[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
GROWING MORTGAGE FORECLOSURE CRISIS: IDENTIFYING SOLUTIONS AND
DISPELLING MYTHS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JANUARY 29, 2008
__________
Serial No. 110-169
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
------
Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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JANUARY 29, 2008
Page
OPENING STATEMENT
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 2
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law............................................. 45
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Ranking Member, Committee on the Judiciary. 46
WITNESSES
The Honorable Jack Kemp, former Secretary, United States
Department of Housing and Urban Development, Washington, DC
Oral Testimony................................................. 50
Prepared Statement............................................. 52
Wade Henderson, Esq., President and CEO, Leadership Conference on
Civil Rights, Washington, DC
Oral Testimony................................................. 56
Prepared Statement............................................. 58
Mr. David G. Kittle, CMB, Chairman-Elect, Mortgage Bankers
Association, Washington, DC
Oral Testimony................................................. 64
Prepared Statement............................................. 66
Dr. Mark M. Zandi, Ph.D., Chief Economist and Cofounder, Moody's
Economy.Com, West Chester, PA
Oral Testimony................................................. 109
Prepared Statement............................................. 111
Ms. Faith Schwartz, Executive Director, HOPE NOW Alliance,
Washington, DC
Oral Testimony................................................. 119
Prepared Statement............................................. 121
Mr. John Dodds, Director, Philadelphia Unemployment Project,
Philadelphia, PA
Oral Testimony................................................. 136
Prepared Statement............................................. 139
Mr. James H. Carr, Chief Operating Officer, National Community
Reinvestment Corporation, Washington, DC
Oral Testimony................................................. 143
Prepared Statement............................................. 145
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 3
Material submitted by the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law:
Article from The Wall Street Journal, titled ``A Mortgage
`Tweak' We Don't Need,'' dated January, 9, 2008............ 11
Prepared Statement of the Honorable Richard K. Armey,
Chairman, FreedomWorks..................................... 13
Prepared Statement of the American Bankers Association....... 17
Letter in opposition of H.R. 3609, the ``Emergency Home
Ownership and Mortgage Equity Protection Act''............. 32
Dear Colleague Letter from the Chairman and Ranking Member of
the Committee on Financial Services........................ 34
Testimony of Frank Keating before the Senate Committee on the
Judiciary.................................................. 35
Prepared Statement of the Honorable Steve Chabot, a
Representative in Congress from the State of Ohio, and Member,
Committee on the Judiciary..................................... 164
GROWING MORTGAGE FORECLOSURE CRISIS: IDENTIFYING SOLUTIONS AND
DISPELLING MYTHS
----------
TUESDAY, JANUARY 29, 2008
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:04 p.m., in
room 2141, Rayburn House Office Building, the Honorable Linda
T. Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Conyers, Sanchez, Johnson,
Lofgren, Watt, Smith, Chabot, Cannon, Keller, Franks, and
Jordan.
Staff present: Susan Jensen, Majority Counsel; Zachary
Somers, Minority Counsel; and Adam Russell, Majority
Professional Staff Member.
Ms. Sanchez. This hearing of the Committee of the
Judiciary, Subcommittee on Commercial and Administrative Law
will now come to order.
I will recognize myself for a short statement.
We are undoubtedly in the midst of an economic crisis
fueled by the subprime mortgage meltdown and falling home
prices. Both the Administration and Congress are seeking
solutions to stem this crisis.
Last year the House passed comprehensive reforms that would
prospectively set higher standards for the mortgage lending
industry. We have already provided relief for homeowners with
respect to the tax consequences of cancellation of indebtedness
through a bill signed into law last December. And both the
House and Senate are currently considering economic stimulus
packages.
Additionally, last month the Judiciary Committee reported
H.R. 3609, the ``Emergency Home Ownership and Mortgage Equity
Protection Act of 2007,'' legislation that I introduced with
Congressman Brad Miller. We worked with Chairman Conyers and
our colleague on the other side of the aisle, Steve Chabot, to
amend the bill in a bipartisan fashion.
About the same time, Treasury Secretary Paulson announced a
voluntary plan by which servicers and others in the mortgage
industry could temporarily freeze the interest rates for
certain homeowners who are current on certain mortgages and who
have specified FICO scores.
And the financial services industry is promoting a program
that is intended to proactively reach out to homeowners in
financial distress.
What is clear is that the complexity of the mortgage crisis
requires all of these responses, and perhaps even more
aggressive solutions. Today's hearing will provide an
opportunity for us to consider how some of these responses will
address the crisis and to dispel the untruths about the Miller
legislation with this Conyers-Chabot compromise.
Experts predict that the worst is still ahead, as a large
majority of subprime borrowers will face a 40 percent or
greater increase in their monthly mortgage payments, once their
initial teaser rates expire and their fixed interest rates
reset into higher variable rates early this year.
People are losing their homes, and neighborhoods have gone
from vibrant to desolate. It is my hope that today's hearing on
the subprime issue will aid us in our examination of the
possible solutions to this mortgage mess and demonstrate the
need to act quickly to resolve this issue.
Accordingly, I very much look forward to hearing from our
witnesses today and appreciate their efforts in helping us
respond to this crisis.
At this time I will now recognize my colleague, Mr. Cannon,
the distinguished Ranking Member of the Subcommittee, for his
opening remarks.
Mr. Cannon. Thank you, Madam Chair. This is in fact the
third hearing that I think we have had on this issue, and so I
would ask unanimous consent to make my statement available for
the record. And in addition to that, I have a series of items
for the record.
One is a Wall Street Journal article today called ``A
Mortgage `Tweak' We Don't Need.'' The second is the testimony
that would have been given by Mr. Dick Armey, if he had been
here today. The third is a statement on behalf of the American
Bankers Association dated today.
In addition to that, we have a letter that is from a series
of associations, beginning with the American Bankers
Association, the American Financial Services Association and
several others. We have a letter on the HOPE NOW Alliance from
Congressman Frank and Congressman Bachus. And then this is
testimony from Frank Keating in 1991 in the Senate Judiciary
hearing on cramdowns of home----
If we could have those admitted to the record, I would
appreciate that.
Ms. Sanchez. Without objection, so ordered.
[The prepared statement of Mr. Cannon and the information
follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Ranking Member, Subcommittee on
Commercial and Administrative Law
Article from The Wall Street Journal, titled ``A Mortgage `Tweak'
We Don't Need,'' dated January, 9, 2008
Prepared Statement of the Honorable Richard K. Armey, Chairman,
FreedomWorks
Prepared Statement of the American Bankers Association
Letter in opposition of H.R. 3609, the ``Emergency Home Ownership and
Mortgage Equity Protection Act''
Dear Colleague Letter from the Chairman and Ranking Member of the
Committee on Financial Services
Testimony of Frank Keating before the Senate Committee on the Judiciary
Mr. Cannon. And with that, I would yield back in the hopes
that we have a hearing that moves very quickly. This is the
biggest panel, I think, we have ever had, or had in the last 12
years. And hopefully, we can move through it quickly.
Thank you, Madam Chair. I yield back.
Ms. Sanchez. I thank you, Mr. Chairman.
And at this time I would now like to recognize the
distinguished Chairman of the full Committee, Mr. Conyers, for
an opening statement.
Chairman Conyers. Thank you very much.
The reason the panel is so large, Mr. Cannon, is that the
subject matter is so complex and requires at least this many
people, and maybe more. And I want to thank you very much for
having been with us on all of this.
And I want to thank the Ranking Member as well, Lamar
Smith, for allowing us at the last moment to join Subcommiee
Chair Sanchez and I in inviting James Carr to be added to the
already lengthy panel.
I am always happy to see all my friends here, starting with
the person who probably doesn't need universal health care,
although he has a bad cold, Jack Kemp. Our days go back to the
Martin Luther King era and the struggles that we had
congressionally, which I will never forget. Wade Henderson,
leading the Leadership Conference on Civil Rights, and all of
the rest of you.
I was just in Detroit over the last weekend, at Wayne State
University, where we had this same kind of hearing, and because
of James Carr's presentation, I was so pleased that the
minority would join the Chair and I to invite him to this
hearing. And he was able to make it, after changing his
schedule.
Now, we are working on a stimulus package. A stimulus
package is like taking a garden hose to a 10-alarm fire and
wondering why we aren't winning the battle. And there are lots
of good things in it and it is well intended--maybe it will
send a signal and all that.
But what this is--the problem, as I see it--is that we are
dealing with a subject matter that has more potential
cumulative financial damage than all the problems of the Great
Depression in 1929, plus all of the financial dislocations that
we have seen in the ``dot com'' bubble, and the scandals of
Enron, Adelphia, WorldCom and others.
Here this little adjustable mortgage rate problem is now
shaking world markets globally, not just on Wall Street. This
thing is moving with far deeper implications than any of us
could imagine.
Now, as usual we congratulate people who are putting on
band-aids and have been trying to do the best they can. And it
is not the job or the jurisdiction of this Committee to go into
the entire depth of the financial dislocation that is going on,
but the biggest problem is not to recognize that it is there.
And so it is in that spirit that I am so proud that this
little old Subcommittee number five in Judiciary, which gets
all the heavy lifting of the whole Judiciary Committee, is once
again saddled with this huge responsibility. And I am very
proud that all of you could come and lend your talent and that
all of our Committee--Cannon has never seen so many witnesses;
I have never seen so many Members at a Subcommittee hearing
before.
Thank you very much.
Mr. Cannon. So much for the hope, Mr. Chairman, of a quick
hearing. [Laughter.]
Ms. Sanchez. I thank the distinguished Chair of the full
Committee for his opening statement.
And I would now at this time like to recognize Mr. Smith,
the distinguished Ranking Member of the full Committee, for his
statement.
Mr. Smith. Thank you, Madam Chair.
Before I make my statement, I, too, would like to recognize
our former colleague and a former vice presidential candidate,
Jack Kemp, who is here today. I regret that on this particular
issue we are not on the same side, which also reminds me that I
might have missed an opportunity yesterday when our Chairman
called and wanted to add a friend as a new witness today, Mr.
James Carr. I should have asked that we dropped a witness at
the same time, but I missed my chance. But nevertheless, I
appreciate someone with his credibility and stature testifying
today, Jack Kemp.
Madam Chair, when the Committee last looked at subprime
mortgages, the Administration and Congress had recently
undertaken several initiatives to address the growing concern
surrounding this issue.
The secretary of treasury's plan, or HOPE NOW, had just
been announced. The House had passed bipartisan tax relief to
help homeowners benefit fully from debt forgiveness. The
Federal Housing Administration's Secure program was taking
hold, increasing FHA's flexibility to offer refinancing. And we
had passed legislation to modernize the FHA, Fannie Mae and
Freddie Mac.
Against that backdrop it was clear that we needed to allow
time for these measures to work before considering the dramatic
step of rewriting key longstanding terms of the bankruptcy
code. There continue to be developments we should monitor.
The HOPE NOW program appears to be gathering a considerable
head of steam. It is already making good on its promise to help
troubled homeowners. The subprime mortgage crisis, meanwhile,
has touched off instability, not only in our markets, but
around the globe. Fears of recession in our economy have
heightened.
Key policymakers are responding to these broader economic
developments. The message from Fed Chairman Ben Bernanke has
been that what the economy needs to do to hold off a further
downturn is liquidity, liquidity, liquidity.
A group of bipartisan leaders in the House of
Representatives and the Administration have negotiated an
economic stimulus package based on similar principles. The
stimulus is designed to inject liquidity into the market
immediately. This directly responds to the housing crisis by
increasing the lending flexibility of the FHA, Fannie Mae and
Freddie Mac.
One thing, though, hasn't changed since we last met. That
is the law of economics. What they told us then, they tell us
now. Turning existing primary residence mortgage contracts into
bankruptcy will inevitably contract liquidity. Mortgage
interest rates will rise. Other lending terms will become more
restrictive. Lending will decrease. New homeowners and those
who can still refinance will be hesitant to do so, although it
is their home related spending that we desperately need to fuel
our economy.
It is precisely the opposite of what the market needs. It
is the economic equivalent of throwing cold water on a freezing
man. It will undercut the Paulson plan. It will undercut the
stimulus package. It will undercut FHA reform. It will undercut
our economy.
So again, we should refrain from making changes to the
bankruptcy laws. Other better measures are taking hold. The
stimulus package will soon add to that hold. Our legislative
efforts must strengthen the housing market, not weaken it.
I look forward to hearing from all of today's witnesses.
And, Madam Chair, before I yield back the rest of my time,
I do want to say to the Chair that several Members may be
leaving almost immediately to go to the House floor for
consideration of the FISA bill that we are considering there as
well. And I yield back. Thank you.
Ms. Sanchez. I thank the gentleman.
Without objection, other Members' opening statements will
be included in the record. And without objection, the Chair
will be authorized to declare a recess at any point in the
hearing.
I am now pleased to introduce our distinguished witnesses
for today's panel.
Our first witness is Jack Kemp. Mr. Kemp is the founder and
chairman of Kemp Partners, a strategic consulting firm helping
clients achieve both business and public policy goals.
Mr. Kemp was the Republican Party's vice presidential
candidate for the 1996 campaign. From 1989 to 1993, Mr. Kemp
served as Secretary of Housing and Urban Development, and
before his appointment to the cabinet, he represented the
Buffalo area and western New York in the United States House of
Representatives from 1971 to 1989.
Mr. Kemp spent 13 years in professional football, playing
quarterback for the San Diego Chargers and the Buffalo Bills.
He co-founded the AFL Players Association and was elected
president for five terms. Mr. Kemp served on the board of
Habitat for Humanity and is chairman of Habitat's National
Campaign for Rebuilding our Communities.
We want to welcome you here, Mr. Kemp, especially in light
of the fact that you are not feeling well.
Our second witness is Wade Henderson. Mr. Henderson is the
President and CEO of the Leadership Conference on Civil Rights,
LCCR, and counsel to the Leadership Conference on Civil Rights
Education Fund. The LCCR is the Nation's premier civil and
human rights coalition.
Mr. Henderson is well known for his expertise on a wide
range of civil rights, civil liberties and human rights issues.
Since taking the helm of the LCCR in June 1996, Mr. Henderson
has worked diligently to address emerging policy issues of
concern to the civil rights community and to strengthen the
effectiveness of the coalition.
Prior to his role with the Leadership Conference, Mr.
Henderson was the Washington Bureau Director of the National
Association for the Advancement of Colored People, the NAACP.
In that capacity he directed the governmental affairs and
national legislative program of the NAACP.
Mr. Henderson was previously the Associate Director of the
Washington national office of the American Civil Liberties
Union, the ACLU, where he began his career as a legislative
counsel and advocate on a wide range of civil rights and
liberties issues.
Mr. Henderson also served as executive director of the
Counsel on Legal Education Opportunities, CLEO. Mr. Henderson
is the Joseph L. Rauh, Jr., Professor of Public Interest Law at
the David Clarke School of Law of the University of the
District of Columbia and the author of numerous articles on
civil rights and public policy issues.
Welcome, Mr. Henderson.
Our third witness is David Kittle. Mr. Kittle is chairman
elect of the Mortgage Bankers Association and president and
chief executive officer of Principle Wholesale Lending,
Incorporated, in Louisville, Kentucky.
He started with the American Fletcher Mortgage Company and
became the top loan originator before moving to management in
1986. In 1984, Mr. Kittle opened his own company, Associates
Mortgage Group, Incorporated, and sold it in January of 2006.
He is a former chairman of MORPAC, MBA's political action
committee, a former vice chairman of the MBA residential board
of governors, and is a member of MBA's advisory committee. Mr.
Kittle is also a member of the Fannie Mae advisory council.
Welcome, Mr. Kittle.
Our fourth witness is Faith Schwartz. Ms. Schwartz is the
executive director of HOPE NOW Alliance, a coalition of
nationwide servicers, lenders, investors, counselors and other
mortgage market participants working together to help owners in
distress. Ms. Schwartz previously served as HOPE NOW's project
manager.
Prior to joining HOPE NOW, she was senior vice president of
enterprise risk and public affairs at Option One Mortgage
Corporation, a subsidiary of H&R Block, Incorporated. Ms.
Schwartz has also served as the chair of the Mortgage Banking
Association's nonconforming credit committee in both 2005 and
1996.
Prior to joining Option One Mortgage Corporation, Ms.
Schwartz was director of sales national lending for Freddie
Mac. From 1995 to 1997, Ms. Schwartz was chief operating
officer for Fieldstone Mortgage Company. She was also executive
vice president at TMC Mortgage Corporation from 1991 to 1995.
Ms. Schwartz began her mortgage banking career at Dominion
Bankshares Mortgage Corporation in 1983, where she served as
vice president of secondary marketing for wholesale purchase
programs.
We want to welcome you, Ms. Schwartz.
And you guys are a little bit out of order, but I would
like to introduce our fifth witness, Mr. Mark Zandi.
Dr. Zandi is the chief economist and co-founder of
economy.com, which provides economic research and consulting
services to corporations, governments and institutions,
maintaining one of the largest online databases of economic and
financial time series.
Dr. Zandi's recent work includes the study of the outlook
for national and regional housing market conditions, the
determinants of personal bankruptcy, the location of high
technology centers, and the impact of globalization and
technological change on real estate markets.
In addition to being regularly cited in The Wall Street
Journal, The New York Times, Business Week, Fortune and other
leading publications, Dr. Zandi also appears on ABC News, Wall
Street Week, CNN and CNBC.
Welcome, Dr. Zandi. Nice to have you here in person.
Our sixth witness is John Dodds. Mr. Dodds has been the
director of the Philadelphia Unemployment Project since its
founding in 1975. The Philadelphia Unemployment Project, PUP
for short, is both a membership organization and an advocacy
organization for the unemployed and low wage workers.
PUP has focused on preventing mortgage foreclosures since
the recession of 1981-82 and has been a leading advocate for
programs and policies to help preserve homeownership. Its
sister organization, the Unemployment Information Center, is a
HUD approved housing counseling agency that handles hundreds of
delinquency and default cases each year.
Under Mr. Dodds' leadership, PUP counts among its
achievements campaigns that have led to, among other things,
the Nation's first state foreclosure prevention program in
Pennsylvania, the expansion of health care for the uninsured in
the Commonwealth of Pennsylvania and city of Philadelphia, an
innovative reverse commute project for inner city workers,
increases in the state minimum wage, programs to protect income
homeowners from real estate tax foreclosures and reductions in
legal fees to families facing foreclosures.
Welcome to our panel, Mr. Dodds.
Our final witness is James Carr. Mr. Carr is the chief
operating officer for the National Community Reinvestment
Coalition, an association of 600 local development
organizations across the Nation dedicated to improving the flow
of capital to communities and promoting economic mobility.
Mr. Carr is a visiting professor at Columbia University in
New York and George Washington University in Washington, D.C.
Prior to his appointment at NCRC, Mr. Carr was senior vice
president for financial innovation, planning and research for
Fannie Mae Foundation and vice president for research at Fannie
Mae.
He has also held posts as assistant director for tax policy
with the U.S. Senate Budget Committee and as a research
associate at the Center for Urban Policy Research at Rutgers
University. Mr. Carr has appeared on numerous television
stations, as a frequent radio talk show guest, and was a
recipient of the 2003 Community Impact Award from the National
Organization of Black County Officials.
Again, I want to thank you all for your willingness to
participate in today's hearing. Without objection, your written
statements will be placed into the record, and we would ask
that you limit your oral testimony to 5 minutes.
You will note that we have a lighting system in front of
you. When your time to speak begins, you will see the green
light. Four minutes into your testimony, you will receive a
yellow warning light that you have about a minute to summarize
your testimony. And alas, when the light turns red, your time
has expired. If you are mid-thought when the red light comes
on, we will allow you to finish your final thought before
moving on to our next witness.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions,
subject to the 5-minute limit.
With all the ground rules now established, I will invite
Mr. Kemp to please proceed with his testimony.
TESTIMONY OF THE HONORABLE JACK KEMP, FORMER SECRETARY, UNITED
STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, WASHINGTON,
DC
Mr. Kemp. Thank you, Madam Chair. I am going to stay within
5 minutes of getting through my testimony.
Thank you for so kind an introduction. Congressman Conyers,
thank you for your long-time friendship.
Oh, no wonder I couldn't hear myself.
Thank you, again, John, for your kind words. It has always
been an honor to work with you.
And to my friend, Chris Cannon, good to see you.
And it is a particular pleasure to be next to a very dear
friend, a great patriot, and a wonderful devotee of and
advocate for civil rights and social justice in our country.
Wade Henderson and I worked together arm in arm for the D.C.
voting rights bill, and I want to tell him personally and
publicly how much I appreciate his courage and tenacity on
behalf of people who sometimes don't have a voice.
I think that is who I am speaking for today--people who
don't have a voice in this great issue over stimulus. I really
appreciate the Conyers-Chabot Emergency Home Ownership and
Mortgage Equity Protection Act. I know it has been called the
most dangerous thing that we could be doing right now. And I
would find it dangerous if we don't do something like this.
I am not here as an expert on bankruptcy jurisprudence, but
as a former Member of the House, HUD secretary, a long-time
advocate for homeownership for all Americans as a real tool to
strengthen our communities, our economy, while building wealth
and assets for low and working families.
Madam Chair, I don't need to tell you about the role
homeownership plays in our society. It embodies the American
dream. It represents an invaluable economic asset for millions
of families.
A strong housing market has been a principal engine for our
Nation's economic growth, contributing the development of
stable and thriving communities, broadening the tax base, and
obviously allowing for rising employment opportunities.
Today's housing recession is, as you said and Chairman
Conyers said, extremely serious. In perspective the overall
economy is still growing, though slowing down. The subprime
mortgage meltdown exists today because there was an abundance
of liquidity and I believe fed by the Federal Reserve Board
keeping interest rates too low for too long, and thus causing a
housing bubble.
When Ben Bernanke came in, he took a 1 percent overnight
cost of money, the Federal funds rate, to 5.25 in 16 straight
steps, and all of a sudden those adjustable rate mortgages in
the prime and subprime area were absolutely causing balloon
payments that have wiped out the value of people's homes.
At the end of last year, I was approached by a coalition of
consumer advocacy and homeownership advocates and
organizations, who asked that I consider supporting this
bipartisan legislation as it was amended right here in this
Committee.
As you know, having served as President Bush's HUD
secretary and serving in Congress, I believed that
bipartisanship alone is not the singular ingredient for good
policy. However, in this case I salute the Chairman and
Congressman Chabot and all the Members of the Committee who
support this legislation for striking what I think is a right
balance.
When I was the secretary of HUD, we fought against economic
pessimism every day in an effort to spread the American dream
of homeownership, particularly for moderate and low-income
families. Homeownership, especially among people of color, has
risen to historic levels, and they have got a long way to go.
In just the last 5 years, 2.5 million to 2.8 million
families bought their very first home. Now, the subprime
mortgage crisis is threatening to roll back this progress, and
I can tell you flat out, if we can possibly do it, I want to
keep people in their homes. That is the purpose of my
testimony, and, I believe, this bill.
This bill will have more impact on these home owning
families than any other option currently on the table, in my
opinion. I see estimates that as many as 600,000 homeowners
might be eligible, as well as preventing about $72 billion of
wealth that would be lost to families who would be affected by
virtue of their home being in a location near a foreclosed
home.
Given the severity of this national crisis, allowing a
judge to modify in bankruptcy court, I believe, is the right
thing to do. The bill is targeted at only subprime and non-
traditional ARM mortgages and would be available for only 7
years after it is enacted in order to mitigate against the next
waves of rising interest rate resets.
I believe it is narrowly tailored and an appropriate remedy
for homeowners and the right thing for the Congress to do. Now,
some lenders' representatives--and I have got great respect for
them, some here and some around this country; I worked with
them in all 4 years of HUD--have claimed that H.R. 3609 would
drive up interest rates and harm the securities market.
Now, there may be a legitimate reason why some of this
country's biggest and largest banking institutions would oppose
this legislation. But those reasons are not it. There is no
data that support the contention that bankruptcy changes being
contemplated in Congress would do either. H.R. 3609, as you
well know, applies to existing loans only. Therefore, by
definition it could not affect future interest rates, because
it would not apply to future loans.
Now, there have been decades of experience in which
bankruptcy courts have been modifying mortgage loans on family
farms in Chapter 12, commercial real estate in Chapter 11,
vacation homes, condo loans, investor properties in Chapter 13,
with no ill effects--no ill effects on the credit in those
submarkets.
Ms. Sanchez. Mr. Kemp?
Mr. Kemp. I am sorry.
Ms. Sanchez. Your time has expired. I will allow you to
summarize your final thought.
Mr. Kemp. Let me summarize. As I wrote in a recent Los
Angeles Times op-ed, bankruptcy law is widely off kilter in how
it treats homeowners and homeownership. And I believe, Madam
Chair, this is a legitimate, logical way to provide health and
help for more than 600,000 homeowners.
Thank you very much for your hospitality.
[The prepared statement of Mr. Kemp follows:]
Prepared Statement of the Honorable Jack Kemp
Ms. Sanchez. Thank you, Mr. Kemp. I appreciate your
summarizing as quickly as possible. I know that you are not
feeling well, so if you would like to leave the panel, you have
the indulgence of the Chair to do so at this time.
TESTIMONY OF WADE HENDERSON, PRESIDENT AND CEO, LEADERSHIP
CONFERENCE ON CIVIL RIGHTS, WASHINGTON, DC
Mr. Henderson. Chairwoman Sanchez, Ranking Member Cannon
and Members of the Subcommittee, I am Wade Henderson, president
of the Leadership Conference on Civil Rights. Thank you for
inviting me to discuss solutions to the growing national
epidemic of home foreclosures.
Before I begin my formal remarks, Madam Chair, I want to
digress for a moment to thank you and, most importantly, Mr.
Conyers, Mr. Chabot, Mr. Watt and leaders like Secretary Kemp
for your extraordinary effort in last year's reauthorization of
the Voting Rights Act.
The Voting Rights Act is one of the most important civil
rights bills of our time, and the overwhelming support for its
reauthorization is proof positive that the protection of civil
rights is not a partisan issue. It is a national issue. And it
is in that spirit that I come before you today.
Now, there is a great deal that can be said about what led
to the Nation's foreclosure crisis, what impact it will have,
and what could have been done to prevent it, and what our best
options are now for moving forward. I am pleased to focus today
on one of the best of those options.
At the outset I want to say that the Leadership Conference
fully supports the version of H.R. 3609 that was approved by
the full Committee, and I want to thank the sponsors for your
leadership. H.R. 3609 offers a strong, yet pragmatic step that
will save hundreds of thousands of families from losing their
homes.
For the past several years, when I have testified or
otherwise talked about the need for changes to our Nation's
mortgage finance system, I have usually spent much of my time
explaining what was going wrong and what the likely consequence
would be for individual homeowners, the communities in which
they live, and the economy at large. I obviously don't need to
spend much time on that anymore. I think most Americans get it
now.
Subprime lending, which can and should be used in a
responsible way to create new homeownership opportunities for
persons with impaired credit, was instead shamelessly perverted
through recklessness, greed and unrealistic expectations.
Dealing with it and with the havoc sweeping through the entire
housing sector requires swift, multi-faceted and compassionate
action.
We certainly want the industry, with the Administration's
support, to do its share. But at the same time, individual
homeowners and our economy as a whole cannot afford to wait for
an industry that collectively created the mess, and is now
being devoured by it, to take the lead in cleaning it up.
For several reasons we believe that using bankruptcy
proceedings to avert foreclosures is one of the most important
and timely steps Congress can take to deal with the foreclosure
crisis.
One key advantage, especially as we face growing questions
about the economy, is its cost. Because bankruptcy
modifications do not involve public funds, H.R. 3609 will not
give the appearance of a bailout or create moral hazard. And
because bankruptcy comes at a heavy cost, monetary and
otherwise, it does not let borrowers off the hook.
I should note parenthetically that many lenders have
recently come to recognize the value of obtaining bankruptcy
protection, which makes it ironic that borrowers cannot do the
same.
At the same time, H.R. 3609 will benefit other homeowners
and our economy. Every home that gets saved from foreclosure or
from abandonment by borrowers expecting foreclosure, which is
another growing problem, helps protect the value of neighboring
homes, slowing a vicious cycle that leads to even more damage
to affected communities.
Needless to say, empty houses are more than just eyesores.
They also drain local government resources and undermine public
safety. Now, while the bill will not save every home, it will
greatly help control the bleeding, protecting communities from
even more harm.
I would hope that every Member of Congress would recognize
the value of that result, but I can't help but notice that it
is now the Subcommittee's third hearing on this bill and that
you have taken the unusual step of holding this one after the
Committee's markup, which can only mean that there are still
some very serious misunderstandings about H.R. 3609 that must
be addressed.
The opposition to the bill is especially frustrating,
because it generally comes from industry representatives, who,
despite best efforts of civil rights and consumer groups, have
long been reluctant to acknowledge the full extent of the
problem we are facing.
As late as October, the industry told the Subcommittee,
even after the problems with unsustainable loans had become
painfully obvious to the public, that foreclosures are mostly
the result of ``unemployment, divorce or illness, and not the
loans themselves.''
Last year's rapid growth in foreclosure rates speaks for
itself, and it is unsettling to wonder if the industry
posturing might have delayed efforts to mitigate that growth.
Opponents of the bill also argue that the industry is
working to reduce foreclosures through the use of loan
modifications and repayment plans. But without a doubt, I am
glad that many lenders and servicers recognize that there are
serious problems and are taking steps to save homeowners from
their mortgages.
I see the light has come on, so I will summarize.
Ms. Sanchez. I will allow you to finish your final thought.
Mr. Henderson. Thank you.
Let me say that this bill is such an important step, such a
modest step, and such a fundamental protection for the rights
of homeowners and the communities in which they live. We are
happy to provide our full support for the enactment of this
legislation.
Thank you, Madam Chair.
[The prepared statement of Mr. Henderson follows:]
Prepared Statement of Wade Henderson
Ms. Sanchez. Thank you, Mr. Henderson, for your testimony.
And I note that we have been joined by Mr. Chabot from
Ohio, not a Member of the Subcommittee, but interested enough
to come and sit in on today's proceeding.
So thank you for your attendance.
With that, I will invite Mr. Kittle to provide us with his
testimony.
TESTIMONY OF DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, MORTGAGE
BANKERS ASSOCIATION, WASHINGTON, DC
Mr. Kittle. Madam Chair, Ranking Member Cannon, thank you
for the opportunity to appear before you again.
I am pleased to discuss the solutions to the situation in
the mortgage market and to help dispel some myths relating to
the Emergency Home Ownership and Mortgage Equity Protection
Act.
It is a myth that allowing cramdowns of mortgages will be a
cost-free and easy way to help homeowners. We expect that H.R.
3609 will cost your constituents hundreds of dollars a month
and thousands of dollars a year. Passage of this bill will
encourage homeowners to file for bankruptcy, an expensive and
invasive process. Instead of encouraging homeowners to seek
bankruptcy, Congress should focus on ways to keep people out of
bankruptcy and in their homes.
There are very real and severe consequences for consumers
who declare bankruptcy. Bankruptcy is a long, arduous and very
public and expensive process, costing thousands of dollars in
legal costs. Even when people file for bankruptcy, almost two-
thirds of them are unable to fulfill the terms of their
repayment plan.
Filing bankruptcy will allow a federally appointed trustee
to scrutinize the consumer's every expenditure. Additionally,
bankruptcy stays on a consumer's credit report for 10 years,
making it difficult to acquire future credit, buy a home, car
or insurance, and in some cases, even obtain employment.
If bankruptcy judges are allowed to independently change
the terms of a signed mortgage contract, lenders will face new
uncertainty as to the value of the collateral, the home. To
account for the new risk, lenders will be forced to require
higher down payments, higher cost at closing, and higher
interest rates, pushing the dream of homeownership beyond the
reach of millions of families.
As you know from my previous testimony, we estimate that a
change in the bankruptcy law, allowing cramdowns in the future,
may increase interest rates across the board by at least 1.5
percentage points for those seeking to buy a home or refinance
their existing mortgage.
In Los Angeles County, California, for example, where the
average home price is about $360,000, a homeowner's monthly
payment at 6 percent for a 30-year fixed rate mortgage is
roughly $2,100 per month. However, if H.R. 3609 were enacted,
holding everything else constant, the homeowner could pay an
additional $358 every month, an annual increase of over $4,200.
It is a myth that this legislation will actually be
positive for the mortgage industry. Despite the changes made in
the bill by Congressman Chabot, the legislation continues to be
retroactive. The result of a retroactive bill will be a
devaluation of the current loan and mortgage servicing
portfolio. This will have an immediate and severe impact on the
mortgage market, as companies book the diminished value of
their loans and servicing rights.
Rates will certainly have to rise to offset the anticipated
losses. Some companies will not survive. The writedowns and the
markets will go through another period of severe instability.
It is a myth that the total cost of foreclosure is greater
than that of the risk of bankruptcy. Lenders often have
mortgage insurance to protect themselves against losses. The
FHA program is one kind of credit enhancement. Bankruptcy voids
these credit enhancements in the amount of the cramdown. The
lender will have to absorb the increased risk, which will
ultimately pass on to the consumer in the form of higher prices
or more restrictive lending terms.
It is a myth that the preference given to primary
residences is simply a loophole. Congress acted deliberately to
increase the flow of capital to homebuyers. The House acted
with broad support when it passed the final version of the
bankruptcy code in 1978. The Supreme Court supported this
provision with a specific defense from Justice Stevens in 1993.
Finally, Congress should not encourage Americans to walk
away from their debts. Bankruptcy is a final resort and should
be sought only by the most extreme circumstances. At a time
when the mortgage market is already experiencing a serious
credit crunch, this bill threatens to increase costs to
consumers, destabilize the mortgage market and result in injury
to the overall economy.
We urge Congress to finish work on the stimulus bill,
modernize the FHA and pass a predatory lending bill that
provides uniform protection for all consumers. Congress should
not change the bankruptcy laws and increase costs on every
borrower seeking a new mortgage.
Thank you for the opportunity to appear before you again,
and I look forward to answering your questions.
[The prepared statement of Mr. Kittle follows:]
Prepared Statement of David G. Kittle
ATTACHMENTS
Ms. Sanchez. Thank you for your testimony, Mr. Kittle.
At this time I would invite Dr. Zandi to present his oral
testimony.
TESTIMONY OF MARK M. ZANDI, Ph.D., CHIEF ECONOMIST AND
COFOUNDER, MOODY'S ECONOMY.COM, WEST CHESTER, PA
Mr. Zandi. Thank you, Mr. Chairwoman. Thank you for the
opportunity today.
I just want to say that my views are my own. They are not
those of the Moody's Corporation. I will make a half dozen
points in my remarks.
First, the Nation's housing mortgage markets are suffering
an unprecedented downturn. The last time I spoke before this
Subcommittee, the market was bad. It has gotten measurably
worse. Activity peaked 2.5 years ago, and since then home sales
have fallen approximately 35 percent. Starts are down nearly 50
percent and house prices by 8 percent.
Two-thirds of the Nation's housing markets are experiencing
substantial price declines, with double digit declines
throughout Arizona, California, Florida, Nevada, the Northeast
corridor and the industrial Midwest.
Second, residential mortgage loan defaults and foreclosures
are surging, and without further significant policy changes,
will continue to do so through the remainder of the decade.
Falling housing values, resetting adjustable rate mortgages,
tighter underwriting standards and weakening job markets are
conspiring to create an unprecedented mortgage credit problem.
According to very accurate data based on consumer credit
files, there were 450,000 first mortgage loans in default to
the first step in the foreclosure process as of year-end 2007.
This equates to some 1.8 million defaults at an annualized
pace. Even mortgage loan modification efforts increase
measurably in coming months, I expect almost three million
defaults this year and next. At least two million homeowners
will likely lose their homes.
Third, the severe housing downturn and surging foreclosures
are weighing very heavily on the border economy, which may very
well experience a recession this year. Regional economies, such
as California, Florida, Nevada, much of the Midwest, parts of
the Northeast, which together account for one-half of the
Nation's GDP, are in my judgment already in or very near
recession.
The unraveling of the housing mortgage markets continues to
undermine the fragile global financial system, as Congressman
Conyers points out. Estimates of the mortgage losses global
investors will bear range as high as $500 billion. These losses
that have been publicly recognized now total about $150
billion.
Losses on construction and land development loans made by
the banking system to homebuilders are sure to increase
measurably, and the credit problems in other consumer loans are
rising rapidly, particularly in those parts of the country in
recession due to the housing recession.
Fourth, while policymakers' efforts to date in responding
to the mounting problems in the housing and mortgage markets
and broader economy are helpful, they may very well prove
inadequate. Since this past summer, the Federal Reserve has
aggressively lowered rates. The Administration and Congress are
quickly working toward a substantive fiscal stimulus package.
Policymakers are also working to shore up the housing and
mortgage markets in several ways, the most notable including
increasing the GSE's mortgage loan caps and the Treasury
Department's effort through HOPE NOW to facilitate mortgage
loan modifications and establishment of mortgage repayment
plans for struggling homeowners.
Recent studies conducted by the MBA and Moody's Investors
Service based on information provided by mortgage loan
servicers through last fall indicate that hard-pressed
homeowners are indeed receiving some increased relief. The
Moody's study found that 3.5 percent of subprime ARM loans that
reset in the first 8 months of this year had been modified.
This is up from only 1 percent in an earlier survey conducted
by Moody's.
Despite these improvements, given the still substantial
impediments to loan modification efforts, they are unlikely to
increase sufficiently to forestall an unprecedented number of
foreclosures through the remainder of this decade with the
consequent negative repercussions for the broader economy.
Tax, accounting and legal hurdles have been overcome, but
large differences in the incentives of first and second
mortgage lien holders and various investors in mortgage
securities are proving to be very difficult.
While the total economic benefit of forestalling
foreclosure is significant, these benefits do not accrue to all
of the parties involved in determining whether to proceed with
a loan modification. Moreover, given the overwhelming number of
foreclosures, servicers are also having difficulty
appropriately staffing the modification efforts.
It is also important to consider that for loan
modifications to occur under the Treasury plan, many borrowers
will have to produce more financial information than they did
when they obtained the original loan. More than half of the
subprime loans in 2006, for example, were stated income loans,
for which borrowers were not required to produce a W-2 or tax
return, and they will be reluctant to do so now.
There are thus a number of significant impediments to the
effective implementation of the Treasury plan via HOPE NOW,
suggesting that at best an estimated quarter million borrowers
will actually benefit from loan modifications.
Thus, while HOPE NOW is a laudable effort, it should not
forestall passage of legislation, H.R. 3609, to provide hard-
pressed homeowners facing foreclosure more protection in a
Chapter 13 bankruptcy. If HOPE NOW is successful in helping
many borrowers, then these borrowers would not avail themselves
of the opportunity to avoid foreclosure in Chapter 13 provided
by this legislation. However, if HOPE NOW is not sufficiently
successful, which may very well be the case, then this
legislation will prove invaluable.
Thank you.
[The prepared statement of Mr. Zandi follows:]
Prepared Statement of Mark M. Zandi
Ms. Sanchez. Thank you, Dr. Zandi.
At this time I would invite Ms. Schwartz to give her
testimony.
TESTIMONY OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW
ALLIANCE, WASHINGTON, DC
Ms. Schwartz. Thank you, Chairman Sanchez and Ranking
Member Cannon. I appreciate having the opportunity to testify
today.
As you know, my name is Faith Schwartz. I am the executive
director of the HOPE NOW Alliance. I want to tell you how the
HOPE NOW Alliance is making real progress in an unprecedented
joint industry and nonprofit national initiative to reach out
to at-risk borrowers and find solutions to prevent
foreclosures.
The HOPE NOW Alliance is a broad-based collaboration
between credit and homeownership counselors, lenders,
servicers, investors and housing trade organizations, where we
have gotten together to achieve the real results and reaching
more at-risk borrowers and providing positive solutions to
avoid foreclosure.
HOPE NOW now includes 25 national loan servicers that
comprise over 90 percent of the subprime market and a vast
majority of the prime market. We have strong participation from
respected nonprofits like NeighborWorks America and the
Homeownership Preservation Foundation with its network of
trained counselors, and we are adding and expanding that
network of nonprofits.
While this is a voluntary effort, and it has certainly been
created at the urging of the secretary of the treasury and
Alphonso Jackson of HUD, I must say that once you are a member
of HOPE NOW, you need to adhere to principles that are adopted
by HOPE NOW. I will just mention a few of those in light of our
time.
One of the early principles adopted was that everyone has
to reach borrowers at risk in adjustable rate loans before the
loans adjust at a minimum of 120 days prior to that adjustment.
In addition to that, they must define the terms of the mortgage
and all the options they would have if they cannot afford the
adjustment.
Maybe the most notable principle that I think will have a
dramatic effect on how loan servicers and consumer credit
counselors and housing counselors communicate is every lender
has agreed to create a 1-800 number, a fax and email that is
assigned to just third-party housing counselors. This is a big
step forward so that there is better communication and
efficiency of how third parties can help borrowers at risk get
right into the servicing shops.
Additionally, today we are releasing a set of numbers for
all servicers direct for the consumers to have--all 800 numbers
for all 25 servicers--and that is attached to our testimony, so
that in all of your offices, you will have a way to reach all
these loan servicers, if your constituents call.
A major challenge is that the borrowers who are in trouble
are reluctant to call their servicers, and historically, one
out of two loans that went to foreclosure were never in contact
with their loans servicers. That statistic is changing. HOPE
NOW is part of that, as are many of the other efforts that have
been going on for some time to risk borrowers at risk.
HOPE NOW has an aggressive monthly direct mail outreach
campaign to at-risk borrowers. It is a very targeted campaign
for those servicers who had had no contact with borrowers,
despite numerous attempts to reach them. In November, HOPE NOW
sent about 220,000 letters out to borrowers, and early response
shows 16 percent of those borrowers responded.
Through January, we will see close to 700,000 letters sent
to these most at-risk borrowers who otherwise would go to
foreclosure, and we are encouraged by the early results of the
most at-risk population.
For the November result, 21 percent of those who received a
letter in November improved or maintained their delinquency
status by making at least a payment. Forty-three percent of
those who responded are in some sort of active loan mitigation
or modification efforts. None of these borrowers had been in
contact with their servicers prior to the outreach.
We are also actively providing nonprofit counseling to
homeowners through our 888-995-HOPENOW hotline that is run by
the Homeownership Preservation Foundation. This hotline has
been in existence since 2003, and it has ramped up
significantly this year, and you will hear some statistics of
how they are manning the hotline and getting borrowers back
into the servicing shops.
It is having a dramatic impact. Since the hotline's
inception in 2003, 373,000 borrowers have called this hotline.
In 2007 alone 245,000 calls have been made into the hotline,
and those calls resulted in more than 83,000 homeowners being
counseled in 2007.
Call volume in 2007 alone has increased tenfold in December
from the beginning of 2007. By February 1st, we will have 400
housing counselors assigned to this hotline to help man the
line and keep capacity and all of the activity in line to
accommodate all the calls.
Last night President Bush cited HOPE NOW in the State of
the Union address, and Secretary Paulson and HUD Secretary
Jackson have urged homeowners in trouble to call the hotline.
All of this attention does give more opportunity for borrowers
to reach the servicers.
Ms. Sanchez. Ms. Schwartz, your time has expired.
Ms. Schwartz. Oh, no. Okay.
Ms. Sanchez. Final thought, or----
Ms. Schwartz. Well, I would like to speak to some of the
metrics, and you will see on the board to my left we are going
to measure all the metrics going forward. We now comprise the
majority of the subprime market and the prime market at that
point, so I think we are going to have some very good
statistics to share with you and be transparent about all our
results. We look forward to it.
[The prepared statement of Ms. Schwartz follows:]
Prepared Statement of Faith Schwartz
Ms. Sanchez. Thank you.
As you will notice, we have had a series of buzzers go off
that has signaled to us we have votes pending across the
street. Since we have about 6 minutes to get across the street
to vote, we are going to stand in recess. When we return from
votes, we will hear the testimony of Mr. Dodds and Mr. Carr. So
we are in recess. Thank you.
[Recess.]
Mr. Johnson. [Presiding.] Okay. This hearing is now called
back into order.
And before we get started, I would like to, by way of
unanimous consent, include the following documents into the
record. Number one, a statement by the Honorable John Conyers,
the Chair of the full Committee. It is dated January 29th. Also
I want to include an article out of the Detroit Free Press
dated January 29, 2008, entitled, ``Will the State Stay Third
in Foreclosure Rate?'' referring to the State of Michigan.
Also, a statement of the National Association of Consumer
Bankruptcy attorneys dated January 29, 2008, entitled,
``Hearing the Growing Mortgage Foreclosure Crisis: Identifying
Solutions and Dispelling Myths.'' Also a study by Professors
Adam J. Leviten and Joshua Goodman from Georgetown University
Law Center dated January 28, 2008, entitled, ``The Effect of
Bankruptcy Stripdown on Mortgage Interest Rates.''
Also to be included in the record would be a chart that is
from AlixPartners, page 13, that depicts an overview of the
subprime lending industry. And last, but not least, a statement
from the Center for Responsible Lending, a rebuttal to the ABA
bipartisan House Resolution 3609. It is dated January 28, 2008.
And that having been accomplished, we will now resume our
testimony. Now, we will go Mr. John Dodds.
Mr. Dodds?
TESTIMONY OF JOHN DODDS, DIRECTOR, PHILADELPHIA UNEMPLOYMENT
PROJECT, PHILADELPHIA, PA
Mr. Dodds. Thank you for having me today. I am John Dodds
from the Philadelphia Unemployment Project. Our organization
has spent many, many years working on protect homes of
homeowners. We work directly with people facing foreclosure. We
have worked in Pennsylvania. We have the only state foreclosure
prevention program in the country, which has helped over 40,000
families save their homes.
Recently, I was in Cleveland, Ohio, looking at doing a tour
there. I can tell you it was a very appalling situation, the
number of abandoned properties everywhere we looked, properties
being stripped of aluminum siding off the walls sold for
scrap--very, very depressing.
And there we have in front on the subprime problem. Their
foreclosures have already started. Properties are going for
$14,000 a year, if people will buy them in those neighborhoods.
And people can't even sell a house for that amount.
We are trying to stay out ahead of that in Philadelphia. We
are doing a little better there. I am thinking the whole
country would want to stay ahead of that. We don't want to see
these subprime loans turn into foreclosures and abandoned
property.
We have two million subprime loans that are going to reset
in the next 18 months, and the question is how do we keep these
loans performing? I think that is what everybody wants--to see
these loans perform--and we think that they ought to be
modified, that the terms are not affordable for people. Very
often people were sold a bill of goods, or maybe they over
promised or whatever, but it is bad for the entire economy for
these loans to go bad and to foreclose with the kind of numbers
we could see.
So also, in Philadelphia we have many, many neighborhoods
were over half of the loans are subprime. Now, we right now do
not have too much abandonment. If these loans go through in the
next 18 months, we could see many, many abandoned properties,
which will deteriorate the property values of the homeowners
that haven't lost their homes, too. Abandoned properties
obviously bring down values quickly.
So affordable loan modifications is what we think needs to
happen, but it is not going to happen to scale, and I want to
tell you why. We work with homeowners every day. One thing is
that mortgage companies have had a long history of basically
being collectors. They collect bills. If you don't pay,
somebody calls you and says, ``Pay, or else.''
Now, we are trying to switch to a different mentality. We
are going to do loss mitigation. We are going to work this out.
We have found that this is very difficult. We have homeowners
that are not being offered affordable deals at all. In fact,
they are being offered deals--double payments, things like
that, when people can't afford.
I have with me today Janice Freeman, who was with Wells
Fargo. She got behind in her mortgage. No deal was offered. She
ended up in a bankruptcy.
Ms. Freeman, do you want to stand up?
She ended up in a Chapter 13 bankruptcy, because she didn't
know what else to do. She was told, ``Forget it. You have got
to pay everything, or else.'' She got into bankruptcy.
Bankruptcy doesn't work right now. This is why this
legislation is important. She paid her lawyer over $2,400 over
a period of time to get into bankruptcy. Her payment was raised
from $1,147. She had to pay another $400 a month, because she
couldn't pay her mortgage, so they put her in a plan in which
she would pay the mortgage plus $400 plus the lawyer.
She ended up three different times she got behind. The
lawyer had her file again, $350 each time. Now, she only owed
$3,500 when she got into this situation. Now her bankruptcy is
dismissed.
We are working with her right now to get a loan
modification. That is what she should have had--terms that she
can afford. This is what this legislation would do, which would
put people in a situation where bankruptcy would actually
change the terms so they can afford it. Bankruptcy right now
just makes you pay your current mortgage plus, which people
can't do.
The other thing is people get put into payment plans,
payment plans that they can't afford at all. They should be
getting--once again, I think what HOPE NOW is hoping for, and
many of us are hoping for is--loan modifications that make
sense.
But Janice Lee, who is also here, was offered double
payments. She finally got herself into--after a very aggressive
young woman--she finally got a decent payment plan. It is good
for 6 months. At the end of 6 months, she has got a $10,000
balloon payment. There is no way she can make that payment.
So what we think has to happen is loan modifications have
to happen in large scale. We just don't think it is possible in
the terms that we have. In the next 18 months, the lending
companies are not going to be in a position to do these. These
are time consuming. They have to collect all kinds of data--pay
stubs, bills, and so forth.
We had a nice time with Countrywide, where we are working
with the top executives. They offered us a pipeline to get our
things done quickly. We sent down about a dozen loans--
Countrywide Mortgage delinquent mortgages--and a month letter
people are starting to get sheriff sale notices. They are
starting to get foreclosure notices.
We called Countrywide. We have a special hotline for
advocates. We are advocates. We called, and they said, ``You
know what? None of your papers have gotten through imaging
yet.'' They are all in imaging, meaning they hadn't been
copied, so nobody had even looked at one of the documents a
month later.
I think that that is what is going to happen all over this
country, as this tidal wave of foreclosures comes through. And
even to the good-hearted lenders that are trying to work this
out, there is going to be a volume problem, and I think we are
going to see that. And we are seeing that, and that is what we
are seeing, that the people aren't getting these done.
Then where are they going to go? They are going to lose
their homes. Or there will be a safety valve. We think that
this legislation will be a safety valve. 3609 will be a safety
valve, so at that point, when they are in foreclosure, that
they can go file a bankruptcy, and then the judge will be able
to modify the terms to make them affordable.
One thing that----
Mr. Johnson. All right, Mr. Dodds, your time has expired.
Very sorry.
Mr. Dodds. Okay. Well, thank you. So we think it is a
problem, and this is a solution, not the only solution, to a
real world problem that is not going to get fixed by just talk.
[The prepared statement of Mr. Dodds follows:]
Prepared Statement of John Dodds
Mr. Johnson. Thank you.
Mr. Dodds. Thank you.
Mr. Johnson. All right.
Mr. Carr?
TESTIMONY OF JAMES H. CARR, CHIEF OPERATING OFFICER, NATIONAL
COMMUNITY REINVESTMENT CORPORATION, WASHINGTON, DC
Mr. Carr. Good afternoon.
Mr. Johnson. Good afternoon.
Mr. Carr. On behalf of the National Community Reinvestment
Coalition, I am honored to participate in the hearing today.
Regional economic downturns, speculation on skyrocketing
home values, and widespread and unfair and deceptive mortgage
lending practices have combined to create the perfect
foreclosure storm in America. Common to all three of these
contributing factors is the reality that effective regulation
of the markets would have greatly limited the foreclosure
damage we are currently experiencing.
Moreover, unfair and deceptive practices contributed to the
other foreclosure related stimuli. By offering products, for
example, based on inadequate underwriting, and often combined
with fraudulent or otherwise inappropriate appraisals, these
loans gave the illusion of affordability to millions of
families and also in the process helped to create the housing
bubble.
It would be difficult to overstate the significance of the
collapse of the subprime market and its attendant foreclosure
crisis. The damage goes far beyond its direct effect on the
families who are losing their homes. The negative fallout is
impacting heavily the communities in which those foreclosures
are heavily concentrated, the national economy and
international markets.
As a result, homeowners across the country are now paying
for the extraordinary failure of regulation of the subprime
market, regardless of whether they had anything to do with a
subprime loan. Both the Administration and the Federal Reserve
Board have concluded that unfair and deceptive practices
contributed to the collapse of the subprime market.
The Federal Reserve has proposed rule changes pertaining to
subprime mortgage lending that address almost every aspect of
the lending process. It is a clear statement of the extent to
which lending abuses had become prevalent. Those rules address
issues ranging from the ability to repay loans, verification of
income, marketing practices, prepayment penalties, servicing
abuses, excessive broker fees and many other issues.
Their proposed rules are a good start. More needs to be
done to address this issue to purge it fully from the market.
Moreover, legislation is needed to forcibly address the housing
related institutions that are not covered by the Federal
Reserve.
The foreclosure crisis threatens the long-term stability of
the housing markets and the U.S. economy. Failure to stabilize
the housing markets would compound and make worse an economic
downturn, and a severe economic downturn would presuppose more
families to foreclosure.
Further, the deterioration in home prices threatens the
most significant asset held by the typical American household.
As a result, at a time when working families are worried about
stagnant wages, loss of employment benefits, rising health care
and energy costs, and ballooning consumer debt, failure to
mitigate further the deterioration of home equity could create
greater anxiety among the American public and a further loss of
consumer confidence that of course would be very harmful for
the economy.
There are several initiatives that have been discussed
already--FHA Secure and the HOPE NOW hotline. These initiatives
are essential, critical to addressing this problem, but for
reasons for which I would be pleased to discuss in Q&A, these
initiatives by themselves are not substantial enough.
Basically, it is the scale of the problem and the types of
solutions that are being offered.
As a result, the bankruptcy bill that is being discussed
today, H.R. 3609, would be an important added feature to help
homeowner who are immediately at risk of losing their homes.
Importantly, how they got there helps to justify the change in
legislation, and that is the reality that many of those loans
are predicated on unfair and deceptive practices. So as a
result, unwinding them is not unfair to the lending
institutions that put those consumers at jeopardy in the first
instance.
In the interest of time, I will conclude by saying as
Harvard University professor Elizabeth Warren pointed out, and
she is the person who coined the term ``exploding mortgages,''
families have had better consumer protection buying a toaster
or microwave oven than purchasing a home.
The time has come to help consumers who have been
financially damaged by failed regulatory policy in the mortgage
arena. That fix will not be cost free. There will be pain, and
it needs to be shared.
Equally, the time has come to eliminate predatory lending
practices from the housing markets once and for all. The
American public deserves better.
Thank you.
[The prepared statement of Mr. Carr follows:]
Prepared Statement of James H. Carr
Mr. Johnson. All right. Thank you, Mr. Carr.
Now we will----
Mr. Cannon. Mr. Chairman, may I ask unanimous consent to
include the statement of Mr. Chabot in the record?
Mr. Johnson. Sure.
Mr. Cannon. Thank you.
Mr. Johnson. Without objection.
[The prepared statement of Mr. Chabot follows:]
Prepared Statement of the Honorable Steve Chabot, a Representative in
Congress from the State of Ohio, and Member, Committee on the Judiciary
Mr. Johnson. Now we will move to questions, and I will take
the first few questions, and then I will turn it over to my
friend, Mr. Cannon.
Mr. Henderson, some have likened the predatory lending
practices in the subprime mortgage industry as the 21st
century's version of redlining. What are thoughts about that
assessment?
Mr. Henderson. Mr. Chairman, there is some truth in that
observation, although I think it is important, even in
examining the subprime market, that not all subprime lenders
should be criticized for the current state of affairs.
Subprime lending played an important role in providing
credit opportunities for individuals with impaired credit. The
difficulty we are witnessing today, however, is not because of
the existence of subprime lending.
It is subprime lending run amok without adequate regulation
and an abandonment of communities by conventional lenders, a
failure of regulators like the Office of Thrift Supervision,
the comptroller of the currency and the Federal Reserve to do
what it needed to do to ensure that there was a balance of
credit opportunity that included both conventional lenders and
subprime lenders, where appropriate.
So the combination of factors that we are witnessing today
that led to this difficulty was the existence or creation of
new products without appropriate supervision or regulation and
extending credit to individuals who clearly did not have the
ability to pay and averting the gaze of lenders from
circumstances that should have been an adequate warning that
the loans that they were advancing were problematic from the
outset. And it is that combination of factors that has produced
the results we are witnessing.
And one last point. The bankruptcy bill that Mr. Conyers
and Mr. Chabot have introduced is a modest step that is
intended to inject a pragmatic reality in allowing hundreds of
thousands of borrowers to adjust their circumstance without
doing violence--without doing violence--to the entire mortgage
lending industry. And that is an important part.
Mr. Johnson. Thank you. I will note, and I would ask for a
response from anyone on the panel, the notion that subprime
mortgages have been marketed to persons with credit scores high
enough to qualify for conventional loans with far better terms
and that it appears that there is some evidence that minorities
who could have qualified for the cheaper prime loans instead
were steered into the subprime loans--if anyone would care to
speak on that issue.
Mr. Carr?
Mr. Carr. The disproportionate reliance of subprime loans
with minority communities has been known for years. The State
of North Carolina, for example, instituted an anti-predatory
lending bill as far back as 1999, and so there is a cacophony
of research that tracks this.
The Federal Reserve study showed--I believe it was 2006--
that of all subprime mortgages outstanding, 55 percent of loans
to African Americans were subprime and 45 percent to Latinos
were subprime. A study last year--I believe it was in the third
quarter--showed that a substantial share of borrowers in the
subprime market actually had credit scores--I think it was over
60 percent--that would qualify them for prime mortgages.
And so this issue of steering is something that has been
known for years within the housing industry. It has been
documented extensively, and it is well known, and it is one of
the major concerns with respect to unfair and deceptive
practices within the industry.
And I might add that we are already beginning to see the
damage to African American households disproportionately as a
result of the foreclosure crisis. Between the second quarter of
2004 and 2007, the homeownership rate for African Americans
fell by more than 2.5 percentage points, compared to just .06
for non-Hispanic white households.
This is a very distressing circumstance, given the fact
that African Americans already have a homeownership rate which
is considerably below that of non-Hispanic white households.
Mr. Johnson. All right. Thank you.
And I would also point out for the record that a study by
the Consumer Federation of America has found that nationwide,
women are 32 percent more likely to receive subprime loans than
men.
My time just about being expired, I will not yield to my
friend from what state?
Mr. Cannon. From Utah.
Mr. Johnson. Utah.
Mr. Cannon. But would you mind yielding to the gentleman
from Florida, since he doesn't have to stay for this hearing,
and I probably do. If we can let him take his 5 minutes, he can
go do other things. Then I will take mine later on.
Mr. Johnson. All right. Certainly.
Mr. Cannon. Thank you.
Mr. Johnson. Sir, you have 5 minutes.
Mr. Keller. I thank the gentleman for yielding.
There is no question that people are hurting right now, and
a time when families are paying higher costs for mortgages,
health insurance and gasoline, I think it is morally wrong that
we ask them to pay even more of their money in higher taxes and
then turn around and use that on wasteful earmark projects.
We have seen progress just today in passing an economic
stimulus plan in the House of Representatives, and yesterday
President Bush wisely called for a crackdown on wasteful
earmark spending in his State of the Union address.
This afternoon we are looking at the third prong, the home
mortgage crisis. And the issue before us seems to be should we
allow contracts to be modified by the bankruptcy courts? Those
folks who are proposing this in their testimony say this is
really the one solution these people have facing foreclosure,
and they need relief.
The other folks on our panel have testified that this will
actually hurt first time homebuyers, because it will result in
higher down payments and higher interest costs, and we should
instead go with volunteer programs like HOPE NOW and FHA
Modernization. They point out that there is a reason the
current law for over 100 years has not allowed judges to
rewrite these home mortgages.
So let me try to take a balanced approach and get to the
bottom of this.
Let us start with you, Mr. Kittle. I have on my credit card
a rate of about 9.5 percent, but my home mortgage is about 5.5
percent. There is a reason that we pay a higher cost in credit
cards. Is that correct?
Mr. Kittle. It is.
Mr. Keller. And the main reason is the credit card is
unsecured, whereas the home mortgage is secured.
Mr. Kittle. That is correct.
Mr. Keller. And if we allow these mortgages to be
rewritten, I know that you have some concerns that this will
result in higher down payment costs for first time homebuyers.
Is that right?
Mr. Kittle. Yes, sir. It is.
Mr. Keller. Give us an idea. Are we looking at a 20 percent
requirement for some down payments? Or what do you anticipate
here?
Mr. Kittle. I can give you some precedent, some history.
Mr. Keller. Okay.
Mr. Kittle. In 1978, when the bankruptcy law was
rewritten--actually the last time--it then included in that
legislation investment loans. In 1978, you are the single-
family residential owner occupied in an investment loan for the
same price. After that legislation, you must have a 25 percent
down payment, your interest is as much as three-eighths percent
higher, and your fees and/or could be as much as a point and a
half more in discount points. That is because cramdown is
available on those types of loans.
Mr. Keller. So you are--and I got that number from the Wall
Street Journal--are you concerned the home down payments could
be as high as 20 percent requirement?
Mr. Kittle. We are concerned. Exactly.
Mr. Keller. And from your earlier testimony, you mentioned
your concern that interests rates for these first time
homebuyers may go up to a percent and a half.
Mr. Kittle. That is correct. A percent and a half higher.
Yes, sir.
Mr. Keller. You also mentioned a concern about higher
closing costs. I wasn't sure what you were getting at there.
Does that mean more in origination fees?
Mr. Kittle. Adding on additional fees because of the
additional risk.
Mr. Keller. Do you have a percent or estimate of what you
would see in terms of higher closing costs?
Mr. Kittle. If it neared the example that I just gave you
could be as much as a point or a point and a half in discount.
Mr. Keller. Okay.
Now, Ms. Schwartz, you have testified that historically
about half of the people facing foreclosure didn't even bother
to call their lender to renegotiate. Is that correct?
Ms. Schwartz. That is a well-known historic number.
Mr. Keller. Now, are you seeing some changes to that
pattern, now that we have the HOPE NOW program in effect? And
what changes are you seeing?
Ms. Schwartz. Well, we are seeing a number of changes. We
are introducing the third parties so that homeowners have
someone to talk to, an advisor to go to, if they don't care to
go to the servicer for whatever reason that might be. And
through the HOPE hotline, an extensive outreach effort, both
outbound and inbound, we are seeing a major shift in that
number. And we will be reporting on that throughout the year.
Mr. Keller. It seemed like a very meritorious program. The
criticism comes from the other side a little bit that it is
purely voluntary. And so what do you say to the person who is
facing foreclosure, and his particular lender doesn't
participate in HOPE NOW or have similar standards, and so he
feels that the bankruptcy option is his only option? What do
you say to that person as a remedy?
Ms. Schwartz. Well, I can only speak for the servicers that
are part of HOPE NOW, which is a vast majority of lenders in
the subprime market servicers.
Mr. Keller. Okay.
Let me ask Mr. Kittle that same question. What about the
person facing foreclosure, and his particular lender doesn't
participate in the HOPE NOW type of standards and practices?
What do you say to that person as a remedy?
Mr. Kittle. Well, most all of the servicers that are
members of the Mortgage Bankers Association--all of them, as a
matter of fact--are linked on our home loan learning center. We
give the borrower a direct link to that servicer. MBA will help
contact the servicer for the borrower, but we will send them to
HOPE NOW and encourage them. And you will contact that
servicer, even though they are not a member.
Ms. Schwartz. Oh, absolutely. The HOPE NOW hotline is for
everyone to call. And it is prime borrowers, subprime
borrowers. That is out there. It is in the public domain.
Mr. Keller. Mr. Chairman, let me just say my time is
expired. I will yield back, but if I had more time--and
hopefully some other people do--I was going to ask Dr. Zandi to
give the opposite on all those questions. So I was trying to be
balanced about it, but my time has expired.
Mr. Johnson. Thank you.
I would now turn to Mr. Mel Watt from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
I actually will pick up in a similar vein, because, as many
of you know, I have been talking for the last 3 or 4 years with
the lender and borrower consumer community, trying to work out
the appropriate balance on the new predatory lending bill that
the House passed. And one of the things I have found is that
quite often we talk past each other and don't really listen to
what people are saying. And we do it to our detriment.
One of the issues that I raised in the very, very first
hearing on the original bill that got amended through the
compromise with Mr. Chabot that we reported out was that there
is some possibility, as Mr. Kittle indicated, that we could be
incentivizing people to take the easy route and go into
bankruptcy. I think that personally would be a devastating blow
to people, if they took that easy route.
After that hearing, I invited the lender community to give
me some ideas about how we might be able to remove that what
might be a perverse incentive for people to go into bankruptcy.
And the lending community decided that it could stop this
bankruptcy bill as an alternative to trying to improve it to
address the concerns.
So I am still trying to figure out how to remove the
perverse incentive. I don't condemn the HOPE NOW project. It is
a wonderful project for the people who are able to take
advantage of it. But there are some people who are not going to
be able to take advantage of the HOPE NOW project, and there is
a group of people at the end of the day who won't have any
alternative other than bankruptcy.
And what I am trying to find is how we can limit the impact
of the bankruptcy cramdown provision to just that group of
people, because I have seen the adverse impact that going into
easy bankruptcy, or being talked into easy bankruptcy, can have
in the business community, in our community as minority
individuals. And so I want to focus on that a little bit.
One idea might be to create a gatekeeper, who would make a
really serious determination about whether bankruptcy was in
fact the only option available to save somebody's home for him.
One might be to create a series of findings that a bankruptcy
judge might have to make regarding this being the only
alternative available.
Mr. Carr, you seem to be shaking your head. You probably
have thought about this, because you know how terrible it is
for people to end up in bankruptcy as a first resort, rather
than as a last resort. Talk to me about how we can remove,
possibly, that perverse incentive for people to end up in
bankruptcy, because I heard what Mr. Kittle said. I have heard
what the concerns are about the bill, and I am concerned about
it, too.
Mr. Carr. Absolutely. I think Mr. Kittle raises a very
important point, and I think it is worth just going back to the
previous question to say I don't know that the objections--it
certainly is not in the community in which I travel.
I was just at a meeting with 14 of the largest lenders
yesterday. The issue isn't that the plans are voluntary. It is
what is it that the private market can realistically offer as a
loan modification that actually restructures the loan and makes
it permanently affordable? And that is the challenge. And most
of the modifications that are happening are not doing that.
While it may be true that the private market led the way in
getting us into the problem, the Federal Government has to lead
the way in getting us out. And that would lead to give
refinancing options that currently don't exist to consumers so
that they don't do bankruptcy, which no family optimistically
looks forward to claiming bankruptcy. But if that is the only
choice that they have, relative to some type of loan
modification or payment plan that simply tides them over for
another 6 months or 12 months or 18 months, it is not a
permanent restructuring.
And I just want to conclude by saying it is important in
this environment that we figure out that housing problem,
because the same estimates on interest rates one could generate
if the housing market continues to deteriorate. And in that
light, I think every one of us is on exactly the same page. The
question is how do we get consumers into long-term affordable
loan products that don't come back to recreate this problem in
another year, year and a half, or 2 years from now?
Mr. Johnson. Thank you, Mr. Carr.
Mr. Watt. Mr. Chairman, let me just make one final comment
on this point, because I think HOPE NOW is great. I think
raising the FHA limit is great. All of these things really are
tools that need to be in the toolbox, but at the end of the
day, there is going to be a group of people who don't have any
alternative to bankruptcy. And they need to have a tool also.
So if we could figure out a way to limit this bill and the
impact of this bill only to those people as a last resort, I
don't know why the lender community would want to fight that,
as opposed to going to foreclosure, selling it, selling the
house at 50 percent or 20 percent of the value, as opposed to
getting 80 percent or whatever the bankruptcy judge thought was
a reasonable cramdown figure.
And that nobody in the lender community has been able to
explain to me. It is a no-brainer. I yield back. And having
asked that question a number of times, I have yet to get an
answer.
Mr. Johnson. Thank you, Congressman Watt.
We will now proceed with questions from Mr. Cannon.
Mr. Cannon. Thank you, Mr. Chairman.
And Mr. Watt is keenly aware of the fact that we agreed
that this is the question. I think it is a hard question to
answer, Mr. Watt.
But what I am hearing you say, Mr. Carr, is essentially you
don't think that the private sector can do it or could respond
quickly enough, and so you support this bill because it brings
great pressure to bear on the private industry to act. Am I
reading that right?
Mr. Carr. Well, not really. I support the bill, because I
think it is an important channel for consumers who, if they
don't have access to this bill, will simply lose their homes,
because the modifications aren't going to help them.
But I am further saying that we need something that is
larger than just this bankruptcy bill as well and the programs
that are mostly focused on the voluntary reworking of the
mortgages. What is not available is a source of refinancing
that is large enough for this estimated two million or so
homeowners who are heading into foreclosure.
And I have some recommendations that I can put on the
table, but a lot of think tanks, for example, have been talking
about reinstituting a homeowners loan corporation, for example,
that was established during the Great Depression for a
foreclosure crisis that is analogous to now. There are ways we
could do that without establishing a new institution.
I am just simply saying I don't think that the private
sector can alone completely resolve this problem.
Mr. Cannon. Ms. Schwartz?
Ms. Schwartz. Yes, I would just like to maybe make one
slight clarification. It is daunting, but I think we are making
real progress.
One thing the American Securitization Forum did to help the
process and get to more borrowers, more homeowners, swiftly,
quickly and efficiently was to have one scalable solution for
the current borrowers, who are currently paying, have the
willingness and capacity to repay, before their reset. And that
guidance that was issued.
And also a comfort letter offered by the SEC so that
services could proceed on behalf of investors to modify loans
scalably will start to make a big impact on the future
foreclosures that are cited in the many studies. And that is
one of the reasons that it was done.
Secondarily, everyone can redeploy their resources to the
loan-by-loan delinquent borrowers who need it desperately to
see what is the cause for the delinquency. Sometimes it is
unemployment, or sometimes there has been a disruption, or
perhaps it was the reset that caused it. But whatever those
reasons, then they will redeploy all those resources. And yes,
it is loan-by-loan, but they have to know what is going on,
because that is the servicing agreement with the investor.
Mr. Cannon. Ms. Schwartz, do you think that the private
sector can respond in this program quickly enough to solve the
problem generally?
Ms. Schwartz. I am not sure we are the only solution, but I
can tell you the industry is going across the board with
nonprofits and investors, and they are all at the table, and we
are doing our best to do what we can to slow down and modify
these loans and stop these foreclosures. So we think it is a
huge effort, and it is going to show great impact. We already
have seen them.
Mr. Cannon. Let me direct a question to Mr. Henderson and
Mr. Dodds, because they are sort of on the front lines here.
There is unease about--even Ms. Schwartz acknowledged--that
they would be hard to do. I would point out that I read
someplace in the last couple of days that interest rates are
now nudging down under 6 percent, which is a marvelous tonic
for this whole thing.
Ms. Schwartz. Yes.
Mr. Cannon. That is a really, really big deal. But you both
represent or have dealt with people who have problems and are
struggling with mortgages. You are also both advocates for
people owning their own homes, and that means being able to buy
in at a relatively cheap rate. I don't think anybody has been
critical of the numbers that Mr. Kittle has suggested.
In the balancing that we need to do here, and given the
cost, especially the much, much, much higher down payments that
we are talking about, we know that people can somehow live with
a larger payment, if they can budget it, so the extra point and
a half or so in closing costs, people can maybe live with that.
But a 20 percent down payment puts most houses beyond most
people.
Shouldn't be wary of doing or creating a cramdown in this
bankruptcy bill that will put a much higher threshold before
people buying houses?
Mr. Henderson. Certainly, Mr. Cannon, were that to be the
result of the proposal before us today. It certainly would be a
cautionary issue worthy of further examination. But having said
that, I do not believe that the current bill will result in the
loss of homeownership opportunities of the magnitude that you
have described. We are back----
Mr. Cannon. Because of the shortness of my time, can I just
ask do you disagree with the idea that Mr. Kittle has
presented, which we have many times? I think Mr. Zandi also
gave us statistics like this in an earlier hearing----
Mr. Henderson. Yes.
Mr. Cannon [continuing]. That the down payment is going to
go up.
Mr. Henderson. I don't dispute the fact that the down
payment will go up, but I also recognize that there is a need
for a more comprehensive adjustment in the mortgage lending
system to prevent that result from occurring.
The question that Chairman Johnson asked earlier about
whether there is steering that put a disproportionate number of
African Americans, Latinos, women and older Americans in the
subprime market is true and well documented.
Having said that, we certainly encourage homeownership
opportunity, but that involves a more comprehensive adjustment
in the mortgage lending system with more regulation of banks
and traditional lenders, fulfilling their fiduciary
responsibility in the communities in which they function.
Our particular concern about the notion that voluntary
efforts will result in a positive outcome is belied by the fact
that over almost a year our organizations have been meeting
with groups like the Mortgage Bankers Association and others,
trying to seek a more coordinated loan modification program.
We talked about a 90-day moratorium on foreclosures to give
both borrowers and lenders an opportunity to restructure these
loans. Voluntary efforts have been woefully inadequate, and the
evidence of that is borne out by the increasing numbers of
foreclosures month after month.
If there is not a modest intervention in the market by the
Federal Government, it will be virtually too late to serve
those who are actually legitimate borrowers who in fact are in
need of support.
And to suggest somehow that Chapter 13 is the easy way out
ignores the fact that there has been a substantial adjustment
in our bankruptcy laws over the past several years, making the
consequence of filing bankruptcy more difficult than ever
before. It is not an option of first resort for many people. It
is an option of last resort.
But as you saw from some of the people that Mr. Dodds
brought with him, the consequences of a failure to address
these issues is the loss of home, the loss of equity. And for
many people, like African Americans and Latinos, this
represents the greatest loss of wealth ever documented in
modern times. That is something that we are deeply concerned
about.
Mr. Cannon. Mr. Chairman, I see my time has expired. Do we
have the possibility of a second round here?
Mr. Johnson. Yes, I think that would be appropriate. And if
you want to continue with your 5 minutes in the second round,
or would you want to wait?
Mr. Cannon. I think I would actually like to continue----
Mr. Johnson. All right.
Mr. Cannon [continuing]. Because we are getting to the gist
of the argument here. There is a radical agreement on many,
many issues here, and we divide on some basic ones.
And so, Mr. Dodd, I would like to hear. Do you basically
agree with what Mr. Henderson said?
Mr. Dodds. Yes, I think the voluntary efforts are going to
be woefully short for people, though. We are talking about
scaling. But in the next year and a half, two million loans are
going to be going----
Mr. Cannon. Let me intervene, because you sort of said that
earlier, and I really want to get to the deep issues here.
People don't voluntarily do things, especially people who are
sitting out on the sidelines with investments----
Mr. Dodds. Right.
Mr. Cannon [continuing]. Or with guarantees on investments.
And, in fact, I believe Mr. Zandi, you would like to
comment at this point about Moody's role in the subprime
problem with its over rating of the mortgage backed securities.
Mr. Zandi. No, I don't want to talk about that at all.
[Laughter.]
Mr. Cannon. All right, but there is a problem. You
acknowledge the problem.
Mr. Zandi. That is not my purview, and I am not part of the
rating agency, and I am here as a----
Mr. Cannon. But the point is----
Mr. Zandi [continuing]. We will go around, and all of us
are in this together.
Mr. Cannon. I don't mean to beat the heck out of you right
now. The fact is we have so many people, and we have such a
complex process that has led to this very high level of
homeownership with low down payments, and some abuses.
Mr. Carr, you talked about the abuses.
Mr. Dodds, you talked about the abuses.
Mr. Henderson, you also talked about the abuses.
But you can't have a free marketplace without some rough
elbows here and there, not that we should condone rough elbows,
but now we are talking about having had a failure, it is one
thing to say that it doesn't work very well, but have people go
voluntarily in a path.
On the other hand, we are now looking at people who figured
it out. They have looked in the gaping jaws of the beast, and
they are saying, ``We have a big problem.'' We have got write-
offs. Last week's Business, we got a list of all the write-
offs. It is a stunning--it is a stunning--number of write-offs.
And people everywhere have been writing down these kinds of
loans.
And so now you have--I think, is it fair to say, Ms.
Schwartz, that there is an incentive out there on the part of
the private industry to come together and solve the problem?
Ms. Schwartz. Yes. All the incentives are aligned. There is
no good outcome in these foreclosures, and we are working hard.
Mr. Cannon. And as I understand--Mr. Dodds, I am going to
give you a chance to talk here, but--you have every incentive
to keep your people from going to bankruptcy and to working
through a system, if you can get these guys in the private
sector to work with you. Isn't that the case? Mr. Dodds, yes.
Mr. Dodds. Mr. Cannon, I think one of the big problems is
that the lenders are not going to be able to communicate well
with these homeowners, that people, when they are in problems,
the real world is when people can't pay their bills, they don't
open their bills. They put them in corners.
Mr. Cannon. Right.
Mr. Dodds. And that may be----
Mr. Cannon. Look, I agree. I understand. That is a well-
taken point. But advocacy groups like you guys can reach out to
those people and help facilitate.
Mr. Dodds. You know what happens? When we send letters out,
they are getting letters from everybody under the sun. They are
getting flooded with letters, and it is very difficult to reach
these folks. And one of the groups that has done the best job
of reaching them are Chapter 13 lawyers.
Mr. Cannon. Yes.
Mr. Dodds. And I would say not in a good way.
Mr. Cannon. Right.
Mr. Dodds. They put them in bankruptcies they can't afford.
They have taken their money, and they have basically done a
disservice very often. But right now, if we change this law so
that bankruptcy would work, these people will go out and find
those homeowners. It will only be a safety valve. It won't be
the whole program. HOPE NOW continues. They would find these
homeowners, and they would get them in bankruptcy. The judges
would----
Mr. Cannon. Mr. Dodds, you are saying that you would trust
bankruptcy lawyers to solve the problem, because their
financial incentives are better than the guys----
Mr. Dodds. Yes, you are talking----
Mr. Cannon [continuing]. Who face a meltdown of the whole
economy after all their investments?
Mr. Dodds. You are talking free market, and part of free
market is these----
Mr. Cannon. I grant you. That is part of free market.
Mr. Dodds [continuing]. Finding homeowners and getting them
in programs, which the lenders are going to have a hard time
doing it. They are already having a hard time doing that.
Mr. Cannon. Let me just take the one point, not to be
argumentative, but I think we are getting here to sort of the
center of the issue. You have got somebody who gets a whole
bunch of bills. He can't pay his bills, because his mortgage
payment has gone way up, and he doesn't know what to do. How
dumb can a person be to not recognize that there is a big trend
in America?
Every single presidential candidate is talking about these
issues, and we are argue that they are a small player in a
large trend, and all we need to do is tell those people there
are forces out there that exist to help them. If we get that
message to people, then they come to people like you, and you
help them to----
Mr. Dodds. Again, I don't believe we can do the volume. I
don't believe that lenders are set up to do the volume. When we
did Countrywide, I am telling you, they couldn't even get the
stuff through the imaging department in over a month.
Mr. Cannon. That was a great story, Mr. Dodds.
Mr. Dodds. Even if they try, even if they try very well.
Mr. Cannon. What happens in our bankruptcy courts? We hang
up the bankruptcy courts in this dramatic fashion with all
these guys who got out and hustled business. And now everybody
has got a stay on their payments, and now the market is really
fouled up.
And I think, Mr. Kittle, you would like to speak. And I
think you have been very clear, and I am going to end by giving
you the floor.
Mr. Kittle. Thank you. I feel neglected just a little bit.
[Laughter.]
I will just give you one number. In the third quarter of
2007, our servicing members of MBA helped modify, worked out
over 236,000 loans in the third quarter. It is on a trend like
this. We need the opportunity, along with our members, the
market to correct itself, and HOPE NOW to take advantage of
lenders who want to help. We are making a difference. We think
we can handle the volume.
Mr. Zandi. I would like to make a point.
Mr. Johnson. The time has expired for Mr. Kittle.
I will now move to Mr. Watt.
Mr. Watt. I will let Mr. Zandi respond, because I still
think we are really talking past each other here.
I don't think the issue is the numbers at all--236,000. You
have got three million people who are in default or are likely
to be in default. So at the end of the day, there is always
going to be somebody that you are not going to be able to work
out. That is the person that we are trying to protect,
ultimately, and the person that lenders are so intent on not
having some external party make a determination about.
Lenders are not going to be able to do it, so why wouldn't
the solution to this require exhausting every other option
before you get to bankruptcy? And if your only option is
bankruptcy, why is the lender community so resistant to
allowing--I mean, bankruptcy was always intended as the last
resort.
Mr. Kittle, go ahead and tell me that. I have been waiting
on people to tell me.
You tell me, Mr. Zandi, and some on the other side.
Mr. Kittle. You give Mr. Zandi an opportunity, and I will
take it back, if you have time.
Mr. Watt. All right.
Mr. Zandi. Yes. At the end of last year of 2007, there were
450,000 loans in default, first mortgage loan default. That is
the first step in a foreclosure process. Then let us turn to
the board and look at the data. In the second half of last
year, we saw 250,000 repayment plans and 120,000 loan
modifications. When you do the math, they are not all covered.
Second point. Repayment plans do not solve anybody's
problem. They make the problem worse for the borrower. They are
going to end up in default. All they are doing is taking the
interest not paid, rolling it back into principal, and the
amount owed monthly going forward is going to rise. So you are
delaying the day of reckoning for these people, not by years,
but by months. So repayment plans--that means nothing.
Mr. Cannon. Would the gentleman yield for a clarification
here?
Mr. Watt. Yes. Sure.
Mr. Cannon. In those repayment plans, don't interest rates
get adjusted? So you have got a subprime mortgage that is going
to bounce? Are we not adjusting those interest rates?
Mr. Zandi. Those are modifications. Those aren't repayment
plans. No. And in fact in modifications, we don't know what
those modifications are. If you listen to the lenders--take
Countrywide, for example, to bring up a case in point--what
they are saying a modification is is that we are going to take
the interest rate and give these people--it is almost like a
repayment plan--give them some chance to repay what they owe
over some period of time.
Mr. Watt. And if I can just intone here, part of the
problem is the housing prices got bid up so high that the
houses aren't even worth trying to keep--a lot of them--
anymore, so if you don't cramdown to a manageable value for the
house, this is not going to work anyway.
Mr. Zandi. Mr. Cannon, this is a good idea. It is a
laudable plan. It is worth going down this path. But the
numbers don't suggest that it is going to solve the problem. It
may make a big dent.
And the other point is in terms of the cost, the cost will
not rise. I mean, if you look at the Federal Reserve, and they
said, ``Give your opinion, Freddie Mac, tomorrow. What would be
the impact on mortgage rates?'' well established research that
has been well refereed, gone through the Federal Reserve
system, discussed in many times, the number is 25 basis points.
I could go to Fannie Mae and Freddie Mac tomorrow with 25
basis points on a mortgage loan, so how in the world could we
possibly get to a point and a half on the mortgage rate, when
we are talking about this cramdown bill?
Mr. Cannon. Mr. Watt, would you yield?
Mr. Zandi. If we get rid of Fannie Mae and Freddie Mac----
Mr. Watt. I have been yielding for the last 5 minutes. Yes.
Mr. Zandi. Mr. Cannon, if we get rid of Fannie Mae and
Freddie Mac, there is no market.
Ms. Schwartz. There is no market.
Mr. Zandi. It doesn't matter what the percentage is at.
Mr. Cannon. Let me just ask Mr. Watt a question.
Doesn't it seem in this whole scheme, when people have bid
up and made improvident decisions on buying houses that are
overpriced, that the market ought to be allowed to correct
itself, and that we actually really can't affect the whole
from----
Mr. Watt. I am a firm believer in the market correcting
itself for the people who it can be corrected for. This bill
talks about people who--I mean, you know, even the minority
issue that Representative Johnson raised, the 60 percent that
Mr. Carr talked about that should have been in a prime loan in
the first place, they can get their loan refinanced as soon as
we raise the cap on FHA. They can go and get a good loan, if
the market quits steering and making discriminatory loans.
Those are not the people that I am worried about in this
bill. These are the people who have no other resort and end up
in bankruptcy as the only resort. Ms. Schwartz is not going to
be able to solve their problems. She is not going to sit here
and tell us, with a straight face or not with a straight face,
that she can solve every one of these problems in HOPE NOW.
HOPE NOW is a wonderful program for people who can afford
to refinance, reorganize, but some time at the end of the day,
there are going to be some people who can't afford to do that.
And what are we going to do about those?
Mr. Cannon. I ask unanimous consent that the gentleman be
granted an additional minute, because I want to ask a question,
Congressman. [Laughter.]
Mr. Johnson. Let Ms. Schwartz answer that question first,
and then you ask permission granted without consent.
Ms. Schwartz. For the record, HOPE NOW has been around for
3 months, and in the last 30 days, we brought on almost 10 more
servicers.
Mr. Watt. That is fine, but you know, you can bring on 500
servicers, but there are still at the end of the day, some
people who you are not going to be able to help. Isn't that
right?
Ms. Schwartz. Absolutely.
Mr. Watt. Okay. That is the only point I am trying to make.
Ms. Schwartz. But we can help hundreds of thousands of
borrowers----
Mr. Watt. And we want you to do that.
Ms. Schwartz [continuing]. A quarter, and that is what we
are talking about----
Mr. Watt. Which is why I am saying one of the solutions
might be to say, if somebody comes to bankruptcy, ``Okay, have
you gone to HOPE NOW and exhausted every remedy you can? Is
this your only resort?''--because I don't people to declare
bankruptcy, unless they have exhausted every other option that
they have.
Ms. Schwartz. And HOPE NOW is----
Mr. Watt. And I have invited the industry to tell me how we
can structure this so that only the people who are using it as
a last resort are the beneficiaries of it. And there has been
deafening silence----
Mr. Cannon. Would the gentleman----
Mr. Watt [continuing]. And there continues to be deafening
silence from everybody except Mr. Cannon.
Mr. Johnson. The time has expired.
Mr. Cannon. I ask unanimous consent that the gentleman be
granted one additional minute, because I just want to----
Mr. Watt. I yield that minute to you.
Mr. Cannon. I actually am trying to figure out who it is
you want to help, because those people who have been steered to
subprime loans who can now get prime loans are not people that
you are concerned about. They can do it.
Mr. Watt. They will go into Ms. Schwartz's program.
Mr. Cannon. Are you concerned about the people who paid too
much for their home? They have overpaid. The market is not
going to sustain that price, and so they need to be able to go
to bankruptcy to lower that price, to lower that mortgage
amount?
Mr. Watt. That is part of the group.
Mr. Cannon. Okay.
Mr. Watt. And maybe they will solve some of those problems
in Ms. Schwartz's deal. But somebody at the end of the day Ms.
Schwartz is not going to be able to help.
Mr. Cannon. I am not sure how big that group is, but if you
focus on that relatively small group, you will have this broad
market effect, which means 20 percent down, and I think there
is some agreement. Maybe it is only----
Mr. Watt. No, you don't believe that, Chris.
Mr. Cannon. I believe that if you get----
Mr. Watt. If you all believe that----
Mr. Cannon. If you----
Mr. Watt. You are not going to have that broad market
effect. If you get that little group of people who have no
other resort other than to go and appear in bankruptcy----
Mr. Johnson. Okay. I am losing control of this hearing----
Mr. Watt [continuing]. It is going to have a point and a
half worth of impact on the whole market? That is ridiculous.
Mr. Johnson. Okay, we have had good discussion here.
Mr. Cannon. One more comment.
Mr. Johnson. Mr. Cannon, go ahead and make your comment.
Mr. Cannon. Mr. Watt, if you can come up with an
identification of the group, I would be happy to work with you
on that. Then you won't have the broad market effect, if it is
a very, very narrow group. And I think that is what you have
been saying you have tried to work on.
Mr. Watt. That is what I have been saying.
Mr. Cannon. We will talk about that and see if we can't
come up with it.
Mr. Watt. That is what I have been saying.
Mr. Cannon. I don't think we can do it.
Mr. Watt. I will limit the number to just the people who
really need it.
Mr. Dodds. The other issue is that you have already
compromised this, so this only affects current loans. None of
this cramdown will affect anyone in the future, so I think----
Mr. Cannon. You have 7 years in the current bill. That is
the problem with that.
Mr. Dodds. Exactly. But it is going to end, if it passes.
So you are not going to talk about the future market. I think
that is the compromise that has already been put together to
prevent from occurring that you are talking about. I am not
sure where this giant increase in down payments is going to
come from in a bill that is only for retroactive subprime
mortgages, which I think the market itself is taking us out of
the subprime fiasco. Nobody is doing subprimes today, so that
to me seems to be an answer to the problem also.
Mr. Johnson. Okay. We will now go to Mr. Keller from
Florida.
Mr. Keller. Thank you, Mr. Chairman. Those who are
deafeningly silent wish to speak. And I have tried to get at
one side of the case through Mr. Kittle, and I am going to go
to the other side.
And the gist that I got from you, Mr. Kittle, before I move
on, is you believe that HOPE NOW, FHA Secure and FHA
Modernization are the best way to help this troubled subprime
crisis, because if we allow the courts to rewrite these home
mortgages, then it would result in future first time homeowners
having to pay higher down payments, higher interest rates and
higher closing costs. Is that a correct summary?
Mr. Kittle. That is correct. Along with higher loan limits
for the GSEs.
Mr. Keller. Okay. Thank you.
I am going to turn to the other side, and I am going to
tell you whom I am going to talk to--Mr. Carr and Dr. Zandi. So
you all listen to this, if you would.
So, Dr. Zandi, let me start with you. What do you think of
the concerns raised by Mr. Kittle that this could possibly lead
to higher down payments of as much as 20 percent, higher
interest rates going up as much as 1.5 percent and higher
closing costs as much as one or two points? Is that a concern
of yours? Or do you think those figures aren't going to happen?
Mr. Zandi. I don't think they are going to happen, no.
Mr. Keller. And why is that?
Mr. Zandi. Well, for a few reasons. First, I believe the
cost of foreclosure is measurably greater than the cost of
bankruptcy. Those economic benefits will accrue to somebody,
borrowers and lenders.
Mr. Keller. If you don't believe that those figures will
happen, do you believe there is a concern, albeit now 20
percent of some risk of higher down payment?
Mr. Zandi. No, I don't think there will be--not under the
current legislation.
Mr. Keller. And are you concerned that there might not be
an interest rate increase of 1.5 percent, but some interest
rate increase?
Mr. Zandi. No, I don't think there will be a measurable
increase. I don't think there will be a measurable increase.
Mr. Keller. Are you concerned, maybe not an increase of two
points for closing costs, but some increase in closing costs?
Mr. Zandi. No, I don't think the costs will rise. I do not.
Mr. Keller. Mr. Carr, the same questions to you. Do you
have concerns about the possibility of higher down payments,
interests rates or closing costs, if this bill were to pass?
Mr. Carr. Not at all. I don't believe that they would be
significant. I think they would be modest. But I would point
out, and ask Mr. Kittle to excuse me if I am attributing the
wrong organization, but I thought it was a remarkable statistic
I read recently that showed 40 percent of the foreclosures in
the third quarter were actually loan mods, which means those
mods are not sustainable.
Mr. Keller. Okay. And we will let you all deal with that
later. I just have a limited amount of time. The gist of what I
got from you, Mr. Carr, earlier is the challenge is not that
this is a purely voluntary program with all these entities
participating in HOPE NOW. The challenge is even when they do
participate, the relief is inadequate, that further relief is
needed through this bankruptcy cramdown provision. Is that
correct?
Mr. Carr. That is correct, for the voluntary programs--not
FHA Secure, because that is a refinance.
Mr. Keller. Okay.
Now, Dr. Zandi, reading your testimony, you estimate that
about two million people could lose their homes and that this
legislation will benefit about a quarter of those, 570,000
people. What about the remaining three-quarters? How will they
seek to remedy their troubling situation of facing foreclosure,
if this bankruptcy cramdown legislation is not going to be
their result?
Mr. Zandi. I think no matter what we do, there will be
many, many foreclosures. I think, given the stunning decline in
housing values, which are only accelerating, given the
weakening job market, given the ARM resetting, given the deep
recessions in places where people are losing homes----
Mr. Keller. Don't you think many of those would in fact
benefit from things like HOPE NOW and FHA Secure and FHA
Modernization?
Mr. Zandi. Absolutely. Absolutely. I am very supportive of
those ideas. I think they are all very good ideas. I think they
are too small, and they are not going to be effective enough.
And I think that the proof is in your data right in front of
you. You can see it. It is not going to work sufficiently.
Mr. Keller. Okay.
Mr. Kittle, you have heard from two well-respected people.
They are not concerned about the down payments going up or the
interest rates going up or the closing costs going up. Do you
have a rebuttal as to why you think they should be concerned,
but aren't?
Mr. Kittle. Well, the precedent has been set in 1978 with
investment properties. I mean, that is something that is there.
It has been there. Those costs on those loans have gone up.
If you talk about one of the comments that were made that
this is retroactive, fear is what is driving the stock market
right now. Fear is what is driving our economy. It is fear with
our servicers and lenders and our members that Congress will
come back the next time and when it won't. So fear is driving--
--
Mr. Keller. Even if it is 100 percent concrete retroactive,
the market may say, ``Heck, Congress could come in and bail
these folks out just like they did in the past. I am not going
to make this loan at a competitive rate.'' Is that what you are
saying?
Mr. Kittle. Generally, with all due respect, once Congress
starts, they don't stop.
Mr. Keller. Dr. Zandi, your response.
Mr. Zandi. Two responses. First, with regard to the
investor property, the difference in interest rates is a point
and a half between investor property and single family occupied
homes. That point and a half is due to the much higher credit
risk involved. If you give money to an investor, there is a
much higher probability of default. You need to be compensated
for it.
It has nothing to do with cramdowns. It has to do with the
higher probability of default. So I don't think that point and
a half has anything to do with these differences in cramdown
legislation.
Mr. Keller. Okay. I would love to keep going. I have got
more questions, but my time has expired, so I will yield back.
Mr. Johnson. Thank you, Mr. Keller.
Mr. Kittle, what is most expensive to the lender? Would it
be a foreclosure, or would it be a bankruptcy under the
Conyers-Chabot compromise bill?
Mr. Kittle. Well, we haven't seen anything go through under
the compromise, and I know that the average cost of a
foreclosure is around $30,00 to $40,000 to the lender. We are
talking about long-term damage to the lender, something that is
not even there yet.
Mr. Johnson. And in addition to those expenses to the
lender, you would have the loss of the property to the
borrower, the effect on the surrounding community of vacant
homes, which then contribute to a loss of property tax
revenue----
Mr. Kittle. That all depends on when a customer and a
letter get together----
Mr. Johnson. We have crime.
Mr. Kittle. It depends upon at which point the customer,
the borrower, and the lender start to communicate. There are
many things that happen where the property--they get it done
before the property is vacant.
Mr. Johnson. Well, given the fact that you have got so many
other costs associated with a foreclosure--cost to society--but
just looking at it from the lender's standpoint, $30,000 to
$40,000 it costs to foreclose, doesn't it seem that it would be
cheaper to allow a bankruptcy court to adjust the interest rate
and the payoff on a loan down to reflect market value, and then
the borrower is able, since he or she is in Chapter 13, to
repay the mortgage and at some point come out of bankruptcy?
Doesn't it make sense that you would have that option on
the table as one of the tools in the toolbox, as Congressman
Watt suggested?
Mr. Kittle. No, sir, it doesn't. It may be easier and
quicker, but the cost long term is much greater for future home
borrowers to the lenders. They will lose their loss of credit
enhancements. FHA by itself--right now there is a statute in
place that doesn't even allow cramdowns, so if cramdowns go
through forward, that portion's cramdown goes directly back to
the servicer on every FHA loan. My members, should this happen,
will no longer want to participate in the purchase and
origination of the FHA loans, which are for first time
homebuyers----
Mr. Watt. Will the gentleman yield?
Mr. Kittle [continuing]. Honest people out of this type of
situation.
Mr. Johnson. Mr. Zandi, how would you respond to that?
Mr. Zandi. I just want to respond to the point about FHA
and the enhancement. If you look at the 2006 HOMDET data and
look at those loans, those FHA loans, that would be classified
as subprime under this legislation, 300 basis points over
prevailing market rates, that would encompass less than 2
percent of all the FHA first purchase loans and just about a
little over 3 percent--3.1 percent--of refinancings.
So the universe we are talking about here is very, very
small.
Mr. Kittle. May I respond to that, please?
Mr. Johnson. I will yield to Mr. Watt.
Mr. Kittle. I would like to respond just to what he just
said, because the data that he just said is inaccurate, if I
may.
Mr. Watt. You all are arguing about data. We are trying to
find the solution.
Mr. Kittle. Well, this is the solution. FHA----
Mr. Watt. I don't think this the solution at all on this
issue. This is about whether this is a more viable solution
than foreclosure for somebody as a last resort. Now, the
question that----
Mr. Kittle. Part of your stimulus package is FHA reform.
Mr. Watt. No, I am not talking about stimulus package. I am
talking about somebody who is having their house foreclosed.
They aren't going to get $300 in the stimulus package. They
aren't going to get any of that. I mean, this isn't about a
stimulus package to me. This is about saving somebody's house.
Mr. Johnson. Reclaiming my time. [Laughter.]
Mr. Watt. Can I just make the point that I wanted him to
address that was related to this? In most states--North
Carolina is one of them--there is no such thing as a
deficiency, so you foreclose and you sell. You can't get
anymore than the cramdown value of the house. Usually, it is
going to be a lot less than the cramdown value of the house,
because some opportunist is out there, the only person that is
going to buy, and the point I am making is that the cramdown
figure is going to be higher than your foreclosure sale figure.
Mr. Johnson. And the time having expired----
Mr. Watt. I ask unanimous consent the gentleman be given
two additional minutes----
Mr. Johnson. Thank you for----
Mr. Watt [continuing]. At least one of them----
Mr. Johnson. Without objection.
Mr. Watt [continuing]. Let Mr. Kittle respond, because I
don't see how you think this is going to be more advantageous.
Foreclosure is going to be more advantageous--work out far more
advantageous. If you can work it out, it is great. But
foreclosure is not a better alternative than this bill will
provide to you in bankruptcy in most cases. Do you think so?
Mr. Kittle. My time? To answer your question, I am not only
concerned, but I am concerned, about the people whom you are
talking about. And if you could identify that small number,
like Mr. Cannon asked, that would be great. We would try to
address it, both HOPE NOW and as an industry in MBA.
But I am concerned about the long-term effect of a short-
term solution for your constituents being able to purchase
homes down the road. It is a postponed.
Mr. Watt. Mr. Kittle, I think you are being disingenuous--
--
Mr. Kittle. Not at all.
Mr. Watt [continuing]. Because the truth of the matter is
the long-term implication of your selling in foreclosure at a
figure that you can't even begin to approach as the cramdown
figure is a lot more devastating to the industry and a lender
than the cramdown figure is going to be.
Mr. Kittle. Well, I----
Mr. Watt. And you can't convince me otherwise. I think you
are being disingenuous with us now.
Mr. Kittle. Well, I am not being disingenuous, Mr. Watt. I
gave you figures in my testimony earlier, both written and
stated, of what we thought the cost of the cramdown would be.
We stand by those figures. We have precedence for those
figures.
Mr. Johnson. Reclaiming my time.
Mr. Henderson, did you have something you wanted to add?
Mr. Henderson. Yes, sir. I think, Mr. Chair, both you and
Congressman Watt have framed the issue appropriately, which is
to say whether foreclosure is a more costly result than the
result that would be accomplished by this modest interjection
in the market that this bill represents.
And again, when you total, as you suggested, not just the
cost to the individual borrower, who loses his or her home, but
the surrounding neighborhood, the impact on the community in
which the foreclosure occurs, the potential for increase in
crime, the other debilitating effects that this kind of
widespread housing dislocation has on these neighborhoods, it
is not incalculable, but it is obviously much more substantial
than we have talked about here.
And it does seem to me that the effort on the part of
Congressman Watt to try to define the population of people who
would most be affected by this bill and who would benefit is
the way to go.
I can't explain to you why you have had difficulty in
getting cooperation from the industry to identify that
population, but I can say that the effort to drive the industry
to coordinate a more effective response in loan modification,
as we have seen through the Hope Six program--we certainly
support these things.
These are all necessary elements to have on the table, but
they are necessary, but insufficient, to meet the magnitude of
the problem. And that is why this adjustment, which is only for
a period of 7 years and only applies to existing loans, is a
modest intervention that we think is timely and suited to the
magnitude of the problem.
Mr. Johnson. All right. Thank you, Mr. Henderson.
My time has expired, and I would like to thank all of the
witnesses for their testimony today.
Without objection, Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask that you answer as promptly as you
can, to be made a part of the record. Without objection, the
record will remain open for 5 legislative days for the
submission of other additional information and materials.
Again, I thank everyone for their time and patience. This
hearing of the Subcommittee of the Commercial and
Administrative Law is adjourned.
[Whereupon, at 4:36 p.m., the Subcommittee was adjourned.]