[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SUBPRIME MORTGAGE CRISIS
AND AMERICA'S VETERANS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
of the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 28, 2008
__________
Serial No. 110-74
__________
Printed for the use of the Committee on Veterans' Affairs
U.S. GOVERNMENT PRINTING OFFICE
41-374 PDF WASHINGTON DC: 2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
COMMITTEE ON VETERANS' AFFAIRS
BOB FILNER, California, Chairman
CORRINE BROWN, Florida STEVE BUYER, Indiana, Ranking
VIC SNYDER, Arkansas CLIFF STEARNS, Florida
MICHAEL H. MICHAUD, Maine JERRY MORAN, Kansas
STEPHANIE HERSETH SANDLIN, South HENRY E. BROWN, Jr., South
Dakota Carolina
HARRY E. MITCHELL, Arizona JEFF MILLER, Florida
JOHN J. HALL, New York JOHN BOOZMAN, Arkansas
PHIL HARE, Illinois GINNY BROWN-WAITE, Florida
MICHAEL F. DOYLE, Pennsylvania MICHAEL R. TURNER, Ohio
SHELLEY BERKLEY, Nevada BRIAN P. BILBRAY, California
JOHN T. SALAZAR, Colorado DOUG LAMBORN, Colorado
CIRO D. RODRIGUEZ, Texas GUS M. BILIRAKIS, Florida
JOE DONNELLY, Indiana VERN BUCHANAN, Florida
JERRY McNERNEY, California VACANT
ZACHARY T. SPACE, Ohio
TIMOTHY J. WALZ, Minnesota
Malcom A. Shorter, Staff Director
______
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
STEPHANIE HERSETH SANDLIN, South Dakota, Chairwoman
JOE DONNELLY, Indiana JOHN BOOZMAN, Arkansas, Ranking
JERRY McNERNEY, California JERRY MORAN, Kansas
JOHN J. HALL, New York VACANT
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Veterans' Affairs are also
published in electronic form. The printed hearing record remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing record, the process
of converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
February 28, 2008
Page
Subprime Mortgage Crisis and America's Veterans.................. 1
OPENING STATEMENTS
Chairwoman Stephanie Herseth Sandlin............................. 1
Prepared statement of Chairwoman Herseth Sandlin............. 33
Hon. John Boozman, Ranking Republican Member..................... 2
Prepared statement of Congressman Boozman.................... 33
WITNESSES
U.S. Department of Veterans Affairs, Judith A. Caden, Director,
Loan Guaranty Service, Veterans Benefits Administration........ 29
Prepared statement of Ms. Caden.............................. 59
______
Center for Responsible Lending, Ellen Harnick, Senior Policy
Counsel........................................................ 19
Prepared statement of Ms. Harnick............................ 45
Freddie Mac, Donald J. Bisenius, Senior Vice President, Credit
Policy and Portfolio Management................................ 5
Prepared statement of Mr. Bisenius........................... 37
HOPE NOW Alliance, Larry Gilmore, Deputy Director................ 21
Prepared statement of Mr. Gilmore............................ 51
NATIONAL ASSOCIATION OF REALTORS, Anthony Agurs, ABR, CRS,
Member, Board of Directors, and REALTOR, Agurs Group, El
Cajon, CA...................................................... 17
Prepared statement of Mr. Agurs.............................. 40
UniCredit Markets and Investment Banking, Roger M. Kubarych,
Chief U.S. Economist, and Henry Kaufman Adjunct Senior Fellow
for International Economics and Finance, Council on Foreign
Relations...................................................... 4
Prepared statement of Mr. Kubarych........................... 34
SUBMISSIONS FOR THE RECORD
Iraq and Afghanistan Veterans of America, Todd Bowers, Director
of Government Affairs, statement............................... 62
Mortgage Bankers Association, Kieran P. Quinn, CMB, Chairman,
statement...................................................... 62
Veterans of Foreign Wars of the United States, Justin M. Brown,
Legislative Associate, National Legislative Service, statement. 71
SUBPRIME MORTGAGE CRISIS
AND AMERICA'S VETERANS
----------
THURSDAY, FEBRUARY 28, 2008
U.S. House of Representatives,
Subcommittee on Economic Opportunity,
Committee on Veterans' Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:00 p.m., in
Room 334, Cannon House Office Building, Hon. Stephanie Herseth
Sandlin [Chairwoman of the Subcommittee] presiding.
Present: Representatives Herseth Sandlin, Donnelly,
McNerney, and Boozman.
OPENING STATEMENT OF CHAIRWOMAN HERSETH SANDLIN
Ms. Herseth Sandlin. Good afternoon, ladies and gentlemen.
The Committee on Veterans' Affairs Subcommittee on Economic
Opportunity hearing on the subprime mortgage crisis and
America's veterans will come to order.
I would like to call attention to the fact at the outset
that the Iraq and Afghanistan Veterans of America and Mortgage
Bankers Association have asked to submit written statements for
the hearing record, I ask for unanimous consent that their
statements be entered for the record. Hearing no objection, so
entered.
[The statements of Iraq and Afghanistan Veterans of America
and the Mortgage Bankers Association appear on p. 62.]
Ms. Herseth Sandlin. In July 1943, President Franklin
Delano Roosevelt recognized the need to invest in our Nation's
troops after their service to our country by highlighting that,
``The members of the Armed Forces have been compelled to make
greater economic sacrifice and every other kind of sacrifice
than the rest of us and they are entitled to definite action to
help take care of their special problems.''
One year after this speech, President Roosevelt signed the
``Servicemembers Readjustment Act 1944,'' which included
readjustment benefits to help our veterans with education,
housing, and employment opportunities.
Sixty-four years later, we on this Subcommittee, find
ourselves reevaluating that law and others to address the needs
of today's servicemembers, veterans, and their dependents.
While we have held at least nine Subcommittee hearings on
education and employment issues, today's hearing gives us the
opportunity to assess how the current housing market affects
our veterans and determine if the U.S. Department of Veterans
Affairs' (VA's) Home Loan Programs have a role to play in
addressing the foreclosures affecting our communities.
This past Tuesday, Realty Track, an online retailer of
foreclosed properties, released its January 2008 foreclosure
report that highlights that the foreclosure rate has increased
57 percent when compared to the same month in 2007.
It might be safe to say that no one on this Subcommittee
has seen more recent foreclosure rates in his congressional
district than Congressman Jerry McNerney in his metro area of
Stockton, California, which had the second highest rate of
foreclosures in 2007.
As we will hear from our distinguished panelists today,
data specific to veterans does not exist or is limited in scope
leaving us with an incomplete puzzle. This makes it harder for
us to get a good idea of how current mortgage problems are
affecting our veterans.
However, many of us have heard from returning
servicemembers that we represent and veterans back home about
the problems they have encountered. Problems such as that
expressed by Mr. Marty DuBois, a veteran concerned about losing
his home because he does not qualify for a VA home loan due to
equity requirements.
We have also heard several complaints from veterans
residing in high-cost residential areas in which the current VA
home loan is insufficient and this will effectively price them
out of the market.
As you can see on the television screen above, veterans
have been caught in the mortgage crisis and some economic
projections suggest that we should only expect the problem to
worsen.
The image of Mr. Hector Masas, a veteran emotional after
telling Senator Hillary Clinton about the difficulty he has
with paying his mortgage, was posted on yesterday's Washington
Post Express. Mr. Masas, and thousands of veterans like him
throughout our country, deserve better and we must do better to
ensure that they are afforded the protections they need as they
adjust to life after their military service, which includes the
stability and security of home ownership.
I look forward to working with Ranking Member Boozman and
Members of the Subcommittee to continue to improve readjustment
benefits available to all servicemembers and veterans.
I now recognize our distinguished Ranking Member, Mr.
Boozman, for any opening remarks he may have.
[The prepared statement of Chairwoman Sandlin appears on
p. 33.]
OPENING STATEMENT OF HON. JOHN BOOZMAN
Mr. Boozman. Thank you very much, Madam Chair.
The topic that we are going to be discussing and hearing
more about today certainly is a very timely topic for today's
hearing. Every day the media reminds us of the difficulties
facing our national economy because of the subprime mortgage
crisis.
It is clear from reading today's testimony that America's
veterans regardless of whether they have a subprime mortgage or
not, whether they are current in their payments or not, will be
affected in some way by this financial mess.
It is also clear from our witnesses' statements that there
is plenty of blame to go around. It appears that every level of
our national economic structure has played a role in allowing
this to happen.
It would be easy to blame just the borrowers who fooled
themselves into believing they would never be faced with
increased payments or the lenders and brokers who encouraged
such behavior with highly speculative mortgage products or big
investors in Wall Street financial services giants who appear
to have demanded increasingly risky transactions. I guess you
could say there was enough greed to go around.
So the question before us today is what can VA do to help
veterans stuck in the mess that they are in. Under current law,
their options are limited, but we must be careful here. The VA
wisely has maintained its underwriting standards and as a
result, taxpayers are not seeing their funds wasted.
The VA Guaranty Program is solvent and does not reflect the
difficulties in the subprime market. As we will hear from our
witnesses, the mortgage business is very complex with multiple
levels of markets, borrowers, lenders, and investors, and the
potential for negative unintended consequences is significant.
So we want to work hard, you know, to keep the VA program
stable and financially viable so that tomorrow's veterans will
benefit just as yesterday's and today's have.
So I look forward to any suggestions from our witnesses
that they may have to ease the situation.
Thank you, Madam Chair.
[The prepared statement of Congressman Boozman appears on
p. 33.]
Ms. Herseth Sandlin. Thank you, Mr. Boozman.
I would now like to welcome those on our panels today who
are testifying before the Subcommittee for the first time. We
appreciate your insights and the written statements that you
have already submitted.
I would like to remind all of our panelists that your
complete written statement has been made part of the hearing
record. Please limit your remarks to 5 minutes so that we have
sufficient time to follow-up with questions we may have once
everyone has had the opportunity to provide their initial and
opening testimony.
Joining us on the first panel, and I would like to invite
them to the witness table as I introduce them, Mr. Roger
Kubarych, Chief U.S. Economist for UniCredit Markets and
Investment Banking, and Mr. Donald Bisenius, Senior Vice
President of Credit Policy and Portfolio Management for Freddie
Mac.
Please let me know if I am not pronouncing your last name
correctly. I appreciate both of you gentlemen being with us
here today. We will start with you Mr.----
Mr. Kubarych. Kubarych.
Ms. Herseth Sandlin. Kubarych. Okay. Very good. I have the
emphasis wrong. Kubarych. Very good. Mr. Kubarych, thank you
for being here. You are now recognized for 5 minutes.
STATEMENTS OF ROGER M. KUBARYCH, CHIEF U.S. ECONOMIST,
UNICREDIT MARKETS AND INVESTMENT BANKING, AND HENRY KAUFMAN,
ADJUNCT SENIOR FELLOW FOR INTERNATIONAL ECONOMICS AND FINANCE,
COUNCIL ON FOREIGN RELATIONS; AND DONALD J. BISENIUS, SENIOR
VICE PRESIDENT, CREDIT POLICY AND PORTFOLIO MANAGEMENT, FREDDIE
MAC
STATEMENT OF ROGER M. KUBARYCH
Mr. Kubarych. Madam Chairwoman, thank you for inviting me
and Members of the Subcommittee.
Veterans are affected by the subprime mortgage crisis and
the broadening financial turbulence that has developed in at
least four ways.
First, some veterans are directly involved because they
bought homes financed by subprime mortgages which too often
contained a raft of abusive terms and conditions and now they
are unable to meet their obligations. Some may already be
facing delinquency or even loss of their homes through
foreclosure.
Second, many more veterans are impacted indirectly as a
result of persisting declines in home prices. One recent survey
say they are down 9 percent over the last year. It is not good.
So the equity they have in their homes is contracting and
standards of living will take a hit.
Third, all veterans are hurt by the diminished availability
of credit because of the squeeze on banks and other financial
institutions who made unwise investment decisions, suffered
losses that are now straining to repair wounded balance sheets.
And, fourth, veterans along with the rest of us are facing
higher costs of energy and other imports as a result of the
decline in the value of the dollar and the rise in commodity
prices, both traceable in part to the erosion of confidence in
our financial markets and our currency. These are big negative
effects and they could lead to a business recession.
I have been asked to try to give some historical
perspective of how we got into this mess and I have just a few
simple points that are not so simple.
One, securitization of mortgages is not new.
Securitization, the pooling of thousands of individual mortgage
loans into mortgage-backed securities that can be sold to
institutional investors in the marketplace, got started in the
early 1980s. It was so good that within a few years, it had
caught on so that over half of all mortgages were securitized.
And since 1995, it has always been over a half.
Secondly, securitization done prudently provides immense
benefits to nearly everyone, especially borrowers. It is more
efficient than traditional lending done as a single business
when you separate out the business into three: origination of
mortgages, loan servicing, and investing. That allows mortgage
market participants to amass expertise, advanced technology,
and to operate on a national, even global scale.
Three, securitization could not have thrived without
indispensable government support mainly from Ginnie Mae, Fannie
Mae, and Freddie Mac originally. These were government-
sponsored enterprises (GSEs). They facilitated the bundling of
loans into mortgage-backed securities by taking over the risk
of loss or default of individual homeowners and setting high
credit standards.
Four, subprime mortgages represented an almost
inconsequential part of the mortgage financing system until
early in this decade. The pivotal event was when Fannie and
Freddie, now stockholder owned and privately managed since the
early nineties, lost control of their operations and were
forced by Office of Federal Housing Enterprise Oversight
(OFHEO) to shrink.
Private mortgage banking stepped in, but not always
prudently. And as a result, we saw a development of a lot of
terms and conditions which on the face of it none of us would
recommend our own children or family members would take, but
people did in massive amounts. They were securitized and
resecuritized into mortgage-backed securities, collateralized
debt obligations, and other forms and by last year had reached
20 percent of all holdings of mortgage securities.
Growth of these mortgage-related securities created a time
bomb. We know what happened. It started last July and it has
gotten worse.
The next point is that the U.S. financial regulatory system
was ill-equipped to deal with abusive lending practices of many
financial institutions. Too many just fell through the
regulatory cracks.
Number eight, the rating agencies made poor judgments and
they awarded high ratings with little or no evaluation of risk.
Nine, institutional investors were lazy and cheap, lazy
because they did not do their own due diligence, cheap because
they did not hire other outside experts to help them.
And, finally, many borrowers overextended themselves by
assuming that the housing price boom would go on forever.
What do we do next? I do not have any big program to
recommend, but I do think that there is a role for specific
government support over and above the voluntary programs that
are now in place.
[The statement of Mr. Kubarych appears on p. 34.]
Ms. Herseth Sandlin. Thank you.
Mr. Bisenius.
STATEMENT OF DONALD J. BISENIUS
Mr. Bisenius. Thank you, Chairwoman Herseth Sandlin,
Ranking Member Boozman, and Members of the Subcommittee.
Good afternoon. My name is Don Bisenius and I am the Senior
Vice President for Credit Policy and Portfolio Management at
Freddie Mac. Thank you for the opportunity to address the
Subcommittee today.
Freddie Mac is a government sponsored enterprise or GSE
created by Congress with a public mission, to bring liquidity,
stability, and affordability to the Nation's mortgage markets.
Today's conventional conforming market that is supported by
the GSEs and the government market for mortgages backed by the
Federal Housing Administration (FHA) and VA are the only well-
functioning segments of the mortgage market.
The GSEs like the VA do not originate mortgages. We do not
control the loans that the primary market originates. What we
can do, however, is to define the mortgages we are willing to
purchase and guarantee. And because of our size and continued
presence in the marketplace, the GSEs can influence the primary
market.
Freddie Mac has participated in the subprime market as a
responsible and prudent investor. We have not historically
purchased or securitized subprime mortgages directly, but,
instead, limited our participation to investing in the least
risky segments of the subprime private label securities market.
This participation reflects our charter objectives to bring
additional liquidity to the market. It has also been an
important contributor to our efforts to meet our U.S.
Department of Housing and Urban Development (HUD) mandated
affordable housing goals.
In addition to providing liquidity, Freddie Mac has taken a
leadership role in addressing some of the excesses of the
subprime lending market.
Last winter, we were the first to announce that we would
restrict our subprime investments in securities backed by
short-term, adjustable rate mortgages (ARMs) to those that have
been underwritten to fully indexed, fully amortizing levels,
meaning we limited our purchases of the 2/28s and 3/27 ARMs
that were made to borrowers that were qualified at the highest
interest rate for the full length of the loan.
Last April, we also pledged to buy $20 billion in consumer-
friendly mortgages that provide better choices for subprime
borrowers. We have already exceeded that pledge. Since May of
2007, we have bought $42.5 billion of prime mortgages that
financed borrowers whose credit profiles would have otherwise
relegated them to the subprime market. That helped almost a
quarter of a million families.
As to the data related to veterans, we do not track whether
mortgages we buy go to veterans. Further, I am not aware of any
data that would tell us how many veterans have subprime loans.
But I think it is fair to say that the impact of this crisis is
at least as severe on veterans as it is on other borrowers.
When the subprime crisis erupted as a national issue over a
year ago, the conditional wisdom blamed the structure of the
short-term 2/28 and 3/27 subprime ARM, products where interest
rates are fixed for the first 2 or 3 years and then adjust, the
cause of the problem.
The theory was that exploding interest rate resets caused
large increases in payments and made mortgages unaffordable. We
have come to understand that the resets are not the only, nor
necessarily the most important, element of this story.
More fundamentally, the subprime foreclosure crisis derives
from a combination of looser lending underwriting standards and
subsequent house price depreciation that makes it impossible or
uneconomic for stretched borrowers either to sell or to
refinance into new higher-balance loans as they might have in
the past.
Unfortunately, there are too many borrowers stuck in
subprime loans who simply cannot qualify for prudent,
sustainable mortgages.
For example, as part of our subprime commitment, we
developed our Safe Step subprime alternative product. But when
we required originators to validate the borrower's income, the
property's value, and other information, borrowers simply could
not qualify.
At Freddie Mac, we spend a fair amount of time thinking
about how to address this situation. And like almost everyone
else, we have concluded that there is no silver bullet.
Nevertheless, let me quickly suggest some things that can
be done to mitigate its effects. Focus on servicing practices
to keep borrowers in their homes whenever possible. At Freddie
Mac, we have found that early intervention can help borrowers
avoid foreclosure and last year, we helped nearly 47,000
borrowers keep their homes through early intervention.
Help some borrowers refinance into more sustainable
mortgages such as Freddie Mac Safe Step or the FHA Secure.
Support community stabilization efforts of local and
national nonprofits and State and local governments hard hit by
the crisis.
And, finally, help families transition to more affordable
housing. Despite all of our efforts, not all borrowers can
afford the house they are currently living in.
The housing crisis is going to be painful and take time to
resolve. Freddie Mac remains committed to working with
Congress, the Administration, our lender partners, and other
industry participants to find and implement effective solutions
to this vexing problem.
Thank you for the opportunity to appear, and I would be
happy to answer any questions.
[The prepared statement of Mr. Bisenius appears on p. 37.]
Ms. Herseth Sandlin. Thank you, Mr. Bisenius.
Let me start with a question to you both based on, Mr.
Kubarych, what you said that we have to do something beyond
just the voluntary steps that may be taken by certain lenders,
certain banks.
In each of your opinion, who is best equipped and in the
best position to provide for loan modifications, for repayment
plans, and any other foreclosure prevention initiatives? Some
of which, Mr. Bisenius, you described as early intervention. Is
it the lender? Is it a different entity? Should it be
mandatory? What steps should we be taking in terms of an
appropriate Federal Government response?
Mr. Kubarych. So we started out with a program, basically
voluntary work-outs which is affecting a relatively small
proportion of those homeowners at risk. Until we stop the rise
in delinquencies, there will be continued downward pressure on
housing prices, particularly in those parts of the country
where subprime was particularly, let us say, overused,
California, Florida, Detroit, northern Ohio, and so on.
Now, we can identify quite easily the people who are most
at risk. And my simple suggestion is the U.S. Government is now
borrowing money in the markets for 5 years for about 3 percent.
And the same people, if they had to borrow on their own 5-year
money, it would be about 12 percent. There is a big spread
there.
If the U.S. Government utilizing existing agencies, FHA,
VA, and so on, were simply to set up a program to extend loans
to individuals so they could take the money and repay abusive
mortgages, they would be in a position to retain their houses
and to maintain the debt service on those new loans.
And the taxpayer would be a beneficiary of two things. One,
less downward pressure on everybody's home prices, which will
otherwise suppress the economy a lot, and, two, there will be a
reward to the taxpayer from the operation of such a system. It
is not as extensive as what we did in the depression. That was
much more elaborate and I do not think we need that much.
But in that expanded role, for the U.S. Government would
take a voluntary program, add a specific government lending
program to it that would be tailored for low- and medium-income
people for the houses that they are living in, not for
speculative or second homes, and all it would require is the
ability to prepay those abusive mortgages.
Mr. Bisenius. I have maybe just two additional thoughts to
his comments. One is what makes this problem particularly
challenging is the nature of the market. Historically, with
Freddie Mac and Fannie Mae being the two largest participants
in the overall market, we were very capable of being able to
define servicing standards, foreclosure prevention standards
that effectively became adapted as an industry standard.
In the private-label securities market, where most of the
subprime mortgages exist, there is not one entity. There are a
collection of investors who each have to independently decide
what they want done with the loans that they have invested in.
What we have observed is that many of the private-label
security investors are actually suggesting, and at times
requiring, that their servicer follow the standards set out by
Freddie Mac and Fannie Mae. So in some sense, they are
migrating to adapt our servicing standards both because they
have observed that they have been pretty effective at loss
mitigation and at helping homeowners stay in their mortgages.
So there is not one entity that can dictate in the private-
label securities market, but we are at least seeing a migration
of people adopting Freddie and Fannie type standards.
Ms. Herseth Sandlin. Thank you both for your insights.
Mr. Boozman, do you have questions?
Mr. Boozman. Yes.
Mr. Kubarych, could you comment on a statement that the
GSEs lost control of their operations. I think you mentioned
that and it was in your written testimony.
Mr. Kubarych. When they first started out, they basically
were facilitating securitization and providing comfort to
investors to buy those securities.
They got involved in buying their own paper and investing
in mortgages and they got to the point where they were one of
the biggest mortgage holders in the country. Some years, they
were buying more than half of the product that they were
generating and holding it themselves. They would finance that
quite readily because they had almost as good a credit rating
in the capital markets as the U.S. Government.
But this exposed them to enormous market risk, the
technical term is convexity risk, which has to do with the fact
that you cannot really predict the repayment rates of the
mortgages that they were holding. And they became one of the
world's biggest users of financial derivatives.
Now, that is a very tough business and they got involved in
accounting problems that led to a couple of Chief Executive
Officers leaving, a couple of Chief Financial Officers being
fired, and fines and other constraints by the regulator, OFHEO.
And that is how they lost control.
And only yesterday those handcuffs have been taken off. So
now they are viewed to have made tremendous progress toward
putting their houses in order.
While they were under these handcuffs, that was a great
opportunity for good institutions and bad to rush into the
mortgage market and do all kinds of lending which probably
would not have met their high standards and led to this
problem.
Mr. Boozman. How do you respond to that, Mr. Bisenius? In
your testimony, to me, you did not seem to acknowledge any
blame at all.
Mr. Bisenius. What I do is I separate out the phenomenon
that was described and suggest that while it is true that the
operating systems of Freddie Mac were not sufficient to be able
to properly account for the nature of the business that we were
taking on, that actually had little to do with the developments
that went on in the subprime market. In fact, what we observed
was that there were investors who were willing to take on loans
that were riskier and underwritten to looser standards than
what we historically would buy.
That market developed outside of us and even if we had
perfect financial books and been able to have been active, our
standards would have been ignored over the last 3 or 4 years as
other market participants either thought they understood the
risk better or who were willing to put capital at risk more
aggressively than we were.
What we have seen over the last year is as those investors
have lost money, more and more have come back to say we now
want to originate to the standards of Freddie and Fannie.
So I do not believe the accounting issues that Freddie and
Fannie had are directly correlated nor causal of what went on
in the subprime market.
Mr. Boozman. Mr. Kubarych, you mentioned regulated and
unregulated financial institutions. Can you give us some
examples of each one of those?
Mr. Kubarych. Well, one example is New Century Financial.
Based in California, but operating in many markets, it went
bust a year ago in February. And if you were to ask who is the
regulator of New Century Financial, I think that around the
main banking regulatory organizations a year ago, they would
have scratched their head and eventually maybe said that there
must be somebody in California that was the primary regulator,
but nobody really knew.
That was one example. There were many others. There have
been about 200 failures of mortgage banks of varying size not
all of which had any regulator and some who had regulators that
were unskilled in dealing with the kind of rapid growth in the
business they represented.
Now, Mr. Bernanke, Chairman Bernanke, has testified, and I
have listened in on a number of them, where he has pointed out
that the Federal Reserve had the responsibility for setting
certain rules for consumer protections and other rules of the
game, guidelines for mortgage activities and abusive tactics
and so on, but they do not have the enforcement powers. And,
you know, basically nobody really wanted to take the initiative
to say we want enforcement powers.
Mr. Boozman. Thank you, Madam Chair.
Ms. Herseth Sandlin. Thank you, Mr. Boozman.
Mr. McNerney.
Mr. McNerney. Thank you, Madam Chair. I want to thank you
specifically for holding this hearing and for bringing to light
the severity of the problem in my own district.
Mr. Kubarych, I am going to follow-up on Mr. Boozman's
question a little bit concerning how we got into this
situation.
You mentioned that there was a change in behavior at Fannie
Mae and Freddie Mac. What caused that change in behavior? Were
there new products out there? Was there a different economic
theory or was there a loosening of regulation on the Federal
level? What caused these managers to start making those kinds
of investments?
Mr. Kubarych. I think that they underestimated the risks
and they thought that they could earn higher rates of return
for their shareholders and get bigger bonuses. I mean, I think
that is what led them to be putting more and more of their own
product on their own balance sheets. And I think they were kind
of caught by surprise, blind-sided by just how risky it is.
I have been managing, off and on, mortgage portfolios a
good part of my career. It is very tough, very, very tough. It
is one of the hardest things in the fixed-income markets to do.
And they did it very well for periods of time. But then as the
volatility in the markets increased in this decade, it became
very difficult for them to do it as well as they should have.
So I think that has been cured, but it was not easy and it
has taken a long time.
Mr. McNerney. So it is just a difference in philosophy? I
mean, maybe new managers came in and saw that there was some--
--
Mr. Kubarych. I think a difference of incentives. I think
we were in a period where the incentives were to take more risk
because the shareholders wanted you to carve out rates of
return on equity that would drive the stock price up.
Mr. McNerney. Thank you.
Mr. Bisenius, you said that you did not track veterans that
are using the services. Is there some reason that is not done?
Do you think it is a good idea and if it is a good idea, what
are the obstacles to doing that?
Mr. Bisenius. I do not have a strong view on whether it is
a good or bad idea. We have never been asked to in the past. We
have not. The only obstacles would be whether the originator in
creating the loan captures that as a data field and is able to
deliver it into the delivery systems.
Mr. McNerney. So you do not have any specific ideas on
that? Do you have any specific ideas on how we can help
veterans specifically that are caught in this kind of a
foreclosure situation?
Mr. Bisenius. Well, I think it is twofold. The good news is
we do not differentiate either and as such we are helping all
the people who take out loans that Freddie Mac invested in,
veterans as well as nonveterans. And, therefore, we make
available to them all the loss mitigation efforts that I
described in my testimony.
My understanding is that the VA does similar types of loss
mitigation, foreclosure prevention type efforts. So I think
both the VA themselves, as well as Freddie Mac and Fannie Mae,
are taking similar actions with veterans as they are with other
borrowers in the products that we invest in and guarantee.
Whether those same activities are occurring for veterans who
are part of subprime or private label mortgage securities, I do
not know for sure.
Mr. McNerney. Thank you.
One more question. How helpful do you think it would be to
help families transition to more affordable housing or to get
them out of their expensive homes?
Mr. Bisenius. How helpful would it be?
Mr. McNerney. Yes.
Mr. Bisenius. I think it would be tremendously helpful.
Mr. McNerney. That is basically the goal?
Mr. Bisenius. Right. When we look at the underlying homes
and the incomes of the borrowers who are facing some of these
foreclosure situations, there is no way they have the income
with almost any amount of modification to be able to afford the
house that they are currently in.
Mr. McNerney. So we might look at that in terms of veterans
as a part of our Committee.
Thank you, Madam Chairwoman.
Ms. Herseth Sandlin. Thank you, Mr. McNerney.
Mr. Donnelly.
Mr. Donnelly. Thank you, Madam Chairwoman.
This first question, if you could just give me a quick
answer to. We are into this process now of working through
these loans. How much longer do you think this process is going
to go?
Mr. Kubarych. You want my guess?
Mr. Donnelly. Yes.
Mr. Kubarych. Two years. Yeah. I would bet somewhere
between 2 to 5 years.
Mr. Donnelly. You figure we are about 25 percent into it
right now, 20, 25 percent? When you figure the overall total
is, we are going to hit about a $1.5 trillion of loans on this
or about $1 trillion and that we are about $300 billion into it
right now?
Mr. Kubarych. Well, I figure there's $2 trillion in loans
that are at risk, that delinquency rates will get in the 20 to
30 percent range. So take 30 percent of $2 trillion.
Mr. Donnelly. Okay.
Mr. Kubarych. Of those that go delinquent, not all of them
will end up in foreclosure. And I think the number that seems
to be a good one is about a third.
Mr. Donnelly. Okay.
Mr. Kubarych. So a third times 30 percent times $2
trillion. Then take 50 percent of that because about half the
value of the house is erased in a foreclosure and there are
costs and all that kind of nonsense. And that will give you an
estimate of the dead weight loss on the economy, but that gets
multiplied through all the leverage in the collateralized debt
obligations (CDOs).
Mr. Donnelly. Right. The next question is, you had
mentioned a concept, and forgive me if I phrase it wrong, but
you are here to correct me, the government is borrowing about 3
percent.
Mr. Kubarych. Yes.
Mr. Donnelly. Some of these loans are at about 12 percent.
Mr. Kubarych. That is where they are going.
Mr. Donnelly. That is where they are going?
Mr. Kubarych. Yes.
Mr. Donnelly. Your idea is let us use some of this
government lending or borrowing power----
Mr. Kubarych. Right.
Mr. Donnelly [continuing]. To try to get reduced rates for
the homeowners?
Mr. Kubarych. That is right.
Mr. Donnelly. Okay. Now----
Mr. Kubarych. I put strings attached on the loan.
Mr. Donnelly. Right. And what I was wondering is, I have so
many questions, I am trying to get them into my time here, what
are some of those strings and then would the government
continue to handle all the loans as well or would we have
private servicers who handle it for us? What is your vision on
that?
Mr. Kubarych. I think the government is perfectly well-
equipped to service the loans.
Mr. Donnelly. Okay.
Mr. Kubarych. That is the least of our problem. I am sure
there are many servicers that would be delighted to bid for the
right to actually do the computer work. The strings are very
simple. Limits on the ability of the homeowners that do this to
borrow on their credit cards or entertain other kind of debt.
It really is very similar to what we are familiar with in
debtor-in-possession lending.
Mr. Donnelly. Okay. And what that would do is some of these
people who are going to bounce from 5-percent ARMs to 12
percent will be able to keep their homes?
Mr. Kubarych. Yes. That is the idea. I do not know what to
do about people that are so under water that they have huge
negative equity. That is beyond the scope of my limited idea.
Mr. Donnelly. What you are looking at is a process where
there is equity, where you look and you go this person with
this income can handle this house----
Mr. Kubarych. They can carry the 5 percent, but they cannot
carry the 12.
Mr. Donnelly. Right. Okay. Next thing I wanted to ask you
about is, or this is almost a statement, one of the things,
Madam Chairwoman, that is so disturbing to me in this past year
or two is in disability claims that veterans make.
We have a lot of vets coming back from Iraq and Afghanistan
who wind up making a disability claim who are injured and
cannot go back to their jobs and find themselves in this ARM
situation----
Mr. Kubarych. Yeah.
Mr. Donnelly [continuing]. Where they have this going off
in the next 4 or 5 months and they cannot get a hearing on
their disability claim for another 7, 8 months. So they do not
even have money to pay against where they are now and they have
this ARM going off. And it is almost a hopeless situation that
these vets are put in in some proportion because of the
disability situation that we face.
Mr. Kubarych. As a taxpayer, I just think it is a waste of
my taxes not to be doing that for them.
Mr. Donnelly. It is approximately 188 days now, I think,
that it takes. So you can come back injured from Iraq or
Afghanistan, not be able physically to handle your old job, and
then you do not even have the money to make present payments on
your ARM as opposed to the time bomb that is coming down the
road.
And then just as an aside, I wanted to mention that we had
veterans in my district who are losing their jobs this June at
a Citicorp statement processing center. And the reason they are
losing their jobs is because this statement processing center
is closing down, one of the most efficient operations in the
country, extraordinary productivity, they hit all their
targets, hit all their goals, because of what Citicorp did in
this subprime situation. They said, well, sorry. We screwed up
here on Wall Street in New York and we are closing down your
200-person processing center in South Bend, Indiana. You guys
did a good job. You are out of luck.
And so it is not only homeowners. It is the regular folks
all throughout the country who have been working hard and have
been devastated. As you said, what I see more than anything is
the chase for a bonus. It is a chase if I can catch a couple
extra points on return, we will get more in, my bonus will be
bigger.
Mr. Kubarych. Yeah.
Mr. Donnelly. Twenty million dollars is not enough. I need
a $30 million bonus. I think that is what we are dealing with.
Thank you, Madam Chairwoman.
Ms. Herseth Sandlin. Thank you, Mr. Donnelly.
Mr. Boozman, did you have any further questions?
Mr. Boozman. No thank you.
Ms. Herseth Sandlin. If I could just pursue this a little
bit further, I appreciate your willingness to give us your
estimates.
Mr. Kubarych, when you said, okay, if we could have a
specific government lending program, 5 percent, borrow that at
5 percent versus the twelve. I know Mr. Donnelly probed some of
the same questions I had, but I take it then that you think
that there are a certain number of these borrowers, maybe a
third of the 30 percent of the $2 trillion that is at risk,
that are not necessarily in homes they cannot afford, but they
just got a bad loan.
Mr. Kubarych. Right.
Ms. Herseth Sandlin. Do you have----
Mr. Kubarych. I cannot put it as precisely as a third. I
would say somewhere between a quarter and a half are in loans
that are defective----
Ms. Herseth Sandlin. Okay.
Mr. Kubarych [continuing]. With abusive conditions----
Ms. Herseth Sandlin. Okay.
Mr. Kubarych [continuing]. Exploding ARMs, misstatement of
terms, many of the things that you heard of before.
Ms. Herseth Sandlin. Okay.
Mr. Donnelly. Madame Chairwoman.
Ms. Herseth Sandlin. Mr. Donnelly.
Mr. Donnelly. This is to either of you and this follows up
on the Chairwoman's question. How many of these loans, what
percent would you say, are simply you look at it and even if we
fix it, the income just will not be able to carry it?
Mr. Bisenius. My best guess it would be at least a half.
Mr. Donnelly. So it is about half one way, half the other
way?
Mr. Bisenius. Right.
Mr. Donnelly. Okay.
Mr. Bisenius. Actually, a point relative to the earlier
comment is, one, with all of the recent rate cuts, the amount
of payment shock many borrowers are going to face has actually
gone down pretty significantly. They will still face some, but
the amount of shock that they are going to face today is
actually less than it would have been, say, a year ago when
rates were higher.
The challenge you have is many of these borrowers and the
lenders working with them created loans where they could barely
afford the payment at the start rate and, therefore, it is not
just the shock. It is they could not hardly afford what they
had and were hoping for house price appreciation to allow them
to either refinance or extract equity. In the absence of that,
they are now struggling just to make the payment itself.
Mr. Donnelly. Do you figure that in terms of the housing
market and housing values that it will stay either stagnant or
fall more until we work through this $2 trillion?
Mr. Kubarych. The average will fall more. But the
concentration of declines will still be greatest in those areas
that have the disproportionate portion of subprime mortgages.
In other words, in South Bend, Indiana, my friend John
Brademas used to be the Congressman from South Bend.
Mr. Donnelly. Well, I have been blessed to follow him.
And----
Mr. Kubarych. He is a wonderful----
Mr. Donnelly. He set an extraordinary record.
Mr. Kubarych. He is an extraordinary man. Anyway, the
volatility of housing prices in most of Indiana is much less
than in the Miami area, or in Phoenix, or Las Vegas, or Los
Angeles. There is no doubt about it.
But we are looking at a distribution. And there will still
be parts of your district in which prices will go down 10 or 15
percent, even though the average only goes down 1 or 2 percent.
And that is the key point here. We have a spectrum of
outcomes, which leave a noticeable percentage of people
disproportionately hurt. And my guess is a lot of veterans are
living in those kinds of neighborhoods.
Mr. Donnelly. Thank you, Madam Chairwoman.
Ms. Herseth Sandlin. Mr. Boozman.
Mr. Boozman. Again, I apologize. I had to run outside for a
second for a call. But the people that were making these loans,
was it more in an effort to figure out a product where they
could make loans to make money, or were the people that were
making them not devious enough to, I guess, in the sense of
figuring out a product so that people could qualify, make the
loan, so that you could do business that way, and never really
feel like the ARM would come into play like it is now? Or is it
more that they were just devious, and really felt well, I am
going to jack this person around down the line?
But to me that really doesn't make any sense, because that
does have the potential of getting us in the----
Mr. Kubarych. They were in business to earn commissions. It
was a commission-based business. They wanted to push out as
much product as possible, because they were getting paid
basically piece work.
Now what happened to the mortgages that they created was
that they were getting securitized, but not with the oversight
of a Fannie or Freddie with the strong credit standards.
They were being securitized. And then those securities
themselves were not being sold. They became mortgage pass
through securities. But no institutional investor was
particularly interested in them, because they were--they were
defective.
But then they were repackaged. Wall Street repackaged the
mortgage-backed securities into collateralized debt
obligations. They were able, with rating agencies' advice and
judgment, to package them in such a way that trenches, in other
words, parts of the CDOs were judged to be triple A. And other
parts were judged to be single A.
And lots of lazy investors, the world over and some very,
very big, you know, well-heeled institutional investors in Asia
and the Middle East and so on, were buying these tranches,
because they were rated triple A without any due diligence of
their own. They trusted the ratings. They trusted the
salesforce of the Wall Street firms that were presenting them
to them. Everybody told them this was a great deal.
And so nobody checked on the base. But it goes right back
down on the ability of the individual homeowner to keep making
the mortgage payments. And nobody asked that question.
And once they couldn't make the payments, the cash flows
that were supposed to go into the mortgaged-backed securities,
which went into the CDOs, they evaporated. And then everybody
asked: Gee wiz, does my CDO have bad loans in it too? Sell.
And so then you had the normal market response to go to the
other extreme. And that led to these fantastic losses. The
Congressman, Mr. Donnelly, mentioned one institution involved
in it. And that is why we had this gargantuan losses.
Mr. Boozman. We have seen that there is a portion of that
market that was actually stretching. I would say stretching for
housing, right? There were consumers who were at the fringe.
And you were trying to figure out how do I get them into the
house, because every year I wait, house prices were going up.
And they weren't able to get in. So the scenario that has been
described clearly existed. There was also a subset of these
borrowers who it was stretching for housing with kind of a hope
that they could grow into the mortgage. And that hope got
burst.
Mr. Kubarych. By the way, these people had an incentive not
to qualify people for prime loans.
Mr. Boozman. Yeah.
Mr. Kubarych. Their incentive was to put them into subprime
loans with the higher commissions. Even for people who could
have qualified for the prime loans, had they been encouraged to
do things like give the W2 form, provide information on their
bank accounts, etc. They were encouraged to say you don't have
to give me any proof of your income and your assets. And I will
be able to make your decision in a day. You don't have to wait
a month or two. Lots of encouragement for people.
And, you know, obviously, you know, I have friends who say,
``Well, it is the fault of the borrower. They didn't do enough
work on it.'' But, all right, that is easy to say. We have to
deal with the reality of the fact that people maybe they should
have done more careful due diligence. But we are dealing with
ordinary people not experts. And this was set up in a way with
a lot of advertising and Internet support and so on.
Mr. Bisenius. It is----
Mr. Kubarych. It is a very--it is a very sad and shameful
part of our financial history.
Mr. Bisenius. It is a portion of those borrowers that has
just been described are the ones that I mentioned in my
testimony that we have been able to refinance into prime
mortgages. They probably would have qualified before. They
fortunately still qualified today.
Mr. Kubarych. Yes.
Mr. Bisenius. And we were able to get them into a prime----
Mr. Kubarych. Yeah. And we would like to see more of that
happen.
Mr. Bisenius. Yeah.
Mr. Boozman. Thank you, both of you very much. That is very
helpful.
Mr. Bisenius. Okay.
Mr. Kubarych. Thank you.
Ms. Herseth Sandlin. Yes. We all appreciate the insights
and the expertise that you have brought to the table. I don't
want to make any assumptions about what your response would be,
so let me ask just one final question.
Do you think that there should be government intervention
of some kind in regulating the market going forward to ensure
that those who would qualify for a prime loan are always given
the option, through disclosure requirements, that they would
qualify, that they go through the steps to determine whether or
not they are eligible for a prime loan?
Mr. Kubarych. I believe that if we go back to time-tested
common sense banking principles, we can solve this problem. And
government can really help get us on that route.
Mr. Bisenius. I probably share the view that to the extent
consumers could qualify for a prime mortgage, a GSE-eligible
mortgage, it is in their best interest. And we ought to do
everything we can to encourage that.
Ms. Herseth Sandlin. Okay. I think that is along the lines
of yes. Right. I think what you are identifying is that we have
had some actors in an unregulated environment whereby they are
not only operating without a regulator. But they are also
seemingly operating outside of the sphere of the self
regulation within the industry in terms of what the best
practices have been, either on servicing or on disclosure. Also
in some of the----
Mr. Kubarych. Right.
Ms. Herseth Sandlin [continuing]. You said the core
principles in banking.
Mr. Kubarych. You are right.
Ms. Herseth Sandlin. Whereby some government intervention
may be necessary at this point.
Mr. Kubarych. Yeah. And we don't want to leave it just to
the courts. That is not an efficient way to do it.
Ms. Herseth Sandlin. Thank you. Thank you very much.
Mr. Kubarych. Thank you.
Ms. Herseth Sandlin. We appreciate your time and testimony.
We look forward to working with you in the future as we explore
some of the proposals for further consideration.
Joining us on our second panel is Mr. Anthony Agurs, member
of the Board of Directors for the NATIONAL ASSOCIATION OF
REALTORS (NAR); Ms. Ellen Harnick, Senior Policy Counsel for
the Center for Responsible Lending; and Mr. Larry Gilmore,
Deputy Director, for HOPE NOW Alliance.
Welcome to all three of you. Thank you for joining us here
today and providing your written statements. We will go ahead.
Again, if you could keep your opening comments to 5 minutes, as
you can tell we have some questions. We will give you other
opportunities after your opening statement to add further
comments to questions that are posed or other testimony that is
offered.
Mr. Agurs, we will go ahead and begin with your testimony,
you are recognized for 5 minutes.
STATEMENTS OF ANTHONY AGURS, ABR, CRS, MEMBER, BOARD OF
DIRECTORS, NATIONAL ASSOCIATION OF REALTORS, AND REALTOR,
AGURS GROUP, EL CAJON, CA; ELLEN HARNICK, SENIOR POLICY
COUNSEL, CENTER FOR RESPONSIBLE LENDING; AND LARRY GILMORE,
DEPUTY DIRECTOR, HOPE NOW ALLIANCE
STATEMENT OF ANTHONY AGURS
Mr. Agurs. Madam Chairwoman and Members of the
Subcommittee, thank you for inviting me to testify on behalf of
the NATIONAL ASSOCIATION OF REALTORS.
My name is Tony Agurs. I am a 21-year veteran of the United
States Marine Corps and a REALTOR with the Agurs Group in El
Cajon, California.
The NATIONAL ASSOCIATION OF REALTORS is a strong supporter
of housing opportunities for veterans. We commend the
Subcommittee for its attention to this important issues. I
passionately believe that the American dream of home ownership
is for anyone who desires to achieve that goal for themselves
and their families. But especially for the soldiers, sailors,
Airmen, and Marines of our Armed Forces who sacrificed so much
in defense of the American way of life, yet we ask for so very
little in return.
Unfortunately, like many Americans, our military families
have been hit hard by the subprime mortgage crisis. These
homeowners are in financial crisis and need our help, because
no veteran in high-cost areas can use their VA Home Loan
Guarantee.
We believe the Veterans Home Loan Guarantee is a valuable
asset to help our Nation's veterans achieve the dream of home
ownership in a way that is safe, fair, and affordable. The VA
Home Loan Guarantee Program is designed to provide veterans who
are unable to qualify for a conventional loan with favorable
terms. And I will go even further to say every veteran would
rather use a VA Home Loan than a convention loan anyway.
A study conducted in 2004 found the program did just that.
The percentage of VA borrowers who could not qualify for a
conventional loan was 82 percent for first-time home buyers, 78
percent for repeat borrowers.
And in addition, the typical VA borrower could not qualify
for an FHA loan. Sixty-one percent of VA first-time borrowers
could not meet either the down payment or maximum debt-to-
income ratio required to obtain an FHA loan. The VA program,
therefore, offers unique and important benefits for helping our
military families, veterans, and retirees achieve the dream of
home ownership.
Despite offering borrowers a zero-downpayment loan, one of
the hallmarks of the VA Home Loan Program, the delinquency rate
is extremely low. And according to the most delinquency rates
survey published by the Mortgage Bankers Association, the rate
was 6.58 percent, foreclosures was 1.03 percent. In contrast,
subprime delinquency rates, which were a staggering 16.31
percent and foreclosures 6.89.
Part of the real reason is we are proud, we are
disciplined, and we do what we are expected to do. In addition,
the VA Home Loan Program offers protection for borrowers when
financial difficulties occur by offering a variety of
supplemental loan servicing programs that help military
families avoid foreclosures.
In 2007, VA accomplished more than 8,400 successful
interventions, which translated into saving the government over
$181 million in claims avoided.
However, without reforms, this program has not served many
veterans who could use its benefits. We urge the following
three enhancements to the VA program.
Increase the VA Loan Limits in high cost areas. The current
VA loan limit is equal to $417,000. States with the largest
veteran populations are California, Florida, Texas,
Pennsylvania, New York, and Ohio. Twenty-five million veterans
live in 60 percent of the urban areas. Thirty-six percent of
them live in these high-cost areas out of the--four of the six
States. Veterans in these areas should not be penalized for
geographic differences in the housing market. NAR supports
legislative efforts to increase the VA limits to 150 percent of
the conforming loan limit.
Ease refinancing for veterans. Some veteran homeowners, a
lot of veteran homeowners, have risky sub-prime mortgage loans,
because they couldn't afford to use their VA eligibility.
Veterans are required to have at least 10-percent equity in
a home in order to refinancing it. We believe that Congress
should reduce that down to 5 percent.
FHA has a component that allows 3-percent equity only in
order to refinance. In addition, the law limits the guaranty
that can be used for a typical VA refinance loan to $36,000.
As a result, refinancing loans of more than $144,000 will
result in a lender not receiving the 25-percent backing from
the VA. And as a result, probably will not do the loan. We urge
Congress to eliminate this refinancing restriction and make the
maximum VA guaranty applicable to all VA loans.
Permanently authorize ARMS. I know ARMS are a bad
terminology in a convention sense. But for what the VA does
with them, it makes perfect sense. And there is no prepaid
penalty, because we know servicemembers have an escalating rate
of promotion. And they actually get promoted on a regular
basis, which helps them afford those programs.
And finally, you ought to do this because of the promise
that you made.
I would like thank the Subcommittee for allowing me to
present here today. The NATIONAL ASSOCIATION OF REALTORS
strongly support housing opportunities for our Nation's
veterans and active-duty military professionals.
It is our hope that the Subcommittee will support our
recommendations for enhancing and improving the VA home loan
guarantee program, so it may be a real benefit to those who
have so bravely served our country.
[The prepared statement of Mr. Agurs appears on p. 40.]
Ms. Herseth Sandlin. Thank you very much. Ms. Harnick, you
are recognized.
STATEMENT OF ELLEN HARNICK
Ms. Harnick. Well thank you very much. I am very pleased to
be here today. Much of what I was prepared to say was said
previously by Mr. Kubarych and others.
So rather than repeat, I think I want to pick up on two
points that were made during the first panel. One was the point
that Mr. Kubarych said--made that many of these loans are loans
that none of us would encourage a family member to make. They
were structured in a way that were abusive in the sense that
they were designed to fail.
And this relates to a second point that came up on the
first panel, which is the problem that we have borrowers who
are getting homes that they simply could not afford, or is the
problem fundamentally caused by people getting loans that were
unsustainable when sustainable loans were available?
And the unfortunate and very tragic aspect of this
particular crisis is that most of the borrowers who received
these unsustainable loans, qualified for loans that would have
been sustainable for them.
And part of it relates to a point that was made on the
first panel. That a number of these borrowers who received
these subprime loans actually did qualify for prime. The Wall
Street Journal did a study released a couple of months ago
looking at loans originated in 2005 and 2006. These are
subprime loans. And in each of those years, over 50 percent of
the people who received these subprime loans actually had
credit scores that would have qualified them for prime loans.
And what that means in very practical terms, is that these
people could have had 30-year fixed rate loans at below the
cost of that introductory rate on the adjustable rate mortgage
they got.
And a second point worth noting is that for even--for the
minority of borrowers who didn't have the credit scores that
would have qualified them for prime, they could have gotten,
even in the subprime market, a 30-year fixed-rate loan at a
relatively nominal cost above the introductory rate they got,
on average for an additional 65 basis points, which means, you
know, there are 100 basis points to a percentage. So less than
1 percentage point higher than the introductory rate would have
gotten these people 30-year fixed rate loans. And so a lot of
the problems we are seeing now would not have happened.
And it is certainly true, the comment that was made on the
first panel, that--by Mr. Bisenius that a lot of these people,
because of LIBOR being reduced, will face payment shock that is
less than the payment shock that people who are currently in
default--currently in foreclosure have faced.
Nevertheless, they are going to face payment shock. And the
point he made is very well taken. These loans were underwritten
so people could just afford them at that starter rate, but
just.
And so an interest--you know, an interest rate increase of
even just a percentage point or 1.5 percent was going to push
those into the realm of being unaffordable.
So that is the real tragedy here. To put numbers on what we
are talking about, in the subprime--on these subprime mortgage
loans alone, the expectation is that two million families will
lose their homes to foreclosure on these unsustainable loans
over the next few years.
And to put a number on the sort of spillover effect that
people have been talking about, 40 million other families who
are repaying their loans on time, will suffer the consequences
of their home prices diminishing as a result of these
foreclosures.
And I think you all are aware that there are other quality
of life issues that become implicated. Boarded up homes on a
block are not merely an eyesore, which would be bad enough, but
they are also a magnet for crime which puts, you know, burdens
on police departments.
Children are moved from one school district to another. It
puts burdens on the school districts. And all this happens at a
time when the tax base is declining.
There is one solution out there that has passed through the
House Judiciary Committee with bipartisan support. A
compromised bill was passed out of the Committee. And to get
the bipartisan support, it was narrowed very much to make sure
that it would relate only to those loans that will end in
foreclosure.
It guarantees the lender at least what they would recover
from a foreclosure sale. And it is all done under the
supervision of the courts in an existing system under the
bankruptcy court system.
This is H.R. 3609. And I would urge you to look at this.
Although it would help everyone, not vets alone, it will help
everyone including vets.
And I do believe--well, we will hear about some voluntary
efforts that have been underway. There have been many programs
since May of 2007 and most recently the Hope Now Program. These
are good programs. They will help some people. But they are not
going to address the problems sufficiently.
Foreclosures are outstripping loan modifications by 13 to 1
on these loans we really need to see modified.
Thank you.
[The prepared statement of Ms. Harnick appears on p. 45.]
Ms. Herseth Sandlin. Thank you very much for your
testimony. Mr. Gilmore, you are recognized.
STATEMENT OF LARRY GILMORE
Mr. Gilmore. Madam Herseth Sandlin and Ranking Member
Boozman, thank you for the opportunity to testify today.
My name is Larry Gilmore. And I want to tell you how the
HOPE NOW Alliance is making real progress to reach at-risk
homeowners, including veterans and active personnel to find
solutions to prevent foreclosures.
The HOPE NOW Alliance is made up of a very diverse group of
organizations, which includes counselors, lenders, investors,
other mortgage market participants as well as key trade
associations. All focused on at-risk homeowners with the goal
to provide solutions to avoid foreclosure.
We now have a total of 27 loan servicers who are active
participants that make up over 90 percent of all subprime
service loans and a good portion of prime service loans.
We also have a strong group of counseling organizations
that are active participants. That includes NeighborWorks,
which represents over 240 on-the-ground grass-roots committee
organizations, as well as the Home Ownership Preservation
Foundation, which serves to facilitate all the calls that come
through our national HOPE Hotline.
The members of HOPE NOW are committed to producing results.
Loan servicers who join HOPE NOW commit to a statement of
principles, which includes assisting distressed homeowners to
remain in their homes.
My written testimony contains those principles, which
include contacting and assisting at-risk borrowers 120 days
prior to any adjustable rate mortgage resetting. That also
includes servicers working to provide counseling agencies toll-
free 1-800 numbers, fax numbers, and email addresses to
increase communication with servicers.
We are also publicizing a list of phone numbers of HOPE NOW
servicers that consumers can call to receive help. In fact,
Financial Services Committee Chairman Frank and Ranking Member
Bachus recently sent a ``Dear Colleague'' letter to House
Members to alert them of these numbers.
The major challenge is that borrowers in trouble are
reluctant to ask for assistance. It has been stated that over
50 percent of borrowers who go into foreclosure have very
little to no interaction with their servicer. We are attempting
to make a difference in that space.
HOPE NOW has an aggressive monthly direct mail outreach
campaign to at-risk borrowers. This effort is in addition to
thousands of letters and telephone calls that servicers make on
their own to customers.
We have seen major results with this campaign. This
campaign has been in place since November of 2007. And to date,
we have sent out over 100--excuse me, over one million letters
to borrowers who are 60-plus days delinquent. In November, we
experienced a response rate of 16 percent, in December a
response rate of 21 percent. And this response rate is a lot
higher than the typical response rate servicers receive on
their own of 2-3 percent to letters.
And so we are increasing contact we are having with
borrowers who are most at risk of going into default. HOPE NOW
is actively reaching out to borrowers and providing counseling
services, mainly through our national HOPE NOW--excuse me, HOPE
Hotline, 888-995-HOPE. This hotline is managed by the Home
Ownership Preservation Foundation. We are currently averaging
over 4,500 calls per day that go into this counseling hotline.
And we have over 400 counselors who are ready to assist
borrowers 24 hours a day, 7 days a week, providing counseling
services in English as well as in Spanish.
To date, the HOPE Hotline has received over 456,000 calls,
which led to counseling for over 165,000 homeowners. The call
volume has increased nearly ten fold between the first quarter
of 2007 and the fourth quarter of 2007. More homeowners with
adjustable rate mortgages are also calling. Forty-eight percent
of callers in the fourth quarter of 2007 compared to only 34
percent the first quarter of 2007.
The Home Ownership Preservation Foundation also has an
exciting partnership with the USA Cares to assist families of
active-duty military personnel. To date, they have assisted 154
families by making back mortgage payments. And 130 loans have
been reinstated and 24 are in repayment plans. I provided a few
of these examples in my written testimony.
The Bush Administration, during his State of the Union
Address, spoke directly about the HOPE NOW Alliance initiative
as well as Secretary Paulson with the Department of the
Treasury. And Secretary of HUD Jackson also speaks to encourage
borrowers to use this hotline.
We strongly encourage Members of Congress to continue to
encourage borrowers to call this hotline to ask for assistance.
NeighborWorks also worked with the Ad Council on anational
television, radio, and print advertisement campaign to
encourage homeowners to also call this hotline. In addition to
these efforts, we have other efforts where we are directly
targeting borrowers on the ground, providing assistance.
Over the next 4 months, we are going to be in multiple
markets across the country where we are focused on providing
assistance to assist borrowers through having our servicers
meet with borrowers face to face on the ground. And we are
starting this campaign in California next week, on March 3rd,
in Riverside. And then we are moving to Anaheim on March 5th
and concluding in Stockton, California. And we are working
directly with local non-profit agencies on the ground in our
servicing community.
With that said, I will conclude my comments. Again, we
appreciate you allowing HOPE NOW the opportunity to speak. And
we can talk a little bit later hopefully in regards to data
results.
[The prepared statement of Mr. Gilmore appears on p. 51.]
Mr. Donnelly. Thank you very much. And I would like to turn
it over to Ranking Member Boozman.
Mr. Boozman. Thank you very much. Ms. Harnick, you note the
need for policy action to realign the interest of people who
buy homes, institutions that provide the loans, and the
entities that invest in the mortgages.
What would be the central feature of the policy that you
are talking about? How do we do that?
Ms. Harnick. Well, in order to address that issue, what we
need to do is when we say ``misaligned incentives,'' what we
are speaking of is a state of play now. What Mr. Kubarych was
saying the broker is--just has an incentive to just make a
commission.
And the Wall Street investor has an incentive to get the
most return on the loan. And all of this operates without
regard to whether you are putting the borrower into a loan that
is going to be sustainable over the long term.
And so for the aspect of the policy that we are referring
to there, what you need is to mandate sensible underwriting
standards, ensure that borrowers are put into loans that they
can actually afford to remain in over the long term, and make
sure that responsibility for that translates to all the market
actors who would have an incentive to either behave consistent
with that or not.
Mr. Agurs. Mr. Boozman, there is another part to that.
Being one of the guys who is on the ground with the borrower,
with the home buyer, driving them around in my car, and looking
at homes and everything else, people are desperate for home
ownership.
But on the other side, when the prime and conventional
lenders disenfranchise whole segments of a population, people
have to go someplace, because they want the dream of home
ownership. When the prime lenders block them out and
disenfranchise them, and when they--when they--when the FHA and
the VA programs are so low that they can't even use those tools
that are designed to help those segments of the population,
people have no choice but to fall to the subprime market.
So part of everything that is going to help solve that
problem, let us not forget about how people are being
disenfranchised. The prime and conventional lenders also are
going to have to look at that to open up their window a lot
more to allow these people who are desperate for home ownership
all across America achieve that dream as well.
Mr. Boozman. How do you respond to that, Ms. Harnick? I
guess what you are saying is that because the prime standard is
too high?
Mr. Agurs. Yes, sir.
Ms. Harnick. Well I am not sure. I wouldn't diagnose the
problem that way. I mean, I think the two fundamental problems
we face today are one, how do we ensure that the kinds of loans
that have been made don't get made going forward.
And, two, how do we deal with the people who are in those
loans today?
Mr. Boozman. Right. No. I think what he was saying was that
in the future we have got the problem that we are dealing with
now.
Ms. Harnick. Yes.
Mr. Boozman. And I think you have addressed that well. On
the other hand, he is saying that there, and again, I am not
putting words in your mouth. But my understanding was there is
such pressure from people that don't quite qualify for the
prime qualifications.
Ms. Harnick. Mm-hmm.
Mr. Boozman. What do you do about those people in the
future?
Ms. Harnick. Well you can make responsible subprime loans.
You can lend to people who don't qualify for prime loans. It is
just that you need to ensure that the terms of those loans are
not going to doom them to fail.
Mr. Boozman. Right. I agree. That is very good. Thank you.
Ms. Herseth Sandlin. Mr. Donnelly.
Mr. Donnelly. Thank you, Madam Chairwoman. In regards to
H.R. 3609, it would be good for the borrowers, good for the
lenders too?
Ms. Harnick. Is that the question? Yes.
Mr. Donnelly. Yeah, that is the question.
Ms. Harnick. Yes, Mr. Donnelly.
Mr. Donnelly. Does it work for both ends?
Ms. Harnick. I think that is absolutely right. The way the
bill has been narrowed to get the bipartisan support it needed
in Committee, the bill will only apply--the only loans that
will be subject to modification are those loans that would end
in foreclosure.
And the way they accomplish that is you have to pass--the
borrower has to pass a means test. So you look at the
homeowner's monthly income. And then you make a deduction for
modest living expenses set by the IRS. And if the homeowner has
enough money left over to pay the mortgage, they have to pay
the mortgage. They can't benefit from this help.
The help is available only for those families who will lose
the home in foreclosure without modifying the loan. And so what
the bill does is it says we will guarantee that the
modification is structured in a way that the lender will get at
least as much as they would get from the foreclosure sale.
Mr. Donnelly. So why would a lender object to that?
Ms. Harnick. Well----
Mr. Donnelly. If there is any reason.
Ms. Harnick. I mean, I think----
Mr. Donnelly. If they are going to come out with a decent
loan as opposed to one that goes underwater and sinks.
Ms. Harnick. I think it is very difficult frankly to
articulate a reason why this outcome is not good for the
lender. That is all I can say.
I know that there are different--servicers sometimes have
different incentives. And that is part of the problem. But
there is not a good reason.
And, in fact, what I think everyone recognizes is that the
only way to avoid these foreclosures is to modify these loans
so that they are sustainable.
And everyone recognizes that to go to foreclosure sale,
where a lender gets liquidation value at best after incurring
substantial costs, often having to maintain the property for
the 2 years it could take to complete the foreclosure, it is
very difficult to see why guaranteeing market value paid back
at a rate that is above prime--it is prime plus a risk premium
to account for the fact that this is a risky borrower, it is
very difficult to see why that is not at least as good an
alternative to a liquidation sale.
Mr. Donnelly. Okay. And, Mr. Agurs, in my home State of
Indiana, in 2003, there were about 8,000 VA loans made.
Mr. Agurs. Mm-hmm.
Mr. Donnelly. In 2007, 2,000, about 25 percent of what
there was just 3 or 4 years earlier. Is that because you think
a lot of these vets were steered into some of these loans, or
how would you explain that kind of a drop?
Mr. Agurs. Mr. Donnelly, I will use California as an
example.
Mr. Donnelly. That would be great.
Mr. Agurs. That is the State that I am in. Our median home
price in California is $588,000. The maximum loan amount on a
VA loan is $417,000.
Mr. Donnelly. So they can't be used.
Mr. Agurs. It can't be used. And even if we roll that back
a few years, when the VA loan guarantee was $240,000, the only
way for somebody to own a home that was a veteran who had a VA
certificate of eligibility--and I will say that is one of the
most important things that we as veterans look to is that VA
guarantee, is to go outside of that arena. And one of the
hallmarks is the 100-percent financing on the VA dollar down
ability to purchase a home.
Most of our active-duty servicemembers and veterans don't
have 3-percent, 5-percent, 10-percent, or 20-percent
downpayment to become a homeowner. But because of the promise,
because of the guarantee, we absolutely believe that the VA--
the VA home loan guarantee is a very best bet. But because of
the low limits, not only can they not afford it, and to a great
degree a lot of the lenders don't even understand the VA
program.
And I will say as a result of that, they send them
somewhere else where they would find it an easier fit to help
them achieve the dream of home ownership, yet there is
ramifications on the backside of it, which is what we are
seeing right now.
Mr. Donnelly. So do you think it is a fair statement to say
that with a lot of the vets, the price of the homes just start
to get so much that they couldn't stay in the game?
Mr. Agurs. Absolutely.
Mr. Donnelly. And that is probably--do you see that as one
of the main reasons for the drop?
Mr. Agurs. I see it as one of the main reasons for the
drop. And the other reason for the drop, if you look on part of
it, bottom line it is more profitable for lenders to do a
conventional or FHA loan than it is to do a VA loan.
Mr. Donnelly. Okay. And then, Mr. Gilmore, in regards to
the HOPE NOW, and we appreciate everything that has been done
in regards to that and everybody who is participating.
With servicers, we talked about starting 60 days before. Do
you think it would help even more if they started contacting
these homeowners 6 months before the ARM goes off to get in
touch with them and say, okay, what product can we work with?
What is a price point for you, as opposed to 60 days? I know 60
days may sound like a lot to some. But to others when you have
four kids running around and you have other bills you are
working on, that can sometimes be a very short time frame for
the largest investment you will ever make in your life.
Mr. Gilmore. Yeah, definitely, the earlier the better. And
actually in our statement of principles, all of the servicers
agree to contact borrowers who are in adjustable rate mortgages
120 days prior to loan reset. And so that is close to 6 months.
But the earlier they can contact that borrower to inform
them that that rate is going to change, they can better prepare
that borrower to either refinance into another product or
change the situation where they can prepare for the loan
resetting.
Mr. Donnelly. You know, I am fortunate enough to also be on
the Financial Services Committee. And I can tell you that a
large number of the Members of that Committee look at that 6-
month timeframe as the timeframe that really provides both the
lender, or the servicer rather, and the homeowner with the time
to get in contact with the homeowner, who is probably nervous
and scared anyhow, and hears from the bank, or hears the bank's
name, and wants to put the phone under the bed and pretend it
didn't ring.
Mr. Gilmore. Right.
Mr. Donnelly. And so you have to spend some time just
talking just to get them to talk to you. And so many of us look
at that 6-month timeframe as one that provides an appropriate
time to start working on these things.
Mr. Gilmore. That is good to know. The good thing about the
HOPE NOW Alliance, what we are attempting to do is really set
the floor for the servicing industry. And the good thing is
many servicers have established their own best practices. But
we have a number of members who are participating. And that is
something we could take back as a potential option for the
Alliance members to consider.
Mr. Donnelly. If you would--I would appreciate it, because
it doesn't cost you anything more. You just have to get engaged
a little bit earlier. Thank you, sir. Thank you, Madam
Chairwoman.
Ms. Herseth Sandlin. Thank you, Mr. Donnelly.
This may have been mentioned while I had to step out. Mr.
Agurs, I think you will be happy to know, and you maybe already
know, that there have been bills introduced already including
from Chairman Bob Filner and Ranking Member Buyer of the full
Committee that include some of the provisions that you have
identified and recommended as improvements to the VA Home Loan
Guarantee Program. We appreciate the recommendations that you
have made today.
I would like to pursue a little bit further, separate from
what H.R. 3609 includes, Ms. Harnick, do you think that we need
to approach the problems that we are seeing in a way that makes
a distinction between those who are in trouble that would have
qualified for a prime loan and those who wouldn't have?
For example, what is your response to the idea of a
specific government lending program that gets us away from the
12-percent interest versus the 5 percent? Should we target that
to the people who wouldn't have qualified for a prime loan? Do
we require the lenders to refinance and do loan modifications
with those that would have been eligible for a prime loan? What
are your thoughts on that?
Ms. Harnick. The distinction between someone who would have
qualified for prime and not, we should also remember that there
are those who would have qualified and could have afforded a
30-year fixed rate subprime loan as well. But I don't know that
that's the key distinction. To answer the question about this
idea of refinancing, having a refinancing option, I think it is
certainly very much worth looking at. I think as we said on the
first panel, it is an option that makes sense for borrowers who
have equity in their homes. If you tried applying that option
to borrowers who were upside down, as they say, where they owe
more than the home is worth, then what you have is the
taxpayers transferring money to the lenders to pay them the
fair market value on a loan that is only secured, pay them more
than the fair market value on the loan.
So I think it is a solution that is definitely worth
thinking about for people whose problem is not that their loan
is worth more than their home. I think that for people whose
loan is worth more than their home, I think what you want to
see is a modification of that loan that would get the lender
what they would get if it was sold at foreclosure, which is the
option, get them at least that. But you may as well get that
for them in a way that keeps the family in the home because not
only does it benefit that family, but it helps avoid the
decline in the rest of the neighborhood.
Ms. Herseth Sandlin. Mr. Hall. We have been joined by Mr.
Hall from New York, also another Subcommittee Chairman. Did you
have questions for witnesses?
Mr. Hall. Thank you, Madam Chair, and Ranking Member
Boozman. And I apologize to both of you and to the witnesses
for being late. I am, as are many of us, double and triple
booked. And I just had one question I guess, and forgive me if
it's already been asked. But I guess first for Mr. Gilmore, are
the problems affecting active-duty veterans who are returning
soldiers different from those affecting the Guard and Reserve?
Mr. Gilmore. That is a good question that I really do not
have an answer for. Our effort is really designed to assist all
borrowers who are in delinquency and who are headed to
foreclosure. And we have not done any specific analysis to
separate how veterans and active-duty workers are assisted
compared to all borrowers, all of those borrowers who are
headed toward delinquency.
Mr. Hall. Anybody else, Ms. Harnick?
Ms. Harnick. You know, I----
Mr. Hall. I am just curious because in my, well, in all of
our districts, but in my district in particular there is a
deployment, redeployment, redeployment of Guard and Reserve, as
if they were active duty. And many of these soldiers live in
very different circumstances from active-duty people who are on
a base. And I think they are, you know, leaving jobs and homes
that they did not think they were going to be taken away from
for a year or two at a time. And their families are under
financial and other stress that I would imagine it would
translate into the danger of foreclosure. But----
Ms. Harnick. Well the one thing I could say is that some of
the, the way these loans were structured that was so dangerous,
some of those aspects are particularly problematic for
servicemembers, or people who are called up in the Reserves. So
that for instance, the prepayment penalty, the loans are
structured so that if you pay the loan off before the rate
jumps up you have to pay a fine for that. And that is hard for
anybody. But I would, anecdotally, what I have heard from
veterans is that it is particularly difficult for people who
have a military career because they move so much. They are
often called upon to move before the rate resets, which means
they are going to have to pay a prepayment penalty. And it is,
these are pretty expensive. In fact, they are so expensive that
typically people pay them, in the subprime market anyway, pay
them by increasing their loan balance to cover the new fine
they have to pay on top of repaying the loan. So things like
that I think are particularly problematic for people who are
called upon to move. Particularly when they move on short
notice.
Mr. Gilmore. Mr. Hall, I can give you a more specific
answer to that as well. In regard to active duty, plus the
Guard and Reserve who are called to active duty, I think that
if you look at using a more judicious use of the Soldiers,
Sailors, and Airmen's Relief Act it will have a lot more teeth
in it that will help our active duty and Reserve folks who are
in these issues right now. And I do not think that has really
been explored, using that effectively.
Mr. Hall. So it seems that as with other issues that we try
to help veterans deal and help the VA deal with, that
information and outreach is probably one of the key components
to make sure that, that the veterans or soldiers, servicemen
and women are educated as much as possible about the options
that are open to them, or the ones they shouldn't take. And
also, that we probably should be doing more to educate lenders
about their responsibility, or their patriotic responsibility,
I think, to treat our veterans or our soldiers fairly in this
regard. Some of it is bully pulpit and education, as well as--
--
Mr. Gilmore. When the Servicemembers Civil Relief Act is
specifically designed to help active duty and Reserve component
servicemembers specifically for situations like this.
Mr. Hall. Thank you very much, Madam Chair.
Ms. Herseth Sandlin. Mr. Boozman, did you have any further
questions? I have one follow-up in terms of the distinction, in
terms of where the problems become more manifest, active-duty
servicemembers versus National Guard and Reserve. I know, Ms.
Harnick, you talked about some of the anecdotal evidence you
are hearing in terms of the number of times that active-duty
personnel move. Are any of you aware of any type of evidence
similar to what we were hearing a couple of years ago in the
payday loan industry? An unregulated area where servicemembers
were the targets of some predatory lending? There are
allegations about that in terms of where they were setting up
right outside of bases. Do we have any evidence to suggest
this? I know we have heard different testimony today in terms
of how we got to this problem. Servicemembers and their
families were being identified by some of those operating in
the unregulated sphere of pushing the product in terms of the
adjustable rate mortgages for those higher commissions. Is
there any evidence?
Ms. Harnick. Well I can say this, and again it is going to
be just anecdotal evidence. But I know, I have a vet who works
with me and he is constantly getting mailings that are aimed at
veterans that are, you know, come from subprime lenders. And I
have seen some of the ads for some of the subprime lenders that
specifically target, you know, they call them patriot loans or
things like this, and that meant to particularly target
veterans. But this is simply anecdotal.
Ms. Herseth Sandlin. Is that for people who have separated
from service? Or?
Ms. Harnick. I am sorry, I cannot answer that.
Ms. Herseth Sandlin. Well, I appreciate your testimony and
responses to our questions. There may be some follow up in
written form, but thank you again for being here before the
Subcommittee. We appreciate the good work that you're doing in
the industry and the insights that you have offered to us here
today. Thank you.
I would now like to invite panel three to the witness
table. We have one final witness here on our third panel today.
We invite her back to the Subcommittee, Ms. Judith Caden,
Director of Loan Guaranty Service for the U.S. Department of
Veterans Affairs. Thank you for being here. Thank you for your
written statement, and you are recognized for 5 minutes.
STATEMENT OF JUDITH A. CADEN, DIRECTOR, LOAN GUARANTY SERVICE,
VETERANS BENEFITS ADMINISTRATION, U.S. DEPARTMENT OF VETERANS
AFFAIRS
Ms. Caden. Thank you for the opportunity to appear here
today to discuss the subprime mortgage crisis and America's
veterans. As we have been hearing, subprime is a generic term
to describe mortgage loans with interest rates higher than
prime rates. The subprime loans that are causing the current
crisis usually have several layers of risk associated with
them. These layers of risk are generated by a combination of
one or more factors, such as lack of income verification, lack
of asset verification, lack of underwriting, low borrower
credit scores, large margins, low teaser rates, etc. VA
Guaranty Loans, on the other hand, have none of these
characteristics and have carried an average borrower Fair Isaac
Corporation (FICO) credit rating of around 680 as opposed to
the subprime average of below 620.
Credit losses mounted from the record setting losses of the
subprime loans made in 2000 and since, and secondary market
investors recognize this risk and have priced the potential
losing money on future investments to the point where
originators of subprime mortgage loans could no longer afford
to sell them. This lack of liquidity in the secondary market
has had a tremendous impact on the ability and desire of
lenders to originate subprime loans.
Again, VA guaranteed home loans are not subprime products.
VA guaranteed home loans must be written and made in accordance
with our credit underwriting standards. Lenders underwriting VA
loans must ensure that the contemplated terms of repayment bear
a proper relation to the veteran's present and anticipated
income and expenses, and that the veteran is a satisfactory
credit risk. The VA program has faired well in recent years
with regard to foreclosure rates. According to data from the
Mortgage Bankers Association, between the third quarter of 2005
and the third quarter of 2007, VA's serious default rate
declined while all other mortgage types, including prime loans,
rose.
That said, we do operate in the broader mortgage
marketplace and will be collaterally affected by the subprime
turmoil currently affecting the market. This collateral effect
will generally be the result of declining housing prices. With
additional foreclosed homes on the market, a glut of new
construction available, and weak demand, the inventory of
unsold homes has risen. Concurrently, credit has tightened as
investors withdraw funds from the mortgage market, causing even
some well qualified buyers to experience difficulties in
obtaining new mortgages. With supply now exceeding demand,
prices for homes have naturally declined. In the current
marketplace there are fewer borrowers able or choosing to
purchase homes and therefore fewer opportunities to sell homes.
We expect that the deflation in house prices will eliminate
certain foreclosure avoidance tools that were previously
available to us, especially the ability to sell a property to
prevent foreclosure, with the net result being more
foreclosures.
For veterans who have obtained a VA guaranteed home loan we
can offer supplemental servicing assistance during times of
financial hardship and default. When we receive notice that a
veteran borrower has become seriously delinquent we take an
active role in working to avoid foreclosure. We intercede on
his or her behalf with the loan holder. And we work to make
them get mortgage payments that they can handle. There are
other alternatives that we also work on. I think it was already
mentioned that we were able to intervene in over 8,000
instances. We kept those veterans in their homes. For a veteran
or servicemember who has obtained a subprime loan we can offer
general advice and guidance through our nine regional loan
centers, and they have been getting some calls. But there
really is nothing we can do on their behalf with a lender.
Regrettably, there are veterans who have subprime mortgages who
will be adversely affected by the subprime crisis. We are
authorized to guarantee refinancing loans, however I think, as
you have already heard, there are limits on those loans and
what we can do. There has to be an equity position and they are
effectively limited to $144,000.
We are proud of the success of the VA Home Loan Program in
helping veterans obtain and retain homes. While we have
expanded and modified over the years we have retained sound
underwriting criteria.
Madam Chairwoman, that concludes my testimony and I look
forward to answering any questions you or the Committee may
have.
[The prepared statement of Ms. Caden appears on p. 59.]
Ms. Herseth Sandlin. Thank you, Ms. Caden. The Home
Mortgage Disclosure Act does not require veteran status to be
collected as part of the applicant's data. What are your
thoughts? Do you think we should, in light of some of what we
heard in some of the earlier panels, relating to going forward
with making sure that if we make any modifications to the VA
Home Loan Guaranty Program that they are well-informed changes
that can be sustained in light of what else is happening in the
current housing market? What are your thoughts? Do you think it
is worthwhile to collect that data?
Ms. Caden. I think that would be very helpful. We have been
asked, just like many others, about how many veterans are
affected by what is going on right now. We cannot answer that
question, and really no one can because that is not a
demographic that is collected. So I certainly think it would be
helpful.
Ms. Herseth Sandlin. Do you think it would be helpful to
respond to some of the questions we are getting about how many
veterans are affected? Also, perhaps upon application, if a
particular veteran is either denied a prime loan or moves and
is looking to finance another home? An application that would
give you data to access to be able to outreach and share
information about the VA Home Loan Program?
Ms. Caden. I think it would. We could certainly be more
communicative with veterans because we would know who they are,
where they are, and what they are doing. The education and the
outreach are very important. We work mostly through the lenders
and the real estate agents to inform veterans of the VA program
and make sure they are aware of it. Certainly if they are
asking that question and it is being disclosed up front, that
is an opening to start to talk about the Home Loan Program.
Ms. Herseth Sandlin. Mr. Boozman.
Mr. Boozman. In follow up, if you did that would that help
you with knowing if veterans were being targeted?
Ms. Caden. I would think it would. We would be looking at
what types of loans they are getting and also at the denial
rates.
Mr. Boozman. Yeah, I think that would be very helpful.
Ms. Caden. I think it would.
Mr. Boozman. All of our witnesses have done a very good job
of telling us and really helping me understand a lot more about
the problem as to why we are there and things. The reality is
that we are there. If, in your opinion, what kind of a PAYGO
problem would we run into if we authorized VA to refinance
loans for properties with a 10, 15 percent negative equity as
long as they were current on their payment? Would that be a big
PAYGO problem or not?
Ms. Caden. I do not believe it would, especially if there
were certain parameters of how much VA's payment would be, and
also if we were still underwriting the loans and making sure
the veterans qualify. And I think we would.
Mr. Boozman. Do you have any opinion as to whether or not
that would be a worthwhile thing to do, or?
Ms. Caden. In my personal opinion, looking at what is
happening right now, I think it would be worth looking into.
Mr. Boozman. Mm-hmm, very good. That is really all the
questions that I have, Madam Chair.
Ms. Herseth Sandlin. Thank you, Mr. Boozman. In light of
what we heard from Mr. Donnelly, and I think you were here
during his questions, and when we see the data and the fewer
number of not only foreclosures, which is a good thing, but of
the guarantees. Is the number too low? You know that there have
been bills introduced, and we may be having a legislative
hearing to get your comments in more detail about some of the
bills that have been introduced. Is your sense that in light of
what has been happening in the current housing market,
particularly in the States that were cited earlier that have a
very high veteran population, where those home values have been
and the trend upward that we have been seeing until the current
housing crisis in those communities, is it too low? Do we need
some more flexibility as it relates to the equity restrictions
or the total amount that can be guaranteed?
Ms. Caden. Well, certainly in the area of the regular
refinancing loans because those are limited to the $144,000 and
require an equity position. In today's market, that's probably
not realistic, in my opinion. Even with the $417,000 effective
loan cap, I think there are areas where veterans are not able
to utilize their earned benefit because of that.
Ms. Herseth Sandlin. Okay. I think that is the only
question that I have for now as well. Again we look forward to
working with you as we work toward addressing some of the
proposals that we have heard today, and some of the bills that
have been introduced, as we take a closer look at those. The
Subcommittee is interested in your insights, in addition to
what we heard from Mr. Bisenius with what some of the GSEs have
done in terms of the servicing standards. It is clear here, as
well in terms of what the VA has done in intervening on behalf
of the borrower with the lender as well as some of the
suggestions that were made with regard to FHA and other
programs that have been very useful to many borrowers, that
there is a way that we can find different mechanisms that do
not overreach. Rather, working with existing programs, working
with the mortgage industry, to find a way to help borrowers in
different situations.
Mr. Donnelly made a very good point earlier about the fact
that many of our veterans are in this discrete subgroup that
are waiting for disability ratings and compensation. That would
help alleviate some of their problems in the short term. One of
the recommendations of Ms. Harnick in her written testimony was
protection for a year for veterans, perhaps, or at least for
some period of time. We have addressed some of that in the
Subcommittee previously. We appreciate your expertise and the
information that you consistently provide to the Subcommittee
and members of our staff. I thank you for joining us and for
your testimony, and I look forward to working with you.
I do want to commend, in particular, all of the staff at
the VA for being such staunch advocates for our veterans on a
whole host of issues, but particularly with how they are
getting caught in the mortgage crisis that the entire country
is experiencing right now. We value everyone's expertise and
insights that they offered, and interest in today's topic.
Thank you, Ms. Caden, we look forward to seeing you again soon.
Thank you to all of our panelists today. The hearing stands
adjourned.
[Whereupon, at 3:45 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Prepared Statement of Hon. Stephanie Herseth Sandlin, Chairwoman,
Subcommittee on Economic Opportunity
In July 1943, President Franklin Delano Roosevelt recognized the
need to invest in our Nation's troops after their service to our
country by highlighting that ``the members of the armed forces have
been compelled to make greater economic sacrifice and every other kind
of sacrifice than the rest of us, and they are entitled to definite
action to help take care of their special problems.'' One year after
this speech, President Roosevelt signed the Servicemember's
Readjustment Act of 1944, which included readjustment benefits to help
our veterans with education, housing, and employment opportunities.
Sixty-four years later, we in this Subcommittee find ourselves
reevaluating that law and others to address the needs of today's
servicemembers, veterans and their dependents. While we have held at
least nine Subcommittee hearings on education and employment issues,
today's hearing gives us the opportunity to assess how the current
housing market affects our veterans and determine if the VA's home loan
programs have a role to play in the closures affecting our communities.
This past Tuesday, RealtyTrac, an online retailer of foreclosed
properties, released its January 2008 foreclosure report that
highlights that the foreclosure rate has increased 57 percent when
compared to the same month in 2007. It might be safe to say that no one
in this Subcommittee has seen more recent foreclosure rates in his
Congressional district than Congressman Jerry McNerney where his metro
area of Stockton, California, was ranked the second highest rate of
foreclosures in 2007.
As we will hear from our distinguished panelists, data specific to
veterans does not exist, or is limited in scope, leaving us with an
incomplete puzzle that makes it harder for us to get a good idea of how
current mortgages are affecting our veterans. Fortunately, many of us
have heard from our returning servicemembers and veterans back home
about the problems they have encountered. Problems such as that
expressed by Mr. Marty Dubois, a veteran, concerned about losing his
home because he does not qualify for a VA home loan due to the equity
requirements. We have also heard several complaints from veterans
residing in high-cost residential areas in which the current VA home
loan is insufficient, and this will effectively price them out of the
market.
As you can see on the television screen above, veterans are still
being caught-up in the mortgage crisis and we should only expect this
problem to worsen. The image of Mr. Hector Mesas, a veteran crying
after telling Senator Hillary Clinton about the difficulty he has with
paying his mortgage, was posted on yesterday's Washington Post Express
paper. Mr. Mesas, and the thousands of veterans throughout our country
deserve better, and we must do better to ensure they are afforded the
protections they need as they adjust to life after their military
service.
I look forward to working with Ranking Member Boozman and Members
of this Subcommittee to continue to improve readjustment benefits
available to all servicemembers and veterans. I now recognize Mr.
Boozman for any opening remarks he may have.
Prepared Statement of Hon. John Boozman, Ranking Republican Member,
Subcommittee on Economic Opportunity
Good afternoon. Madame Chairwoman, you have chosen an especially
timely topic for today's hearing.
Every day, the media reminds us of the difficulties facing our
national economy because of the subprime mortgage crisis. It is clear
from reading today's testimony that America's veterans, regardless of
whether they have a subprime mortgage or not, whether they are current
in their payments or not, will be affected in some way by this
financial mess.
It is also clear from our witnesses' statements that there is
plenty of blame to go around. It appears that every level of our
national economic structure has played a role in allowing this to
happen. It would be too easy to blame just the borrowers who fooled
themselves into believing they would never be faced with increased
payments. Or the lenders and brokers who encouraged such behavior with
highly speculative mortgage products. Or big investors and Wall Street
financial services giants who appear to have demanded increasingly
risky transactions. I guess you could say there was enough greed to go
around.
So, the question before us today is what can VA do to help veterans
stuck in this mess? Under current law, their options are limited. But
we must be careful here. VA wisely has maintained its underwriting
standards and as a result, taxpayers are not seeing their funds wasted.
The VA guaranty program is solvent and does not reflect the
difficulties in the subprime market. As we will hear from our
witnesses, the mortgage business is very complex, with multiple levels
of markets, borrowers, lenders and investors and the potential for
negative unintended consequences is significant. I want to work with
you to keep the VA program stable and financially viable so that
tomorrow's veterans will benefit just as yesterday's and today's have.
I look forward to any suggestions our witnesses may have to ease
this situation.
Prepared Statement of Roger M. Kubarych, Chief U.S. Economist,
UniCredit Markets and Investment Banking, and Henry Kaufman
Adjunct Senior Fellow for International Economics and Finance,
Council on Foreign Relations
Madame Chairwoman, members of the Subcommittee:
Thank you for inviting me to testify on the important topic
``Subprime Mortgage Crisis and America's Veterans.'' As a financial-
sector economist trying to make sense for UniCredit management and
clients of what has gone wrong in the U.S. mortgage market, and as a
part-time scholar with the Council on Foreign Relations engaged in a
multi-year project assessing the strengths and deficiencies of what
I've called ``Americanization of Finance,'' I am still stunned by the
severity of the developments that have taken place. From an
unsustainable boom in U.S. housing markets, we have watched a massive
contraction in activity since 2006, evidenced by plunging housing
starts, sales and prices. The consequences have been truly painful for
many. Numerous homeowners are struggling with mortgages they cannot
afford. Major banking and other financial institutions here and abroad
have suffered enormous losses, and their ability to conduct normal
lending activities is impaired. And the whole sorry episode has
contributed to diminished respect internationally for the integrity of
the U.S. financial system and its guardians, perhaps most conspicuous
in the decline in the value of the dollar in foreign currency markets
since the crisis broke out last summer and a worrisome escalation of
commodity prices, not least crude oil.
Veterans are affected by the subprime mortgage crisis and the
broadening financial turbulence that developed in its wake in at least
four ways:
First, some veterans are directly involved because they bought
homes financed by subprime mortgages, which too often contained a raft
of unfriendly or outright abusive terms and conditions, and are now
unable to stay current on their debt-servicing obligations. Some
portion of these veterans may be already facing delinquency or even
loss of their homes through foreclosure.
Second, many other veterans are impacted indirectly, as a result of
the widespread decline in the value of houses throughout much of the
United States. The current values of their homes are caught in the
overall housing slump, and their personal net worth is or will be
contracting. Not all will be impacted equally. Those veterans who
bought their homes years ago probably still have substantial unrealized
capital gains, despite the recent moderate declines in average home
prices. But any recent veterans who bought houses near the peak in the
housing boom are going to lose a good portion, maybe all, of the equity
they had in their homes. The standards of living of many veterans will
take a hit.
Third, all veterans, just like every American, are hurt by the
diminished availability of credit because of the squeeze on many banks
and other financial institutions who made unwise investment decisions,
suffered losses, and are now straining to repair wounded balance
sheets.
Fourth, veterans, along with the rest of us, are facing higher
costs for energy and other imports as a result of the decline in the
value of the dollar and the rise in commodity prices, both traceable in
part to the erosion in confidence in our financial markets and our
currency.
These are big negative effects. That's why it's understandable why
so many economists, whether in the private sector, in the Federal
Reserve or in the U.S. Government, are either predicting a business
recession or raising the odds that a recession might develop.
Before making a few suggestions about what might be done to
ameliorate the adverse effects on veterans and other homeowners with
these radioactive subprime mortgages, let me make a few points--highly
abbreviated to save time--that might help put the current mess in some
perspective.
1. Securitization of mortgages is not new. Securitization--that
is, the pooling together hundreds or thousands of individual mortgage
loans into a mortgage-backed security, MBS, that can be sold to
institutional investors much like a traditional corporate bond--got
started in the early eighties. That was a time when high inflation and
correspondingly high interest rates were making it almost impossible
for many commercial banks and savings & loan associations to offer
mortgages. Within a few years, the useful innovation had caught on to
such an extent that over half of all outstanding mortgages were
securitized (the rest were held mostly by banks and thrifts). Here's
some useful data, drawn from the Fed's Flow of Funds accounts, showing
quickly and pervasively mortgage securitization caught on:
Mortgage Securitization: From Humble Beginnings to Central Part of the System
----------------------------------------------------------------------------------------------------------------
1975 1980 1985 1990 1995 2000
----------------------------------------------------------------------------------------------------------------
Total mortgages $ trillion 0.46 0.96 1.52 2.62 3.46 5.13
----------------------------------------------------------------------------------------------------------------
Percent securitized 5.3 11.1 25.2 39.9 50.2 54.8
----------------------------------------------------------------------------------------------------------------
Source: Federal Reserve Board, Flow of Funds.
[I left out the more recent data until later: since 2000 the market
has had a new element: explosive growth in subprime mortgages and a
different way of securitizing them, but I will come back to that
shortly.]
2. Securitization done prudently provides immense benefits to
nearly everyone: borrowers, investors, and the banks who engineer the
process. From humble beginnings, securitization blossomed because it is
a superior way of doing the business. Its inventors recognized that the
traditional business practiced by banks and thrift institutions of
originating mortgage loans, doing the servicing of those loans in-
house, and holding them on their balance sheets posed enormous
problems. Those problems were especially nasty when short-term interest
rates were elevated or when individual cities and towns encountered
localized economic distress. It was far more efficient to divide the
single business model into three parts, with specialization in
origination of mortgages, loan servicing, and investing. By this
separation, large mortgage-market participants could amass expertise
and advanced technology. And they could do it on a national playing
field, reducing the risk of undiversifiable geographic lending
concentrations that were often the bane of many local banks and
thrifts.
3. Securitization couldn't have thrived without indispensable
government support. Mainly that came from GNMA, FNMA, and FHLMC,
commonly referred to as Ginnie Mae, Fannie Mae, and Freddie Mac. These
government-sponsored enterprises, GSEs, facilitated the bundling of
loans into MBSs, most importantly by taking over the risk of loss
through default by individual homeowners on their mortgages and by
setting high standards on the quality of the mortgages that they were
prepared to guarantee (called ``conforming'' mortgages). That meant
that buyers of pass-through securities (the simplest kind of MBS)
didn't have to worry about credit risk so they could focus on the very
difficult, but manageable, exposure to market risk that they took when
investing in mortgage-backed securities. The private markets couldn't
do it alone, but didn't have to, because of the integral role of the
GSEs in the financial system.
4. Until the early 2000s, subprime mortgages represented a
modest, almost inconsequential, part of the mortgage financing system.
But by about 2002, things were changing rapidly. What happened? First,
Fannie and Freddie, stockholder-owned and privately managed since the
early nineties, lost control of their operations. They got in the habit
of doing more than absorbing credit risk and facilitating
securitization but instead began to hold more and more mortgages in
their own portfolios, financed through borrowing (relatively cheaply
because of an implied U.S. Government safety net) in the capital
markets. Some market professionals thought of them as running the
biggest hedge funds in town. But in so doing they were taking huge
market risks and relied on massive transactions in financial
derivatives in order to try to hedge the risks they were taking. They
handled this badly and for years their financial accounts have been a
mess. CEOs and CFOs were replaced, fines were paid, and their overseer,
OFHEO, essentially put limits on their growth until they got their
financial houses in order.
5. This opened the door for major players in the private sector
to move into the home mortgage financing business in a major way. And
that included pushing the envelope on creditworthiness of borrowers.
Long-tested rules of thumb on what once constituted sound banking
practices went out the window. By 2006, upward of 40% of all new
mortgages being originated were subprime or Alt A, i.e. deficient in
some ways. It created a time-bomb when these loans were securitized
through privately issued MBS or then recombined into collateralized
debt obligations, CDOs. These are complex securities comprised of a
variety of MBSs and other financial instruments, often involving
substantial leverage. Last summer, they became almost unmarketable when
buyers realized the potential for loss was far greater than they had
ever imagined.
6. The growth in mortgage-related securities by what the Fed
calls ``asset-backed securities issuers'' was stupendous. The data are
in the chart below. From a relatively modest level, private
securitization, increasingly involving subprime mortgages in the 2002-
2007 period, has taken on an increasing and probably inordinate share
of overall mortgage financing business:
Mortgage Securitization in This Decade, End of Period
----------------------------------------------------------------------------------------------------------------
2000 2002 2003 2004 2005 2006 Q3 2007
----------------------------------------------------------------------------------------------------------------
Total home mortgages $ trillion 5.13 6.44 7.23 8.28 9.34 10.42 11.03
----------------------------------------------------------------------------------------------------------------
Total percent securitized 54.8 56.1 53.6 52.1 53.5 55.4 57.0
----------------------------------------------------------------------------------------------------------------
Percent securitized privately 7.5 8.5 9.2 12.7 16.7 19.7 19.8
----------------------------------------------------------------------------------------------------------------
Source: Federal Reserve Board, Flow of Funds.
7. The U.S. financial regulatory system was ill-equipped to deal
with abusive lending practices of financial institutions not under the
formal supervisory authority of the Fed or other traditional bank
regulators. The majority of mortgage banks fell between the cracks.
That was dangerous once their role in the mortgage financing suddenly
escalated. As the housing boom fueled soaring home prices, large
numbers of potential home buyers were eager to get in on the action.
Many were not creditworthy under normal standards. But the mortgage
bankers developed variations on conventional loans to allow them to
borrow. Subprime mortgage products offered low teaser rates to attract
customers. They let applicants lie about their incomes and put up small
or even zero downpayments. But those borrowers would have to accept
stiff prepayment penalties, a sharp break from normal U.S. customs, and
agree to pay sharply higher interest rates when their initial low rates
were adjusted in a year or two. A more responsive regulatory system
would have stepped in to catch the most abusive tactics before
thousands were trapped in loans they would likely not be able to carry.
8. The ratings agencies made poor judgments and were subject to
intense conflicts of interest, since their compensation was paid by the
issuers. They awarded high ratings evidently with little or no
evaluation of the likelihood of default should house prices fall back.
9. Institutional investors were lazy and cheap: lazy, because
they relied almost entirely on credit ratings rather than performing
their own due diligence; cheap, because they didn't pay outside experts
to ``stress test'' the conclusions of the ratings agencies under
differing scenarios.
10. And many borrowers cynically got themselves into trouble by
assuming that the housing price boom would go on forever. Instead they
chased the dream of becoming mini-real estate speculators, while
subjecting themselves to high and escalating interest rates in return
for not having to tell the truth about their incomes and not having to
put up sizable downpayments.
In short, there is more than enough blame to go around. What can be
done, now that the situation has gone beyond the danger point?
While I don't have a formal policy proposal to offer, I do have
four observations with which to conclude:
First, every first-year economics student comes across the concept
of ``externalities'' or what are also described as ``neighborhood
effects.'' What this means is there is a market failure. And when there
is market failure there is a strong case for public policy to
counteract the negative effects. Foreclosures present an especially
brutal externality as the adverse neighborhood effects are visible to
everyone: who wants to live next door to a boarded up home taken over
by a lender? Isn't it obvious that the value of every house in such a
neighborhood is going to be undermined, to some extent or perhaps a
lot, by foreclosures? So isn't there a strong public policy case for
preventing them? Yes, and President Bush himself acknowledged such a
case in his remarks of early September 2007. The sad thing is that the
administration was agonizingly slow in following up on his call for a
program to assist troubled borrowers so as to minimize foreclosures.
Subsequent efforts, from Hope Now to the latest iteration announced by
the Treasury Secretary a few days ago, are useful but insufficient.
Second, the case for a public policy response is further
strengthened by another example of market failure: the provision of
flood insurance. Everybody knows that private insurance companies have
no interest whatsoever in offering flood insurance. Most homeowners are
not at risk and wouldn't buy it. Only those who live in familiar
exposed areas, along the Gulf Coast, or the Ohio River system, or
similar spots, desperately need coverage but couldn't afford what a
private insurance company would have to charge in order to provide such
coverage profitably. So government has to step in, and even then not
everybody who would benefit bothers to buy the affordable coverage
government provides. Analogous arguments can be made for credit risk
insurance.
Third, now that hundreds of thousands of homeowners, including
veterans, are at risk of becoming delinquent and possibly losing their
homes, the voluntary program for individual loan work-outs that is in
place needs to be supplemented by something more comprehensive. The
simplest approach would be for the government to offer affordable
medium-term loans to low- and middle-income individuals to allow them
to repay abusive subprime mortgages on their primary residences. That
may require legislation to override particular terms in mortgage
contracts that impose stiff prepayment penalties, a feature that was
almost unheard of in American mortgages before the subprime mortgage
explosion.
Finally, the financial regulatory system governing mortgage
financing and securitization, by far the largest part of the credit
markets and easily the most important for the vast majority of
Americans, has to be fundamentally upgraded. The administration has put
its emphasis on FHA and the GSEs. That is their prerogative. But other
key elements of the system failed to function in the public interest.
Appropriate implementation of the Banking Holding Company Act by the
Federal Reserve has been spotty. The SEC has been slow in recognizing
its enormous mistake in giving special pride of place to credit ratings
agencies, thereby nurturing an unwarranted complacency among investors
that somehow the SEC stands behind their methods and the ratings
themselves.
America's veterans have served this country with skill and valor.
They have a right to expect that the economy and financial system of
this country is similarly managed in the national interest, even if
that sometimes means that certain participants in financial markets
must accept restraints on their activities. No one should be proud of
what has happened in the field of mortgage financing in the past five
years. And it shouldn't be allowed to get worse.
Prepared Statement of Donald J. Bisenius, Senior Vice President,
Credit Policy and Portfolio Management, Freddie Mac
Chairwoman Herseth Sandlin, Ranking Member Boozman, members of the
Committee:
Good afternoon. My name is Don Bisenius, and I am the Senior Vice
President of Credit Policy and Portfolio Management at Freddie Mac.
Thank you for the opportunity to address the subcommittee today, and to
offer some of our thoughts on the subprime mortgages crisis and the
effects it may be having on America's veterans.
Freddie Mac's Role in the Mortgage Market
Freddie Mac is a government-sponsored enterprise, or GSE, created
by Congress with a public mission to bring liquidity, stability and
affordability to the Nation's residential single and multifamily
mortgage markets. Unlike the Federal Housing Administration or the
Department of Veterans Affairs, we are not part of the federal
government. We are a shareholder-owned corporation, capitalized
entirely by private-sector money. We currently guarantee about $1.75
trillion of mortgage-backed securities, providing home ownership
opportunities for nearly 11 million families.
Historically, Freddie Mac has guaranteed mortgages in the
conventional conforming segment of the mortgage market--so-called
``prime'' mortgages for no more than the ``conforming'' limit,
currently $417,000. Today, the conventional conforming market,
supported by Freddie Mac and Fannie Mae, and the government market for
mortgages insured by FHA or guaranteed by the VA, are the only well-
functioning segments of the mortgage market. Long-term fixed-rate
mortgages are widely available and rates are low. The market shares of
the GSEs, the FHA and the VA all grew significantly in 2007, especially
in the second half of the year, as the supply of funds from other
investors disappeared. We are doing the job that Congress assigned us:
helping to maintain stability by providing liquidity to the markets
that we were created to serve.
The GSEs, like the VA, do not originate mortgages. We do not
control what loans the primary market originates. What we can do is
define what mortgages we are willing to purchase and guarantee. Because
of our size and constant presence in the marketplace, in most economic
environments the GSEs can influence what loans the primary market
chooses to originate. Over the past 3 or 4 years, however, our
influence waned as subprime originators found investors who were
willing to assume more risk than we felt was prudent.
We do not track whether mortgages we buy are made to veterans, so I
cannot tell you how many veterans' homes we have financed over the
years. I am not aware of any data that would tell us how many veterans
have subprime loans, but it is reasonable to assume that the impact of
the crisis is at least as severe on veterans as it is on other
borrowers.
We do offer mortgage products that help active-duty servicemembers
and recent veterans buy homes. In 2006, we extended our flexible Home
Possible Neighborhood Solutions affordable mortgage products
(originally targeted at teachers, police, fire and other public sector
employees) to members of the Armed Forces and recently separated and
retired military and military reservists. These are prime mortgages
that permit eligible families with limited credit or downpayment
savings to finance up to 100% of the value of their new home. Together
with our lender customers, we have specific initiatives for military
communities at Fort Benning, Fort Riley, Fort Drum and the naval
installations in the Virginia Tidewater that focus on financial
literacy and home ownership opportunities for active-duty
servicemembers. Deployed servicemembers qualify for capped interest
rates on mortgages sold to Freddie Mac under the Servicemembers Civil
Relief Act.
The Subprime Issue
When the subprime crisis erupted as a national issue about a year
ago, the conventional wisdom blamed the structure of short-term 2/28
and 3/27 subprime adjustable-rate mortgages (ARMs), in which interest
rates are fixed for the first two or three years of the loan, and then
adjust periodically. The theory was that ``exploding'' interest-rate
resets caused large increases in monthly payments that made mortgages
unaffordable for many families, and public policy responses focused on
blunting the effects of payment shock. This remains a concern, but the
Federal Reserve Board's continuing cuts in short-term interest rates
will help avert ``payment shock'' for recent subprime borrowers by
significantly lowering upcoming increases in their monthly payments.
We have come to understand that resets are not the only or
necessarily the most important element of the story. More
fundamentally, the subprime foreclosure crisis derives from a
combination of (1) looser lender underwriting standards, especially
with recent originations, that allowed speculation and may have put
families into homes they could not afford to keep without continued
house price appreciation; and (2) subsequent house price depreciation
that makes it impossible or uneconomic for stretched borrowers either
to sell or to refinance into new higher-balance loans as they might
have in the past.
This does not mean that subprime mortgages are intrinsically bad;
many subprime loans perform as agreed, even in today's market.
Historically, they have helped families with weak credit become
homeowners, in return for a higher interest rate to compensate the
lender for the higher risk of default these loans pose.
Freddie Mac has participated in the subprime market as a
responsible and prudent investor. We have not historically purchased or
securitized subprime mortgages directly, and instead have limited our
participation to investing in the highest-rated, least risky segment of
the subprime mortgage securities market (also known as the subprime
``private label'' market). This participation reflects our charter
objectives to bring additional liquidity to the mortgage market. It has
also been an important contributor to our efforts to meet our HUD-
mandated affordable housing purchase goals. In fact, by carefully
tailoring our securities purchases, nearly 80% of the units financed by
our 2007 subprime purchases met one or more of our three affordable
goals--the low- and moderate-income goal, the special affordable (or
deeply targeted) goal, and the underserved areas goal. This approach
has proven to be very prudent, given the losses others are taking in
this market.
In addition to providing liquidity, Freddie Mac has taken a
leadership role in addressing some of the excesses of subprime lending.
As an investor in the least risky subprime securities, we have a
limited ability to influence the market's practices. Nevertheless, last
winter we were the first to announce that we would restrict our
subprime investments in securities backed by short-term ARMs to those
that have been underwritten to a fully indexed, fully amortizing level.
We also restricted the use of stated income in lieu of more traditional
documentation standards and encouraged subprime lenders to escrow
borrower funds for taxes and insurance.
Last April, we pledged to buy $20 billion in consumer-friendly
mortgages that provide better choices for subprime borrowers. We have
already exceeded that pledge. Since May 1, 2007, we have bought about
$42.5 billion of prime mortgages that financed borrowers whose credit
profiles might have otherwise relegated them to the subprime market.
These purchases have helped nearly a quarter of a million families.
As part of this commitment, we created our SafeStepSM
subprime alternative product, introduced in July and designed to give
subprime borrowers more sustainable alternatives. But through the end
of 2007, we have bought only $207 million of these mortgages. It is not
that our credit parameters on the product are particularly
conservative, but we did require originators to validate borrowers'
incomes, property values and other information, and most borrowers
simply could not qualify. This illustrates a dilemma that we all face
in trying to clean up the subprime mess--that there are too many
borrowers stuck in subprime loans who simply cannot qualify for
prudent, sustainable mortgages.
This dilemma is greatly compounded by the significant decline of
house prices in many areas. Many families bought a home over the last
couple of years that are now worth less than they borrowed to buy it.
If this family can afford the monthly payment and does not need to sell
the house, this may not pose an immediate problem. It can be a problem,
however, if the payments are too high or the family wants to move or
sell for some other reason. It is difficult for even a creditworthy
borrower to refinance or sell when the house is worth less than the
total of the outstanding mortgage debt.
Thinking About Solutions
At Freddie Mac, we spend a lot of time thinking about how to
address this situation. Like almost everybody else, we have concluded
that there is no silver bullet, and that, unfortunately, things are
going to get worse before they get better. For the moment, the
combination of lack of borrower capacity and falling house prices
demonstrates that there are no easy solutions to this problem.
Nevertheless, let me suggest some things that can be done to
mitigate its effects:
Focus servicing practices on keeping borrowers in their
home whenever possible. Loan modifications, repayment plans and other
foreclosure prevention initiatives are important. The Hope Now subprime
loan modification program and the related Project Lifeline project fall
into this category. At Freddie Mac, we have found that early
intervention can help some borrowers avoid foreclosure, and last year
helped nearly 47,000 borrowers keep their homes. I understand that the
VA uses a similar approach.
Help some borrowers refinance into innovative mortgages
like SafeSteps and FHASecure. It may be appropriate to consider other
approaches that take house price declines into account. But unless the
borrower has the capacity to afford the monthly payments, a refinance
simply sets up both the lender and the borrower for a repeat of the
earlier failure.
Support, with the participation of the public and private
sectors, community stabilization efforts of local and national non-
profits and state and local governments hard-hit by the crisis. In many
communities, such as Las Vegas, we have to deal with the problem of
foreclosures on investment properties. While no one wants to ``help''
speculators, a foreclosed investment property is just as damaging to a
community as a foreclosed family home. Moreover, foreclosures on
investment properties often throws tenants out of their homes and cuts
the supply of affordable rental housing.
Help families transition to more affordable housing.
Despite all our efforts, not all borrowers can afford the house they
are now living in. For these families, short sales and deeds-in-lieu of
foreclosure can help make the transition smoother. We should consider
ways to help these families buy less expensive homes or shift into
affordable rental housing.
I wish I could be more sanguine, but the housing crisis is going to
be painful and take time to resolve. Freddie Mac is committed to
working with Congress, the Administration, our customers and other
industry participants to find and implement effective solutions to this
very difficult problem.
Thank you for the opportunity to appear today, and I will be happy
to answer your questions.
Prepared Statement of Anthony Agurs, ABR, CRS, Member,
Board of Directors, NATIONAL ASSOCIATION OF REALTORS, and,
REALTOR, Agurs Group, El Cajon, CA
Executive Summary
The NATIONAL ASSOCIATION OF REALTORS is a strong supporter of
housing opportunities for veterans. We commend the Subcommittee for its
attention to issues impacting American veterans. Many veterans, like
other Americans, were seduced by the low payments promised by abusive
subprime lenders. However, military families seem to be an especially
attractive group for those wishing to prey on people with less than
perfect credit.
We believe the Veterans Home Loan Guaranty Service can be a
valuable asset to help our Nation's veterans achieve the dream of home
ownership in a way that is safe, fair, and affordable. This program,
created under the GI bill, encourages private lenders to offer
favorable home loan terms to qualified veterans. However, without
reforms, this program has not served many veterans who could use its
benefits. We urge the following enhancements to the VA program to
assure all our military families have the opportunity to reach the
American dream of home ownership.
Increasing the VA Loan Limits in High Cost Areas--The
current VA loan limit is equal to $417,000. States with the largest
veteran population are CA, FL, TX, PA, NY and OH, respectively. Four of
these states include areas where the median home price is well above
the national average and above the current loan cap of $417,000.
Veterans in these areas should not be penalized for geographic
differences in the housing market. NAR supports legislative efforts to
increase the VA limits to 150% of the conforming limit in high cost
areas.
Easing Refinancing for Veterans--Some veteran homeowners
have a risky sub-prime loan that they will not be able to afford when
the interest rate or loan terms reset. But current law makes it nearly
impossible for veterans to refinance into a VA home loan.
VA requires veterans to have at least 10% equity in a
home prior to refinancing. This limitation makes it impossible for many
veterans in risky sub-prime loans to refinance into a safer, more
affordable VA loan. We urge Congress to revisit this provision of law
to reduce to 5% the equity required to refinance a home.
In addition, law limits the guaranty that can be used
for a typical VA refinance loan to $36,000. As a result, refinance
loans of more than $144,000 will result in the lender not receiving 25
percent backing from VA and, as a result, probably not making the loan.
We urge Congress to eliminate this refinancing restriction and making
the maximum VA guaranty applicable for all VA-guaranteed loans.
Permanently Authorize ARMS--While the vast majority of VA
loan guarantees are for fixed term loans, VA does have authority to
guaranty adjustable-rate mortgages (ARMs) and hybrid ARMs through
September 30, 2008. We urge Congress to make these programs permanent
and continue to provide VA with the flexibility to serve all America's
veterans.
I thank the Subcommittee for this opportunity to share the views of
NAR regarding veterans housing. The NATIONAL ASSOCIATION OF REALTORS
strongly supports housing opportunities for our Nation's veterans and
active duty military professionals. It is our hope that the
Subcommittee will support our recommendations for enhancing and
improving the VA home loan guarantee program, so it may be a real
benefit to those who have so bravely served our country.
__________
As a veteran and a REALTOR thank you for inviting me to testify on
the Subprime Mortgage Crisis and its impact on American veterans. My
name is Anthony Agurs, and I am a REALTOR with the Agurs Group in El
Cajon, CA. I am proud to say I served 21 years in the United States
Marine Corps and have now been in real estate for nearly 14 years.
I am here on behalf of 2008 NAR President Dick Gaylord and the 1.3
million members of the NATIONAL ASSOCIATION OF REALTORS representing a
wide variety of housing industry professionals committed to the
development and preservation of the Nation's housing stock and making
it available to the widest range of potential home buyers.
The NATIONAL ASSOCIATION OF REALTORS is a strong supporter of
housing opportunities for veterans. We commend the Subcommittee for its
attention to issues impacting American veterans. Military veterans
represent more than 25 percent of the U.S. homeless population,
although they comprise only 11 percent of the civilian adult
population.\1\ Men and women who have served this country deserve
better. As NAR Past President Pat V. Combs said at a press conference
on VA home loans last year, ``The homelessness rate among our veterans
is unacceptable to REALTORS, who believe in building safe, healthy
communities. . . . Many of our members are veterans and active service
personnel who know firsthand the struggles and sacrifices faced by
those who have fought to protect our safety and freedom.''
---------------------------------------------------------------------------
\1\ Vital Mission: Ending Homelessness Among Veterans, Homelessness
Research Institute (November 2007).
---------------------------------------------------------------------------
REALTORS across the country are also doing their part to help our
veterans. In November, NAR presented a 2007 Good Neighbor award to Phil
Landis. Chosen from over 320 REALTOR nominees nationwide, Phil is a
REALTOR, a Vietnam vet, and since 2001 has been Chairman of the
Veterans Village of San Diego (VVSD). VVSD provides food, clothing,
housing, substance abuse treatment, mental health counseling, and job
training and placement services to homeless veterans. Since becoming
active in the organization, Phil has utilized his real estate acumen to
improve the financial standing of the VVSD, growing its net worth from
$1.5 million to almost $16 million. Today, VVSD has 100 employees, a
five-acre site with 127 treatment beds and a new 112-bed facility
scheduled to open in 2008. Phil has been in real estate for 21 years
and currently is a sales associate with RE/MAX Ranch & Beach in San
Diego.
In addition, NAR has partnered with U.S. Vets, an organization
serving the homeless veteran population. U.S. Vets works to break the
cycle of homelessness by fostering individual responsibility. NAR
sponsored its inaugural U.S. Veterans Day Golf Tournament in
Washington, DC. All proceeds from the event went to U.S. Vets-DC. In
addition, as part of our Annual Convention in 2007, NAR President-elect
Charles McMillan and First Vice President Vicki Cox Golder visited the
Las Vegas office of U.S. Vets on Veteran's Day and presented a donation
to help the more than 5,000 homeless veterans living in Clark County,
Nevada.
I passionately believe in the American Dream of Home Ownership for
anyone who desires to achieve that goal for themselves and their
families especially the Soldiers, Sailors, Airmen, and Marines of our
Armed Forces who sacrifice so much in defense of the American way of
life, yet ask for so very little in return. Unfortunately, like many
Americans, our military families have been hit hard by the subprime
mortgage crisis. These homeowners are in financial crisis and need our
help.
Subprime Mortgage Crisis
Irresponsible and abusive lending practices are a major problem for
all of our Nation's communities. While responsible subprime lenders
have played an important role in helping millions of consumers achieve
homeownership, abusive lending occurs much too often in subprime
markets. Unfortunately, some lenders have abused their role and taken
advantage of some borrowers, including veterans, by charging extremely
high interest rates and loan fees unrelated to risk, using aggressive
sales tactics to steer consumers into unnecessarily expensive or
inappropriate loan products, advertising ``teaser'' interest rates
(like the 2/28 or 3/27 adjustable rate mortgage) that steeply increase
after the first few years of the loan and basing their lending on
artificially high appraisals. Real estate professionals have a strong
stake in preventing abusive lending because:
Abusive lending erodes confidence in the Nation's housing
system.
Legislative and regulatory responses to lending abuses
that go too far can inadvertently limit the availability of reasonable
credit for prime as well as subprime borrowers in a credit-driven
economy. When responses to abusive lending constrain the ability of the
secondary mortgage market to provide liquidity for home finance,
consumers will find it more difficult and expensive to buy a home.
Citizens of communities, including real estate
professionals, are harmed whenever abusive lending strips equity from
homeowners. This is especially the case when irresponsible lenders
concentrate their activities in certain neighborhoods and create a
downward cycle of economic deterioration.
Just last month, the Center for Responsible Lending (CRL), which
more than a year ago warned Congress about the more than 2 million
American families projected to lose their homes to foreclosure,
released startling research on the spillover effect on our Nation's
communities and neighborhoods. Specifically, CRL estimates:
More than 40 million neighboring homes will suffer a
decline in property values because of foreclosures in their
neighborhood;
Homeowners living near a foreclosed home will see their
property value reduced by about $5,000; and
The total decline in property values and reduced tax base
from foreclosures will total $202 billion.\2\
---------------------------------------------------------------------------
\2\ Subprime Spillover: Foreclosures Cost Neighbors $404 Billion;
40.6 Million Homes Lose $5,000 on Average, Center for Responsible
Lending (January 2008).
Recently, the U.S. Conference of Mayors \3\ commissioned a report
on the economic and fiscal impact of foreclosures. The findings were
largely consistent with the CRL report and concluded that 2008 will
bring more foreclosures, curtailed consumer spending and significant
financial stresses for state and local government budgets. NAR research
shows that due to the housing market contraction, the U.S. economy
expanded only 2% in 2007. A further weakening of the housing market has
the potential to tip the economy into recession in 2008.
---------------------------------------------------------------------------
\3\ The Mortgage Crisis: Economic and Fiscal Implications for Metro
Areas, Global Insight for the United States Conference of Mayors and
the Council for the New American City (November 2007).
---------------------------------------------------------------------------
State and local governments will immediately feel the impact of the
reduced property tax revenue, which goes to fund important county/city
services we depend on every day (police protection and fire rescue
services, schools, social services, public transportation etc.). Some
have already begun to cut back or curtail funding for critical programs
that help the homeless. Furthermore, what many people do not realize is
that foreclosures actually require local governments to spend money
``for inspections, court actions, extra law enforcement, visits from
city utilities and sometimes demolition.'' \4\
---------------------------------------------------------------------------
\4\ T.W. Farnam, As Foreclosures Rise, Mayors Brace for Fallout,
Wall Street Journal (January 28, 2008).
---------------------------------------------------------------------------
Someone once said that foreclosures are like mold--once it starts,
it's difficult to rid a community of it. Families struggling to make
mortgage payments and living in a neighborhood where homes have already
been lost to foreclosure will find it difficult to refinance or sell
due to declines in neighborhood home values. Far too often these
financially stressed families will end up losing their home and feeding
the vicious cycle of foreclosures.
Impact on Veterans
Many veterans, like other Americans, were seduced by the low
payments promised by abusive subprime lenders. However, military
families seem to be an especially attractive target for those wishing
to prey on people with less than perfect credit. A report by the
National Consumer Law Center found the following:
``Military personnel are ripe targets for consumer predators
because many are low-income (always the most targeted group) but have a
far longer list of economically attractive qualities than most low-
income people. Periods of deployment like those for the recent war in
Iraq are especially vulnerable times. And military conduct codes that
stress the need for orderly personal lives, including orderly finances,
may inadvertently be driving service people toward the quick fixes many
consumer predators offer.'' \5\
---------------------------------------------------------------------------
\5\ ``In Harms Way--At Home: Consumer Scams and the Direct
Targeting of America's Military and Veterans'', National Consumer Law
Center (May 2003).
---------------------------------------------------------------------------
Veterans are more likely to have lower credit scores due to their
service to our country. Sporadic civilian work due to calls to service
and low military pay lead some military families into financial
difficulties.
Committee Chairman Filner recently stated, ``For many of our
returning servicemembers and veterans, the stress of what they have
gone through in war is still prevalent when they return home.
Unfortunately, for many of these heroes, subprime loans are the only
option when they do not have the best credit score, and more often than
not, their low credit score is a direct result of their service to our
country.'' \6\
---------------------------------------------------------------------------
\6\ Hon. Bob Filner, ``Filner Introduces Legislative Package to
Help Veterans Survive the Subprime Mortgage Crisis'', Press Release,
December 19, 2007.
---------------------------------------------------------------------------
VA Home Loan Guarantee Program
We believe the Veterans Home Loan Guaranty Service can be a
valuable asset to help our nation's veterans achieve the dream of
homeownership in a way that is safe, fair, and affordable. This
program, created under the GI bill, encourages private lenders to offer
favorable home loan terms to qualified veterans. The VA home loan
guarantee program made its first loan for a home in Washington, DC in
1944. Today, the VA has guaranteed well over 18 million loans to
American veterans. We believe this program is a vital homeownership
tool that provides veterans with a centralized, affordable, and
accessible method of purchasing homes as a benefit for their service to
our nation.
The VA home loan guarantee program is designed to provide veterans
who are unable to qualify for a conventional loan with favorable loan
terms. A study conducted in 2004 found the program did just that. The
percentage of VA borrowers who could not qualify for a conventional
loan was 82% for first-time home buyers, and 78% for repeat borrowers.
In addition, the typical VA borrower could also not qualify for an FHA
loan. Sixty-one percent (61%) of VA first-time borrowers could not meet
either the downpayment and/or maximum debt-to-income ratios required to
obtain an FHA loan.\7\ The VA program, therefore, offers unique and
important benefits for helping our military families achieve the dream
of home ownership.
---------------------------------------------------------------------------
\7\ Evaluation of VA's Home Loan Guarantee Program, Final Report.
Economic Systems Inc.; ORC Macro; The Hay Group; Department of Veterans
Affairs, July 2004.
---------------------------------------------------------------------------
Despite offering borrowers a zero-downpayment loan, VA's
delinquency rate is low. According to the most recent delinquency
survey published by the Mortgage Bankers Association, VA's delinquency
rate was 6.58%, and the foreclosure rate was 1.03%. In contrast, sub-
prime delinquency rates were a staggering 16.31%, and foreclosure rates
were 6.89%.\8\
---------------------------------------------------------------------------
\8\ National Delinquency Survey, Mortgage Bankers Association, Q307
(December 2007).
---------------------------------------------------------------------------
In addition, the VA home loan program offers protections for
borrowers when financial difficulties occur by offering a variety of
supplemental loan servicing programs to help military families avoid
foreclosure. VA offers financial counseling and can serve as a conduit
between the veterans and the private lender holding the loan. VA will
try and negotiate repayment terms for borrowers in financial
difficulty. Under some specific conditions, VA may also purchase the
loan and allow the borrower to make payments directly to the VA at a
reduced interest rate.
These interventions not only help the veteran retain their home,
but save the VA money by avoiding the payment of a guarantee claim. In
2007, VA accomplished more than 8,453 successful interventions, which
translated into a savings to the government of $181.3 million in claims
avoided.
The VA home loan program has a proven record for promoting
homeownership amongst our nation's veterans. However, with the
increasing costs of housing, and abuse in the subprime market, we
believe additional enhancements are needed to improve the program's
usefulness and position it as a viable homeownership vehicle in this
changing world. We are pleased to note the bills introduced by Rep.
Murphy and Chairman Filner (H.R. 2385 and H.R. 4884 respectively) which
will implement some of these changes. NAR strongly supports these
bills, and urges the Veterans' Affairs Committee to move them to
markup.
Increasing the VA Loan Limits in High Cost Areas
The VA loan guaranty limit is currently set at 100% of the
conforming loan limit. Despite recent increases to the conforming loan
limit included in the Economic Stimulus Act of 2008, it does not appear
that the VA loan guaranty will increase above the current $417,000 loan
limit. This is unfair to our military personnel and veterans who live
in high cost communities where FHA and conventional limits will exceed
$417,000 but will be excluded from homeownership and refinancing
opportunities that would be available to them if the VA loan limit were
allowed to move in concert with the conforming loan limit for those
communities.
Of the 25 million veterans currently alive, sixty percent (60%)
live in urban areas. States with the largest veteran population are
California, Florida, Texas, Pennsylvania, New York and Ohio,
respectively. These six states account for about 36% of the total
veteran population. Of these, California, Florida, Pennsylvania and New
York all include areas where the median price of homes are well above
the national average, and above the current loan cap of $417,000.
Veterans in these areas should not be penalized for geographic
differences in the housing market.
NAR supports legislative efforts to increase the VA limits to 150%
of the conforming limit in high cost areas. The VA loan guarantee is a
critical entitlement for our men and women in uniform, providing them a
safe, affordable, and accessible method of purchasing homes in return
for their service to our nation. In light of risky and sometimes
predatory alternative loan products being marketed, the veteran's loan
guarantee needs to serve all veterans, regardless of where they live.
Easing Refinancing for Veterans
Some veteran homeowners are certainly among those who are currently
in a risky sub-prime loan that they will not be able to afford when the
interest rate or loan terms reset. But current law makes it nearly
impossible for veterans to refinance into a VA home loan.
VA requires veterans to have at least 10% equity in a home prior to
refinancing. This limitation would make it impossible for many veterans
in risky sub-prime loans to refinance into a safer, more affordable VA
loan. We urge Congress to revisit this provision of law to reduce to 5%
the equity required to refinance a home. Increasing the cap from 90% to
95% will provide more opportunities for veterans to refinance. In light
of the high number of non-VA adjustable rate mortgages that will reset
in the coming months, allowing veterans the opportunity to use the loan
guarantee is critical. The highly touted FHASecure program permits
refinance loans with only 3% equity. Veterans should be afforded the
same type of opportunity that FHASecure provides other homeowners.
In addition, current law limits the guaranty that can be used for a
typical VA refinance loan to $36,000. As a result, refinance loans of
more than $144,000 will result in the lender not receiving 25 percent
backing from VA and, as a result, probably not making the loan.\9\ We
recommend eliminating this refinancing restriction and making the
maximum VA guaranty--25% of the Freddie Mac conforming loan limit
applicable for all VA-guaranteed loans--be they purchase or refinance.
---------------------------------------------------------------------------
\9\ On a standard loan the VA limit goes to $104,250, or 25% of
$417,000.
---------------------------------------------------------------------------
Raising the guarantee on VA refinancing loans and reducing the
loan-to-value ratio will allow more qualified veterans to refinance
their loans and save their homes. In light of the high number of non-VA
adjustable rate mortgages that will reset in the coming months,
allowing veterans the opportunity to use the loan guarantee will save
many from foreclosure.
Permanently Authorize ARMS
The Veterans Benefits Improvement Act of 2004, which was signed
into law by President Bush as Public Law 108-454 on December 10, 2004,
extended the VA's authority to guaranty adjustable-rate mortgages
(ARMs) and hybrid ARMs through September 30, 2008. In addition, the law
indexed the VA guaranty to the Freddie Mac conforming loan limit.
The bulk of the VA's guaranty activity is in fixed-rate mortgage
loans and this trend is likely to continue even if Congress
reauthorizes the VA to guaranty adjustable- and hybrid adjustable-rate
mortgage loans. However, these adjustable- and hybrid adjustable-rate
loans provide the VA with additional flexibility to better meet the
needs of the nation's veterans, service members and reservists.
ARMs are especially useful for active duty military. These soldiers
can purchase a home with a low interest ARM, and will likely get orders
to relocate prior to the first rate adjustment. Since military families
tend to move often, an ARM or hybrid ARM can be a very good choice. In
addition, many military families can anticipate promotions or salary
increases, making payments on the adjusted interest on an ARM possible.
The VA does not allow lenders to charge borrowers a prepayment penalty,
and so the risk is low for the veterans if they move or chose to
refinance. We encourage Congress to authorize these products
permanently.
Education and Outreach
NAR strongly believes the private sector has an obligation to help
educate homebuyers about today's mortgage products. Starting in 2005,
NAR worked with the Center for Responsible Lending (CRL) to produce a
series of brochures that describe the pros and cons of conventional
loans and nontraditional mortgages, give consumers tips on how to avoid
predatory loans. In May of 2007, NAR partnered with CRL and
NeighborWorks on a brochure that focuses on helping financially
stressed homeowners understand their options and offers tips on how to
avoid foreclosure. Shortly after the brochure was released, NAR's
President sent an e-mail to over 1.3 million REALTORS informing them
of the foreclosure prevention brochure and encouraging REALTORS to put
the brochure into the hands of every consumer they help to become a
homeowner.
In 2006, NAR partnered with the Department of Housing and Urban
Development to produce a brochure promoting FHA home loans. Shopping
for a Mortgage? FHA Improvements Benefit You has been a valuable
resource for REALTORS and their clients.
NAR is now in discussions with the Department of Veterans Affairs
to work together on a similar brochure promoting the VA Home Loan
Guarantee Program. Getting the word out about VA loans and steps
veteran homeowners should take when loan trouble is on the horizon is a
critical way to prevent additional military families from falling prey
to abusive or predatory lending.
Conclusion
I thank the Subcommittee for this opportunity to share the views of
NAR regarding veterans housing. The NATIONAL ASSOCIATION OF REALTORS
strongly supports housing opportunities for our Nation's veterans and
active duty military professionals. It is our hope that the
Subcommittee will support our recommendations for enhancing and
improving the VA home loan guarantee program, so it may be a real
benefit to those who have so bravely served our country.
Prepared Statement of Ellen Harnick, Senior Policy Counsel,
Center for Responsible Lending
Chairwoman Sandlin, Ranking Member Boozman, and members of the
Subcommittee, thank you for holding this hearing to examine the
foreclosure crisis, a problem that is affecting many veterans. We
appreciate the opportunity to speak today.
I offer this testimony as Senior Policy Counsel of the Center for
Responsible Lending (CRL) (www.responsiblelending.org), a not-for-
profit, non-partisan research and policy organization dedicated to
protecting homeownership and family wealth by working to eliminate
abusive financial practices. We are affiliated with a community
development lender, Self Help, which provides carefully underwritten
subprime loans to people who have been under-served by other lenders.
Self Help has provided over $5 billion of financing to 55,000 low-
wealth families, small businesses, and nonprofit organizations, and our
loan losses have been less than one percent per year.
EXECUTIVE SUMMARY
It is difficult to overstate the magnitude of today's foreclosure
crisis. According to Moody's Economy.com, America's ``housing and
mortgage markets are suffering an unprecedented downturn,'' and unless
policymakers take significant action, home losses due to unsustainable
loans will continue to rise through the rest of this decade.\1\ A
significant number of the families who lose their homes will be men and
women who have served our country.
---------------------------------------------------------------------------
\1\ Testimony of Mark Zandi, ``The Looming Foreclosure Crisis: How
to Help Families Save Their Homes,'' before the U.S. Senate Committee
on the Judiciary (December 5, 2007).
---------------------------------------------------------------------------
This crisis, which has not been confined to the housing market but
has impacted the entire economy, has brought our Nation to the brink of
recession. In the past, families typically experienced foreclosures due
to an unexpected personal crisis, such as job loss, illness, divorce,
or death. Now, however, the leading cause of foreclosure is the nature
of the mortgage loans themselves. This crisis was caused by a number of
factors, including the following:
Dangerous loan products.
Reckless underwriting.
No escrow for taxes and insurance.
Risk layering.
Broker abuses.
Wall Street demand for more, riskier loans.
Lack of oversight and regulation.
Today, we offer a number of policy recommendations aimed at
cushioning the impact of the foreclosure crisis on veterans. The first
two items relate to all homeowners, while the final three items relate
specifically to veterans.
1. Permit bankruptcy judges to fix distressed home loans.
2. Establish common-sense standards for sustainable mortgage
origination.
3. Expand the VA home loan program to address the current
situation.
4. Assist veterans who are seeking loan modifications.
5. Consider extending period of post-service foreclosure
protection.
Below, we describe both the causes and the policy recommendations
in more detail.
BACKGROUND
A year ago this month, our organization appeared before the Senate
Banking Committee to sound an alarm about the subprime market. At that
time, we had just released new research predicting that due to
predatory and unsustainable lending practices, 2.2 million families
were likely to lose their homes to foreclosure. We knew that those
lending practices would cause a crisis in the housing market; indeed,
the subprime fiasco is causing the largest disaster in the housing
market since the Great Depression.
What we did not anticipate is how extensive a spillover effect the
housing crisis would have on the global economy, nor did we anticipate
the effects on the prime mortgage market. Irresponsible lending, fueled
by Wall Street demand for highly risky loans, has pushed our Nation to
the brink of recession. Part of the reason for the spillover is that
the impact of foreclosure is not confined to the families who lose
their homes. In addition, 40 million Americans who pay their mortgage
on time also are poised to experience drastic drops in their property
value as a direct result of subprime foreclosures.\2\ The consequent
pullback in spending by homeowners whose properties have lost value is
further fueling a downward economic spiral.
---------------------------------------------------------------------------
\2\ See CRL Issue Brief, ``Subprime Spillover: Foreclosures Cost
Neighbors $202 Billion; 40.6 Million Homes Lose $5,000 on Average,''
rev. January 18, 2008.
---------------------------------------------------------------------------
The housing crisis is hitting veterans especially hard. As a recent
Pentagon study has shown, military personnel are particularly
vulnerable to predatory lending, \3\ and the financial stresses for
many military families have been well documented. Although military
personnel on active duty receive some protections related to their
mortgages, these protections are phased out when they separate from
service.
---------------------------------------------------------------------------
\3\ See ``Report On Predatory Lending Practices Directed at Members
of the Armed Forces and Their Dependents,''August 9, 2006, which can be
found at http://www.defenselink.mil/pubs/pdfs/
Report_to_Congress_final.pdf.
---------------------------------------------------------------------------
Illustrative stories are not hard to come by. One case, reported by
Newsweek as well as other sources, involved an Iraq war veteran from
Kentucky, a man named Shawn Howell.\4\ Mr. Howell bought a home for his
wife and four children shortly before he was deployed. He felt good
about having a secure place for his family while he served his country.
Following the advice of his mortgage broker, the Howells took out two
adjustable-rate mortgages. The interest rate started at 5.4%, but--just
after Howell returned from a difficult and dangerous year in Iraq--the
rate shot up to 9.9%. The increase was completely unmanageable,
especially since Mr. Howell was no longer receiving combat pay. He took
on two jobs and made numerous attempts to contact the lender to find a
way to avoid foreclosure. In spite of Mr. Howell's best efforts, the
lender, Countrywide Financial, refused to modify the terms of the loan.
The Howells weren't able to sell their home, and the lender foreclosed.
Today, they live in a trailer.
---------------------------------------------------------------------------
\4\ Dick Gordon radio broadcast, ``The Story,'' American Public
Media (June 12, 2007). See also, Karen Springen, ``This is Not My
Beautiful House,'' Newsweek web exclusive (March 28, 2007).
---------------------------------------------------------------------------
Another veteran who received an abusive loan testified at a field
hearing held by Chairman Filner last November, Air Force veteran Nellie
Cooper. Ms. Cooper refinanced her home loan into an adjustable-rate
loan. Her mortgage payments ballooned while local property values
dropped, which has prevented her from refinancing into a more secure,
fixed-rate loan. She testified, ``Nobody will finance 92 percent value
of a house, and I am getting more in arrears.'' Cooper, who lives in
Oceanside, Calif., was not able to get help from the VA, because right
now, except in very rare cases, VA does not refinance mortgages it
didn't make originally. She didn't initially buy the house through VA
because she was told repeatedly by real estate professionals and
brokers that she didn't qualify and the paperwork was ``too
cumbersome.'' \5\
---------------------------------------------------------------------------
\5\ ``Mortgage Crisis Hits Home for Troops, Vets,'' Army Times,
December 2, 2007.
---------------------------------------------------------------------------
What Caused the Foreclosure Crisis?
The foreclosures faced by these veterans are not just the typical
foreclosures of years past, such as those precipitated by catastrophic
and unforeseen events such as job loss, divorce, illness or death. In
many cases, these foreclosures are due to the unsustainability of the
mortgage itself, even without any changes in the families' situation,
and even where the family qualified for, but was not offered, a loan
that would have been sustainable. Moreover, while significant losses so
far have been concentrated in the subprime market, it is becoming
increasingly evident that the problems are spreading to the Alt-A and
even prime markets.
This crisis has been created by a matrix of factors. I have
outlined each of these factors below.
Dangerous products. Subprime lenders flooded the market with high-
risk loans, making them appealing to borrowers by marketing low monthly
payments based on low introductory teaser rates. The most well known of
these products is the hybrid adjustable-rate mortgage (ARM), often
known as a 2/28 or 3/27. This type of loan begins with a fixed interest
rate for either two or three years, then converts to a higher interest
rate pegged to an index such as LIBOR. The loan then continues to
adjust every six months, which can be as much as 30-50% more than the
original rate.
Another complex product that has put many low-income families at
risk is the payment option adjustable-rate mortgage (POARM). This
product allows people to make monthly payments that do not cover
principal and interest, which means that the home experiences
``negative amortization''--that is, the principal balance of the loan
grows larger--during the period that the minimum payment is being made.
Unfortunately, lenders like Countrywide offered these loans to
borrowers for whom they were not suited, structured the products so
that the payments substantially increase in five years or less when
they hit their negative amortization cap, used excessive teaser rates,
and failed to document income. Unlike 2/28s, the POARMs that were
poorly underwritten are largely Alt-A mortgages as opposed to subprime.
Reckless underwriting. It is widely recognized today, even within
the mortgage industry, that lenders became far too lax in qualifying
applicants for subprime loans.\6\ They underwrote ARMs only to the
initial rate, which means they did not even consider how homeowners
would be able to pay their loans once the payment adjusted upward, even
with rates constant in the economy. Even worse, many lenders qualified
borrowers without any verification of income at all, using so-called
``stated-income'' or ``no-doc'' loans. Fitch recently noted that
``loans underwritten using less than full documentation standards
comprise more than 50 percent of the subprime sector''.\7\
---------------------------------------------------------------------------
\6\ See, e.g., Vikas Bajaj and Christine Haughney, ``Tremors at the
Door--More People with Weak Credit are Defaulting on Mortgages,'' The
New York Times, citing Inside Mortgage Finance (January 26, 2007).
\7\ See Structured Finance, note 21, p. 4.
---------------------------------------------------------------------------
No escrow. Subprime lenders also didn't escrow for taxes and
insurance as prime lenders do, which left many families reeling when
those bills came due. This deceptive practice gives the borrower the
impression that the payment is affordable when, in fact, there are
significant additional costs. A study by the Home Ownership
Preservation Initiative in Chicago found that for as many as one in
seven low-income borrowers facing difficulty in managing their mortgage
payments, the lack of escrow of tax and insurance payments were a
contributing factor.\8\
---------------------------------------------------------------------------
\8\ Partnership Lessons and Results: Three Year Final Report, p. 31
Home Ownership Preservation Initiative, (July 17, 2006) at
www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf.
---------------------------------------------------------------------------
Risk layering. In many cases, lenders combined multiple risk
elements in one loan, such as hybrid ARM products with no documentation
of income and no escrow. Regulators have expressed concern about this
practice, stating that ``risk-layering features in loans to subprime
borrowers may significantly increase risks for both the . . . [lender]
and the borrower.'' \9\
---------------------------------------------------------------------------
\9\ See Interagency Guidance on Nontraditional Mortgage Product
Risks, note 42.
---------------------------------------------------------------------------
Broker abuses. Mortgage brokers are individuals or firms who find
customers for lenders and assist with the loan process. Brokers provide
a way for mortgage lenders to increase their business without incurring
the expense involved with employing sales staff directly. Brokers also
play a key role in today's mortgage market: According to the Mortgage
Bankers Association, in 2006, mortgage brokers originated 45 percent of
all mortgages, and 71 percent of subprime loans.\10\
---------------------------------------------------------------------------
\10\ See MBA Research Data Notes, ``Residential Mortgage
Origination Channels,'' September 2006.
---------------------------------------------------------------------------
Unfortunately, given the way the current market operates, abuses by
mortgage brokers are not surprising. First, mortgage brokers hold
themselves out to consumers as trusted advisors for navigating the
complex mortgage market: that is the service they sell, and it is the
service consumers assume they are buying. Yet, for the most part,
brokers deny that they have any legal or ethical responsibility to
refrain from selling inappropriate, unaffordable loans, to avoid
benefiting personally at the expense of their borrowers, or even to
offer homeowners the best loan they qualified for.
Second, the market as it is structured today gives brokers strong
incentives to ignore the best interests of homeowners. In the majority
of subprime transactions, brokers are paid more by lenders if they
deliver mortgages with rates higher than those for which the borrower
qualifies. This payment is called a ``yield spread premium.'' Not all
loans with yield-spread premiums are abusive, but because they have
become so common, and because they are easy to hide or downplay in loan
transactions, unscrupulous brokers can make excessive profits without
adding any real value. A related problem is racially discriminatory
steering, in which lenders or brokers ``upsell'' minority borrowers
into loans more expensive than those for which they qualify. The Wall
Street Journal recently commissioned a study that found of those
receiving subprime loans originated in 2005, more than half would have
qualified for prime loans--in fact, for loans originated in 2006, that
number was as high as 61%.\11\
---------------------------------------------------------------------------
\11\ See Subprime Debacle Traps Even Credit-Worthy, Wall Street
Journal, December 3, 2007
---------------------------------------------------------------------------
Wall Street demand for more, riskier loans. Wall Street's appetite
for risky mortgages encouraged lax underwriting and the marketing of
unaffordable loans. Demand from Wall Street for subprime loans was so
intense that it encouraged subprime lenders to abandon reasonable
qualifying standards, to forget about standard documentation
requirements, and to ignore whether borrowers could actually afford the
loan. As Alan Greenspan told Newsweek, ``The big demand was not so much
on the part of the borrowers as it was on the part of the suppliers who
were giving loans which really most people couldn't afford. We created
something which was unsustainable. And it eventually broke. If it
weren't for securitization, the subprime loan market would have been
very significantly less than it is in size.'' \12\
---------------------------------------------------------------------------
\12\ ``The Oracle Reveals All,'' Newsweek (Sept. 24, 2007) pp. 32,
33.
---------------------------------------------------------------------------
Market participants readily admit that they were motivated by the
increased profits offered by Wall Street in return for risky loans.
After filing for bankruptcy, the CEO of one mortgage lender explained
it this way to the New York Times, ``The market is paying me to do a
no-income-verification loan more than it is paying me to do the full
documentation loans,'' he said. ``What would you do?'' \13\ Even the
chief economist of the Mortgage Bankers Association, when asked why
lenders made so many loans that they knew were unsustainable, replied,
``Because investors continued to buy the loans.'' \14\
---------------------------------------------------------------------------
\13\ The New York Times, January 27, 2007.
\14\ ``Subprime Loans Defaulting Even Before Resets,''
CNNMoney.com, February 20, 2008.
---------------------------------------------------------------------------
Lack of oversight and regulation. Policymakers have long recognized
that the primary federal law governing predatory lending (HOEPA) is
inadequate and outdated. Although the Federal Reserve Board has long
had the authority to step in and strengthen relevant rules since the
legislation's passage, they completely failed to do so until this
crisis had already unfolded, and now, their proposed rules are
significantly weaker than would be necessary to prevent this crisis
from occurring again. As for other regulators, not only have most bank
regulators taken a hands-off approach until recently, but many of the
most egregious abuses were perpetrated by non-bank financial
institutions that were largely unregulated. For the majority of
subprime mortgage providers, there were no regulatory consequences for
making abusive or reckless home loans.
The Crisis is Only Growing
It is important to recognize that while the rate of subprime
foreclosures is alarming today, the worst is still ahead. Many
additional homeowners will find themselves in trouble due to rate
resets on their hybrid ARM, payment option ARM, and interest-only Alt-A
loans. Given the slowdown in housing prices, these homeowners will not
have the option to refinance or sell that they may have had in the
past, increasing the likelihood of foreclosure. As the chart below
shows, a large majority of these hybrid ARM rate resets will occur
throughout 2008, peaking in October, followed by spikes in payment
option ARM resets in 2009, 2010, and 2011.\15\
---------------------------------------------------------------------------
\15\ See Credit Suisse, Fixed Income Research, October 23, 2006.
---------------------------------------------------------------------------
Even worse, we are beginning to see many mortgages originated after
2005 beginning to fail even before the reset date. The laxity in
underwriting for these loans was so dramatic that many homeowners
cannot even afford the initial monthly payments.
[GRAPHIC] [TIFF OMITTED] T1374A.001
What Can We Do To Help?
While it would be ideal if lenders voluntarily stepped in to rescue
homeowners who were given dangerous and abusive loans, such voluntary
efforts do not appear to be happening on a scale commensurate to the
problem. The Mortgage Bankers Association--after denying for months
that a foreclosure crisis even existed--now insists that lenders are
making significant efforts to prevent foreclosure, but the numbers
belie that claim. During the third quarter of 2007, mortgage lenders
started about 213,000 foreclosures on subprime loans, but offered
meaningful fixes (``loan modifications'') for only 28,000.\16\
---------------------------------------------------------------------------
\16\ See http://www.mortgagebankers.org/NewsandMedia/PressCenter/
59454.htm.
---------------------------------------------------------------------------
While we welcome the Treasury Department's Hope Now initiative,
which has brought together a coalition of lenders and servicers to
encourage voluntary loan modifications, we fear that the portion of the
program designed to permit servicers to modify loans without engaging
in a case-by-case analysis--the ``ASF fast track modification''--will
not help enough homeowners. Only 3% of subprime ARM borrowers are
likely to receive streamlined permanent modification under its terms.
Repayment plans, which require a subprime ARM borrower to pay the full
often 12% interest rate while catching up on delinquent payments at the
same time, are ineffective. In the absence of detailed reporting, it is
not even clear that the few modifications that have occurred are
sustainable. Countrywide has acknowledged that most of its
modifications ``involved deferring overdue interest or adding the past
due amount to a loan,'' not reducing interest rates or principal
balances on subprime ARMs.\17\
---------------------------------------------------------------------------
\17\ Gretchen Morgenson, ``Can These Mortgages be Saved?'' New York
Times (September 30, 2007).
---------------------------------------------------------------------------
To step into this breach, there are a number of actions that
Congress can take to help veterans at risk for foreclosure.
1. Permit judges to fix distressed home loans. The best solution
to the current mortgage crisis is a small change to the bankruptcy code
that would allow courts to make limited modifications to a mortgage
loan when the borrower is facing foreclosure, ensuring that the
borrower stays in their home and the lender continues to receive a
payment stream. This change, H.R. 3609, has passed the House Judiciary
Committee in a bipartisan compromise struck by Chairman Conyers and
Representative Chabot.
This change does not implicate the 2005 Bankruptcy Code
changes, but rather relates to an older provision of the law. Right
now, wealthy investors and speculators may receive loan modifications
in bankruptcy proceedings for the debt they owe on their yachts,
vacation homes and investor properties. Yet current law bars middle-
class homeowners from receiving a loan modification to save the roof
over their heads. Permitting bankruptcy judges to modify loans on
primary residences could prevent as many as 600,000 foreclosures. (In
reality, this remedy will accomplish its objective even without
requiring most of these families to actually file for bankruptcy.
Changing the Code will provide a template for modification and will
give servicers the precedent and protection they need from lawsuits by
tranches of investors who might otherwise object.)
Making this small fix to the bankruptcy code will be a win-
win for homeowners, lenders, neighbors, taxpayers and the economy as a
whole. Homeowners can stay in their homes. Lenders will be guaranteed
the fair market value of their house, which is more than they would
receive at foreclosure sale, and without the lengthy delays and
expenses associated with foreclosure. And loans can be modified quickly
and effectively.
2. Establish common-sense standards for sustainable mortgage
origination. Any solution to the foreclosure crisis also requires that
we prevent such abuses from happening again, especially since so many
people will need to refinance their current mortgages. In the fall, the
House passed H.R. 3915 to do just that. While that legislation is a
good start, it did not adequately hold Wall Street accountable for its
role in this mess. To restore the world's confidence in our markets and
recover a reasonable expectation of integrity to our mortgage financing
system, we need policy action to realign the interests of people who
buy homes, institutions that provide the loans, and the entities that
invest in those mortgages.
3. Expand the VA home loan program to address the current
situation. Right now, the VA typically does not refinance loans that
were not originated as VA loans. It would be extremely useful to
consider whether the FHASecure program, aimed at providing rescue loans
to homeowners in trouble on their mortgages, could be replicated by the
VA. To be most useful, this program would need to permit some level of
delinquency on a current mortgage and to limit equity requirements.
Furthermore, to encourage more veterans to use VA loans, Congress might
consider capping loan fees at 1%, as proposed by Representative Filner
in H.R. 4884.
4. Assist veterans who are seeking loan modifications. The VA
occasionally assists veterans in negotiating with their lenders to
modify a VA-backed loan. Policymakers in several federal and state
venues have recognized the need for additional counseling and legal
resources to assist homeowners facing foreclosure who seek
modifications from the lenders. Congress should consider how the VA can
expand its efforts to support veterans in working with private lenders
as well.
5. Consider extending period of post-service foreclosure
protection. Currently, under the Servicemembers Civil Relief Act, if a
lender moves to foreclose on a servicemember's home during the term of
service or within 90 days thereafter, a judge may stay the proceedings.
Chairman Filner has introduced legislation (H.R. 4883) that would
extend this period to a full year. Recent experience with loan
modification suggests that 90 days may be insufficient for veterans to
get their financial affairs in order and to explore options for saving
their homes, especially as they often have many other pressing matters
to attend to upon returning home. Congress should consider extending
this period of protection.
Conclusion
The subprime lending system has failed our Nation's veterans along
with millions of other middle-class families. Veterans put their lives
on the line to protect our country's security and our way of life. Now,
their families are on the verge of losing their homes and financial
security, and we all will be worse off as a result.
As outlined here, policymakers have a number of tools at their
disposal to mitigate the harm caused by this situation and prevent it
from happening again in the future. We greatly appreciate the
Subcommittee's interest in the foreclosure crisis, and we look forward
to working with you to explore and implement the recommendations that
we and others have suggested.
Prepared Statement of Larry Gilmore, Deputy Director,
HOPE NOW Alliance
Madam Chairwoman, Ranking Member Boozman and Members of the
Subcommittee, I am Larry Gilmore, Deputy Director of the HOPE NOW
Alliance. I appreciate the opportunity to appear before you today on
behalf of HOPE NOW to talk about the efforts to help veterans and all
at-risk homeowners stay in their homes during this time of serious
challenges in the housing market.
The HOPE NOW Alliance is a broad-based collaboration between credit
and home ownership counselors, lenders, investors, mortgage market
participants and trade associations. Since last October, the HOPE NOW
Alliance has worked to dramatically expand and coordinate the efforts
that individual companies and non-profits are making to help homeowners
in difficulty. HOPE NOW has been strongly encouraged by Treasury
Secretary Paulson and Housing & Urban Development Secretary Jackson and
by Members of Congress and other leaders. HOPE NOW has established and
is expanding a coordinated, national approach among servicers,
investors, \1\ non-profit housing counselors and other industry
participants to enhance our ability to reach out to borrowers who may
have or expect to have difficulty making their mortgage payments and to
offer them workable options to avoid foreclosure. The HOPE NOW Alliance
is achieving real results in reaching more at-risk borrowers and in
providing positive solutions that avoid foreclosure.
---------------------------------------------------------------------------
\1\ After a mortgage is made, the lender will often sell the loan
to investors. A loan servicer acts as the intermediary between the
borrower and the investor. The servicer's role is to collect payments,
handle escrow accounts, forward principal and interest payments to the
investor and deal with issues that arise from delinquency and
foreclosure. A servicer is typically compensated 25 basis points
(0.25%) of the loan balance for performing this service, or $250 on a
$100,000 loan balance.
---------------------------------------------------------------------------
Progress in Helping Struggling Homeowners
The members of the HOPE NOW Alliance recognize the urgency of this
issue, and we are working to reach new milestones on a weekly basis. I
am pleased to have the opportunity to share our progress with you,
including our most recent data results.
First, the Alliance is continuing to expand and add companies and
organizations who commit to specific efforts to reach and assist
borrowers. As of February 25th, we have 27 loan servicers in the
Alliance who represent over 90 percent of the subprime market. In
addition, we have strong participation from respected non-profits, led
by NeighborWorks America, the Homeownership Preservation Foundation,
and the Housing Partnership Network, with their networks of trained
counselors. We are continuing to expand our network of non-profits.
One of the Alliance's first steps was to demonstrate our commitment
to results by adopting a Statement of Principles on helping distressed
homeowners stay in their homes. These principles are helping ensure
that all borrowers receive quality service and assistance when they
contact their lender/servicer in the Alliance.
The following are the principles embraced by HOPE NOW servicers,
which are consistent with calls for the industry to expedite solutions
for borrower:
HOPE NOW members agree to attempt to contact at-risk
borrowers 120 days, at a minimum, prior to the initial Adjustable Rate
Mortgage (ARM) reset on all 2/28 and 3/27 ARM loan products;
HOPE NOW members agree to inform borrowers of the
potential increase in payment and terms of the loan, in an effort to
determine if the borrower may face financial difficulty in keeping
their mortgage current;
HOPE NOW members agree to establish a single port of
entry for all participating counselors to use; and
HOPE NOW members agree to make available dedicated e-mail
and fax connections to support counselor and consumer contacts.
By establishing these principles, HOPE NOW members are improving
the infrastructure needed to help more borrowers on a much larger
scale. In addition to improving lender/servicer systems for working
with counselors and borrowers, we are redoubling our efforts to reach
out to at-risk borrowers.
One of the most significant on-going challenges we face in helping
consumers is a persistent reluctance of struggling borrowers to contact
their servicer for help. Historically, evidence has shown that about
half of borrowers who go into foreclosure never contacted their
servicer for help. Freddie Mac reported at the end of January that 57
percent of the Nation's late-paying borrowers still don't know that
their lenders may offer alternatives to help avoid foreclosure.\2\ We
are working to drastically reduce that number and help as many troubled
homeowners as possible avoid foreclosure.
---------------------------------------------------------------------------
\2\ http://www.freddiemac.com/news/archives/corporate/2008/
20080131_07ropersurvey.html.
---------------------------------------------------------------------------
In November, HOPE NOW servicer participants began a monthly direct
mail outreach campaign to at-risk borrowers. This direct mail effort--
on the HOPE NOW letterhead--is in addition to the thousands of letters
and telephone contacts made by individual servicers to their own
customers.
In our first direct mail effort in November, HOPE NOW members sent
232,850 letters to borrowers who are behind on their mortgage payments
and who have not had contact with their servicer. The November letter
provided a dedicated phone number for the individual borrower to use to
call their own servicer for help. As a result of these letters, more
than 16 percent of borrowers contacted their servicer, far more than
the typical 2-3 percent response rate to a letter.
In December, HOPE NOW sent a second wave of direct mail outreach
letters to 259,633 at-risk homeowners, providing individual servicer
hotlines as well as the 888-995-HOPE Hotline provided by the
Homeownership Preservation Foundation. As a result of these letters,
more than 21 percent of borrowers contacted their servicer. The monthly
direct mail efforts continued in January and February of this year, and
to date, over one million letters have been sent to at-risk borrowers.
We will report more results as data are compiled.
The Homeowner's HOPE Hotline is a key component of the outreach and
assistance effort for at-risk homeowners. The hotline directly connects
homeowners with trained counselors at non-profit counseling agencies
that have been certified by the Department of Housing and Urban
Development (HUD). This counseling service is completely free to
borrowers and is offered in English and Spanish. The counselors have
direct access to the lender/servicers through improved single points of
entry that all HOPE NOW Alliance members have agreed to create.
The Homeowner's HOPE Hotline is having a dramatic and positive
impact for at-risk homeowners. The HOPE NOW Alliance will continue to
expand the Hotline's capacity and promote it to reach more at-risk
borrowers.
To date, the Homeownership Preservation Foundation
Homeowner's HOPE Hotline has received 456,243 calls, with over 245,000
calls in 2007 alone;
Calls are increasing monthly. In December 2007, there
were 93,794 calls to the Hotline that produced 15,462 counseling
sessions;
165,755 homeowners received counseling after calling the
Hotline, 83,000 of which occurred in 2007;
In January 2008, there were 82,569 calls that produced
19,558 counseling sessions.
The Counseling sessions produce results. Through October
26, 2007, more than half of all homeowners counseled have been
connected with their lender for assistance, and one quarter of all
homeowners counseled in the fourth quarter of 2007 were referred to
their lender for a recommended workout;
Counseling sessions are rapidly increasing. Call volume
has increased nearly 10fold between first quarter 2007 and fourth
quarter 2007;
Lender/servicers are urging borrowers to call for
counseling. Homeowners primarily hear about the Homeowner's HOPE
hotline from their lender;
More homeowners with ARMs are calling--49 percent of
callers in the fourth quarter of 2007 were ARM borrowers, up from 34
percent in the first quarter.
Publicity for the Homeowner's HOPE Hotline continues to increase
and we hope more homeowners will learn about it. We are proud that the
Homeowner's HOPE Hotline provides a resource for free, non-profit
counseling to any homeowner, anywhere in the country. President Bush,
Treasury Secretary Paulson and HUD Secretary Jackson have mentioned the
Homeowner's HOPE Hotline several times and they have urged homeowners
in trouble to seek help. Members of Congress have also highlighted the
hotline. Thirty-eight Mayors from across the country recently created
public service announcements for their local media markets urging
borrowers to use the hotline. Anytime the Homeowner's HOPE Hotline is
mentioned by public officials or on television, calls to the hotline
increase dramatically. We welcome that support and are continuing to
work to expand the counseling network for the hotline.
Members of Congress, in an effort to help their constituents avoid
foreclosure, have asked us on many occasions what they could do to
help. The single most important thing Members and other community
leaders can do to help people stay out of foreclosure is to urge
homeowners to seek help and publicize HOPE NOW efforts, particularly
the Homeowner's HOPE Hotline, 888-995-HOPE. We would like to work with
the Veterans Affairs Committee to ensure that more veterans are aware
of the HOPE hotline and other assistance from the HOPE NOW Alliance.
The Homeownership Preservation Foundation, the HOPE NOW Alliance
member managing the telephone network, is continuing to add trained,
experienced counselors to the program to handle the increasing call
volume from concerned homeowners. Tremendous progress has been made in
just the last few months. The hotline now has 400 trained counselors
assisting borrowers, up from 64 at the beginning of 2007. The agencies
providing counseling include Auriton Solutions, CCCS Atlanta, CCCS San
Francisco, Novadebt, Springboard and Money Management International.
NeighborWorks America, known formally as the Neighborhood
Reinvestment Corporation, is a Congressionally chartered non-profit
organization with a national network of more than 240 community-based
organizations in 50 states. NeighborWorks is a leader in the HOPE NOW
Alliance, and with its partners, is actively providing in-person
counseling services to consumers across the country. NeighborWorks has
also been the leader in working with the Ad Council on the national
advertising campaign for the Homeowners' HOPE hotline, which includes
television, radio and print materials.
HOPE NOW is working to add more non-profit agencies to the effort.
HOPE NOW is working with HUD and HUD counseling intermediaries to
review ways to include additional grass-roots counseling groups. We are
working to broaden the HOPE NOW effort to ensure it is a model that
works broadly for industry, non-profits and consumers to maximize the
ability to reach troubled borrowers.
Servicers' ability to reach borrowers, either directly or through
an intermediary is the key to helping them stay in their homes. The
solutions will vary with the circumstances of the borrower. Prudent and
responsible loan modifications, repayment plans and other types of
workout options are solutions that can both help borrowers keep their
homes and minimize losses to investors. The HOPE NOW Alliance is
committed to pursuing all viable solutions to help people stay in their
homes.
HOPE NOW Multi-City Outreach Events
In addition to the direct mail campaign and promotion of the HOPE
hotline to reach at-risk borrowers, HOPE NOW is initiating a series of
events across the country to reach more at-risk borrowers and provide
them with an opportunity to meet with their loan servicer and find
solutions. The first HOPE NOW outreach events are next week in
California: March 3rd in Riverside, March 5th in Anaheim, and March 7th
in Stockton. The purpose of these events is to enable more borrowers to
meet with their servicer or a certified home ownership counselor face-
to-face to develop a workout solution that helps the borrowers stay in
their home.
Tools for Helping Struggling Borrowers
The HOPE NOW mortgage servicers recognize that it makes good
economic sense to help borrowers who are in trouble. Borrowers who are
not able to stay current on their loans are very costly to the
servicer, who must forward principal and interest payments to investors
as well as remit taxes and insurance payments, even if borrowers are
not paying them. In addition, significant staff resources must be
employed to contact the borrower, assess the situation, work on
repayment plans and other loss mitigation solutions, and if these
efforts do not resolve the situation, initiate and manage the
foreclosure process.
Informal forbearance and repayment plans are generally the first
tool servicers employ to help borrowers. Servicers allow mortgagors to
miss a payment, with the explicit understanding the payment(s) will be
made up some time soon. If the situation is more involved than a short-
term cash crunch due to temporary unemployment or illness, a servicer
may turn to a special forbearance plan, which will typically combine a
period of postponed or reduced payments followed by repayment of the
arrearage over an extended timeframe, but within the original term of
the loan.
Loan modifications are the next level of loss mitigation options. A
loan modification is a change in the underlying loan document. It might
extend the term of the loan, change the interest rate, change repayment
terms or make other alterations. Similarly, a servicer may attempt to
refinance the delinquent borrower into a new loan. Loan modifications
are one solution for borrowers who have an ability to repay a loan, and
have the desire to keep their home, but may need some help in meeting
this goal because the current loan terms are not sustainable for that
borrower.
HOPE NOW members have worked aggressively to make all of the
available tools as efficient as possible. The American Securitization
Forum (ASF) has created a framework that allows servicers to more
readily modify certain at-risk loans that are securitized in the
secondary market. This effort has received the backing of the
Departments of the Treasury and HUD, many Members of Congress, the
federal banking agencies and state and local officials.
The focus of the ASF framework is to identify categories of current
subprime hybrid ARM borrowers who can be streamlined into refinance or
modifications. We believe that the ASF-established framework will add
to existing efforts to assist distressed borrowers. The key is to find
solutions which help borrowers but do not violate the agreements with
investors who now own the securities containing these loans.
The ASF has worked with servicers and investors to create and
implement a process which identifies, in advance of loan resets,
borrowers who would qualify for refinancing, loan modifications or
other workout options. To ensure that investors accept and support far-
reaching loan modification and other workout solutions, this process
cannot violate pooling and servicing agreements with investors. The
goal is to minimize the risk of legal action by investors against
servicers who help borrowers.
The ASF framework covers securitized subprime adjustable rate
mortgage loans, the so-called 2/28's and 3/27's that were originated
between January 1, 2005 and July 31, 2007 with an initial interest rate
that resets between January 1, 2008 and July 31, 2010. In other words,
the framework is for loans that have just begun to adjust. The ASF
framework will help provide solutions for homeowners with these
subprime hybrid ARMs who qualify for three different types of help:
refinancing, modification and other loss mitigation efforts.
Refinancing: One segment of borrowers is comprised of
those who are current, likely to remain current even after reset, or
likely to be able to refinance into available mortgage products,
including the Federal Housing Administration (FHA), FHA Secure or
industry products. Generally, the servicer will determine whether loans
may be eligible for refinancing into various available products based
on readily available data such as LTV, loan amount, FICO and payment
history. The servicer will facilitate a refinance in a manner that
avoids the imposition of prepayment penalties whenever feasible. HOPE
NOW will continue to work with the alliance to ensure that all
servicers have access to products and programs generally available in
the market to refinance eligible borrowers.
Loan Modifications: A second segment of borrowers is
comprised of those with good payment records who will not qualify for
refinancing for any variety of reasons, such as a drop in home equity
or insufficient credit score. These borrowers will be targeted for
streamlined loan modifications if the loan is a primary residence
(i.e., not an investment or vacation property) and meets additional
criteria. Borrowers in this category will be offered a loan
modification under which the interest rate will be kept at the existing
rate of the loan for five years. This fast track option does not in any
way preclude a servicer from conducting a more individual in-depth
review, analysis and unique modification for a borrower to determine if
a longer term modification would be appropriate.
The fast track framework allows the servicer to make these
decisions:
Whether the borrower is unable to pay under the
original loan terms after the upcoming reset and default is reasonably
foreseeable, based on the size of the payment increase, and the current
income if the borrower did not pass the FICO improvement test;
Whether the borrower will be able to pay a modified
loan based on payment history prior to the reset date;
Whether the borrower is willing to pay a modified loan;
and
Whether the modification will maximize the net present
value of recoveries to the securitization trust and is in the best
interests of investors in the aggregate, because refinancing
opportunities are not available and the borrower is able and willing to
pay under the modified terms.
Loss Mitigation: This third segment of borrowers is
comprised of those for whom the loan is not current and who will not be
able to refinance into any available product. These borrowers are
significantly behind in their payments before the loan resets and their
situations need to be evaluated individually. It is especially
important for us to reach this group of borrowers through efforts such
as the HOPE NOW direct mail campaign and through the national
advertising campaign for the Homeowner's HOPE hotline. For loans in
this category, the servicer will determine the appropriate workout and
loss mitigation approach on a loan-by-loan basis. Referrals from
counselors if the borrowers contact the Homeowners' HOPE hotline will
also be important. Approaches for these borrowers may include loan
modification (including longer term rate reductions, capitalization of
arrearages and term extensions), forbearance, short sale, deeds in lieu
of foreclosure or foreclosure. Because these borrowers are already
behind in their payments, and may face challenges such as a loss of
income or other issues, they require a more intensive analysis,
including current debt and income analysis, to determine the
appropriate loss mitigation approach.
Servicers, however, can only help borrowers who come forward for
help. Borrowers must respond to servicers' notices and phone calls.
That is why the outreach effort is so important. If borrowers do not
respond, at some point the servicer has to assume the homeowner has no
intention of paying off the obligation. It is also important to note
that the options for helping borrowers who purchased homes as
investments are limited. During the housing boom of the last several
years, there were many speculators and investors looking to profit from
price appreciation. The strength of our economy relies on the
willingness of people to take risks, but risk means that you do not
always win. During this time, a majority of these properties were
purchased to try to capitalize on appreciating home values or to use
rents as a source of investment income, or some combination of both.
With the downturn in the housing market, a number of these investors
are walking away from their properties and defaulting on their loans.
According to data by the Mortgage Bankers Association, in the third
quarter of 2007, 18 percent of foreclosure actions started was on non-
owner occupied properties. Foreclosure starts for the same period for
non-owner occupied properties in Arizona, Florida, Nevada and Ohio were
at 22 percent.
HOPE NOW is seeking to help all borrowers at risk, not just
subprime ARM borrowers eligible for fast track refinance or
modifications. The ASF framework for a streamlined, scalable solution
for current borrowers facing a reset allows servicers to give more
detailed attention to at-risk, hard-to-reach, delinquent borrowers.
Servicers will be able to work closely with credit counselors and/or
homeowners to ensure all options are explored to avoid foreclosures.
The scalable outreach and modification effort in no way precludes on-
going workout solutions for the highest risk delinquent borrowers. By
having this framework in place, human capital and other resources are
able to focus on the cases that require the most attention.
Project Lifeline
HOPE NOW members are continuing to work to develop new methods and
programs to assist at-risk homeowners. Project Lifeline is the latest
effort to help the most at-risk borrowers--those borrowers who are 90
days or more late on their mortgage and face the greatest risk of
losing their home. No later than March 31, all HOPE NOW servicers will
adopt the principles of this effort to reach most at risk borrowers
(90-day plus delinquent), work with agreed upon steps with borrowers
and if appropriate, put a 30-day ``pause'' on foreclosures. The program
will begin by servicers sending a letter to seriously delinquent
homeowners. This program reaches most loans, Prime, Alt-A, Subprime,
and second liens. The servicers will reach out to homeowners with the
following straightforward steps that may qualify them for a loan
modification:
1. Call your mortgage servicer.
2. Tell the servicer you received a letter, you want to stay in
your home and you are willing to seek counseling, if necessary.
3. Provide updated financial information so the servicer can
explore a suitable solution.
4. If appropriate, any pending foreclosure will be `paused' for up
to 30 days during the review process until a formal decision is made
and a plan is created.
5. If a workout plan is established and the homeowner follows the
plan for three consecutive months, their loan will be formally modified
as they have demonstrated their ability to meet their requirements.
Measuring Our Results
The members of HOPE NOW recognize that results are the key to this
national effort to assist at-risk homeowners. I am pleased to share
with you the latest results from HOPE NOW servicers on their efforts in
the second half of 2007. This latest HOPE NOW data, released on
February 6th, shows that significantly more homeowners received
assistance than previously estimated.
Fourteen HOPE NOW servicers responsible for more than 33.3 millions
home loans (about 62 percent of both prime and subprime loans
outstanding nationwide), as of September 2007, provided the data. The
latest report shows that an estimated 869,000 homeowners were helped in
the second half of 2007 through either a formal repayment plan
(652,000) or a loan modification (217,000).
During the same period, 283,000 foreclosure sales were completed.
Based on 1,446,000 average monthly delinquencies of 60 days or more
past due during the second half of 2007, 45.3 percent received a formal
repayment plan, 14.8 percent received a modification and 19.7 percent
resulted in a completed foreclosure sale.
The data for the second half of 2007 reveal 324,000 prime borrowers
and 545,000 subprime borrowers were helped:
20.7 percent of prime borrowers helped received a
modification;
27.5 percent of subprime borrowers helped received a
modification; and
34.8 percent of subprime borrowers helped during the
fourth quarter received a modification; and
49.8% of those helped in January 2008 received a loan
modification indicating a rapid increase in the use of modifications as
a loss mitigation solution.
In addition, the study also collected information on foreclosure
activity and trends. These data are revealing. While there appears to
be a large number of foreclosures initiated by servicers, less than
half of those initiated actually result in a completed sale. Frequently
borrowers do not respond to their servicer's attempts to contact them
until they receive their first legal action notice. HOPE NOW's borrower
outreach initiatives are already increasing the number of borrowers who
respond before a foreclosure action is initiated.
In addition to aggregate nationwide data, the report includes
quarterly data for the 50 states and the District of Columbia.
The latest state level data from HOPE NOW servicers show that
efforts to help borrowers are rapidly increasing. The trend in formal
repayment plans is up in all states but more so in the states that
experienced rapid and substantial increases in home prices. That is to
be expected because of the more rapid increase in delinquencies in the
states that experienced a rapid increase and then decline in housing
prices. However, it is clear in all states that the upward trend in
loan modifications completed is much greater than the upward trends in
delinquencies and in formal repayment plans, which clearly indicates
that servicers increasingly are working with borrowers to modify the
terms of their loans. The upward trend in loan modifications is much
more pronounced in the states that had substantial increases in home
prices.
We believe the upward trend in loan modifications and repayment
plans will continue and more homeowners will receive the help they need
to stay in their homes.
We are tracking and measuring outcomes through HOPE NOW and other
efforts. In addition to the data reported here, we are measuring trends
in delinquencies and resolution outcomes (i.e. reinstatement, repayment
plans, modifications, short sales, deeds in lieu of foreclosure,
partial claims and foreclosure). We want to provide consistent and
informative data reports based on common definitions and to provide
information that provides insights into the nature and extent of the
current mortgage crisis that will help in the development of workable
solutions that avoid foreclosure whenever possible.
As we promised at the start of HOPE NOW, as our data collection
initiatives mature and the data are validated, we are providing more
detailed information nationally and on a state by state basis. As I
noted, our alliance is growing weekly. Our participating servicers have
been engaged in developing standard definitions for key loss mitigation
data. The data collection effort is an enormous undertaking, which will
take time to develop fully and perfectly. We are confident, however,
that we will be able to deliver systematic information at the state
level that will help measure what servicers are doing to resolve
difficult situations and to assist homeowners.
Assisting Veterans and Military Personnel
HOPE NOW members are committed to assisting all homeowners in need.
Any homeowner who is concerned about their mortgage situation can call
the national HOPE hotline to speak to a non-profit counselor. We also
urge homeowners to call their servicer directly and ask for assistance.
In addition to the HOPE hotline, we are publicizing the 800-numbers for
the customers of all our servicers.
HOPE NOW member organizations and companies are also involved in
other specific programs to assist veterans and active duty military
personnel.
The Homeownership Preservation Foundation, which manages the HOPE
hotline, has supported U.S.A. Cares in assisting 154 families of active
duty military personnel. They have made back mortgage payments to avoid
foreclosure, and 130 loans have been reinstated and 24 are in repayment
plans. For example, through this partnership, a member of the National
Guard who went onto active duty in November and whose wife and father
both fell ill within two months of each other leading to becoming 6
months behind in his mortgage payments, was able to secure funds from
USA Cares and has fully reinstated his mortgage. Similarly, a retired
Army veteran who suffered from Post Traumatic Stress Disorder had
difficulties finding a job after returning home and who has a wife and
a very young child, received assistance from USA Cares to become
current on his mortgage and Veterans' Affairs was also able to help him
secure a job.
Countrywide Financial is a corporate founding sponsor of Serving
Those Who Serve. Working with Rebuilding Together, they rehabilitate
homes for injured Iraq War veterans to make them more accessible for
their particular disability. Their work focuses on helping veterans who
suffer from one or any combination of four injuries including: loss of
sight, loss of hearing, mobility impairments, and Traumatic Brain
Injury.
Conclusion
The HOPE NOW Alliance and those working with it are committed to
enhanced and on-going efforts to contact at-risk homeowners and to
offer workable solutions. Our top priority is to keep people in their
homes and to avoid foreclosures whenever possible. As I reported today,
869,000 homeowners were helped through modifications or work-outs in
the second half of 2007 and the rate of loan modifications continues to
increase. We are working to help many more at-risk homeowners.
We need the active involvement of all Members of Congress to alert
constituents that help is available when they contact either their
lender/servicers or a non-profit counselor through the Homeowner's HOPE
Hotline.
The HOPE NOW Alliance will continue its work until the problems in
the housing and mortgage markets abate. My testimony today includes
initial, but real and significant results on the number of homeowners
who have been helped. We will provide updates on our progress to
Congress and other concerned policymakers in the coming weeks.
We want to work with the Committee and the Department of Veterans
Affairs to ensure that veterans are aware of and can take advantage of
the assistance offered by HOPE NOW.
Thank you for this opportunity to share this information on our
efforts with the Subcommittee.
__________
HOPE NOW Membership
Counselors
ACORN Housing Corporation
Catholic Charities USA
Citizens' Housing and Planning Association, Inc.
Consumer Credit Counseling Service of Atlanta
HomeFree--USA
Homeownership Preservation Foundation
Housing Partnership Network
Mission of Peace
Mississippi Homebuyer Education Center--Initiative
Mon Valley Initiative
Money Management International, Inc.
National Association of Real Estate Brokers--Investment
Division, Inc.
National Council of La Raza
National Credit Union Foundation
National Foundation for Credit Counseling, Inc.
National Urban League
NeighborWorks America
Rural Community Assistance Co.
Structured Employment Economic Development Co.
West Tennessee Legal Services, Inc.
Servicers/Lenders/Mortgage Market Participants
Assurant, Inc.
Aurora Loan Services
Avelo Mortgage, LLC.
Bank of America
Carrington Mortgage Services
Chase
Citigroup, Inc.
Countrywide Financial Corporation
EMC Mortgage, Inc.
Fannie Mae
First Horizon Home Loans and First Tennessee Home Loans
Freddie Mac
GMAC ResCap
Home Loan Services, Inc. (d/b/a First Franklin Loan
Services & NationPoint Loan Services)
HomEq Servicing
HSBC Finance
Indymac Bank
Litton Loan Servicing
LoanCare Servicing Center, Inc.
MERS
National City Mortgage Corporation
Nationstar Mortgage, LLC.
Ocwen Loan Servicing, LLC.
Option One Mortgage Corporation
PMI Mortgage Insurance Co.
Saxon Mortgage Services
Select Portfolio Servicing, Inc.
State Farm Insurance Companies
Strategic Recovery Group, LLC.
SunTrust Mortgage, Inc.
Washington Mutual, Inc.
Wells Fargo & Company
Wilshire Credit Corporation
Trade Associations
American Bankers Association
American Financial Services Association
American Securitization Forum
Consumer Bankers Association
Consumer Mortgage Coalition
The Financial Services Roundtable
The Housing Policy Council
Mortgage Bankers Association
Securities Industry and Financial Markets Association
__________
Servicer Contact Numbers for Homeowners
Below are the customer contact telephone numbers of HOPE NOW
servicer members. If you are a homeowner having trouble with your
mortgage, please call your servicer's hotline for assistance (please
have your account number ready when calling).
If you would like to talk to a HUD-approved home ownership
counselor, please call the Homeowner's HOPE Hotline, 888-995-HOPE,
operated by the Homeownership Preservation Foundation. Free counseling
is available 24 hours a day, 7 days a week. You can also visit
www.995hope.com for more assistance.
Servicer and Hotline
Aurora Loan Services--800-550-0509
Avelo Mortgage, LLC.--866-992-8356
Bank of America--800-846-2222
Carrington Mortgage Services--800-790-9502
CitiFinancial/Citi Trust Bank--800-422-1498
CitiMortgage/Loss Mitigation--866-272-4749
CitiResidential Customer Care--800-430-5262
Countrywide Home Loans--800-669-6650
EMC Mortgage, Inc.--877-362-6631
First Horizon Home Loans--800-364-7662
GMAC/Homecomings/ResCap--800-799-9250
Home Loan Services, Inc. (d/b/a First Franklin Loan Services and
NationPoint Loan Services)--800-500-5022
HomEq Servicing--888-270-6663
HSBC Consumer Lending--800-333-5848
HSBC Mortgage Services--800-365-6730
HSBC Mortgage Corporation--888-648-3124
Indymac Bank--800-880-6848
JPMorgan Chase Prime Loans--800-446-8939
JPMorgan Chase Non-Prime--877-838-1882
JPMorgan Chase Home Equity--866-582-5208
JPMorgan Chase Default HPO Help Line--866-345-4676
Litton Loan Servicing--800-999-8501
National City Mortgage Corporation--800-523-8654
Nationstar Mortgage, LLC.--888-480-2432
Ocwen Loan Servicing, LLC.--877-596-8580
Option One Mortgage Corporation--888-275-2648
Saxon Mortgage Services--888-325-3502
Select Portfolio Servicing--888-818-6032
SunTrust Mortgage, Inc.--800-443-1032
Washington Mutual, Inc.--866-926-8937
Wells Fargo Home Mortgage--877-216-8448
Wells Fargo Financial--800-275-9254
Wilshire Credit Corporation--888-917-1050
__________
HOPE NOW: Results in Helping Homeowners
As of February 25, 2008
An estimated 869,000 homeowners were helped to avoid
foreclosure in 3rd and 4th quarters of 2007.
This includes an estimated 652,000 formal repayment
plans and an estimated 217,000 modifications.
Subprime modifications doubled in 4th quarter 2007 from
3rd quarter 2007.
Since November 2007, HOPE NOW servicers have sent over
one million outreach letters to at-risk borrowers who have not
previously been in contact with their servicer.
16% responded in November.
21% responded in December.
When servicers send similar letters to their borrowers,
the normal response rate is 2-3%.
Prior to these letters, these borrowers had not
responded to any outreach efforts.
27 servicers part of HOPE NOW as of February 2008.
American Securitization Forum (ASF) guidance--member
companies are adopting and implementing the ASF framework for loan
modifications.
Project Lifeline--Member companies are adopting the
principles of this effort to reach most at risk borrowers (90-day plus
delinquent), work with agreed upon steps with borrower and if
appropriate, put a 30-day ``pause'' on foreclosures.
Homeowner calls have increased to 4,500 per day through
the Homeownership Preservation Foundation's Homeowner's HOPE Hotline.
Over 37,000 counseling sessions completed through the
Homeowner's HOPE Hotline in 4th quarter 2007.
To date, the HOPE Hotline has received 456,243 calls
which led to counseling for 165,755 homeowners. Nearly half of those
counseled have avoided foreclosure by working out new loan terms or by
selling their home.
As of February 2008, increased response capacity to 400
home ownership counselors through the Homeownership Preservation
Foundation and intermediaries, 24 hours a day, 7 days a week.
Prepared Statement of Judith A. Caden, Director, Loan Guaranty Service,
Veterans Benefits Administration, U.S. Department of Veterans Affairs
Madam Chairwoman and members of the Committee, I appreciate the
opportunity to appear before you today to discuss the subprime mortgage
crisis and America's veterans.
The Subprime Crisis
``Subprime'' is a generic term used to describe mortgage loans with
interest rates higher than prime rates. The subprime loans that are
causing the current crisis usually have several layers of risk
associated with them. These layers of risk are generated by a
combination of one or more factors, such as lack of income
verification, lack of asset verification, lack of underwriting at a
fully indexed rate, low borrower credit scores, large margins, low
teaser rates, interest only payments, borrower option payments, and
secondary liens. (Note: Industry often labels loans with some of these
characteristics as Alt-A rather than subprime if borrowers have high
credit scores.) VA guaranteed loans, on the other hand, have none of
these characteristics and have carried an average borrower FICO credit
rating of around 680, as compared to the subprime average of below 620.
In 2000, loans characterized as subprime represented a low
percentage of all mortgage originations, and were made mostly to
borrowers with low credit scores and small loan balances. By
comparison, in 2006, subprime originations represented more than 20
percent of all mortgage originations, and borrowers, despite having
slightly higher credit scores, carried much higher loan balances and
much higher loan-to-value ratios.
Credit losses mounted from the record-setting losses of the
subprime loans made in 2000. Secondary market investors recognized this
risk and priced the potential of losing money on future investments to
the point where originators of subprime mortgage loans could no longer
afford to sell them. This lack of liquidity in the secondary market has
had a tremendous impact on the ability and desire of lenders to
originate subprime loans. It is the primary reason few institutions are
willing to make them.
The VA-Guaranteed Home Loan Program
It is important to understand that the VA-guaranteed home loan
program is not a part of the subprime mortgage market. VA-guaranteed
home loans are not subprime products. Additionally, the average
borrower using the VA-guaranteed home loan program does not have what
would be considered a subprime credit score. To date, VA has not been
affected by the current subprime turmoil as dramatically as lenders
that have all or even some percentage of their portfolios concentrated
in subprime loans.
The laws governing our program provide that VA-guaranteed home
loans must be made in accordance with VA's credit underwriting
standards, which are promulgated in VA regulations. Lenders
underwriting VA loans must ensure that the contemplated terms of
repayment bear a proper relation to the veteran's present and
anticipated income and expenses, and that the veteran is a satisfactory
credit risk. VA's credit standards employ the use of debt-to-income
ratios and residual income guidelines in determining the adequacy of
the veteran's income. When evaluating borrower creditworthiness,
however, VA's standards require lenders to evaluate all of the
borrower's available credit data. In marginal cases, VA seeks to give
veterans the benefit of the doubt with regard to credit and instructs
lenders to examine compensating factors like the veteran's cash
reserves, level of consumer debt, etc., when making an underwriting
decision.
The VA program has fared well in recent years with regard to
foreclosure rates. According to data from the Mortgage Bankers
Association, between the third quarter of 2005 and the third quarter of
2007, VA's serious default rate declined, while all other mortgage
types, including prime loans, rose.
That said, VA does operate in the broader mortgage marketplace and
will be collaterally affected by the subprime turmoil currently
affecting that market. This collateral effect will generally be the
result of declining house prices.
Impact of Subprime Turmoil on VA Home Loan Borrowers
With additional foreclosed homes on the market and a glut of new
construction available and weak demand, the inventory of unsold homes
has risen. Concurrently, credit has tightened as investors, fearing the
quality of subprime loans, withdraw funds from the mortgage market,
causing even some well qualified buyers to experience difficulties in
obtaining new mortgages. With supply now exceeding demand, prices have
naturally declined.
In the current marketplace, there are fewer borrowers able or
choosing to purchase homes and, therefore, fewer opportunities to sell
homes. VA expects that its robust supplemental servicing program, which
offers hope to many veterans with delinquent VA-guaranteed home loans,
will be hampered by this situation. Most notably, the deflation in
house prices eliminates certain foreclosure-avoidance tools that were
previously available to us. The net result will be more foreclosures.
VA-Guaranteed Home Loan Protections
For veterans who obtained a VA-guaranteed home loan, VA can offer
supplemental servicing assistance during times of financial hardship
and default.
VA-guaranteed home loans are subject to certain regulatory
requirements that allow us to help veterans retain ownership of their
homes. The following briefly describes VA's supplemental servicing
assistance to veterans in default on their VA-guaranteed home loans and
the impact thereof.
VA Supplemental Servicing and Loss Mitigation
When VA receives notice that a veteran borrower has become
seriously delinquent on his/her home loan, we take an active role in
working to avoid foreclosure. VA's efforts include pursuing various
options to cure the default, thereby allowing the veteran to retain
ownership of his/her home. VA can intercede with the loan holder on the
veteran's behalf. In the event the borrower can no longer maintain
mortgage payments, VA encourages other alternatives to foreclosure to
help mitigate the negative impact on the borrower.
In FY 2007, due in part to VA's loan servicing intervention
efforts, foreclosure was avoided for more than 57 percent of the VA
loans in serious default. Additionally, VA was able to intervene in
8,453 instances that resulted in successful loan reinstatement. As a
result, VA avoided claim payments estimated at more than $181 million.
However, VA's supplemental servicing efforts will be significantly
hampered by the effects of the depressed state of the subprime market
and tight credit.
Specifically, house price deflation in certain areas will limit the
options available to veterans hoping to avoid foreclosure.
During the most recent housing boom, house prices were such that a
sale often netted the borrower an amount which would satisfy any
outstanding mortgage debt. But in the current environment, house prices
are deflated and many borrowers find themselves unable to sell at a
price which would net an amount to satisfy the outstanding mortgage
debt in time to avoid foreclosure. Secondly, as house prices and values
decrease, so does a borrower's home equity. In many areas, borrowers
now have less equity or no equity against which to borrow. In many
areas home equity values have declined so substantially that this
option is altogether eliminated.
VA Assistance for Veterans with Subprime Loans
For a veteran (or servicemember) who may have obtained a subprime
loan, VA can offer general advice and guidance through our nine
Regional Loan Centers. However, unlike the case of a veteran with a VA-
guaranteed home loan, VA has no legal authority or standing to
intervene on the subprime borrower's behalf.
Because VA only maintains home loan data on veterans who have taken
advantage of the VA loan benefit, we are not aware of how many veterans
may have mortgages that would be categorized as subprime. The Home
Mortgage Disclosure Act does not require `veteran status' to be
collected as part of the loan applicant's data.
Regrettably, there are veterans who have subprime mortgages and who
will be adversely affected by the subprime crisis. VA is prepared to
offer as much assistance as possible to help veterans in this
situation. Our VA Regional Loan Centers have Loan Service
Representatives who can offer advice to all veterans who are
experiencing home loan repayment difficulties, not just those veterans
with VA-guaranteed loans.
VA is authorized to guarantee refinancing loans to veterans.
However, if a veteran wishes to use his/her home loan benefit to
refinance a subprime loan, the resulting loan-to-value ratio could not
exceed 90 percent and the total dollar guaranty is limited to $36,000.
This means that a veteran with no equity would be able to obtain a
refinance loan for only 90 percent of the home's appraised value, and
the maximum loan he/she could effectively obtain is $144,000.
VA Program Revisions with Safeguards
We are proud of the success of the VA home loan guaranty program in
helping veterans obtain and retain homes. While the program has been
expanded and modified over the years, it retains sound underwriting
criteria.
Conclusion
VA expects that our program loan volume will increase. The lack of
availability of mortgage credit, especially subprime products, in the
conventional market will encourage veterans to obtain VA guaranteed
loans. However, VA also expects that the supply glut in the marketplace
and the resultant house price decreases will have a collateral effect
on VA borrowers in default and that the number of foreclosures in our
program will increase. VA stands ready to aid veterans in any way
possible.
Madam Chairwoman, this concludes my testimony. I look forward to
answering any questions you or the Committee members may have.
Statement of Todd Bowers, Director of Government Affairs,
Iraq and Afghanistan Veterans of America
Madam Chairwoman, ranking member and distinguished members of the
committee, on behalf of Iraq and Afghanistan Veterans of America, I
thank you for the opportunity to testify today regarding the Subprime
Mortgage Crisis and America's veterans. I respectfully request that my
testimony today be submitted for the record. I also ask that the
Committee note that my testimony today is in my civilian capacity as
the Director of Government Affairs for Iraq and Afghanistan Veterans of
America and does not necessarily represent the views of the United
States Marine Corps Reserve.
In World War Two, it was the dream of millions of veterans to own
their own homes. The veteran home-loan program made this possible for
thousands of them. Today's combat veterans have the same dream, and the
VA is still here to help them. The VA currently guarantees 2.2 million
home loans, totaling $243 billion dollars. They guarantee about 11,109
new home loans every month, over half of which go to first-time home
buyers. Simply put, the VA's home loan protections are still helping
veterans achieve the American dream.
Like all Americans, however, today's veterans have been affected by
the downturn in the economy and the mortgage crisis. According to a VA-
commissioned 2007 study, 18% of the veterans who sought jobs within
three years of discharge were unemployed. A quarter of those who did
find jobs were earning less than $22,000 a year. In addition, the VA
has already seen 1,500 homeless Iraq and Afghanistan veterans.
These statistics are shocking, and without quick action, we can
expect them to worsen. I am pleased to see that Congress has taken
initial steps to appropriately address this issue. We believe that the
following two pieces of legislation will aid veterans in their
transition:
H.R. 4884, The Veteran Home Loan Guaranty Improvement Act of 2008,
will make home loans more accessible to veterans by easing restrictions
on the home loan guaranty programs administered by the Department of
Veterans Affairs (VA). The bill eliminates the equity requirements for
refinancing in response to the declining home values which prohibit
many veterans from qualifying for the benefit. The bill also reduces
the VA guaranteed home loan funding fees to one percent and eliminates
the funding fees for veterans seeking to refinance a home loan, among
other things.
H.R. 4883 will prohibit foreclosure of property owned by a
servicemember for one year following a period of military service.
I thank you for providing me the opportunity to testify before you
this afternoon. I hope that the information I have provided you will
effectively lay the ground work for the committee make significant
changes to the current obstacles that our nation's newest veterans are
facing.
Statement of Kieran P. Quinn, CMB, Chairman,
Mortgage Bankers Association
Madam Chairwoman, Ranking Member Boozman and Members of the
Subcommittee, I am Kieran P. Quinn, Chairman of the Mortgage Bankers
Association (MBA).\1\ I am pleased to have the opportunity to discuss
the effects of the subprime mortgage situation on America's veterans,
how we can work together to stabilize the mortgage market, help
borrowers in trouble and prevent some of the current problems from
occurring again.
---------------------------------------------------------------------------
\1\ The Mortgage Bankers Association (MBA) is the national
association representing the real estate finance industry, an industry
that employs more than 400,000 people in virtually every community in
the country. Headquartered in Washington, D.C., the association works
to ensure the continued strength of the Nation's residential and
commercial real estate markets; to expand home ownership and extend
access to affordable housing to all Americans. MBA promotes fair and
ethical lending practices and fosters professional excellence among
real estate finance employees through a wide range of educational
programs and a variety of publications. Its membership of over 3,000
companies includes all elements of real estate finance: mortgage
companies, mortgage brokers, commercial banks, thrifts, Wall Street
conduits, life insurance companies and others in the mortgage lending
field. For additional information, visit MBA's Web site:
www.mortgagebankers.org.
---------------------------------------------------------------------------
MBA shares your concerns for helping veterans achieve the dream of
home ownership in responsible and sustainable ways. While we at MBA do
not have access to specific statistics about how the subprime market
transition is impacting servicemembers or veterans, we believe it is
valuable for you to know what the situation is in the market today and
what mortgage companies are doing to address the needs of all
consumers.
Current Market Conditions
Fundamentally, the demand for housing is driven by household
formation and job creation. The single most important step Congress can
take to support the housing market is to encourage long-term economic
growth through sound fiscal and tax policy. Members of Congress should
also recognize that housing and mortgage delinquencies react to
economic conditions and are not a key driver of those conditions.
States such as Ohio and Michigan have seen an exodus of jobs and
population, stranding a significant amount of housing stock and
lowering home prices in the region. States such as California, Florida,
Arizona and Nevada experienced speculative home purchases that far
outpaced the rate of household growth, causing home prices to retreat
to levels of about two years ago. As long as economic growth continues,
these Sunbelt states should be able to grow out of their problems.
Other sections of the country face more long-term and intractable
problems.
It is significant to note that subprime lending has already
essentially stopped, due entirely to the reaction of the world capital
markets to how these loans are performing. While quarterly originations
of subprime loans hit a high of $177 billion in the third quarter of
2005, and were as high as $165 billion as recently as the fourth
quarter of 2006, one year later they were down to $14 billion in the
fourth quarter of 2007, according to the publication, ``Inside B&C
Lending.'' This is a 92-percent decline. As a percent of total mortgage
originations, subprime loans were 36 percent of MBA's estimated total
origination in the fourth quarter of 2006, and were 2 percent of
mortgage originations by the end of 2007.
Historically, the major cause of delinquencies and foreclosures is
job-related, as can be seen in the upper Midwest. However, in the last
year, delinquency and foreclosure rates have increased due to upward
rate adjustments on Adjustable Rate Mortgages (ARMs) combined with
falling home prices. With the recent decline in interest rates, more
homeowners are receiving favorable mortgage rates, either through
lessening the burden on ARM adjustments or more favorable refinance
opportunities. However, housing price declines make it harder for
borrowers to qualify for certain mortgages, such as a loan taken out
with a 10 percent downpayment (90 percent loan-to-value, or LTV), for
example, may now be a 100 percent LTV loan due to a 10 percent house
price decrease.
Given increased delinquency and foreclosure rates, lenders are
taking significant action to help borrowers.
[GRAPHIC] [TIFF OMITTED] T1374A.002
[GRAPHIC] [TIFF OMITTED] T1374A.003
HOPE NOW: Progress in Helping Struggling Homeowners
The HOPE NOW Alliance is a broad-based collaboration between credit
and home ownership counselors, lenders, investors, mortgage market
participants and trade associations, including MBA. The Secretaries of
the U.S. Departments of the Treasury and Housing and Urban Development
encouraged MBA to build on the efforts Members of Congress, State and
local leaders and federal regulators urged us to undertake. HOPE NOW
has established a coordinated, national approach among servicers,
investors, \2\ non-profit housing counselors and other industry
participants to enhance our ability to reach out to borrowers who may
have or expect to have difficulty making their mortgage payments and to
offer them workable options to avoid foreclosure. The HOPE NOW Alliance
is achieving real results in reaching at-risk borrowers and in
providing positive solutions that avoid foreclosure.
---------------------------------------------------------------------------
\2\ After a mortgage is made, the lender will often sell the loan
to investors. A loan servicer acts as the intermediary between the
borrower and the investor. The servicer's role is to collect payments,
handle escrow accounts, forward principal and interest payments to the
investor and deal with issues that arise from delinquency and
foreclosure. A servicer is typically compensated 25 basis points
(0.25%) of the loan balance for performing this service, or $250 on a
$100,000 loan balance.
---------------------------------------------------------------------------
The Alliance is continuing to expand and add members who commit to
specific efforts to reach and assist borrowers. As of February 25th, 27
loan servicers, representing over 90 percent of the subprime market,
were in the Alliance. In addition, we have strong participation from
respected non-profits, led by NeighborWorks America and the
Homeownership Preservation Foundation, with its network of trained
telephone counselors. We are also expanding our network of non-profits
every day.
One of the Alliance's first steps was to demonstrate a commitment
to results by adopting a Statement of Principles to help distressed
homeowners stay in their homes. These principles will help ensure all
borrowers receive quality service and assistance when they contact
their lender/servicer in the Alliance.
The following are the principles embraced by HOPE NOW servicers,
which are consistent with calls for the industry to expedite solutions
for borrowers:
HOPE NOW members agree to attempt to contact at-risk
borrowers 120 days, at a minimum, prior to the initial ARM reset on all
2/28 and 3/27 ARM loan products;
HOPE NOW members agree to inform borrowers of the
potential increase in payment and terms of the loan, in an effort to
determine if the borrower may face financial difficulty in keeping
their mortgage current;
HOPE NOW members agree to establish a single port of
entry for all participating counselors to use; and
HOPE NOW members agree to make available dedicated e-mail
and fax connections to support counselor and consumer contacts.
By establishing these principles, HOPE NOW members are improving
the infrastructure needed to help more borrowers on a much larger
scale. In addition to improving lender/servicer systems for working
with counselors and borrowers, we must continue to increase our efforts
to reach out to at-risk borrowers.
The most significant barrier to helping consumers is a persistent
reluctance of struggling borrowers to respond to servicers' efforts to
offer help. Historically, about half of borrowers who go into
foreclosure never contact their servicer for help or reply to outreach
efforts. Freddie Mac reported at the end of January that 57 percent of
the Nation's late-paying borrowers still do not know their lenders may
offer alternatives to help avoid foreclosure.\3\ MBA is working to
drastically reduce that percentage and help as many troubled homeowners
as possible avoid foreclosure.
---------------------------------------------------------------------------
\3\ http://www.freddiemac.com/news/archives/corporate/2008/
20080131_07ropersurvey.html
---------------------------------------------------------------------------
In November, HOPE NOW servicer participants began a monthly direct
mail outreach campaign to at-risk borrowers. This direct mail effort--
on the HOPE NOW letterhead--is in addition to the thousands of letters
and telephone contacts made by individual servicers to their own
customers. In the first direct mail effort in November, HOPE NOW
members sent more than 215,000 letters to borrowers who are behind on
their mortgage payments and who have not had contact with their
servicer. The November letter provided a dedicated phone number for the
individual borrower to use to call their own servicer for help. As a
result of these letters, more than 16 percent of borrowers contacted
their servicer, far more than the normal 2-3 percent.
In December, HOPE NOW began a second wave of direct mail outreach
to 250,000 at-risk homeowners, providing individual servicer hotlines
as well as the 888-995-HOPE Hotline hosted by the Homeownership
Preservation Foundation. A third direct mail effort was launched on
January 22nd. HOPE NOW will report the results as data are compiled.
The Homeowner's HOPE Hotline is a key component of the outreach and
assistance effort for at-risk homeowners. The hotline directly connects
homeowners with trained counselors at U.S. Department of Housing and
Urban Development (HUD)-certified non-profit counseling agencies. This
counseling service is completely free and is offered in English and
Spanish. The counselors have direct access to the lender/servicers
through improved single points of entry all HOPE NOW Alliance members
agreed to create.
The Homeowner's HOPE Hotline is having a dramatic and positive
impact for at-risk homeowners. The HOPE NOW Alliance will continue to
expand the Hotline's capacity and promote it to reach more at-risk
borrowers. Some basic statistics about Hotline activity in recent
months includes:
Since the Homeowner's HOPE Hotline's inception in 2003,
it has received over 323,904 calls, over 245,000 calls received in
2007;
124,357 homeowners received counseling after calling the
Hotline, 83,000 occurred in 2007 and almost 20,000 in January 2008;
Calls are increasing monthly. In December 2007, there
were 93,794 calls to the Hotline that produced 15,462 counseling
sessions;
In January 2008, there were 82,569 calls that produced
19,558 counseling sessions;
The counseling sessions produced results. Through October
26, 2007, more than half of all homeowners counseled have been
connected with their lender for assistance, and one quarter of all
homeowners counseled in the fourth quarter of 2007 were referred to
their lender for a recommended workout;
Counseling sessions are rapidly increasing. Call volume
increased nearly 10-fold between first quarter 2007 and fourth quarter
2007;
Lenders/servicers are urging borrowers to call for
counseling. Homeowners primarily hear about the Homeowner's HOPE
hotline from their lender;
More homeowners with ARMs are calling--49 percent of
callers in the fourth quarter of 2007 were ARM borrowers, up from 34
percent in the first quarter.
Publicity for the Homeowner's HOPE Hotline continues to increase.
We are proud that the Homeowner's HOPE Hotline provides a resource for
free, non-profit counseling to any homeowner, anywhere in the country.
President Bush, Treasury Secretary Paulson and HUD Secretary Jackson
have mentioned the Homeowner's HOPE Hotline several times in public
statements and have urged homeowners in trouble to seek help. Members
of Congress have also highlighted the hotline. Thirty-eight Mayors from
across the country recently created public service announcements for
their local media markets urging borrowers to use the hotline.
NeighborWorks is also working with the Ad Council on the national
advertising campaign for the Homeowners' HOPE hotline, which includes
television, radio and print materials. Any time the Homeowner's HOPE
Hotline is mentioned by public officials or on television, calls to the
hotline increase dramatically. MBA welcomes that support and continues
to work to expand the counseling network for the hotline.
Members of Congress, in an effort to help their constituents avoid
foreclosure, have asked on many occasions what they could do to help.
The single most important thing Members and other community leaders can
do to help people stay out of foreclosure is to publicize the HOPE NOW
efforts, particularly the Homeowner's HOPE Hotline, 888-995-HOPE.
The Homeownership Preservation Foundation, the HOPE NOW Alliance
member managing the telephone network, continues to add trained,
experienced counselors to the program to handle the increasing call
volume from concerned homeowners. Tremendous progress has been made in
just the last few months. The hotline now has 400 trained counselors
assisting borrowers, up from 64 at the beginning of 2007.
NeighborWorks America, known formally as the Neighborhood
Reinvestment Corporation, is a Congressionally chartered non-profit
organization with a national network of more than 240 community-based
organizations in 50 states. NeighborWorks is a leader in the HOPE NOW
Alliance, and with its partners, is actively providing in-person
counseling services to consumers across the country.
HOPE NOW is working to add more non-profit agencies to the effort.
In December, NeighborWorks and other HOPE NOW Alliance members met with
HUD and other HUD counseling intermediaries to review ways to include
additional grassroots counseling groups. MBA is working to broaden the
HOPE NOW effort to ensure it is a model that works broadly for
consumers, industry and non-profits to maximize the ability to reach
troubled borrowers.
Servicers' ability to reach borrowers, either directly or through
an intermediary, is the key to helping them stay in their homes. The
solutions will vary with each individual borrower's circumstances.
Prudent and responsible loan modifications, repayment plans and other
types of workout options are solutions to help borrowers keep their
homes and minimize losses to investors. The HOPE NOW Alliance is
committed to pursuing all viable solutions to help people stay in their
homes.
Tools for Helping Struggling Borrowers
It makes good economic sense for mortgage servicers to help
borrowers who are in trouble. Borrowers who are not able to stay
current on their loans are very costly to the servicer. Servicers must
forward principal and interest payments to investors as well as remit
taxes and insurance payments, even if borrowers are not paying them. In
addition, significant staff resources must be employed to contact
borrowers, assess the situation, work on repayment plans and other loss
mitigation solutions, and if these efforts do not resolve the
situation, initiate and manage the foreclosure process.
Informal forbearance plans are generally the first tool servicers
employ to help borrowers. Servicers allow mortgagors to miss a payment,
with the explicit understanding the payment(s) will be made up some
time soon. If the situation is more involved than a short-term cash
crunch due to temporary unemployment or illness, a servicer may turn to
a special forbearance plan, which will typically combine a period of
postponed or reduced payments followed by repayment of the arrearage
over an extended timeframe.
Loan modifications are the next level of loss mitigation options. A
loan modification is a change in the underlying loan document. It might
extend the course of the loan, change the rate, change repayment terms
or make other alterations. Similarly, a servicer may attempt to
refinance the delinquent borrower into a new loan. Loan modifications
are one solution for borrowers who have an ability to repay a loan, and
have the desire to keep their home, but may need some help in meeting
this goal because the current loan terms are not sustainable for that
borrower.
HOPE NOW members have worked aggressively to make all of the
available tools as efficient as possible. Lenders and servicers worked
diligently with the American Securitization Forum (ASF) to create a
framework to more readily modify certain at-risk loans securitized in
the secondary market. This effort has received the backing of the U.S.
Departments of the Treasury and HUD, many Members of Congress, the
federal banking agencies and state and local officials.
The focus of the effort has been to identify categories of current
subprime hybrid ARM borrowers who can be streamlined into refinance or
modifications. MBA believes the ASF-established framework will add to
existing efforts to assist distressed borrowers. The key is to find
solutions which help borrowers but do not violate the agreements with
investors who now own the securities containing these loans.
The ASF has worked with servicers and investors to implement a
system which identifies, in advance of loan resets, borrowers who would
qualify for refinancing, loan modifications or other workout options.
To ensure investors accept and support far-reaching loan modification
and other workout solutions, this system cannot violate pooling and
servicing agreements with investors. The goal is to minimize the risk
of legal action by investors against servicers who help borrowers.
The ASF framework covers securitized subprime adjustable rate
mortgage loans, the 2/28's and 3/27's originated between January 1,
2005 and July 31, 2007 with an initial interest rate that resets
between January 1, 2008 and July 31, 2010. In other words, the
framework is for loans that have just begun to adjust. The ASF
framework will help provide solutions for homeowners with these
subprime hybrid ARMs who qualify for three different types of help:
refinancing, modification and other loss mitigation efforts.
Refinancing: One segment of borrowers is comprised of
those who are current, likely to remain current even after reset, or
likely to be able to refinance into available mortgage products,
including the Federal Housing Administration (FHA), FHA Secure or
industry products. Generally, the servicer will determine whether loans
may be eligible for refinancing into various available products based
on readily available data such as LTV, loan amount, credit score and
payment history. The servicer will facilitate a refinance in a manner
that avoids the imposition of prepayment penalties whenever feasible.
HOPE NOW will continue to work with the alliance to ensure all
servicers have access to products and programs generally available in
the market to refinance eligible borrowers.
Loan Modifications: A second segment of borrowers is
comprised of those with good payment records who will not qualify for
refinancing for any variety of reasons, such as a drop in home equity
or insufficient credit score. These borrowers will be targeted for
streamlined loan modifications if the loan is a primary residence
(i.e., not an investment or vacation property) and meets additional
criteria. Borrowers in this category will be offered a loan
modification under which the interest rate will be kept at the existing
rate of the loan for five years. This fast track option does not in any
way preclude a servicer from conducting a more individual in-depth
review, analysis and unique modification for a borrower to determine if
a longer term modification would be appropriate.
The fast track framework allows the servicer to make these
decisions:
Whether the borrower is unable to pay under the
original loan terms after the upcoming reset and default is reasonably
foreseeable, based on the size of the payment increase, and the current
income if the borrower did not pass the credit score improvement test;
Whether the borrower will be able to pay a modified
loan based on payment history prior to the reset date;
Whether the borrower is willing to pay a modified loan;
and
Whether the modification will maximize the net present
value of recoveries to the securitization trust and is in the best
interests of investors in the aggregate, because refinancing
opportunities are not available and the borrower is able and willing to
pay under the modified terms.
Loss Mitigation: This third segment of borrowers is
comprised of those for whom the loan is not current and will be unable
to refinance into any available product. These borrowers are
significantly behind in their payments before the loan resets and their
situations need to be individually evaluated. It is especially
important for us to reach this group of borrowers through efforts such
as the HOPE NOW direct mail campaign and through the national
advertising campaign for the Homeowner's HOPE hotline. For loans in
this category, the servicer will determine the appropriate workout and
loss mitigation approach on a loan-by-loan basis. Referrals from
counselors if the borrowers contact the Homeowners' HOPE Hotline will
also be important. Approaches for these borrowers may include loan
modification (including longer term-rate reductions, capitalization of
arrearages and term extensions), forbearance, short sale, deeds in lieu
of foreclosure or foreclosure. Because these borrowers are already
behind in their payments, and may face challenges such as a loss of
income or other issues, they require a more intensive analysis,
including current debt and income analysis, to determine the
appropriate loss mitigation approach.
Servicers, however, can only help borrowers who come forward for
help. Borrowers must respond to servicers' notices and phone calls. At
some point, the servicer has to assume the homeowner has no intention
of paying off the obligation. It is also important to note the options
for helping borrowers who purchased homes as investments are limited.
During the housing boom of the last several years, there were many
speculators and investors looking to profit from price appreciation.
The strength of the American economy relies on the willingness of
people to take risks, but risk means you do not always win. During this
time, a majority of these properties were purchased to try to
capitalize on appreciating home values or to use rents as a source of
investment income, or some combination of both. With the downturn in
the housing market, a number of these investors are walking away from
their properties and defaulting on their loans. In the third quarter of
2007, 18 percent of foreclosure actions started were on non-owner
occupied properties. Foreclosure starts for the same period for non-
owner occupied properties in Arizona, Florida, Nevada and Ohio were at
22 percent.
HOPE NOW helps all borrowers, not just subprime ARM borrowers
eligible for fast track refinance or modifications. The ASF framework
for a streamlined, scalable solution for current borrowers facing a
reset allows servicers to give more detailed attention to at-risk,
hard-to-reach, delinquent borrowers. Servicers will be able to work
closely with credit counselors and/or homeowners to ensure all options
are explored to avoid foreclosures. The scalable outreach and
modification effort in no way precludes on-going workout solutions for
the highest risk delinquent borrowers. By having this framework in
place, human capital and other resources are able to focus on the cases
that require the most attention.
Measuring Results
MBA recognizes results are the key to this national effort to
assist at-risk homeowners. The latest results from HOPE NOW servicers
on their foreclosure prevention efforts in the second half of 2007 are
attached. This latest HOPE NOW data, released on February 6th, shows
significantly more homeowners received assistance than previously
estimated.
Fourteen HOPE NOW servicers responsible for more than 33.3 million
home loans (about 62 percent of both prime and subprime loans
outstanding nationwide), as of September 2007, provided the data. The
latest report shows an estimated 869,000 homeowners were helped in the
second half of 2007 through either formal repayment plans (652,000) or
loan modifications (217,000).
During the same period, 283,000 foreclosure sales were completed.
Based on 1,446,000 average monthly delinquencies of 60 days or more
past due during the second half of 2007, 45.3 percent received a formal
repayment plan, 14.8 percent received a modification and 19.7 percent
resulted in a completed foreclosure sale.
The data for the second half of 2007 reveal 324,000 prime borrowers
and 545,000 subprime borrowers were helped:
20.7 percent of prime borrowers received a modification;
27.5 percent of subprime borrowers received a
modification; and
34.8 percent of subprime borrowers, during the fourth
quarter, received a modification, indicating a rapid increase in the
use of modifications as a loss mitigation solution.
In addition, information was collected on foreclosure activity and
trends. These statistics are revealing. While there appears to be a
large number of foreclosures initiated by servicers, only one-third of
foreclosures initiated actually result in a completed sale. Frequently,
borrowers do not respond to servicers' attempts to contact them until
they receive their first legal action notice. HOPE NOW's borrower
outreach initiatives are already increasing the number of borrowers who
respond before a foreclosure action is initiated.
The latest state-level data from HOPE NOW servicers show that
efforts to help borrowers are rapidly increasing. The trend in formal
repayment plans is up in all states but more so in the states that
experienced rapid and substantial increases, and now declines, in home
prices. That is to be expected because of the more rapid increase in
delinquencies in those states. However, it is clear in all states the
upward trend in loan modifications completed is much greater than the
upward trends in delinquencies and in formal repayment plans, which
clearly indicates servicers increasingly are working with borrowers to
modify the terms of their loans. The upward trend in loan modifications
is much more pronounced in the states with substantial increases in
home prices. We believe the upward trend in loan modifications and
repayment plans will continue and more homeowners will receive the help
they need to stay in their homes.
As you can see, we are tracking and measuring outcomes through HOPE
NOW and other efforts. In addition to the data reported here, we are
measuring trends in delinquencies and resolution outcomes (i.e.
reinstatement, repayment plans, modifications, short sales, deeds in
lieu of foreclosure, partial claims and foreclosure). We want to
provide consistent and informative data reports based on common
definitions and to provide insights into the nature and extent of the
current mortgage crisis that will help in the development of workable
solutions that avoid foreclosure whenever possible.
As promised at the start of HOPE NOW, as data collection
initiatives mature and the data are validated, MBA is providing more
detailed information nationally and on a state-by-state basis. As
noted, the Alliance is growing weekly. Participating servicers have
been engaged in developing standard definitions for key loss mitigation
data. The data collection effort is an enormous undertaking, which will
take time to fully develop and perfect. We are confident, however, to
be able to deliver information at the state level to help measure what
servicers are doing to resolve difficult situations and to assist
homeowners.
Misinterpretation of Key Report Fuels Public Concern
On January 17, MBA released a study of actions lenders took to
assist borrowers in the third quarter of 2007. The paper also discussed
something known in the industry as the ``Moody's 1% Number.'' In
September 2007, Moody's released a study suggesting the mortgage
industry had only assisted one percent of the people who needed help. A
later report in December showed an increase of this number to 3.5
percent.\4\ In that same report Moody's made a much-overlooked but
critical statement: ``The ratio of loans that were modified or on a
workout plan as a percentage of seriously delinquent loans active as of
September 30th (60+ days), a meaningful barometer of the extent to
which servicers are undertaking loss mitigation activity, was 24
percent.'' Servicers had undertaken loss mitigation activity for nearly
one in four distressed borrowers and this was before any of the
streamlined modifications had begun or the HOPE NOW efforts had really
expanded.
---------------------------------------------------------------------------
\4\ Various groups have used the 3.5 percent figure as a political
rally cry despite the fact that this admittedly flawed indicator
represents a tripling of loan modification activity since the September
report.
---------------------------------------------------------------------------
Despite this important statement, some continue to focus on the 3.5
percent number when Moody's itself has made it clear the 24 percent
number is the ``meaningful'' indicator. This is the case because not
every subprime ARM borrower needs help; in the third quarter of 2007,
according to MBA's National Delinquency Survey, approximately 70
percent of subprime ARM borrowers were paying on time. The December
2007 Moody's report itself reveals that more than half of the loans
evaluated prepaid or refinanced before resets occurred. This population
does not need loss mitigation assistance. Unfortunately this important
fact is often overlooked and consistently underreported by the media.
Efforts to Serve and Assist Veterans and Servicemembers
Qualifying veterans and servicemembers have access to favorable
loan terms through the Department of Veterans Affairs (VA) loan
program. This program offers veterans and servicemembers 100 percent
financing in exchange for a small funding fee (e.g. guaranty fee) which
can be financed into the mortgage. The federal government provides this
help to veterans and servicemembers not by actually making the loan,
but by providing a guarantee that protects the lender against losses in
the event of foreclosure. The guarantee is a form of credit enhancement
that allows lenders to provide 100 percent financing.
Servicemembers who are in active duty status also have critical
protections available to them under the Servicemembers Civil Relief Act
(SCRA).\5\ In particular, interest rates for mortgages taken out prior
to active duty status are reduced or capped at six percent while the
servicemember is on active duty. The interest rate differential between
the note rate and the six percent cap is not deferred, but forgiven.
---------------------------------------------------------------------------
\5\ 50 U.S.C. App. 501 et seq.
---------------------------------------------------------------------------
Moreover, SCRA prohibits foreclosure and eviction actions during
the servicemember's period of active duty plus an additional three
months. These are significant protections that recognize the importance
of our servicemembers' efforts in defending our country. These benefits
are unique to active duty military personnel.
Legislative Efforts to Address Market Conditions
Congress has acted robustly to address challenges in the mortgage
market. This hearing, along with over a dozen others in various
Committees, has illuminated how the mortgage market works, recent
failings in market operations and how Congress can address the issues.
Congress has also worked with the Executive branch and industry in
creating and supporting the HOPE NOW initiative, which I discussed
earlier.
MBA continues to believe transparency in the mortgage process needs
to be improved to help borrowers understand, shop for and choose the
loan to best meet their needs. We also believe a uniform national
mortgage consumer protection standard for all home buyers will simplify
the process for borrowers and protect them, facilitate better
enforcement against predatory practices and assist the smooth flow of
global capital into the mortgage market.
Since last February, it has become clear that industry participants
and policy makers needed to respond to the credit crunch and market
conditions. In December, Congress passed important legislation
extending the mortgage insurance deduction and providing tax relief for
forgiven mortgage debt. Also last year, HUD launched the FHASecure
program to help borrowers who have made their payments before a rate
reset refinance into a FHA-insured loan.
Fiscal and monetary policy must also respond to the current
weakness in the overall economy. Congress recently passed an economic
stimulus which will help the market in two ways. First, it will
stimulate the economy directly through payments to consumers and
indirectly through tax changes. It will also help by temporarily
raising the loan limits for investment by Fannie Mae, Freddie Mac and
for FHA loans. This will result in a more stable housing system,
particularly addressing the situation in high-cost states like
California. Further, Congress should make clear what the rules of the
game are, so the current market upheaval is not exacerbated by a rapid
change in regulation. These include passage of a uniform national
mortgage lending standard, regulatory reform of the housing government
sponsored enterprises (Fannie Mae and Freddie Mac) and FHA
modernization.
Efforts that would serve to increase prices or push market
participants out of the housing finance system, such as efforts to
encourage more consumers to file for bankruptcy, should be avoided. In
order for the market to change course, certainty must be realized by
consumers, lenders and investors. With the possibility of major
investor liability still on the horizon, secondary market participants
and mortgage lenders will remain apprehensive of lending to all but
borrowers with perfect credit. The longer these fears remain, the
longer the national housing market will take to rebound.
Conclusions
MBA is pleased to have this opportunity to discuss the situation in
the mortgage market and how we can help stabilize the market, assist
those who are in trouble and how we can prevent today's problems from
recurring.
In the midst of the concern for the market, it is important to keep
in mind the benefits of home ownership. Homeownership makes American
communities stronger, by giving families ownership interest in what is
happening around them. Crime goes down and educational achievement
increases. Owning your own home is still the best way to build, grow
and maintain wealth in America today. As Congress wrestles with ways to
address the market, we ask that the goal be to increase home
ownership--in responsible and sustainable ways--and that Congress
refrain from efforts that will make it harder for American families to
achieve the dream of home ownership.
Thank you for the opportunity to present our testimony on this
important issue.
Statement of Justin M. Brown, Legislative Associate,
National Legislative Service, Veterans of Foreign Wars of the United
States
MADAM CHAIRWOMAN AND MEMBERS OF THIS SUBCOMMITTEE:
On behalf of the 2.3 million members of the Veterans of Foreign
Wars of the United States and our Auxiliaries, I would like to thank
you for the opportunity to testify before this distinguished body. The
subprime mortgage crisis is an issue that is affecting the entirety of
our Nation. We appreciate this Committee's rigor in recognizing the
affects it will have upon American veterans. The thought of America's
heroes in the streets due to their use of a bad financial tool makes us
all shudder. It is of the utmost importance, that if nothing else, we
learn from our mistakes and insure this never happens again.
Unfortunately, we have no veteran specific information on veterans'
exposure to the subprime mortgage market because it is not tracked. It
is important to note that Department of Veterans Affairs (VA) home loan
guarantees did not apply to subprime loans and are not being directly
affected by the subprime mortgage crisis. However, veterans have used
multiple financial tools to purchase their homes, including subprime
mortgages. We do have some opinions as to why some veterans may be
finding themselves faced with a subprime mortgage foreclosure: the
veteran was working with predatory lenders, the veteran did not have
access to prime loans, the veteran lacked knowledge or qualification
for a VA home loan, the veteran lived in a large urban area in which
housing averages exceeded the VA home loan cap, or the veteran had a
bad or lower credit score due to deployments, or any combination of the
above.
The VA home loan process is very lengthy, and costly, to both
lenders and veterans. This bureaucratic red-tape may have become an
incentive for lenders and real-estate agents to discourage VA home
loans and may have led to veterans using subprime mortgages. Also, VA
home loans are capped at a level cost prohibitive to certain geographic
regions. The unreasonable VA loan cap in expensive urban districts may
have led several veterans to subprime loans in those areas. In
comparison to VA home loan guarantees, Federal Housing Authority home
loan caps vary by state and county allowing prospective mortgagees more
flexibility.
We strongly recommend that measures be introduced to strengthen and
expand the use of the VA home loan guarantee program for veterans. In
the housing market crunch, veterans are likely to rely more heavily on
VA home loans as access to capital becomes more difficult and
guaranteed loans become more attractive to lenders.
Our primary recommendations for the VA home loan guarantee program
are: raise the maximum cap of VA home loans specific to the needs and
averages of individual communities, decrease the completion time of a
VA guaranteed home loan (thereby decreasing the likelihood of lenders
to encourage alternative less attractive mortgage options), repeal the
funding fee to obtain a VA loan guarantee, and increase outreach and
access to VA home loan specific information.
The Veterans of Foreign Wars are appalled that there are
individuals in our country who targeted veterans and others for
substandard loans knowing they would likely default after the initial
rates were raised. Those individuals have done their country, and the
men and women who served it so proudly, a great disservice.
Let us all work hard for our future and those affected by this
terrible tragedy. We are a great Nation and our people deserve better.
Madam Chairwoman, Ranking Member Boozman, and members of this
Subcommittee I thank you for the opportunity to testify and am happy to
answer any questions you may have.