

strides forward to a healthy thriving community, and the investment that will be lost over the years. 

Finally, we ask that you resurrect the antipredatory lending legislation. Yes, area lenders have tightened their underwriting criteria for now, and subprime lending activity has been reduced, but 

these are cyclical, and if there is an opening, when the market returns there will be nothing in place to stop or monitor this destructive practice. 

The Central Valley will benefit from the Neighborhood Stabilization Fund, the housing counseling funds, and would also benefit 

from the opportunity for REO bulk sales at discounted prices. 

We have hired and trained six additional counselors, bringing 

our total now to eight counselors who are certified and trained on 

staff, thanks in part to funding raised by the California Reinvestment Coalition and from the National Foreclosure Mitigation Counseling funds. We have partnered with Washington Mutual, 

Citibank, Bank of America, and most recently, Countrywide, to provide our counseling services in Stockton. We have been working to 

build funding and resources from area government and 

NeighborWorks America to allow us to move forward with our 

plans to expand with a NeighborWorks branch here in Stockton, in 

addition to our Sacramento homeownership center, but funds are 

not fully available at this time. 

New interest is building again by first time homebuyers who see 

the opportunity to buy. Our prepurchase education numbers are 

rising. Last year, we funded $1.8 million in downpayment assistance funds, and we are seeking more capital to fund this program 

as now the market opportunity and affordability is available for 

some. 

Thank you for this opportunity to address this field hearing of 

the Financial Services Committee. 

[The prepared statement of Ms. Canada can be found on page 66 

of the appendix.] 

The CHAIRMAN. Our next witness is Patty Amador, the president 

of Ambeck Mortgage Associates. Pull the microphone closer. Just 

pull it closer to you. Don’t lean forward. 

STATEMENT OF PATTY AMADOR, PRESIDENT, AMBECK 

MORTGAGE ASSOCIATES 

Ms. AMADOR. Thank you. First of all, thank you for inviting me 

to participate today, but most importantly, thank you for your attention and your concerns regarding what is an extremely critical 

situation here, in the Central Valley. 

On August 4th, I sent an e-mail to our local congressional office, 

for the attention of Congressman Dennis Cardoza. It was subsequent to the passing of H.R. 3221 and the pending of H.R. 6694 as 

they were referred. I would like to share that e-mail with you 

today: 

‘‘Hi Lisa. It has come to my attention that there is legislation 

pending that would revive the use of the Nehemiah and downpayment assistance programs, H.R. 6694. I would like to take this time 

44 

to voice my support for passing this bill. Why? Not because I necessarily agree with the basis of the program. 

‘‘Having been in the mortgage industry for the last 30 years, and 

being old school, I believe that homebuyers are better homeowners 

when they have to plan their finances and save for the purchase 

of their homes. 

‘‘Unfortunately, right or wrong, within the last few years, we 

have created a generation of home buyers who do not financially 

plan or save for the purchase of a home. 

‘‘This not minimizing the desire to own. Programs such as Nehemiah, as well as many more, have been made available, eliminating the need for personal funds. The reason I support the continuation of Nehemiah, at least at this juncture, is that very reason. Potential homebuyers, at least first-timers, are not prepared 

with the money it takes to buy. That doesn’t necessarily mean they 

can’t afford or won’t make the payment. 

‘‘I am extremely concerned about the current state of our economy. I believe that if tools, such as Nehemiah , are now eliminated, 

what recovery we may be experiencing because of affordable home 

prices will be squashed. 

‘‘This will send our housing situation into further crisis and ultimately further damaging our economy. Regardless of how I may 

feel about the program, I have to say that I really struggle with 

the logic, or the lack of taking the Nehemiah downpayment assistance program off the table at this time, 10 years after its inception. 

‘‘If this decision was a measure taken to minimize the default 

risk, I believe that prudent underwriting practices can offset the 

majority of risk that may be considered inevitable as a result of 

downpayment assistance. Perhaps this is where we should now put 

more focus. 

‘‘I sincerely appreciate your time in considering my concerns and 

ask that you forward them on to Dennis as well as others who have 

the opportunity to protect the mainstay of our economy, the housing market. Patty Amador, Ambeck Mortgage Associates.’’ 

I do appreciate the efforts of governments, both local and Federal, in attempting to resolve this foreclosure crisis. Personally, I 

don’t have much optimism, and I am an optimist, for the success 

of preventing what I consider to be, for the most part, a train too 

far down the track. 

The success of most programs developed to date is predicated on 

lender cooperation and perceived value on the part of the homeowner. 

So far, we haven’t seen much of either. There is no doubt that 

some foreclosures will be prevented through the efforts of these 

programs, but I believe that the true resolve is within what we are 

seeing and experiencing in renewed interest and activity with new 

buyers. 

As devastating as this foreclosure market has been, it has ultimately brought housing prices back down to realistic levels, affordable levels, and there is renewed interest in qualified homebuyers 

to purchase homes with stable, traditional loan programs. 

I believe that we are experiencing a turnaround in the housing 

market. But as I said in my e-mail to Congressman Cardoza, I am 

45 

concerned about the attack on and the elimination of programs 

buyers have grown to rely on. 

I am concerned about the increases in downpayment requirements, increases to closing costs, and increases to monthly payments affected by increased mortgage insurance lately, and each 

day seems to bring changes that limit lending. 

I won’t argue that lending practices and lending programs have 

definitely contributed to the problem facing us today. Unfortunately, a lot of these financing tools have been pegged as the villain, the sole cause of this crisis. I can assure you that the mere 

existence and availability of these programs was not the problem. 

We have had flexible loan programs in the past. They are a lot 

of what brought us out of the housing crisis of the early 1980’s, 

when prime was 22 percent and mortgage rates were 16 and 17 

percent. 

My message is that we cannot bring this market back by shutting buyers out, by limiting their options, or again, pricing them 

out of the market. Now is not the time. Eliminating downpayment 

assistance programs and increasing downpayment and closing cost 

requirements, will once again make homeownership unaffordable. 

I do understand the concerns of risk due to no or little money invested, but can we be any worse off than the conditions of today? 

I believe putting qualified buyers together with reasonable but 

flexible programs, while utilizing prudent underwriting, will stabilize values and encourage those who can afford to stay in their 

home to stay, with the hope of regaining value. 

I believe the result will strengthen our real estate market, our 

economy, and ultimately provide the basis to resolve our foreclosure crisis. 

Again, I thank you for your time and for this opportunity to participate. 

[The prepared statement of Ms. Amador can be found on page 58 

of the appendix.] 

The CHAIRMAN. I am going to respond. I am going to be meeting 

afterwards with some people concerned about the downpayment assistance program, and it has been mentioned several times, so let 

me just make clear to people where we are. 

It has headstrong advocates. Actually, perhaps the unlikely duo 

of Congressman Gary Miller and Congresswoman Maxine Waters 

have teamed up to be very strong advocates for it. In the bill that 

passed the House, there were no restrictions on it. When it got to 

the Senate, they adopted a provision completely outlawing it, partly at the strong urging of the Bush Administration. 

The Commissioner of the Federal Housing Administration, Brian 

Montgomery, was very eager to have it banned, and the Senate 

agreed with him. We did not agree, but in trying to put a bill together, you can’t always get everything you want, and when we 

had the ardent opposition of both the Administration and the Senate, we lost out. 

At the same time, however, the Senate also completely banned 

any ability on the part of the FHA to adjust pricing in their insurance for risk. The FHA hated that. So the FHA loved the ban on 

downpayment assistance, and hated the ban on risk-based pricing. 

That seemed to me to offer us an opportunity. 

46 

So the bill that was referred to, H.R. 6994—we have copies of 

it—will replace both bans with middle ground, and it will pass the 

House, I can guarantee you. 

What you want to do now obviously is talk to your Senators. We 

think it has the approval now of the Secretary of HUD, and it does 

reinstate the downpayment assistance program. What it will say is 

this, but not exactly as it was, and it did have a high default rate. 

It says that finance downpayment assistance will be automatically 

okay for people who have a credit score of 680 or above. Now that 

means you still have to look and see if they make the payments, 

but a 680 credit score. 

If you have between 620 and 680, you also will be able to get it, 

but there may have to be some higher fees because there is an insurance principle here, and in Fiscal Year 2010, which will begin 

next year, it will allow loans below a 620 score if the HUD Secretary certifies this can be done without the need for a credit subsidy. 

So it also requires anybody who wants to offer downpayment assistance to make available counseling regarding the responsibilities. It doesn’t mandate that the borrower take it but it does mandate that they be offered. 

The House will pass that. It isn’t everything everybody wants, 

but nothing ever is. And I would say this: One, help us by lobbying 

the Senate; and two, if we are able to get this preserved to that 

extent, as I believe we will be, it will be very important for people 

to make sure it is not abused. If it is in place and it works well, 

we will then be able to go forward with it. So that is where we are. 

With that, I am going to recognize Mr. McNerney for the beginning 

of the questioning. 

Mr. MCNERNEY. Thank you, Mr. Chairman, for those comments. 

Carol, I’m going to start off with you, if you don’t mind. I think you 

have done a great job in the community and it has been a pleasure 

to work with your organization, and Pam, also, in our workshops. 

You donated your counselors’ time. So I definitely appreciate that. 

What challenges do you face, or have you faced, over the past 

months in dealing with clients? 

Ms. ORNELAS. There are a lot of challenges out there, but I think 

some of the items that we are really, really concerned about are 

some of the modifications that are coming through. We really 

weren’t seeing very many modifications, clear up to June, and then 

they started to creep in there. But we are seeing, we first saw 1 

year, then we saw a little bit at 3 years, and then very rarely do 

we see a 5-year modification. 

And, of course, our counselors do counsel the families on, you 

know, what is their best option, after seeing those modifications, 

and to get a 1- or 2-year modification, I am very concerned, because 

we are going to be in the same place just 2 years down the road. 

The 5-year modification? Well, you know, we really would like to 

see more 30 years, you know, rewriting of the families’ loans, and 

that is a big challenge, and the fact that our city, our house values 

have gone down tremendously, and the fact that so many families 

did not qualify, initially, for that loan, looking at some of their alternatives, there really aren’t alternatives for them. And that is 

47 

sad to say, because we would like to have a better success rate and 

say yes, we are putting the families in a better situation. 

But that is very, very difficult to say today. 

Mr. MCNERNEY. So it sounds like the biggest challenge is that 

so many people really weren’t qualified for the home they were in. 

I mean, that sounds like the basis of what we are talking about 

there. 

One of the things that you said, that was fairly impressive, was 

how effective counseling has been as a preemptive situation. You 

said you only had one person, or one family who went into foreclosure when they bought a house, after being counseled on what 

was available, and I would like to go to George here, and ask how 

much difference, in your opinion, would it have made, if all the 

mortgage brokers were CMC certified, or had some way to enforce 

counseling on potential buyers? 

Mr. DUARTE. Thank you. It would make a tremendous difference. 

One of the problems that occurred with the dropping of the rates 

and the refinance boom, the whole frenzy starting up, was that so 

many people got into the business at a very low barrier of entry. 

Many people jumped in and became Realtors. Many people jumped 

in and became loan originators for banks, mortgage brokers, who 

had no intention of being professional, and no intention of doing 

the right thing for the client, as actually is required by the DRE 

license and the fiduciary requirement that exists here in the State 

of California. Many people just—and unfortunately, that environment encouraged many quick buck artists who were only in it to 

maximize their income for that transaction, and didn’t have the intention of doing the right thing for the consumer. 

The problem with the stated loans, it occurred, it was easy to get 

the loans, but many of those originators forgot, or never intended 

to tell the consumer, that well, this is what happens in the first 

2 years, and this is what happens after the loan adjusts. Can you 

afford the payment? They very frequently forgot to ask that question. This is what the payment is. Can you afford it? 

Mr. MCNERNEY. I mean, some of what we hear is that, yes, these 

mortgages were bought and sold at a higher level, that the people 

didn’t really have a vested interest in seeing that the loans were 

given to good borrowers. But what you are saying is that there is 

a significant amount of cause also at the local level, with nonqualified and nonprofessionals who were acting as brokers or 

agents of some kind? 

Mr. DUARTE. That is correct. And one of the benefits is that all 

these people now, or a very large percentage of these people who 

got into the business are now out of it, or on the way out of it, and 

the only people who should be in the business of loan origination, 

and dealing with clients, are people who intend to be professional, 

and who intend to stay in the business for a long time, and have 

the intention and the best interests of the consumer in mind at all 

times, and very frequently— 

Mr. MCNERNEY. Is there, for CMC qualification, is there any indication that they would put people in counseling who needed it? 

Or I mean, how would that work in terms of getting the people who 

want to borrow into the right loan, if they think they can get something that they are not really qualified for? 

48 

Mr. DUARTE. Well, actually, that is part of the whole 

prequalification procedure, that a loan origination professional 

would in fact do on a regular and consistent basis in discussing 

with potential clients who wish to purchase a home, what their resources are, what their income is, what their debt is, and what 

their credit score is. 

How much can they actually afford per month? And then base 

the recommendation of a particular loan program or a loan amount 

upon what they have to work with, and not necessarily what conceivably they could get. 

Mr. MCNERNEY. So a mortgage broker would have to act as a 

counselor is basically what you are saying. 

Mr. DUARTE. Essentially, that is true. A professional— 

Mr. MCNERNEY. Carol, do you want to comment on that? 

Ms. ORNELAS. I think we have to have the arms length. I think 

the housing counselor is the housing counselor who sets out the options to the potential buyers. One question that was asked of me 

at one of our prepurchase counseling sessions was, ‘‘Carol, how do 

you know who the good mortgage lenders are and who are the good 

real estate brokers?’’ 

And I said, ‘‘Well, I don’t really have an answer for you, but I 

do have an answer that will help you out as a consumer, and that 

is that, number one, you are here at this education class, and at 

the end of the day, at the end of your training here, we are going 

to have looked at your income, we are going to have looked at your 

home, your score, your FICO score, and we are going to have run 

a mortgage credit report on you, and when you leave here, you are 

going to know how much you can afford in a loan based on an interest rate that is fixed for 30 years. And when you go visit your 

lender and when you go visit your realtor, you hand him this certificate and this is your key to ownership. If they come back and 

tell you that they can’t find you something like that, walk away, 

because this is what you truly qualify for.’’ 

Mr. MCNERNEY. So I mean, Patty, you mentioned earlier, I think 

that you have an old school philosophy. Does that sort of mesh 

okay with that philosophy? 

Ms. AMADOR. The interesting thing with the business, and, you 

know, those who are putting borrowers into loans that they really 

don’t belong in, is it goes really, really deep. I mean, you can’t believe the motivations. If you increase their margin on adjustable 

rate mortgage, you make more money. If you add to the prepayment penalty, you make more money. We have actually seen where 

we have had Realtors approach us and say, if I send you my clients, you know, what will I get out of it? Can I get a fee? 

Ms. SPEIER. Isn’t that a kickback, though? 

Ms. AMADOR. A kickback. 

Ms. SPEIER. Isn’t that illegal? 

Ms. AMADOR. Oh, sure, it is illegal; but it is going on. I mean, 

you know, you talk about prosecution. Well, it is only as good as 

the consequences to that. You can prosecute them but to what— 

Ms. SPEIER. Would the gentleman yield for a moment? 

Mr. MCNERNEY. Yes. 

Ms. SPEIER. I think this prosecution issue is really important, because until we address that, bad behavior will continue to go on, 

49 

because as long as you have no skin in the game, you don’t care. 

And I would like to just suggest, that one of the things we need 

to look at is very similar to what we did in the area of child support enforcement. Until the Federal Government offered inducements to local district attorneys to go after the noncustodial parent 

who wasn’t paying their child support, where they would benefit financially, there wasn’t any enforcement. 

We have to create, on a Federal level, some incentive for local 

DAs and AGs to go after folks who clearly violated the law, and so 

far we have done none of that. I don’t know of one mortgage 

broker, that there has been an action filed against them in a court 

of law. 

Ms. AMADOR. But it needs to go deeper than that. 

Ms. SPEIER. All right. 

Ms. AMADOR. Because what we have seen in our local areas, we 

have actually increased the costs of our recording fees to fund that 

prosecution for fraud, mortgage fraud and other things. And they 

are prosecuted and they are found guilty, and then they are sent 

home with ankle bracelets, and then, you know, a couple of weeks 

later, they are out at the movies and they are not being punished. 

There is no consequence. The honest truth is, the only difference 

between an ethical lender and an unethical one is conscience, because there is no legal deterrent. 

Mr. CARDOZA. If the gentlewoman would yield? Patty, isn’t it true 

that some of these things aren’t even illegal? Putting someone into 

an ARM that is more risky is not any more illegal—I mean, just 

the recommendation, or the influence. And when there was a 30 

year fixed rate available but they were put into an ARM because 

they were getting more commission for that ARM, that was a real 

challenge. And it is the ethics of the individual broker. They 

weren’t committing a crime by doing that. It was just immoral to 

do that. 

Ms. AMADOR. That is 100 percent correct. There is no law to prevent that. 

Ms. SPEIER. Well, there is a fiduciary duty, and I would argue 

that a good attorney could argue that they were not complying with 

their fiduciary duty, they could lose their license, they could be 

banned from the practice for a period of years, and maybe for their 

lifetime. You can create, and we have done that in many professional settings, enough of a stick, so that behavior is curtailed. 

Ms. AMADOR. I would love to see a really big stick. But I will tell 

you, in all honesty, we have had situations that have been reported 

to the Department of Real Estate, and their response is, you know, 

we really don’t have the time to go after those type of minimized 

things. We have bigger fish to fry. And that is a quote. 

Ms. SPEIER. Well, this is a real big fish to fry. 

Mr. MCNERNEY. Well, it is now. Madam Chairwoman, I am going 

to yield back the balance of my time. 

Ms. SPEIER. [presiding] Thank you. Congressman Cardoza. 

Mr. CARDOZA. Thank you. I want to start with Ms. Ornelas, because the information that you provided us with, and Mr. Frank 

has had to step out for just a second again, but the point that you 

made, that the bill that we passed, it was the best that Barney 

would get done, as I said in my opening statement, but it won’t 

50 

work in our community because, you know, the loan-to-value ratios 

have dropped so badly, that so many of our mortgages are underwater by so much. The 50 percent that is in Merced and San Joaquin County and Stanislaus County just means that lenders simply 

can’t write down that much—it is so much greater than the 90 percent challenge. 

I guess there are two questions. First of all, Patty and Pam, have 

you seen much of that? Do you think there is much hope that this 

is going to work out in many cases? There are some cases where 

it might, but what is your analysis? This is really important for the 

chairman to hear, so that he can use it in his battle with the Senate. Because I will tell you, he was advocating for a whole lot more. 

And he is a good, skilled fighter, and we just ran into absolute 

roadblocks when it came to making these corrections that he wanted to do. 

Ms. ORNELAS. Who would you like to— 

Mr. CARDOZA. Well, all three of you can comment. 

Ms. ORNELAS. You know, this is a really difficult situation that 

we are facing here, because looking at some of these loans, even 

if we spread it out for 50 years, we still couldn’t come up with the 

right payment that the family needs. To write it down, we are still 

going to have difficulty with the income that families have in 

Stockton. I am talking Stockton, San Joaquin, and Central Valley. 

We have some of the lowest incomes for the whole State. So, you 

know, that is a problem as well. 

But what I say, more than anything, is shame, shame, shame on 

lenders, because when they did put families into these types of loan 

product, I go back and I tell people, how many of you know, based 

on the job market, that someone is going to get a $5,000 increase 

in a year? More than anything, you see people fighting over 50 

cents more an hour, or $1 more an hour. That did not substantiate 

the increase that was going to happen in these families, in this 

loan. 

So is there, like we heard from our Congresswoman, a fiduciary 

responsibility was heavily on those people who made those loans, 

and I feel that they should be the ones that should write down 

those loans to whatever is affordable. 

So whatever it takes, this may not work, and that is why, in my 

statement, I say we may need to look at the bill and adjust it, especially for those areas hardest hit. 

Ms. CANADA. I guess I will sing the song again about 

prepurchase education, because it does take a big stick, it does take 

a lot of, sometimes, things beyond our control, to get lenders, Realtors, mortgage brokers, and others, if they want to do the wrong 

thing, they have ways to do the wrong thing. But if you are an informed homebuyer, if you are an informed consumer, and someone 

says to you, you can buy this $500,000 home, and you are only 

making $45,000 a year, if you have been through prepurchase education, you are going to take a step back and say, whoa, how can 

I do that? 

Well, you know, the lender can lay it all out for you and you will 

know better. We have consumers come back, time after time, after 

they have been through the prepurchase education, and say to us, 

well, yes, but I like that house over there, that four bedroom in the 

51 

neighborhood that I like, and it is above what you told me but this 

guy said he can do it for me. 

And we show them again, we lay it all out—here is your income, 

here is what you can afford, here is an adjustable, here is these 

things. Informed consumers can make good choices, and do we have 

control on mandating housing counseling for prepurchase, especially if it is interest-only, if it is an adjustable that adjusts any 

more frequently than 2 years, there are requirements there that 

can be installed and I would suggest that the committee look 

strongly at that. 

Ms. AMADOR. My understanding of your question is basically the 

programs, and the effectiveness of the programs in place? 

Mr. CARDOZA. There are so many questions I want to ask. We 

have a long relationship. I was doing real estate when you were 

starting out as well, and it evolved so greatly. We were so tight, 

back when I was a Realtor, about how you qualify for a mortgage, 

and it was about 90 percent of what I did as a Realtor was qualify 

folks, because the Central Valley has always been challenged, having folks that are on the lower socioeconomic stratas and trying to 

get them into affordable housing and all the rest. 

And then now, when the values have plummeted, I just see it— 

I mean, we did the best we could, considering the political realities 

that we were facing in Washington with the Administration’s opposition, and all the rest. 

But I don’t think that we are going to succeed, and my point is 

that I am advocating for—and the reason why I call it the ‘‘Katrina 

of California,’’ and all the rest, is we are going to need some very 

dramatic steps. Ms. Speier was whispering to me, as a sidebar conversation, that this is never going to be enough here, and could 

spread to be more a calamitous situation if we don’t solve it in 

those places where it has really gotten out of control. 

We can argue about what needs to be done, but certainly, the resources need to be put in earlier rather than later. The changes 

need to be made earlier rather than later. 

Now we have political realities that aren’t going to change until 

January, one way or another. But we need to be prepared, and that 

is why the chairman came all this way. And so I guess within that 

context, Patty, give us the benefit of your experience. 

Ms. AMADOR. Well, I think there are two sides to it. You know, 

you have the Government coming forward and really making an 

honest attempt to put programs into place that are going to benefit 

these individuals on the verge of losing their homes. The problem 

is you have the Government doing one thing, and you have lenders 

who are doing another, and what we find is they will take these 

programs that you have implemented, and they will either: One, 

say we are not going to participate in that, we consider it to be too 

much risk-based so we’re just not going to play; or two, they again, 

as you are stating about risk base, they will price them beyond the 

affordability of the buyer. I mean, it doesn’t matter whether they 

are in place or not. They just can’t afford them. 

We found with the FHASecure, that they price them to the point 

where they resulted in interest rates of 7 to 7.5 percent. You know, 

it wasn’t a benefit. The same thing with regards to the rescue, you 

52 

know, program. We had someone say it earlier—the phones were 

ringing off the hook when it first came out. 

Part of the problem is that the lenders, you know, how receptive 

are they, the servicers, to taking not only 90 cents on the dollar 

but paying a 3 percent fee on top of that. So now you’re looking 

at a 13 percent reduction, when they won’t even sit down with 

somebody who wants to negotiate and pay them a 100 percent. Renegotiate me at a 100 percent and, you know, I want to stay here. 

I have somebody on my own staff, who bought their home, put 

$50,000 down, they sold their previous home, put $50,000 into their 

home, and, you know, they are in the mortgage business, their income went down, and values, and they struggled with the lender— 

let me stay, you know, let us renegotiate. And they refused. 

But yet they turned around and sold their home to somebody else 

at current market value. You know, it just— 

Mr. CARDOZA. Doesn’t make sense. 

Ms. AMADOR. It doesn’t make any sense. You know, you are asking them to reduce their—by 90 percent. Take 90 percent of appraised value today, pay a 3 percent fee, and, you know, I don’t see 

them highly motivated to do that when, again, they are not willing 

to take 100 percent. 

The other thing is, that is perceived on the part of the homebuyers is, you know, with the participation for further dollars, 

what we understand to be a 1.5 percent fee, I am still not sure how 

that is going to be implemented. 

You know, the reaction has just not been very strong because 

they just don’t see it as that great of a deal for them. 

And so as much as it is, you know, again, very respected and appreciated that the Government is coming forward and trying to do 

these things, it needs to be tweaked to the point where it really 

makes sense for everybody. 

I would like to address, you know, what you said with regards 

to FICO scores. You know, FICO scores are very subjective. They 

are based on employment and how it is construed to be stable, and 

is based on the length of employment. It is based on how much 

credit history that you have or don’t have. You know, some people 

aren’t big users of credit, which shouldn’t be used against them, 

but it is because it doesn’t, they don’t result in a credit score. 

We are now seeing, in addition to what HUD is doing, Fannie 

and Freddie are doing, we are seeing investors themselves putting 

restrictions on programs. 

We now have investors coming forward and saying we will no 

longer accept nontraditional sources of credit. You know, what that 

is going to do is eliminate some borrowers, particularly Hispanic 

borrowers, because they are not big users of credit. 

So like I said, as I said earlier, you know, it is constantly, constantly limiting the lending ability. I just don’t see how we are 

going to come out of this, because as these properties continue to 

come on to the marketplace, and people are strongly interested in 

buying, how can they do that if we continue to pull these tools off 

the table. 

Mr. CARDOZA. Mr. Chairman, I know I have gone way over my 

time. I just want to make one point, and that is that I introduced 

a bill right before the August recess that would require 

53 

NeighborWorks to make sure that the hardest hit areas had sufficient counseling resources. 

One of the challenges that we have had is that even though we 

are the epicenter, we are ground zero, a calamitous situation, there 

has actually been a shortage of folks who are qualified to provide 

counseling services, and Ms. Speier and I have been talking about 

mandatory counseling services, especially for more risky types of 

mortgages that people might get into. 

But here, we have just had a difficult time. That is why we have 

been intervening so significantly with these housing foreclosure 

workshops. But that is really trying to close the door after the animals are out. 

We really need that kind of intervention and we need that support as we go forward, to make sure that folks have the ability to 

get those counseling services. 

The CHAIRMAN. I did want to say to Ms. Amador, yes, we can do 

a better job of screening, but I guess I disagree with you. Your 

thrust seems to be that homeownership is this important goal, and 

you are very skeptical of restrictions. I think one of the mistakes 

we made was to encourage people to buy homes who should not 

have bought homes, who were not either financially or intellectually ready to do it. 

And one of the problems we have had, and it has gone along with 

the denigration of renters, and I hear people say, well, you want 

homeowners because they care about their property. Most people 

who are low- and low-middle-income, in much of this country, are 

going to be renters. I wish it were the case that everybody could 

be a homeowner. But I also wish I could eat more and not gain 

weight. I wish a lot of things, and I get in trouble if I act on my 

wishes without taking reality into account. 

And I think we have to understand that—and one of the things 

we have done as a result is we have not done enough for rental 

housing. Indeed, one of the things that we had in our subprime 

bill—and by the way, I will say this one thing, Ms. Amador. The 

Senate hasn’t passed the antipredatory lending, and we passed 

ours, but that does not mean that the field is wide open because, 

to his credit, Chairman Bernanke of the Federal Reserve has promulgated a set of rules which will be in effect next year, which will 

do much of what we did, not everything, but there will be serious 

restrictions. 

As a matter of fact, if Chairman Alan Greenspan of the Federal 

Reserve had done 8 years ago what Chairman Bernanke did 2 

months ago, the exact same thing, we would not be in this crisis 

now. 

So there is some hope that is coming there. But we have undervalued rental housing, and, you know, with some people, even if 

they show they can make it, what happens when the roof leaks? 

What happens when there are some other structural problems that 

you have? So I mean, homeownership is a good thing. But the other 

thing I would say is that you asked what is the alternative. 

The FHA will be there. One of the problems we had was that the 

FHA, in 2002, issued 700,000 guarantees, and in 2007, 290,000. So 

we are going to get the FHA back in business, and that will be 

helpful. 

54 

I believe that what the Secretary of the Treasury is contemplating doing with regard to Fannie and Freddie will be helpful, in 

that it will emphasize the housing mission over their sort of private 

shareholder thing. 

Yes? 

Ms. AMADOR. I would just like to make one more point. First of 

all, I don’t believe in just opening up the floodgates again. That is 

not the resolve. I am just trying to make sure that we don’t continue to constrain the possibilities. But one of the things I think 

is to the benefit of the people trying to buy today, is we need to 

remember, they weren’t the people out there trying to buy in those 

bad times, in those bad programs. I think they should be given a 

certain amount of credit, that they recognize that they were priced 

out of the market. 

The CHAIRMAN. No question. I agree with that. The other point, 

though, is we also want to separate out one thing. Right now, there 

is a credit crunch going on that is a consequence of this, so it is 

hard for anybody to borrow. I mean, actually what happened is— 

look—the investor community overreacted. First of all, they bought 

stuff they shouldn’t have bought. Now they won’t buy stuff they 

should buy. 

I mean, you know the story of the little kid who touches the 

stove and gets burned; he doesn’t touch the stove again. The trouble we now have with the investor community is that not only 

won’t they touch the stove again, they won’t go near the bath tub, 

the refrigerator, or the toilet. I mean, anything that looks like it, 

they stay away from. 

So we have that short term. Going forward, yes, we want to 

make this available, and I hope we can make the FHA, and the 

combination of the FHA and Fannie Mae and Freddie Mac—but recently, Fannie Mae and Freddie Mac, you mentioned some cost increases, and they were among the ones that were doing that. That 

is in part because they were in this crunch where they had to appeal to the private market. 

I am hoping that out of what the Secretary of the Treasury is 

now talking about, that tension will be resolved in favor of the 

housing market, so that there will be less need of going into the 

private market, and not be under the same kind of pressure. 

So I agree, we don’t want to do it excessively, but I still think 

that clearly, a number of people who bought homes—look, you gave 

some of these examples, and you talked about counseling—the answer is they shouldn’t have bought, and now they bought the 

wrong kind of mortgage, and other things. But yes, a smaller percentage of people should get into homeownership, I think, than we 

had before. 

Ms. ORNELAS. Chairman Frank, I just want to leave you with 

two schools of thought for today. One of them is that we must understand income levels, and the people whom we were talking 

about today, a majority of them were our working people in our 

country. They were above moderate income for a lot of these cases. 

They are not the low-income people of our communities. Yes, lowincome people did fall through to some of this but we must remember that low-income people didn’t create this problem. It is our 

55 

working people who really believed that they are working to reach 

the American Dream. And the second thing that I— 

The CHAIRMAN. By the American Dream, do you mean homeownership? 

Ms. ORNELAS. Homeownership or a decent place to live. 

The CHAIRMAN. Okay. Can I just say, let’s define it that way. 

Ms. ORNELAS. Decent place to— 

The CHAIRMAN. The dream should be a decent place for your 

family, and that might be rental housing, because if we define it 

strictly as homeownership, we are going to get ourselves in trouble. 

Ms. ORNELAS. And that leads to my second thing. For our community and the State of California, shame on us, because we have 

a housing element, that we look for that stick but that stick is not 

used. That housing element is a joke. We are supposed to submit 

that housing element because that shows the needs of our communities, and we should be building housing at any income level— 

The CHAIRMAN. I agree with that. 

Ms. ORNELAS. —so that people aren’t starving to get into something they really can’t get. 

The CHAIRMAN. Let me add to that, and you mentioned stick. 

There is one other thing—and I work very closely with the home 

builders and they have very very supportive, and I think they recognize that if we want to expand homeownership beyond where we 

now are, we have to do a better job of making manufactured housing available. 

One of the problems that I have found, and this committee has 

been working on, in the bill that passed—it has a lot of good stuff— 

one of the things it does is to make manufactured housing fully 

FHA-eligible. 

Because the model for housing was 30 years, the ownership, etc. 

Manufactured housing doesn’t meet some of the legal issues. When 

I was in the State legislature in Massachusetts, I found that a loan 

for a manufactured home was treated like a car loan, and one of 

the things our community has been doing has been to make manufactured housing more available. And then, of course, you also have 

the zoning restrictions, and the people who say, you know, don’t 

put it near me. 

So reducing the cost of housing is another way to do it. I mean, 

the costs aren’t always the loans, etc. The actual physical basic cost 

has been a problem. 

Ms. ORNELAS. And I can tell you as a parent, because I want to 

talk a little bit—our families in our community. I have a son who 

is graduating from college, and I have a 9-year-old. So I have a 

really, you know, different perspective here from different levels. 

But I remember looking at where housing pricing was going here 

in California, and I was thinking, how in the world will my son, 

whatever career he chooses to do, could he afford to continue to live 

in California? Because those housing prices were unrealistic. 

And then I looked further, and I looked at my 9-year-old, and 

said, by gosh, what will happen by the time he gets to the point 

where he graduates from college and is looking at homeownership? 

We heard it earlier in the testimonies. That is what people were 

saying. If I don’t get in now, I may never ever be able to get in 

there. 

56 

The CHAIRMAN. The 9-year-old is particularly important because 

he is probably the one you are going to have to move in with. 

Ms. ORNELAS. Exactly. 

[Laughter] 

Ms. ORNELAS. Definitely. 

The CHAIRMAN. Are there any further questions from any of the 

members? I really appreciate this. This has been a useful discussion as we go forward. 

I thank all of the panelists, and I invite either the panelists or 

the audience, if you want to submit anything to us, the staff will 

be here, and you can also go through the three Members of the 

House who are here, and we thank you very much. 

The hearing is adjourned. 

[Whereupon, at 3:28 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

September 6, 2008 

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