[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE EFFECTS OF THE FORECLOSURE CRISIS
ON NEIGHBORHOODS IN CALIFORNIA'S
CENTRAL VALLEY: CHALLENGES AND SOLUTIONS
=======================================================================
FIELD HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 6, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-136
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45-620 PDF WASHINGTON DC: 2008
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois KENNY MARCHANT, Texas
ANDRE CARSON, Indiana THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
September 6, 2008............................................ 1
Appendix:
September 6, 2008............................................ 57
WITNESSES
Saturday, September 6, 2008
Amador, Patty, President, Ambeck Mortgage Associates............. 43
Bates, Joseph C., Director, Santa Ana Homeownership Center, U.S.
Department of Housing and Urban Development.................... 18
Canada, Pam, Chief Executive Officer, NeighborWorks Home
Ownership Center, Sacramento Region............................ 40
Duarte, George, CMC, Horizon Financial Associates, on behalf of
the California Association of Mortgage Brokers................. 31
Gutierrez, Hon. Steven, Supervisor, San Joaquin County Board of
Supervisors.................................................... 12
Machado, Hon. Michael, California State Senator, 5th District.... 7
Ornelas, Carol, Chief Executive Officer, Visionary Home Builders
of California.................................................. 36
Peters, Heather, Deputy Secretary for Business Regulation and
Housing, Business, Transportation and Housing Agency, State of
California..................................................... 14
Wooten, Hon. Ellie, Mayor, Merced, California.................... 10
APPENDIX
Prepared statements:
Amador, Patty................................................ 58
Bates, Joseph C.............................................. 62
Canada, Pam.................................................. 66
Duarte, George............................................... 75
Gutierrez, Hon. Steven....................................... 83
Machado, Hon. Michael........................................ 86
Ornelas, Carol............................................... 92
Peters, Heather.............................................. 100
Wooten, Hon. Ellie........................................... 127
Additional Material Submitted for the Record
Cardoza, Hon. Dennis and McNerney, Hon. Jerry:
List of items submitted for the record, copies of which are
available in committee files............................... 130
Wooten, Hon. Ellie:
Additional items submitted for the record.................... 132
THE EFFECTS OF THE FORECLOSURE
CRISIS ON NEIGHBORHOODS IN
CALIFORNIA'S CENTRAL VALLEY:
CHALLENGES AND SOLUTIONS
----------
Saturday, September 6, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12 p.m., in the
Stockton Arena, 248 West Fremont Street, Stockton, California,
Hon. Barney Frank [chairman of the committee] presiding.
Members present: Representatives Frank and Speier.
Also present: Representatives Cardoza and McNerney.
The Chairman. This hearing of the Committee on Financial
Services on the question of the foreclosure crisis will now
come to order.
I apologize for the delay in starting the hearing, and I
appreciate your coming here. Some of you probably know--all of
you probably know--that the Federal Government is about to make
some very drastic moves regarding Fannie Mae and Freddie Mac,
and I had to deal with some of the media about that. So the
delay was my fault, and I apologize.
This hearing has been called at the request of our host,
Member of Congress Jerry McNerney, strongly supported by his
neighbor, and our colleague, Dennis Cardoza, because for a
variety of reasons, none the fault of individuals, just because
of economic circumstance, this area, as you all know, has been
hurt worse by the foreclosure crisis than almost any other
place in the country.
The hearing has several purposes. First, particularly with
some of the officials we have here from both the State and the
municipalities, to make the point that when we think about
trying to diminish foreclosures, we aren't simply trying to
help individuals, although that shouldn't be considered a bad
thing.
But the foreclosure crisis, particularly when it takes on
the dimensions it has taken on here, becomes a problem for more
than just the individual. It hurts the neighborhoods. It hurts
the cities. It hurts the whole economy. The foreclosure crisis
is the single biggest cause of the economic problems we are
facing.
Second, we passed legislation which offers to those who
hold the loans--the servicers, the lenders, the banks--an
opportunity to help us avoid foreclosure, but, by law, that is
voluntary because we could not simply abrogate existing
contracts.
One message we want those who hold the loans to get is
this: If you tell us that you cannot cooperate with public
authorities, advocacy groups and others, in diminishing the
number of foreclosures--no one thinks we can get rid of all of
them--if you tell us that you can't do that because existing
law ties your hands, then I guarantee you that law will look
very different next year.
So if people in the lending industry want to avoid some
very severe, much more restrictive legislation, I think it
would be in their interest to cooperate with us. Not out of a
sense of vindictiveness, but we will be listening. If they say,
look, we would like to help but we can't, because of the way
the law is, then it is our job to change the law.
I am very appreciative to my colleagues from California,
and we have also been joined by another Californian who is a
member of our committee, Congresswoman Jackie Speier, and we
look forward to the testimony and I can guarantee you that what
we hear today--this hearing is actually a forerunner of a
hearing we will have in Washington, in which a similar set of
witnesses will be called, including a lot of the people from
the lending industry.
And on that, I want to say that I am disappointed that we
don't have better representation from those other servicers.
Many of them chose not to come and that is a bad sign. We
invited people; we urged them to come; my colleagues tried to
get them to come; Dennis Cardoza did.
I just want to say to those--and we will have another
hearing. I want to say to those who are in the business of
servicing the loans and making the decisions, if you do not
have the time to come talk to us now as we deal with this,
don't be surprised if we don't have the time to talk to you
next year when we are passing new legislation. There has to be
some reciprocity here. So, with that, I want to thank my
California colleagues and their staff who did the work.
I will tell you, one of the great bargains the American
taxpayer gets, without being fully aware of it, is the
congressional staff. There are people who work for all of us,
in our individual capacities in the committee, almost all of
whom could be making more money, with a lot less aggravation,
in other contexts. The aggravation comes from two sources, by
the way--us and you.
So I am very grateful to them for the excellent job they
have done in making this possible, and I now call on my
colleague, who is the major force behind this hearing, Jerry
McNerney.
Mr. McNerney. Thank you, Mr. Chairman. First of all, I want
to welcome the witnesses and thank them for participating. I
want to welcome everyone here that is going to be listening to
this hearing.
I especially want to thank the chairman for coming all the
way here from Massachusetts, specifically because this area is
impacted so hard by the foreclosure crisis.
It is an opportunity for the chairman to see exactly what
people in this area are thinking, what some of the solutions
people have in mind are, so that we can discuss those, so that
we can get a fair hearing, and so we can move toward whatever
solutions might be appropriate in this case.
I want to echo the chairman's comments. We passed a bill,
the President even signed it in July, it is a good bill, and it
offers a lot of opportunity for people who are in distressed
properties to take advantage of what is being offered now. It
is going to get worse before it gets better.
We don't want to have to move toward more draconian
measures in January. So there is an opportunity, right now,
please take advantage of it, talk to your lenders, find out
what the problem is, work with your Members of Congress, we can
help you, but this is a good offer.
I want to thank Mr. Cardoza for working with me to make
this happen. I want to thank Congresswoman Jackie Speier, a
member of the committee, for coming out here and helping with
our hearing today.
Growth in the Central Valley exploded in recent years,
thanks to readily available credit and home prices that were a
complete bargain compared to nearby Bay area properties.
As we know, the housing market collapse, coupled with an
economic downturn, has had a devastating impact on families and
homeowners throughout the region, particularly here in
Stockton. More and more people are receiving notices of
foreclosures, and families, the very foundation of our
communities have been shaken, and are struggling to keep up
their homes.
In California, foreclosures have surged to a 20-year high;
tens of thousands more people in the State have completely lost
their homes. In addition to cornerstone property housing,
Fannie Mae and Freddie Mac have recorded losses topping $100
billion.
We know from the news this morning that there is a
potential Government intervention in this problem. So the
crisis is real, it is here, we are at the epicenter of it.
Right here, in San Joaquin County, we have registered that an
estimated 1 out of every 30 homes is experiencing distress or
foreclosure.
From month to month, Stockton has occasionally risen to the
top of the foreclosure list throughout the country. So we know
that we are in one of the hardest-hit areas. But our City,
Stockton, is a jewel and we will continue to expand businesses
and homeownership here, and we will remind everyone that
Stockton remains an all-American city, and with dedication and
hard work, we will recover.
However, for the time being, we continue to grapple with
this problem of foreclosures, and the instability created both
in our neighborhoods and in the financial markets.
We all know that when houses are foreclosed, everybody
loses--the house becomes more prone to crime, and attracts
problems. It also is a burden on our local cities and
communities. So we want to do everything we can to avoid
additional foreclosures.
Dennis Cardoza and I have held foreclosure workshops
throughout the valley, and throughout my district, to help put
people in distressed properties in contact with advisers, with
lenders, to give them the best information they can and to give
them an opportunity to stay in their homes.
We are going to continue to do that and I hope that those
workshops have been helpful, and if they are, again, we will
continue to do those.
So I hope that this hearing today does shed some light on
the problem, again showing us what some of the particular
issues are facing our region, so that in Washington we can
address those problems.
I want to again thank the witnesses for coming. I know it
is a Saturday, that it is a difficulty, and it is intimidating
to testify in front of a congressional committee, but we are
really here to learn from you, so I hope that you are open and
honest with us, and we will go ahead and use your testimony.
Thank you very much.
I yield back.
The Chairman. Thank you. Next, a member of the committee,
Congresswoman Jackie Speier. We are particularly grateful to
her for coming. Under House rules, two members of a committee
are necessary for it to be an official hearing, and
Congresswoman Speier has an interest in this and has been very
active as a member, and her presence is really essential.
Ms. Speier.
Ms. Speier. Thank you, Mr. Chairman, and thank you for
holding this hearing, and to my two colleagues, Congressmen
Cardoza and McNerney, thank you for representing your district
as you do.
I am going to resist the temptation to try and do an
autopsy of why we are here, and just speak, very briefly, on a
couple of things.
One is that those who have violated the law, either by
encouraging consumers to misrepresent themselves on
applications, appraisers who did not do appropriate appraisals,
banks that turned their eyes--all of those individuals, in my
view, need to be held accountable, and I believe we should
encourage local DAs and U.S. attorneys, and attorneys general,
to act to change what has been for most of the months that have
passed, a situation where no one has been held accountable. I
think all of us have to be held accountable.
And I would echo the chairman's comments, that it is not
just the foreclosed property that is injured. It is the
neighborhood, it is the community, it is the State.
The lower property taxes means that the education in
California is going to be reduced. We are now 46th in the
Nation in what we spend per pupil on education, and we will
drop to the bottom, and be more like a Third World country in
the kind of education system we are providing to our kids, if
we don't fix this.
So I think as we come up with fixes, which will include the
financial institutions cooperating fully, and in my own
district I have had many constituents who have indicated that
they are getting no cooperation from their particular banks,
they must, in my view, cooperate fully, and then we all need to
recognize that any appreciation in these home values, to the
extent that the Federal Government comes in, or the State
government comes in to help sustain these loans, that we would
all benefit as taxpayers in the appreciation.
So I yield back my time, and thank, again, the chairman,
for hosting this.
The Chairman. Thank you. And then finally, one of the
members who was most instrumental in having this hearing, and I
will tell you also, by the way, you should know with regard to
the FHA, Fannie Mae, and Freddie Mac, all of which have become
even more important in terms of what housing finance we can now
get, a year ago, all of those entities had limits on the amount
of loans they could deal with. That pretty much put people here
out of business, and no one was a more ardent advocate than
Representative Cardoza in those loan limits being raised to
take account of the fact that house prices are variable and
that a price that prevents you from financing luxury housing in
Nebraska not only prevents you from financing luxury housing in
California, it prevents you from financing dog houses in
California.
And thanks to Representative Cardoza, we didn't get
everything we wanted, but there were significant increases in
those which means that going forward, as we being to work our
way out of this--I notice Secretary Peters is here, she was a
very powerful witness when she testified on specifically this
issue, became a bipartisan issue. And you will find, going
forward, that many of you will be able to get some help that
you might not otherwise have gotten, and Representative Cardoza
was a major force in that.
Representative Cardoza.
Mr. Cardoza. Thank you, Chairman Frank. I very much
appreciate you agreeing to do this hearing today, and I want to
thank you for your leadership in the housing crisis.
I sit on the leadership team in the House, these days, and
I have been a front seat witness to what Chairman Frank has
done on a daily basis, and the frustration that he has had to
overcome in dealing with the other body, dealing with some
other folks who didn't want to agree.
You know, all of your hard work and attention to this issue
is so critical to my constituents, 17 percent of whom are
Portuguese. Mr. Frank represents the largest Portuguese-
American population in the country, bigger than this one, so
he--
The Chairman. [In Portuguese]
Mr. Cardoza. Congressman Costa and I say he is more
Portuguese than we are sometimes.
On a more serious note, though, I want to talk about the
fact that Congressman McNerney and I, in this room, had over
500 citizens at our first Workout Conference, and we have had,
I think, 10 to 15 since then. Assemblywoman Galgiani has done
the same. Mr. McNerney has gone on to do others.
In fact, they used the model that we started, right here in
this room in Stockton, to take across the country, and Members
of Congress have been doing it for their constituents all over
the country.
When Congressman McNerney and I requested this hearing, we
didn't know that Fannie and Freddie were going to be in the
situation that they are today, and that it would be so timely
that we were having this meeting. But we took a tour before we
came here, and you can see the devastation inside the
community.
When we came here, and we talked to the individuals, you
see the devastation in the families. You see the individuals
who are grieving. One lady sat about where Mayor Wooten is
sitting right now. She was facing the other direction. She was
telling me that she is 86 years old. She got a call one evening
while she was watching Jeopardy, where the caller asked, ``How
long has it been since you have seen your children?'' She said,
``Well, I do have children on the East Coast.'' The caller then
said, ``Well, you know, your house is worth $200,000.''
This lady was on Social Security, she later testified,
making $960 a month. The caller told her that she qualified for
a loan up to $200,000. And, in fact, if she would just sign up
tomorrow when she came down, they would give her a $200,000
loan on her house.
She said her house was totally paid off. She was happy. She
wasn't bothering anybody. But she was convinced that this was
almost like free money. She went down. She applied for the
loan. She got the loan. Her payments were $260 a month. She
figured she could do that for probably most of the rest of her
life on the money that she had in the bank. Well, one thing and
another happened, and 6 months later, it reset, and she was
paying $1,500 a month on a $900 a month Social Security check,
something to that degree.
And so she was coming to us, trying to figure out how she
could work out of it. She had prepayment penalties she was
going to be stuck with. There were just a number of things.
Now I am totally off the script that my staff has written
for me for today, but as I sit here, it is just compelling to
me to look out, and think about those individual cases.
Sometimes people say, they should have known better, or
they should have read the documents. Well, 53 percent of my
population is Hispanic. A lot of them have limited speaking
capability. English is not a first language. We have a lot of
challenges.
I don't read all of those documents. I am a former Realtor.
I know which ones I need to read and which ones are just
boilerplate. But those folks who aren't as sophisticated,
aren't Members of Congress, do not have a college education,
are much more challenged in that process.
And if they came up with folks, they got involved with
folks who were less scrupulous, or even if they were, if they
had a good Realtor, if they had a good mortgage banker, a lot
of times it was what everybody was doing. They were
refinancing. Everyone thought that this was the new normal,
that housing prices were this cost and some people jumped in,
thinking that if they didn't get in right now, that they would
be out of luck.
And so it is devastating when you see the individual, it is
devastating when you see a community, and it is devastating to
know that up to 25 percent of my district is facing--either has
been foreclosed on, is currently undergoing foreclosure, or
could be foreclosed on by next July. Because that is what we
see going forward, doing extrapolations based on data that my
staff can provide you with, that I had in my testimony but I
won't go into right now.
Mr. Chairman, you know that if 25 percent of any community
would have been devastated at one time, we would have been
voting to send in the National Guard and voting disaster
assistance. But because it happened over a period of time, it
is much like that old adage, that if you throw a frog into a
pot of boiling water he immediately jumps out.
But if you put a frog in a pot of cold water and turn up
the heat, he will sit there and cook. And that is what is
happening to our district right now. We have some devastating
consequences, and it has gradually come upon us, but it doesn't
make the devastation any less of a problem for those
individuals who are being affected by it.
So I am very grateful, and I know Congressman McNerney is
also grateful that you are here.
I am going to be quiet now and let you get to the
testimony, but thank you, and I appreciate what you have done
for us.
The Chairman. Thank you. We will begin our testimony with
State Senator Michael Machado.
Without objection, any documents or complete written
remarks that any of the witnesses wish to insert in the record,
we will accept, and if there are people in the audience who
would like to put something in--let me say this. If, after
listening, there is something that occurs to you that you would
like to send in, Gail Laster, who is here, is the deputy chief
counsel of our committee, we will give you an address and you
can send us material for up to a week from today, and it will
be incorporated into the record.
The Chairman. Senator.
STATEMENT OF THE HONORABLE MICHAEL MACHADO, CALIFORNIA STATE
SENATOR, 5TH DISTRICT
Mr. Machado. Thank you very much, Mr. Chairman, and members
of the House Financial Services Committee. Thank you for
inviting me today, and welcome to California's Central Valley,
Chairman Frank, supplier of America's fresh fruits and
vegetables.
The Central Valley--to put in context my remarks, I will
give a brief description of the Central Valley. It is
predominantly an agricultural region, with predominantly blue
collar jobs; the median income in the Central Valley is about
$51,000 compared to a statewide median income of $56,000, and
over the past several years, the valley has experienced
unprecedented urban growth, extending into the foothills of the
Sierras.
Rising home prices and seemingly low-cost mortgages
attracted local buyers upgrading to larger homes, or first-time
home buyers who were formerly renters, as well as attracting
those migrating from the Bay Area in service of larger homes
and larger lots.
As has been mentioned, the Central Valley has been for
foreclosures in both California and the Nation. In California,
1 in every 182 households is in foreclosure. In the Central
Valley, it is higher; 1 in 73 in Merced, and 1 in every 82 in
Stockton and Modesto, and these cities rank, two, three and
four, nationally, and at times have ranked number 1,
nationally.
My written testimony which I have submitted to the
committee summarizes the reasons I believe the Central Valley
has been so hard hit.
What I would like to talk today about is what we have done
at a State level to try to address the problem. I would also
like to talk about what we purposely haven't done. I believe
inappropriate action by government can be more harmful than
helpful, and something I will focus on throughout the remainder
of my testimony.
The provisions of recently-enacted House Resolution 3221
will have a positive impact in the Central Valley communities,
going forward. However, I believe that the actions of the local
lenders and our State legislature are more likely to have a
greater near-term impact on homeowners.
The California Senate Banking, Finance and Insurance
Committee, which I have chaired after a great teacher in the
former chairwoman, Jackie Speier, since 2006, was the first
State committee in the Nation to hold a hearing on the Federal
interagency guidance in nontraditional mortgage product risk in
January of 2007.
We subsequently held four hearings on subprime lending and
foreclosure avoidance in both 2007 and 2008, and our
participants included the Federal Reserve Board, FDIC, CSBS,
State agencies, academics, and a variety of industry and
consumer groups.
And during that time I have also participated in five town
hall forums, including one with Treasury Secretary Henry
Paulson, here in Stockton.
We learned about inappropriate activity by appraisers in
collusion with real estate brokers to artificially set the
value of homes, to be able to qualify for 100 percent
financing; about actions of real estate brokers who also acted
as mortgage brokers in the same transaction. These activities
were taking advantage of unsophisticated buyers, and putting
them in loans they could not afford.
We introduced several pieces of legislation. The first one
that became operative in 2007, prohibited improperly
influencing an appraiser in connection with a mortgage loan
transaction. This is similar to appraisal provisions of
Regulation Z, which will not become effective until October of
2009. California enacted this in October of 2007.
I also introduced and had passed SB 385, which was enacted
in 2007. It extended the Federal nontraditional and subprime
lending guidance to State-regulated lenders and brokers.
This was important because it leveled the playing field and
prevented regulatory arbitrage among the regulated entities.
Uneven application of rules regarding lending practices
encourages regulatory arbitrage, a practice in which leaders
choose their regulator in order to minimize the amount of
regulatory oversight with which they are subject.
Now, something I want to emphasize: There is a great risk,
in California, of enacting laws that apply unequally to State
and Federal lenders. Not only will the State drive lenders to
Federal regulators and impose fewer restrictions on lending
practices, but we will also send a message to secondary markets
that there will be uncertainty with respect to their
investments.
I believe we should also avoid legislatively modifying
existing mortgage contracts that can send additional signals of
uncertainty to an investor market, causing interest rates to
rise and limiting access to capital.
Capricious action by well-meaning States, particularly by a
State as large as California, can drive up liquidity, limiting
capital available for mortgages, and a prime example of that is
New York, where Fannie Mae and Freddie Mac refused to purchase
loans that fall under New York's new subprime lending law.
In the past year, I have authored legislation that is now
at the Governor's desk, dealing with mortgage practices within
the jurisdiction of the State. One of the primary examples was
1137, which requires lenders to communicate with borrowers
before a notice of default can be issued.
This requires not only a notification, but an actual
contact, and documented contact by the lenders with the
borrowers. Oftentimes, people receive notices in the mail and
they fail to acknowledge them; 1137 requires that before a
notice of default can be filed, they would engage in actual
conversation.
We have also reformed brokering practice in California with
greater accountability, and our informational hearings
encourage action by our State regulators, in part due to our
August meetings, where they initiated a partnership with State-
licensed lenders who agreed to work with borrowers having
trouble with affording their loans.
This will also urge the Department of Corporations to
collect information from our State, and from licensing people,
and this was well before HOPE NOW was rolled out.
But I don't believe we are past the worst of our
foreclosures. Individual neighborhoods, local governments, and
State governments are going to continue to suffer the effects
of crisis for more years.
In the Central Valley, we expect to see another 2 years
pass before housing prices hit bottom again, and begin to
recover. And this is because in this area we have stagnant
incomes, rising household costs, including gas, and additional
exotic loan products such as payment option loans which will
require fully amortized payments that are going to be coming
due.
The general state of the economy combined with the impact
of declining retail sales will put additional pressures on
traditional mortgage households because of reduced hours and
job loss, and this is an expansion of the foreclosure from the
exotic loan products.
I believe foreclosure should be the last resort, but the
industry right now has simply been unable, and at times
unwilling, to meet the demands for loan modifications and
forbearance.
Without greater forbearance by the lending industry for
problem loans, I believe there is little the Federal Government
or the State can do with unaffordable loans.
At the margin, I believe, as we continue forward, there
will be some that will be helped, but in general, I think that
the true observation is that the market will have to absorb the
shock, reset and then go forward.
I think we risk creating a moral hazard with government
intervention to save those who would otherwise lose their
homes, but rewarding risky behavior can only perpetuate the
problem. Both the Federal Government and the States, I believe,
should focus, in the short term, on ensuring that the
legislation we have already enacted is implemented in a way
that maximizes effectiveness.
There needs to be continued accountability and oversight of
lenders and the financial industry. We cannot allow ourselves
to be inundated with products that neither lenders, nor
borrowers, nor regulators, fully understood, which I think was
the case of what happened with the exotic loan products of the
past several years.
We must continue to enforce lending and brokering practices
that are fair to consumers and that provide transparency.
But I want to emphasize that in doing this, this also
creates a very uncomfortable paradox, and that is with
increased scrutiny of mortgage market to protect borrowers,
access to mortgages for traditional housing will become more
limited and the dream for homeownership for many will just
remain that--a dream.
Again, thank you for the opportunity to testify, and thank
you for being here today.
[The prepared statement of State Senator Machado can be
found on page 86 of the appendix.]
The Chairman. Our next witness is the Honorable Ellie
Wooten, the Mayor of Merced.
Madam Mayor.
STATEMENT OF THE HONORABLE ELLIE WOOTEN, MAYOR, MERCED,
CALIFORNIA
Ms. Wooten. Thank you, and thank you for allowing me to be
here.
Depending on the month, Merced County is either 1, 2, or 3,
leading in the foreclosure rates, and this has continued for a
long time. I have had calls from television people as far away
as Japan. I have been followed around by a reporter from The
New York Times, and I don't know how many calls I have had from
TV or reporters, all because we are leading in this foreclosure
rate.
In August of 2006, the president of the Merced County
Association of Realtors stated that 80 percent of the buyers in
our area were speculators and they were coming in, many of them
attracted by the opening of the UC campus. Speculators created
the high per capita foreclosure rate, but when you add that to
the subprime mortgage mess, the bad economy, and the
foreclosure crisis, it compounded the situation for the local
home buyers.
More than a year ago, Merced took a proactive stance to try
to help. We held workshops. We worked with our assembly people.
I believe we have tried to work with Congressman Cardoza as
much as possible. However, we have no real reason to think that
this situation is going to be corrected immediately.
Last year, the county assessor recorded 112 foreclosures in
Merced County. As of July of this year, 524 were recorded,
bringing the total of foreclosures for the year, to date, to
2,185; 1 in 20 homes in Merced County are in foreclosure.
In the second quarter of the year, loan default notices
were sent out to 1,900 homes. That means nearly 1 in 10 homes
in Merced County is in foreclosure or very near to it.
The research firm, First American CoreLogic said that its
statistics show that 15 percent of Merced County mortgages are
delinquent by 90 days or more. The delinquency rate for the
property taxes in Merced County is 8.3 percent this year. Last
year it was 5 percent.
Because of the foreclosures, approximately 1 in 12 Merced
County land owners are unable to pay their property taxes.
There is $20.4 million in property taxes past due. That is a
little more than 8 percent of the total amount the county
expected to collect. The county had to borrow $5 million to
meet their Teeter Plan program, the obligations to transfer
property tax collections to school districts, cities, and other
agencies. And this was after the county went through their
$13.7 million reserve.
Due to the decrease in property values, 21,000 property
owners will see their tax bills reduce this year. Assessed
property values dropped 2.4 percent over the last year. Last
year, only 6,500 people saw their property taxes reduced.
Foreclosures and the housing crisis have affected the CDF
funds, or Mello-Roos. It is the same thing. We have frozen the
positions of two firefighters, three police officers and two
police dispatchers. They were all funded by CFDS funds. The
economic slowdown and housing slump resulted in another 13
positions frozen in the City.
The number of houses that received warnings to clean up
overgrown yards--and I'm sure you have all seen the yellow
lawns, and nuisances--was 3,758. This is almost double the
number in 2006. The cost of the City weed abatement program
doubled from $30,000 to $60,000. The increase is largely due to
foreclosures.
Calls to our code enforcement officers have increased,
largely due to abandoned property calls. The City attorney's
office is working on a plan that would track properties before
they become neglected, and work with the lenders to maintain
them, if at all possible.
The council regularly receives complaints from the public
about abandoned homes in their neighborhoods. The foreclosure
crisis has had a ripple effect throughout our local economy,
and some examples are BMC-West, a company that has been in
Merced for 21 years. Due to the lack of construction, they have
left Merced.
Unemployment in Merced is double the national average at 11
percent. In March, it peaked at 13.6 percent. Unemployed
construction workers, along with title company employees, and
other people in the housing field helped that number balloon.
The development of Merced Passeo LLC took out a $9 million
loan from County Bank in 2007. The developer now estimates the
project has lost 90 percent of its value. County Bank, which
has said the foreclosure crisis has affected business, has laid
off 20 employees, just last Wednesday. It posted a fourth
quarter loss of $14.2 million.
We had to call the surety bonds on two developments in
order to get the necessary infrastructure improvements
completed. In one case, the developer buried an existing bike
path before going out of business.
There is one bright side to the foreclosure crisis.
Currently, 48.6 percent of the residents of Merced can afford a
house. The median home in 2006 as $376,000. Today, it is now
$155,000. But that also means the property values of most
Merced residents has also dropped.
The new Federal housing laws cannot address all of our
problems but it will help more affordable housing in Merced.
The new laws will bring stability to the mortgage market and
help the community climb out of the financial hole they are in
and try to reclaim the American Dream of truly owning a home
and not see the bank repossessing a home.
I will bring to your attention the article in The New York
Times, ``Ruins of an America Dream,'' and it begins with Merced
County. Thank you.
[The prepared statement of Mayor Wooten can be found on
page 127 of the appendix.]
The Chairman. Thank you, Mayor, and your Congressman
reminds me that the letter you gave us was very helpful and we
appreciate that.
Next, we will hear from the Honorable Steven Gutierrez, a
supervisor of San Joaquin County.
STATEMENT OF THE HONORABLE STEVEN GUTIERREZ, SUPERVISOR, SAN
JOAQUIN COUNTY BOARD OF SUPERVISORS
Mr. Gutierrez. Thank you, Mr. Chairman, for this
opportunity. We welcome you on behalf of the San Joaquin Board
of Supervisors to San Joaquin County.
I apologize that it is under these difficult times that we
bring you here. But nevertheless, we hope that you will return
and enjoy this all-American city.
The Chairman. I never get to go anywhere where there is
nice--
Mr. Gutierrez. We apologize for that.
The Chairman. I am in the grief business. I understand
that.
[Laughter]
Mr. Gutierrez. If you stick around a little longer, we will
take care of you. I want you to know that.
Congressman Cardoza, we thank you very much for your
leadership in making this happen today. On behalf of all of my
colleagues, we appreciate your hard work, as well as the work
that you have done in the past as our Representative.
Jerry, Congressman McNerney, again thank you very much for
making this happen. It is a very difficult time for us in San
Joaquin County, for many of our families, many of our children,
many of our young people who are living in uncertain times.
Congresswoman Speier, it is nice to see you back again.
Mr. Chairman, members of the committee, I would like to
begin by thanking you for this opportunity to discuss the
impacts of the recent foreclosures crisis in San Joaquin
County. My name is Steve Gutierrez, and I have served as a
member of the San Joaquin County Board of Supervisors for 12
years. Never in this time have I witnessed a crisis of this
magnitude, of the current mortgage foreclosure crisis.
Foreclosures impact families. The loss of a home and the
subsequent uprooting of families is devastating. Foreclosures
impact neighborhoods. A foreclosed home impacts neighborhood
property, values, and invites crime, drug, and gang activity.
Foreclosures impact communities, resulting in a reduction
of the property tax base and an increased need for services
such as law enforcement, counseling, and homeless assistance.
The foreclosure crisis began a couple of years ago with a
huge wave of resets in the subprime market. It has been the
failure of these loans, coupled with decreasing home values,
which has been responsible for much of the recent turmoil in
our housing market.
Mr. Chairman, my statement and my comments are submitted,
as appropriate, for the record.
I would like to focus on San Joaquin County. Here, in San
Joaquin County, since January 2007, there have been more than
12,000 foreclosures. Let me repeat that: More than 12,000
foreclosures in San Joaquin County; 2,850 foreclosures in my
district alone. This is a significant increase in foreclosures
when compared to historical levels.
As you can see by the chart up here before you, and in my
submittal, foreclosure activity in San Joaquin County is on the
increase, and there is no relief in sight.
In these times of declining revenues and increased demand
for services, counties and cities are taking steps to mitigate
the damages from foreclosures. But Mr. Chairman, we can't do it
alone.
For example, in 2007, county property tax revenues
decreased by approximately 2 percent, or $4 million. It is
estimated that county property tax revenues in the next year
will decrease another 6 percent, approximately $13 million.
In this light, the Federal Government has an important role
in assisting counties, and assisting in saving our
neighborhoods.
The Housing and Economic Recovery Act of 2008, a $300
billion Federal Government initiative, was signed into
legislation to assist 400,000 homeowners facing foreclosure,
and extends the life of the Fannie Mae and Freddie Mac
secondary market loan purchasers.
Initiative programs will begin October 1, 2008, and sunset
September 30, 2011. Key provisions of this legislation are that
it: Provides $4 billion in block grants directly to communities
hit hardest by foreclosures; provides $180 million for pre-
foreclosure counseling; develops an FHA refinance program for
homeowners with problematic subprime loans; reforms FHA, the
government insurer of loans, to make homeownership more
accessible in the high-cost areas; requires a 3.5 percent
downpayment and requires new homeowner counseling; establishes
a $7,500 First-Time Home Buyer Tax Credit; provides for
foreclosure protection for active duty soldiers and veterans;
requires new mortgage disclosures; provides increased Low
Income Housing Tax Credits to States; and establishes a new
independent regulator for Fannie Mae and Freddie Mac.
However, it remains to be seen what effect the Housing and
Economic Recovery Act of 2008 will have on the mortgage
foreclosure crisis. Certainly it is a step in the right
direction. However, some feel that the legislation may be too
little, too late, because potentially, 2.5 million homeowners
could be facing foreclosure in 2008.
And what about the hundreds of thousands of households who
have already lost their homes to foreclosure? Some feel the
legislation is inadequate and has several shortcomings.
The delay from enactment and planned implementation is too
long. Many will have lost their homes to foreclosure in the
interim. There should have been a moratorium on foreclosures.
The legislation should have included a provision that
allowed bankruptcy courts to modify mortgage loan terms on
primary residences, which would have prevented hundreds of
thousands of foreclosures.
Four billion of block grants hit hardest by the foreclosure
crisis is a drop in the bucket when compared to the actual
need.
Off the top, \1/4\ of the grant value is required to be
allocated proportionately, \1/50\ to each State. The question
is: Is the problem proportionate?
Lenders participation is voluntary. They have to agree to
reduce loan amounts to 90 percent of the current home value.
What happens if they don't agree? There seems to be a good
market for the sale of foreclosed properties right now.
There is no acknowledgement of the difficulty borrowers
have finding the holder of their loan, and no remedy for this
in the legislation.
Only those homeowners without secondary debt on their
homes, and whose revised house payment does not exceed 31
percent of the homeowner's monthly income can participate in
the refinance program.
Gentlemen, Ms. Speier, the Housing and Economic Recovery
Act of 2008 is a good first step in addressing the foreclosure
crisis. Please don't let this be the final step. Don't let this
crisis continue to devastate our families, our neighborhoods,
and our communities.
Mr. Chairman, this concludes my testimony, but I would like
to just add one more item. I spent 2 years working with gang
members in the City of Stockton at a particular high school,
and one family itself is experiencing this problem directly.
The father has turned to drinking. The son is turning around,
running around with gangs again. The siblings are following in
the footsteps of the older sibling. And the husband is now
beating his wife.
This situation is affecting families in a tremendous way,
and with the diminishing returns in our property tax revenue
and our general fund dollars, our county is not able to keep up
with the need. Social services are overwhelmed. The City of
Stockton is having huge challenges.
This is--I hate to use the same analogy--but truly is
another perfect storm. I don't know how much more the County of
San Joaquin and the citizens of the County of San Joaquin can
take.
Thank you very much for your time, and I submit all the
documents as well as the maps for the record. There is also a
map there of all the dots that you could see in San Joaquin
County, of all the foreclosures, and if you look at the map
behind it, it is practically all red. Thank you, Mr. Chairman.
[The prepared statement of Mr. Gutierrez can be found on
page 83 of the appendix.]
The Chairman. I mentioned a return witness for us--who did
a very useful job when we were dealing with loan limits--
Heather Peters, the deputy secretary for business regulation
and housing, of the Business, Transportation and Housing Agency
of the State of California.
Thank you, Ms. Peters.
STATEMENT OF HEATHER PETERS, DEPUTY SECRETARY FOR BUSINESS
REGULATION AND HOUSING, BUSINESS, TRANSPORTATION AND HOUSING
AGENCY, STATE OF CALIFORNIA
Ms. Peters. Thank you, Chairman Frank.
Good morning, members of the committee. I want to start off
by thanking you all for coming here today. I know this is not
an easy trip for you to make, and it is very important for you
to see, firsthand, what is going on in California as well as
what is going on here in Stockton. So thank you for making that
effort.
In my role as deputy secretary, I oversee all the
departments that regulate real estate appraisals, financial
institutions, and corporations, as well as the Housing
Community Development Department, and I sit on the board of the
CalHFA, California Home Bank for Low and Moderate Income
Lending. I also chair the Governor's Task Force on
Nontraditional Mortgages.
In all those roles, I have had the great opportunity to
testify, not only before this committee on two prior occasions,
but also to work with Senator Machado, my fellow panelist here
this morning, and I can't thank both the chairman and Senator
Machado enough for the work they have done, and the leadership
they have exhibited in passing legislation that has been long
overdue.
There is no silver bullet. I have been asked here to
comment on the State's response to the foreclosure crisis,
collaborative initiatives that are underway, future predictions
for the housing market, mitigation of community
destabilization, and benefits of the new Federal housing law,
in 5 minutes or less. So I will do my best.
But I want to draw your attention to the fact that I have
submitted written testimony, and as part of that testimony
there are a number of color slides that give you a great deal
of detail about the current situation of the California housing
market, and I have brought with me a 100 copies for the public
to take home with them as well.
There is no silver bullet. This is a multifaceted problem
and we need multifaceted solutions. I started my job 2 days
before Senator Machado had his first hearing on this subject,
and we certainly hit the ground running.
We created the Governor's Task Force on Nontraditional
Mortgages in early 2007. We have been working together
collaboratively with not only the State legislature, but also
local stakeholders, lenders, and servicers, as well as our
Federal counterparts. The Governor and myself have met with
President Bush, the Secretary of HUD, the Commissioner of HA,
the Chairwoman of the FDIC, the Secretary of the Treasury, and
also have worked with the National Governors Association on
this problem.
We have needed that breadth of experience and expertise to
address this. As Senator Machado mentioned, thanks to his bill,
we were able to enact emergency regulations in California in
2007, to implement the Federal guidance and the subprime
statement on lending in to California's regulatory structure at
the Department of Corporations and the Department of Real
Estate. So that in California now, it is an actual regulatory
violation to make a loan without taking into account a
borrower's ability to repay that loan.
Part of those regulations was also to implement a new
disclosure form, because as Mr. Cardoza had mentioned, nobody
reads those papers. I am a lawyer by trade, a real estate
investor and a real estate broker, and when I get the papers, I
don't read them, I just flip to the page where it says, what's
my payment, just like everybody else in America.
Our new form in California is a very simple grid that
discloses 3 days after the application, when you still have
time to shop around, what not only the teaser rate payment is,
but what the worst-case scenario payment would be if the
interest rate adjusted to its full maximum.
That disclosure is made not only on the loan that the
broker wants to sell to the consumer, that makes the broker the
most money, but also all other available loans that borrower
may qualify for.
It also goes and does the math on what the borrower's
income is under each of those payments, and lets them know that
in a worst-case scenario, this is what you're going to have
left to live off of, if you take out this loan.
We are very proud of that. We have also signed a great deal
of legislation, some of which the senator has commented on. We
have additionally made it a crime in California to tie an
appraiser's income to his or her valuation of a property. We
have, as the senator mentioned, required lenders to attempt to
contact borrowers before a default notice is filed.
We have a $1,000 a day fine for holders of REO properties
who do not maintain those properties, and we require 60 days
notice before an REO holder can evict a tenant in the property.
Additionally, as the Chair mentioned, I have worked
tirelessly, and the Governor has personally lobbied on behalf
of California for the Federal Housing Bill. Many provisions of
the Federal Housing Bill, it's a good bill, we are happy it has
passed, in particular the loan limits which I had the
opportunity to testify on previously.
We have spent a good deal of time and money on education in
California. We have made $1.16 million in CDBG grant counseling
available. We have received $8 million in Federal stimulus
money to fund counseling in California and we also expect more
under the new housing bill.
We have launched a $1.2 million ad campaign at the
Governor's urging, to educate people to the fact that there are
options to foreclosures, that it's not a done deal, and they
need to work with their lenders. We have also partnered with
the HOPE NOW Initiative, and I had the honor of speaking with
the Secretary of HUD, right here, at the homeownership event.
By way of stimulus, we have received $5.6 million from the
Federal Government to help the mortgage banking and industry
employees who have been laid off in this crisis.
California is a leader in a great many ways, some of which
we are proud of, and some of which we are not. Unfortunately,
many of the lenders that were writing these loans were based
here in California and we have had significant job loss due to
that.
Additionally, the Governor has made a directive that we
push out as much bond money as possible, as quickly as
possible, to stimulate our housing economy, and help get some
of our construction workers back to work.
We have made $1.06 billion of bond awards since July of
2007 under Prop 46 and Prop 1C. This will help more than 23,000
California families rent or purchase affordable housing.
We have also made awards of over $72 million in Federal
Home Investment Partnership Program funds, and have recently
announced $30 million in CDBG awards, $7.2 million of which is
coming right here to the Central Valley.
One of the most innovative programs we have been able to
implement here in California, under the CalFHA, is our
Community Stabilization Home Loan Program. It is, at this
point, a $200 million pilot program, where we have sat down
with lenders who hold REO properties, we have sat down with
counseling agencies who have willing and able first-time home
buyers who have been precounseled on the value and the
responsibility of homeownership, and this alone provides very
low interest loans, complete with downpayment assistance and
closing cost assistance to first-time home buyers, at very low
interest rates, to purchase properties that have been
foreclosed when the lender has agreed to discount those
properties of at least 12 percent below market value.
So that is an ability to target some areas right now that
desperately need to turn those foreclosures over, and we want
to make sure they get into the hands of home buyers and not
speculators.
That program, thanks to H.R. 3221, will probably be able to
be rolled out statewide due to the bond cap that was in that
bill. So thank you very much for your work on that.
What are my predictions for the future? Well, if we have
learned anything, it is that the housing market is
unpredictable. When the Congress was able to pass the recent
bill giving the Treasury the authority to come in, and step in,
and help Fannie and Freddie, we hoped that they would not be
using it, and I woke up this morning to realize that, yes, in
fact, they are. So it is good that they have that authority.
But even on the smaller scale, you can't predict what is
happening. The mayor brought a newspaper with her. I brought
one with me as well yesterday. I opened my door and the front
page of The Los Angeles Times had an article titled, ``Bobcats
Jump On Vacancy.'' And who would think we would be dealing with
bobcats.
Apparently there are some bobcats that found a koi pond to
be a great place to have their kittens. There are all sorts of
things we are dealing with that we can't predict.
Our median home price in California dipped below $500,000
for the first time in recent memory, in October 2007, and now
it is down to just above $350,000. That has created a lot of
problems with foreclosures, but the silver lining--and we do
have to remember that real estate is cyclical, and we will come
out of this some day, if we all continue to work together on
it.
The silver lining is that affordability is at 48 percent
statewide, up from 24 percent last year. Here, in the San
Joaquin Valley, affordability is up to 35.5 percent versus only
9.7 percent last year.
Sales are starting to pick up. Inventory is down. Inventory
is a very important measure to most economists. Inventory is
down to 6.7 months now, statewide, in California. That is
versus 16.8 in January. So we are seeing a significant
reduction in inventory.
Interest rates are rising slightly but still had historic
lows, which is good for the market. Unfortunately, though, our
defaults are still astronomical. Statewide, we had 37,000
defaults and it has been hovering right around that level for
several months now.
The foreclosures also are climbing. We had 23,685 last
month in the State of California. Stanislaus County, San
Joaquin and Sacramento reported foreclosures in June of 851,
1155, and 1640. So the problem is clearly concentrated here as
well as elsewhere in California.
Another thing to be concerned about on the horizon is the
resetting of the option ARMs. We have seen a softening in the
prime market. We have seen a softening in the Alt-A market, and
defaults rising in traditionally reliable credit scores.
But the option ARMs are also on the horizon. There's a
slide, the last slide in my presentation will show the rest of
those being concentrated in 2010 and 2011. Unfortunately, 53
percent of those loans nationwide are here in California. So
we're going to feel a significant impact in the outyears on
that.
Finally, I want to comment on the new Federal bill. The
most important thing that I urge my colleague, my witness had
left here from HUD, to take away from this today, is in
allocating the $4 billion in emergency assistance for
redevelopment of abandoned and foreclosed homes program, we
need California to be seriously represented in that allocation.
The funding guidelines that were put in the bill clearly
support that California receive quite a bit of that money.
California has 27.14 percent of the foreclosed homes in the
Nation, 13 percent of the subprime loans, 22 percent of the
subprime debt, and 26.67 percent of the homes in default or
delinquency. So I look forward to working with our colleagues
at HUD, and continuing to collaborate with them. The first week
in October, Treasury, HUD, and myself and the NGA, are putting
together a summit on this and we look forward to continuing to
collaborate. Thank you for the opportunity.
[The prepared statement of Ms. Peters can be found on page
100 of the appendix.]
The Chairman. Thank you. I take it you have the Secretary
of HUD, whom I must say I have been very happy to work with.
The new Secretary has shown a great deal of energy. He will be
meeting with us, myself and the senior Republican on the
committee, and we will be talking about this, and talking to me
right up to that minute will be your California chairwoman of
the Subcommittee on Housing, Maxine Waters, who has been the
most ardent advocate of this, and a few others things, but
particularly on the CBDG. So we will be very much aware of
that.
Ms. Peters. Yes.
The Chairman. And finally, we appreciate your attendance.
Next, we have Joseph Bates, who is the Director of the
Santa Ana Home Ownership Center of the Department of Housing
and Urban Development.
STATEMENT OF JOSEPH C. BATES, DIRECTOR, SANTA ANA HOMEOWNERSHIP
CENTER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Bates. Good afternoon, Chairman Frank, and
distinguished members of the committee. Thank you for the
opportunity to testify today on the efforts made by the
Department of Housing and Urban Development in the areas of
foreclosure prevention and intervention.
The Administration and Congress have taken several measures
to address the housing crisis, which I will outline in my
testimony. In response to the housing crisis, the Federal
Housing Administration, FHA, expanded its programs to help more
Americans facing foreclosure refinance into safer, more
affordable mortgages.
In August 2007, President Bush announced a new product
called FHASecure for homeowners who fell behind on their
mortgage payments after their initial interest rate reset.
Since the inception of FHASecure, more than 330,000
families have refinanced with FHA, and by the end of the year,
we anticipate helping approximately 500,000 families.
On July 14, 2008, HUD expanded FHASecure to provide
additional assistance to borrowers with adjustable rate
mortgages. FHASecure is now assisting families who have missed
up to 3 monthly mortgage payments over the previous 12 months,
or have experienced temporary economic hardship such as loss of
overtime or medical needs.
The increased mortgage limits: In March of this year, as
part of the bipartisan economic growth package, the President
signed into law a temporary increase in FHA loan limits through
the end of the year, enabling even more families to purchase or
refinance their homes with an affordable mortgage.
These temporary loan limits, which go as high as $729,750,
are especially advantageous for high-cost areas such as
California, where FHA's traditional loan limit of $362,790
prevented FHA from being utilized.
Thanks to the strong support of Chairman Frank, and many
Members of the California Congressional Delegation, the
recently enacted Housing and Economic Recovery Act makes
permanent a new higher loan limit for high-cost areas of the
country. Here, in California, that means FHA will now be able
to ensure mortgages of up to $625,500.
The Hope For Homeowners Program: In addition to higher FHA
loans, the Housing and Economic Recovery Act further expands
FHA's ability to provide targeted mortgage assistance to
homeowners. The New Hope For Homeowners Program will continue
FHA's existing and successful efforts to provide aid to
struggling families trapped in mortgages they cannot afford.
Under the program, certain borrowers facing difficulty with
their mortgages will be eligible to refinance into FHA-insured
mortgages, provided their lenders agree to write down a
significant portion of their outstanding principal.
While the program is still in its planning stage, and key
details continue to be ironed out, I am pleased to report, Mr.
Chairman, that the board of directors and staff of the four
member agencies have been working around the clock on getting
this program up and running, and we are on track to have it
implemented by October 1st.
I believe the Department will be in a position to discuss
many of the key components to the program at the oversight
hearing you have scheduled for September 17th.
Emergency assistance for the redevelopment of abandoned and
foreclosed homes: The Housing and Economic Recovery Act also
authorized $3.92 billion in Block Grant funds to be spent on
the redevelopment of abandoned and foreclosed homes, and
residential properties.
The funds will be allocated to States and local government
using the following need-based criteria: One, the percentage of
foreclosed homes; two, the percentage of homes financed by a
subprime mortgage; and three, the percentage of loans in
default or delinquent.
HUD will announce each State's allocation, including
specific community allocations, in late September. While it is
premature to speculate how much the State of California and the
communities in the Central Valley will receive, I think it is
fair to assume, given the high rate of FHASecure in subprime
mortgages, California stands to get a significant share of
these funds.
And housing counseling: Housing counseling is an essential
part of any solution to the housing problem. Effective
counseling can help existing homeowners stay in their homes,
and help new homeowners stay out of trouble in the first place.
Funding for HUD's 2,300 approved housing counseling
agencies has increased by 150 percent since 2001, and $50
million was approved for housing counselors in Fiscal Year
2008.
Another $180 million went to the nonprofit NeighborWorks
this year to help prevent foreclosures. The recently signed
housing bill authorized an additional $100 million for
NeighborWorks for foreclosure mitigation activities.
Thank you. I appreciate the opportunity to appear today and
discuss this very important issue.
[The prepared statement of Mr. Bates can be found on page
62 of the appendix.]
The Chairman. We will begin the questioning with our host,
Mr. McNerney.
Mr. McNerney. Thank you, Mr. Chairman. I want to thank all
of the witnesses for your testimony today.
First of all, I want to start with a question for Heather
Peters, and I might want to sort of repeat the question for
Senator Machado.
You mentioned a number of legislative opportunities that
took place in Sacramento, that will help in the foreclosure
crisis. How do you see those working in conjunction with the
Federal programs such as the $4 billion fund for communities to
purchase homes? Is there any vision about how that might happen
or about how we might coordinate efforts?
Ms. Peters. We are in the process of having all of our
departments dig through the minute details of the bill.
At this time, we believe that our Housing Community
Development Department and our CalFHA have the authority they
need to implement those programs, and as I mentioned, we are
well on our way to implementing at least the bond cap. We have
a program ready to put that into and the CBDG grants; we have
plenty of experience with that.
I don't believe we need any additional State legislation on
that. But I will pass the microphone to Senator Machado.
Mr. McNerney. Sure. Thank you.
Mr. Machado. I concur with Heather Peters, and I want to
say that her department has done, I think, an extraordinary job
of picking up the pace and making the efforts to implement the
Federal programs, and also State programs, to come back in and
try to address the needs of the community.
Mr. McNerney. Thank you. Senator, from your perspective,
what do you think we could do, that would best serve the State
and the region?
Mr. Machado. I think you have to divide this probably into
two parts. One is what can the Federal Government do in terms
of financial assistance to local government and local
communities? And I think we are seeing that, in part, with the
recent House legislation that was enacted.
The other part that I think is difficult is how do you get
the financial community to respond. In my office, I am hearing
of more and more people who have tried to call the lender or
the servicer. There is no response, it is difficult to get
access to, and even with the HOPE NOW lines, people often fail
to get the response, if it is beyond help. Part of the problem,
I believe, is that lending institutions are hiding behind the
banner of contracts that servicers have, that oftentimes give
the fiduciary responsibility to the lender or the investor, and
not necessarily the latitude to be able to do the workout.
If we are going to be using taxpayer dollars to bail out
Bear Sterns, to shore up Freddie Mac and Fannie Mae, then I
think the bully pulpit of Congress and State government ought
to be used on the Bank of America's, the Countrywide's, the
Wachovia's, the Washington Mutual's, and others, to be more
responsive in terms of trying to do a workout.
The workouts have to be the--and I understand that--on the
ability to pay. When you have people who were made loans, what
they called NINJAS, no income, no jobs, no assets, with no
equity going into a home, they may not be helped.
But there are others that, with a restructuring, who do
have a legitimate--can demonstrate the ability to pay, that
there ought to be an extraordinary effort on the part of those
lenders to be able to do that, and at this point I think they
are not, and part of it has to do with the complexity of the
investor market, where you have bundled up these loans, you
have separated them into separate tranches, and from a fiscal
and investor perspective, it is often a higher--it is a minimal
impact on the investment if they can dispose of it through a
foreclosure than it is to try to work it out and carry it
forward.
And it is only going to take instilling on institutions a
moral responsibility to be more proactive and to be willing to
take the risk. But it has to come from the industry. As soon as
we start trying to legislate that, we will create a degree of
uncertainty in the secondary market, that I think will further
exacerbate the capital availability, and as I mentioned in my
comments, it creates an interesting paradox that could limit
the accessibility of homeownership.
Mr. McNerney. Thank you, Senator.
Supervisor Gutierrez, what is it about San Joaquin County
and Stockton, that made this area so susceptible to this
problem?
What unique characteristics do we have, in your opinion?
Mr. Gutierrez. Tremendous and unprecedented growth. In many
cases, I will go out and say it--poor planning. The fact that
we haven't truly looked at the economic depression in our
county and the ability for people to pay. Limited resources in
terms of staffing in the county government. Those agencies that
are established within county government to provide those
supportive services are understaffed.
It pretty much sets San Joaquin County into a position of
being taken advantage of, and for a lot of people to fall into
that same category. So many, many families in San Joaquin
County wanted the opportunity to have that dream, Jerry, and at
any cost, because they are taught that once you own a home, you
will have an education, you have the ability to provide an
education for your children. Your children can go to college.
So these folks were preyed upon. And now it is just getting
further exacerbated. But San Joaquin County has had tremendous
growth, and when you look at, for example, the City of Lathrop,
was in real trouble, to throw this on their plate as well--
devastating.
Mr. McNerney. So Supervisor, you have a list of
shortcomings and inadequacies in the bill, and as I look at
them, I say they would be nice to try and implement, but then,
going along with what the senator said, those kind of draconian
steps would cause instability in the marketplace and perhaps
exacerbate the problem.
Do you have any comment on that?
Mr. Gutierrez. Now Mr. Congressman, I agree with the
senator. I think the comments are accurate. However, albeit
there is no silver bullet here, no question about that, and we
are trying to make lemonade, but it is really bitter lemon and
there is not enough sugar to go around. And there was a comment
that Congresswoman Speier made about the district attorney's
office. I could not agree with you more.
Our district attorney, Jim Willett, has made a commitment
to prosecute, wherever he can, for those predators that took
advantage, and try to work out a deal, if he can get those
predators to compensate these families, so they can at least
stay in their homes, try to make them whole.
The problem is when you're looking at diminishing revenues,
to the tune of $4 million today, and $13 million next year,
when the district attorney comes to our office and asks for
those additional resources, for more prosecutors, it is not
going to happen.
Mr. McNerney. I mean, do you think the fear of additional
prosecution will have a positive impact?
Mr. Gutierrez. Absolutely. I don't know what other teeth
you have. I mean, the fact of the matter is that a lot of these
predatory lenders have absconded. They left. You had some folks
working for some people, Congressman, and now they are gone. I
have families who have come to me, who can't get ahold of the
people who processed their loans. They are gone. They are no
longer working for the company. So who is responsible for those
folks?
I will tell you one thing. In a lot of these families, they
don't have the time or resources to go on a hunt.
Mr. McNerney. Well, but I mean after-the-fact prosecution
assumes that you can identify and bring to justice the people
who perpetrated the loans, as opposed to preventative measures
beforehand, that keeps those loans from being offered in the
first place.
Mr. Gutierrez. Absolutely. There is no question about that.
Congressman, I think what I am saying is that as the Federal
Government is looking at, and the State is implementing
measures to prevent this from happening again, you have a
number of families out there who are creating another
generation that is going to be built upon the inability now to
send those children to college and large families. So yes, we
have to implement measures to prevent this from happening again
but what are we going to do about those families who are in the
thick of it right now? That is my concern.
Mr. McNerney. I think I have run out of time here, so I am
going to yield back to the Chair.
Ms. Speier. Thank you, Congressman. Congressman Cardoza.
Mr. Cardoza. Thank you, Congresswoman Speier. I want to
first, if I could, I had 10 constituents who submitted
testimony. We asked a number of the government officials, and
officials that had knowledge of the industry to come speak to
us today, but I also sent out a request to my constituents to
put in writing some of their individual stories, and I would
like to submit for inclusion in the record a list of 10 items
that we will provide to the staff.
Ms. Speier. Without objection, they will be included in the
testimony.
Mr. Cardoza. Thank you.
Also, Mr. Frank alluded to it, that Mayor Wooten, who is
also a realtor in our community, had provided us with a
redlining letter. Well, it was a letter from a lender, saying
that our geographic area didn't qualify for their criteria of
loan making because it was a declining market. And we had been
in contact with that lender, and they have changed their
practice.
But there is another, that she provided today. This is
something that you worked on in the State legislature, as I
recall, and on a little bit different topic. But I want to
submit into the record another letter given to my by the mayor,
that indicates another lender is perpetrating this practice.
Now the reason why I bring this up is because if lenders
start circulating territory and saying this is a bad area and
we are no longer going to lend there, then this will cause the
crisis that we are experiencing today to spiral out of control.
It is already out of control, in my opinion, but it will just
become that much deeper and that much worse.
I am very concerned about that, and I would like the
committee to take a look at it and see what we can do to
preclude this kind of activity.
Ms. Speier. It will be included in the record, without
objection.
Mr. Cardoza. Thank you.
I want to, before I forget gain, when I deviated, and I
always do this, when I deviated from my staff's prepared
comments, I forgot two things that were very important, the
first one being that--well, downpayment assistance is still
critical in my area.
We have low-income folks who have the ability to pay,
especially at today's housing prices, but they don't have the
ability to bring about a large downpayment.
When I was a Realtor, I had hundreds of folks that I would
talk to, who would tell me that that is how they got into their
house, and those folks, for the most part, were always--well,
not always--but they were good citizens, they paid off their
mortgage, they are still in them. I was a Realtor about 10, 15
years ago, 15, 20 years ago maybe. Time flies.
But a program in the recently-passed bill, through no fault
of Chairman Frank, or Chairwoman Waters, or yourself, the
Nehemiah Program was eliminated in this bill that we had to
pass because of the negotiations with the Senate and the
Administration.
I have been in consultation with a number of my Realtors,
and the question I have is to Mayor Wooten, because she deals
with this: How the Nehemiah Program's elimination will
devastate our area, or at least severely impact it.
Mayor Wooten.
Ms. Wooten. The Nehemiah Program was used heavily in Merced
County, and many people were not out of the box when it was
taken away. We are basically an agricultural community. There
are solid people but many of them do not have a bank account
with 20 percent down for this house.
Nehemiah helped in such a manner that the seller came to
the forefront to get them in. From that point on, they have
their home, they made their payments, there was no monkey
business. When the Nehemiah Program was knocked out, it knocked
out quite a few very good qualified buyers, and it has hurt us.
And the other thing I would kind of like to touch on--you
were speaking about people calling their lender to try to get
help and they could not get help. That is because many, many of
these larger institutions no longer have underwriters. The
underwriters commanded more money. Therefore, the underwriters
left, if you will.
The person answering the phone is generally a receptionist,
and when you can get through them, which is highly unlikely,
you get to someone who has 100 to 200 folders sitting on their
desk. It is just not working, and I don't know how you can
bridge that gap.
Mr. Cardoza. Well, that actually brings me to my next
point, and I will tell you, I have worked with you a long time,
Senator Machado, and what you just told me you did in the
legislation about requiring the lenders to make contact with
borrowers--I forgot to mention that when Mr. McNerney and I had
that housing workout forum here, in this room, you were part of
that as well, and I think that is probably where you took back
some of those ideas, because you heard, like we heard, our
constituents saying that folks were not being responsive.
I am very curious to know how your legislation is going to
work, because I think it is a great idea to take back on the
Federal level, is to require--obviously, foreclosures take
place, for the most part, under State law, but when we're
guaranteeing loans, it certainly makes sense for us to require
that the servicers of those loans have to make some kind of
personal contact, and I would like to know how you anticipated
working on a real life, real-time basis.
Mr. Machado. Under the provisions of the bill that I co-
authored, along with Senator Perata, and many others, it
requires that before a notice of default is issued, the lender
has to contact the borrower and let them know that they are in
a situation in which there is going to be a default notice, it
has to be done--there is a prescription that has to be done,
both by mail and also by phone, and that contact has to be
recorded.
If there is no contact made, a notice of default is issued,
and then you proceed into a foreclosure setting. There is
recourse through the courts to--in this case, would be to set
aside the default and the foreclosure until that situation is
remedied.
I think it is very important because of a couple of things.
One, many borrowers who find themselves in a problem are often
embarrassed. They tend to, as we all do, if we have a problem
we put it at the bottom of the pile, and in this case you are
trying to make sure they are notified of that, and also be made
aware of the services that may help them in a counseling
perspective, so that they can start working out of their
particular circumstances in order to be able to avoid
foreclosure.
Mr. Cardoza. Thank you. Supervisor Gutierrez, you were
talking about the challenges that affect local government. I
have said a number of times that I compare this crisis, the
foreclosure crisis in California as the ``Katrina of
California,'' because it has devastated that many housing
units. It has affected so many families. It has caused so many
people to move.
And I had one constituent, the other day, who said, ``But
Congressman, it is not causing the physical harm to individuals
that Katrina caused.'' And I said: ``But you are wrong, because
it causes psychological damage.'' We have seen the domestic
violence cases go up, and you are on the front lines as a
county supervisor dealing with those kinds of challenges. We
have seen suicides. There have been a number of folks who have
been impacted, and I would like you, from your personal
experience, boots on the ground in the community, to share with
us your feeling about that.
Mr. Gutierrez. Thank you, Congressman. And we are still
dealing with Katrina, with the redrawing of the flood plain
maps in San Joaquin County.
Mr. Cardoza. That is a whole different issue, but that is a
problem too.
Mr. Gutierrez. I know. That is a meeting that should be in
the next room.
Mr. Cardoza. Well, since you brought that up, could I just
mention, I know we have been doing a lot of praising of
Congressman Frank and what he has done, but I will tell you
that he has specifically tried to assist me a number of times,
and Mr. McNerney, with regard--you know, we were talking about
Lathrop being devastated in this situation.
Well, the whole San Joaquin County area being a delta, it
has significant issues with levees, and communities that are
being affected right now by this other crisis are now going to
have to repair the levees because FEMA decertified the maps.
And you layer on top of the foreclosure situation--
Mr. Gutierrez. That is right.
Mr. Cardoza. On top of accelerating loan payments, because
they are readjusting, flood insurance is going to be--
Mr. Gutierrez. That is right.
Mr. Cardoza. That is just one more thing to push people
over the edge. So Congressman Frank has really been sensitive
to that. Congresswoman Waters has been very sensitive to that.
And since you mentioned it, I just wanted to thank them about
that. Go ahead.
Mr. Gutierrez. Thank you very much. But that is exactly my
point. So when we talk about San Joaquin County and we talk
about the Central Valley and our senator knows full well the
issues that we are facing in regards to water, a potential
canal, and we can go on for days. So the politics is really
interesting right now for San Joaquin County and the residents
of San Joaquin County.
But getting back to your question in regards to families, I
have a family right now, the Ortiz family, who are sleeping in
a garage because they invested everything that they had into
this home for their family, because they were told that if you
have a home you can send your children to school. And they have
three.
And the young man, the young teenager, he is 16 years old,
was involved in gangs, and he started to get away from gangs
because their life turned around. They actually had a home. He
had his own room, and the children had their own rooms. And now
the predatory lending, somebody came by with a wonderful
opportunity, not unlike the lady that you were talking about,
they took this opportunity because they saw the ability to get
a $100,000 loan, and they were going to take that loan and they
were going to fix up their home, and build their investment.
And what happened? Well, they thought it was 5 years. It
turned out to be two, it reset, and their home payment which
was $1,200 a month, went up to $2,200 a month, and it was a
matter of months. Now they are in a garage and they are trying
to find a place to rent, so they can put their children back in
the home.
The father has turned to alcohol. He is actually beating
his wife. He doesn't know what to do. He is the man of the
house. He failed his family. His child is starting to go back
into the gang, and the siblings are following suit. So that is
one family.
Carol Ornelas can tell you about families on top of
families. Any real estate that is trying to work with a family
to try to help them get a home, they can tell you the stories.
There is so much beyond the finances.
So to characterize this as different than Katrina, quite
frankly, you are affecting a family, you are affecting a
generation. Those young people who are now in that home, who
are enduring this physical violence, seeing their mother and
father traumatized, that is generational. That is going to move
forward. So I think it is a mischaracterization to suggest that
the folks who went through that are any worse than the folks
who are going through this today, and although I am very
pleased to see the Federal Government, who took their eye off
the ball, now putting their eye back on the ball.
And all I am saying is that we have to remember that while
you are trying to fix it and figure out all the kinks, there is
a whole plethora of people out there who are in the thick of
this and have no way out, because you can't bail them out.
And San Joaquin County was approached with some wonderful
ideas. This involved Carol as well. San Joaquin County, the
board of supervisors, we haven't done enough, we really
haven't, but we are asked the question from those people who
have paid off their home, that didn't go into risky
ventures,and their question is this. Why should I, as a
taxpayer, senior citizen, that I am living within my means,
that I am having a hard time paying my medical bills, why
should I, as a taxpayer, foot the bill to bail somebody else
out, regardless of who they are?
And I as a policymaker, front line, face to face with these
voters, what do I say? You have a really good point. So, quite
frankly, it is very challenging and my hat is off to the
chairman and the committee, and you have a big job ahead of
you.
Mr. Cardoza. In closing, Mr. Chairman, I think I have
probably gone over my time, but I just want to draw on what Mr.
Gutierrez said, and Ms. Wooten and Mr. Machado. You know, there
were certainly bad actors in this. But there were certainly
innocent victims as well.
Eighteen months ago, 2 years ago, people were looking, if I
don't jump into a home right now, I'll never be able to buy a
home, cause prices were escalating at such a rate, that every
one of the publications, every newspaper, every radio program,
every TV report, were talking about how high the costs were
going, and for those folks, if they saw a way to jump into the
swimming pool, they were going to try to make that leap because
they thought that they would never ever be able to afford a
house, ever again, if they didn't make the leap now because it
was escalating so quickly.
And so those folks who in good faith were just trying to
take their part in the American Dream were struggling, in any
way possible. These are good folks. These are not criminals.
These are my constituents. They are my neighbors. They are my
friends. They are my family. They are my staff who are trying
to get houses.
I had two of my staff this week tell me that they were
upset that the Nehemiah Program was being taken away, because
that is what they were going to use to get into a house.
So these aren't evil folks. I get really angry when I hear
folks condemn everyone who is involved in this. There are
certainly bad actors. There are certainly situations that have
caused challenges. But there are a whole lot of good people who
have been devastated by this, in much the same way as when a
storm comes and affects everybody, rich and poor alike. So
thank you.
The Chairman. Ms. Speier.
Ms. Speier. Thank you, Mr. Chairman. I am going to try and
ask these questions very quickly, so that we can get on to the
next panel.
First, to you, Ms. Peters. You may recall that after 9/11
there were terrorism dollars made available across this
country, and there was this equalizing that took place, where
Wyoming got as much money as other jurisdictions, when the
likelihood of having terrorist activities there was remote.
In what we have done so far, a quarter of the dollars have
gone across the country, so everyone got a little bit. I am
concerned that this is ground zero for the foreclosure market,
and I want to guarantee that this area, in particular, is
getting the resources it needs.
California is a donor State to the Federal Government to
the tune of $50 billion a year, and it is things like these
formulas that come up, that disadvantage us in ways that it
should not. So I would ask you to look at that formula and
compare it to other States, and then respond to the Chair and
to the members of this committee, so we can assess whether or
not we should be amending that particular formula for dollars
to be had here in this region.
To Senator Machado, you carried a number of bills to try
and address the crisis. Having spent many years in that process
with you, I know how bills get watered down.
So I guess my question to you is what are some of the other
elements that might have been in your bill, that got stricken
from your bill because of opposition by various interests, that
you believe would be important to include in any kind of
reforms that we look at on a Federal level?
Mr. Machado. That is difficult to answer, because I don't
believe in any of my specific legislation, that we did take any
major watering down. If anything, the major hurdle that we face
is the resources for enforcement, and being able to have the
staffing in the Department of Real Estate, in Department of
Corporation, Department of Financial Institutions, to be able
to carry out the law enforcement.
There was subsequent legislation by others that had been
changed substantially, and the biggest problem that we faced in
California when taking a look at the proposals, was whether or
not it was going to create an unlevel playing field and lead to
regulatory arbitrage.
And I have been very strong to make sure that we had a
level playing field, so that State licensees and Federal
licensees would be dealt with similarly, so that we would not
see a migration to whatever area had the least level of
enforcement.
The other side of that is that many people have thought
that they could come in and use private right of action for
enforcement. I don't think that gets to the real problem. I
think it provides for some cathartic relief but it doesn't
necessarily get to the problem that we face.
And I think we have to remember that many of the loans that
were made, that are now problem loans, were made at a time when
it was not illegal to do that, and what we found was because of
the array of products that came up, that found State and
Federal regulators asleep at the switch in terms of
understanding what the problem was, going away from proper
underwriting standards, moving away from disclosures, that we
have come in to try to backfill. Part of that came in with the
Federal guidelines, and employing that. But I think we have
to--people were making legal loans. Were they upright? Was
there a moral responsibility that should have been exercised?
Probably so.
But I think we have to look at this in terms of, how do you
fix the problem, going forward? I think the State, in
cooperation with this Administration, and my colleagues in the
legislation, we have done that in a very strong way.
Ms. Speier. Mr. Chairman, while you were out, Congressman
Cardoza had provided the committee with documentation that
Mayor Wooten also had available to her, that suggests that some
of these banks are redlining and creating guidelines, so they
will not come into certain areas, this area being one of them,
and that documentation has been provided to the committee.
I guess my question to those of you who are on the panel,
and to our committee is, as we move forward with Fannie Mae and
Freddie Mac, and now that we have, let's suggest, a greater
ability to direct them, whether or not we should mandate that
some of these banks come into specifically the most hard-hit
areas in the country, and start making loans in these areas,
because otherwise, you can see that they could just come up
with these guidelines that will have the effect of redlining.
Mayor, do you have any comment on that?
Ms. Wooten. I don't know that you could do that. I
certainly would like to see that, especially for the Central
Valley. The other thing, which is a little off of this, that I
would like to see, and I don't know if it is possible, in the
world of mandates, I do not believe a licensed Realtor should
also have the ability to be a licensed mortgage broker, and the
ability to be a licensed insurance person.
I think many--well, let's just say quite a few of the
problems could be stopped. I don't like that idea, I never have
liked that idea, and I wish there was something that, on a
Federal level, could be done.
Ms. Speier. Thank you. Thank you, Mr. Chairman. I yield
back.
The Chairman. Well, let me begin with that. Maybe you are
on the level, but you are on the wrong level. You have to talk
to Ms. Peters about that, because all--
Ms. Wooten. Sorry. Ms. Peters.
The Chairman. --those licenses you talk about are today's
State licenses. Now we are trying to deal with a brokerage
issue. Let me give a little history. I will respond here. In
1994, the Congress passed a bill called the Homeowners Equity
Protection Act, which empowered the Federal Reserve Board to
issue rules that would prevent subprime mortgages that were the
wrong kind.
Remember, we have two sets of mortgage originators in this
country. We have banks and credit unions and thrifts, and
frankly, if they were the only ones who had originated
mortgages, we wouldn't have the crisis, because they are
subject to sensible regulation by your State bank commissioner,
by the FDIC, by the Credit Union Administration, and by the
Comptroller of the Currency.
What grew up over the years was the origination of
mortgages by people outside that regulated system. Now the
banks aren't entirely out of this, because many of them then
bought some of these. But the banks, as buyers of other
people's mortgages, got into some trouble.
Banks as originators did not. The Federal Reserve Board was
given, in 1994, it was my predecessor, not me, who did this, a
man named John LaFalce, when he was the senior Democrat, and
told the Federal Reserve, please put some rules in so these
kinds of mortgages can't be made in the first place--the people
with the $200,000 house with $960 in income.
And Alan Greenspan said no, that is an interference with
the market, the market knows better than I as a regulator, and
refused to do it.
Chairman Bernanke, a month ago, finally took the authority
that that law gave him and you will not see the kinds of
mortgages that have caused trouble in the future, almost
certainly, because they are now forbidden.
But as many of you have noted, it is one thing to stop
something from happening in the future; we are in a different
legal and constitutional position when we try to undo what is
already done, especially when it was, as was noted, legal at
the time.
So going forward, we were somewhat more encouraged. Then
people raised a question, well, what about people who were
making $35-, $40-, $45,000, who are responsible? Are they going
to be out of the market? No. One of the things we did in this
bill was to empower the Federal Housing Administration, the
FHA, to get back in the business, which it hadn't been in
before, of helping, and that's where the loan limit that your
Governor worked on with Ms. Peters, and Gary Miller worked on,
Maxine, Dennis Cardoza wouldn't give me any peace until we got
it done, and so you will now, going forward, have an FHA that
will be able to give mortgage guarantees for most of
California.
Madam Speaker, I am sorry we couldn't get to your level,
but we got everywhere else.
But that is part of the issue. Now to go beyond that, we
didn't know the Federal Reserve was going to do that.
Last year, this committee that is now sitting before you
passed a law which did restrict some of these practices, and
did try to regulate things. The Senate hasn't passed it yet and
may not get to it. But the Federal Reserve did do that. But as
far as the licensing you talk about, those are all--who gets to
do what are State issues.
But we do basically say that there are a couple of
principles that the bank regulators had been using, very
radical principles, and we apply them now to all mortgage
originators.
One, don't lend people money if they can't pay you back. I
mean, look, if you were a bank, a thrift, and you made a loan
like that, you would have your examiner saying, ``What is the
matter with you?'' Two, don't lend people more money than the
property is worth. Now people couldn't have anticipated the
drop; but they still lent too much.
A couple of other points on the foreclosed property. You
should know that Maxine Waters was just very much the advocate
there.
The formula isn't yet set in stone, and I would say, Ms.
Peters, I would encourage you to work with us. It is up to HUD.
In fact, Secretary Preston is coming to meet with me and the
senior Republican on the committee to talk about this.
We did pass a better bill in the House. It had $15 billion,
half loans and half grants, not $4 billion. It had a formula
that was tied to where the problem is. But we couldn't get it
through and the Senate did. So I can't criticize them.
You know, we had a wonderful bill that didn't pass. They
had a pretty good bill that passed. They win. So we deferred to
them in the final piece. But the specifics aren't there, and my
instruction--Ms. Laster is outside doing the work, she is chief
counsel for housing--our instruction to HUD is please use
whatever flexibility is in that law to get the money where the
problem is.
And there are two kinds you have, by the way. Don't
understate your claims for a good chunk. One, you have more
property. Two, your property is more expensive. In fact, even
though foreclosed property doesn't have its full value,
foreclosed property here is still worth more than foreclosed
property in many other States, and that has to be taken into
account.
We are going to be pressing, very much, for doing that. So
I am more encouraged about the future.
But now on Ms. Speier's point about redlining, I mean the
mayor's right, we can't completely mandate. On the other hand,
one of the things we will be doing next year is having a
serious look at revising the Community Reinvestment Act (CRA).
The Community Reinvestment Act is a good thing but it was
passed 31 years ago. A lot of the entities that now exist
didn't exist then, and aren't covered by the Community
Reinvestment Act. The Community Reinvestment Act did the banks,
and it was all banks then; this was 1977. So we have to expand
the coverage.
Secondly, we have to look at enforcement. Right now, the
Community Reinvestment Act is only enforceable when there is a
change in ownership and they need permission to change
ownership. They get ratings but there's no penalty for having a
lousy rating, other than people make fun of you, and some
people bear with being made fun of better than others.
We are going to be looking at covering entities that are
not now covered by the CRA and improving the enforcement. But
as to the redlining piece, and Ms. Speier is right, it may well
be that there is a greater Federal role in Fannie Mae and
Freddie Mac, and I am hoping that out of what is happening now,
there will be more protection for the housing mission.
But we will look at it, and we will call in some of those
banks, and Ms. Speier, I am sure, will be available to help us
work on this, and ask them to come in, and the staff will be
available, and we will deal with this at the outset, to make
sure that they know how unhappy we will be if they do
redlining.
And the last thing I would say is this: Some of these
things we cannot compel legally, or outlaw. There are things we
would like some of the financial institutions to do and we
can't make them do them.
I should also point out, however, that there are other
things that the financial institutions would like us to do and
they can't make us do them. So if there are things we want them
to do, and things they want us to do, you then get to the basic
principle of legislating, and I am sure many of my colleagues
understand that the ankle bone is connected to the shoulder
bone, and we will proceed, have some conversations, so Ms.
Speier will be able to take the lead on that as a member of the
committee working with the others.
I thank the panel. Remember, again, anything you want to
submit, we will do that, and Ms. Peters, you might want to talk
to Gail afterwards about coordinating her efforts with the
Secretary, to make sure you get your rightful share.
I will now call the next panel: Ms. Amador; Ms. Canada; Ms.
Ornelas; and Mr. Duarte.
Thank you, and we will begin where the microphone is; I am
easy to get along with. We will begin with George Duarte, who
is with the Horizon Financial Associates, and he is speaking on
behalf of the California Association of Mortgage Brokers.
Mr. Duarte.
STATEMENT OF GEORGE DUARTE, CMC, HORIZON FINANCIAL ASSOCIATES,
ON BEHALF OF THE CALIFORNIA ASSOCIATION OF MORTGAGE BROKERS
(CAMB)
Mr. Duarte. Thank you. Mr. Chairman and distinguished
members of the committee, we greatly appreciate the opportunity
to speak today and present testimony on this local crisis.
I am the vice chairman of the Government Affairs Committee
of the State Association of Mortgage Brokers.
I appreciate the opportunity to testify on behalf of CAMB
and I would like to extend my gratitude to Congressman Cardoza
and Congressman McNerney for the invitation to speak today and
to share our observations and experiences about the challenges
consumers face as they seek to avoid the tragedy of
foreclosure, and the impact of rising foreclosures in Central
Valley.
I commend the committee for traveling all this way here to
what has been called our ground zero for the mortgage crisis
that is facing our Nation, and to hear directly from those of
us who are seeing the problems, firsthand, with our boots on
the ground, so to speak.
We are in the community assisting those who are faced with
the tragedy of losing their homes, and witnessing the aftermath
of the crisis and the dramatic impact on the local
neighborhoods.
The Association of Mortgage Brokers is a nonprofit
professional trade organization comprised of licensed real
estate brokers, salespersons, and affiliated lenders, whose
primary business is assisting consumers in obtaining
residential and commercial real estate financing and brokering
conventional and government mortgage loans.
Since its inception in 1990, CAMB has promoted the highest
standards of professional and ethical conduct, among which our
expert knowledge, accountability, fair dealing, and service to
the consumer and to our community. The Association provides
education, legislative and regulatory representation, and
public relations for its members, while serving as a forum for
the development of common business interests across the
industry.
CAMB has led the mortgage industry by being first in
California and the country to define and combat predatory
lending as well as creating a mortgage origination handbook of
best practices, that has set the standard for best practices in
the industry.
At both the State and Federal levels, CAMB has advocated
for and is dedicated to curbing predatory lending practices
while ensuring the best products are available to help more and
more Americans achieve and sustain the dream of homeownership.
In California's Central Valley, the number of homes in
danger of foreclosure has more than doubled in the last year,
and despite some reports to the contrary, the situation is
getting worse.
The Central Valley obviously has been most heavily impacted
by the foreclosure crisis, and with San Joaquin County on track
to have more than 16,000 homes foreclosed in this year alone,
Central Valley continues to be at the center of this crisis.
Stockton has experienced a 50 percent decrease in median
home values or more in just the last 12 months, and our
neighboring cities and counties are also experiencing similar
declines.
This dramatic decline in home values impacts the equity of
homeowners who are not in trouble and has caused them to walk
away from their properties, even when they can make the
mortgage payment, because they owe more than the home is worth,
further exacerbating the problems of vacant properties in our
communities.
Projections are that things will get far worse as the
negative amortizing loans are scheduled to reset in the next 12
to 24 months, as has been stated previously.
It is imperative to stop the downward spiral of people
losing their homes, which is also causing the equity of other
area homeowners to vanish. We commend the committee for its
continued focus on finding ways to achieve stability in the
housing markets, to end the foreclosure crisis, and to stop the
dramatic declines in home values.
As part of CAMB's efforts to assist in the crisis, we
developed the Preserving Home Ownership Initiative. CAMB has
been reaching out to community leaders in an effort to provide
assistance to homeowners who are facing foreclosure through the
CAMB Foundation, which is a 501(c)(3) nonprofit organization.
Through its Preserving Home Ownership Initiative Program, CAMB
Foundation provides free community-based forums that allow
existing homeowners a one-on-one mortgage counseling session
with a CAMB adviser.
The initiative program began initially as a program to help
homeowners to understand their loan documents, and to answer
any questions regarding financing, credit, and homeownership.
Due to the current market situation, the initiative has evolved
into a program that offers counseling to homeowners about the
loan modification process.
These events take place at community locations, often in
partnership with other local organizations and elected
officials. The California Department of Consumer Affairs and
the Business, Transportation and Housing Agency have partnered
with the CAMB Foundation to offer the initiative program in
town hall settings. In addition, the program has been
facilitated by local television networks through telethon
format, allowing us to reach thousands of consumers.
Since January 2008, this year, we have convened more than
50 events across the State of California as part of the
Governor's task force, working closely with Secretary Peters.
In addition, in the last 10 months, we have held 10
telethons, 7 in English and 2 in Spanish. The advisors of the
initiative are experienced volunteers who are members of CAMB.
The counseling service has provided the event as absolutely
free of charge and volunteers are prohibited from engaging in
self-promotion or soliciting business from participants.
We are dedicated to ensuring that the initiative remain an
educational event for consumers as opposed to a forum for
advisers to generate leads. With that in mind, rules of conduct
for advisers at the events are strictly enforced. Counselors
provide advice to consumers about the loan modification
process, and how to have successful interaction with a
servicer. We provide phone numbers for lenders. We offer advice
about what materials consumers should have in front of them
before they call their servicer, and offer strategies for them
to be successful in their call.
For example, we advise consumers to immediately ask for the
Loss Mitigation Department when they call their servicers. We
also provide service and advice about how to complete the loan
modification form.
Further, we counsel consumers on what to expect in terms of
how long they might be placed on hold, acceptable timeframes
they might have to wait to receive the answer regarding the
consideration of their loan modification request.
The counselors try to provide homeowners with as much
information as possible, so they can advocate for themselves
when they contact their loan servicers.
Our most recent initiative telethon was held on August 8,
2008, in Sacramento, California, in which I personally
participated. We partnered with channel 3, KCRA, an NBC
affiliate, from 5 a.m. to 7 p.m., to offer information and
advice to individuals who called the hotline. Telephones were
manned by 10 to 12 counselors who were also available to answer
by e-mail. During the course of the day, we received over 1,000
calls and 400 e-mails from consumers in need of assistance.
What we found--I would like to take this opportunity to
share with the committee what we have learned through our
initiative events about the problems many in danger of
foreclosure are facing in seeking assistance from servicers to
find a solution that would allow them to remain in their homes.
Unfortunately, it is all too often that individuals feel
they have nowhere to turn as a result of the responses they
receive from loan servicers when they call a toll-free phone
number that is printed on their monthly mortgage statements.
While the program has been successful, it is apparent that
much more must be done to reach all those who are in assistance
in avoiding foreclosure. We have learned that consumers are
confused and they do not know where to go for help. The
misinformation they have received is unbelievable.
The first logical step is to call a toll-free phone number,
but for too many homeowners, this only leads to frustration and
confusion. While lenders are reporting high levels of loan
modifications, the efforts are clearly not enough, given the
long lines of people coming to us for help, and the confusion
that consumers express.
What has happened to so many of our fellow Americans to get
them into this situation is abhorrent. The stories that we have
heard are heart-wrenching as well as mortgage professionals, we
find them to be infuriating. Not only are we hearing about high
incidences of mortgage fraud, but the majority of the time at
initiative events participants are learning about their options
for the first time and have been misinformed or misdirected by
their servicer.
We believe in order to stem the tide of foreclosures, it
will be absolutely critical for servicers to make significant
improvements to their loan modification processes, and to offer
clear instructions and competent, trained, and compassionate
individuals to work with their customers.
Counseling entities do not have the ability to address the
sheer volume of all those who need help. Without improvements
to the operations, we will continue to see the high volume of
people in need of assistance in getting the information and
results from the servicers that they need.
As a result of our experiences, I would like to offer some
of the following observations and suggestions about the
problems.
We find that there is a significant lack of experience with
loan servicers. This was mentioned earlier by a previous
participant. The problem is that many individuals are not fully
trained or appropriately qualified to assist consumers with the
process.
There is inconsistency in information. Time and again, we
are told by consumers that they have received different
information, instructions, or advice each time they call and
speak to a different person at their servicer. Because they are
not always talking to the same person, or department, the terms
and requirements for loan modification frequently change.
We see that there is lack of coordination in servicing
departments. Departments do not talk to one another or share
information about a specific account. As a result, a consumer
could be working hard with the Loss Mitigation Department for a
loan modification, but because the Default or Trustee
Department is not aware of this, the person's home can be sold
at a trustee sale in the middle of a loan modification process.
Further, if the consumer is directed to the Collections
Department, the focus is on collecting late payments rather
than working on the loan modification.
Time delays: Most of the servicers take between 90 and 120
days to let a consumer know if they are approved for a loan
modification. Some take even longer. With some of the lenders,
the consumer might send in the loan modification materials but
it takes so long to process it that the package will expire and
the lender will tell the consumer that they have to start over.
Lack of consideration of individual hardship circumstances:
Most servicers require a hardship letter to be included in the
loan modification package. Unfortunately, it appears to us that
these hardship letters are largely ignored. Instead, decisions
are made by formulas as opposed to the individual's personal
circumstances that have caused the difficulty in making
payments. Most people whom we see at our events have 2 or 3
years of excellent payment history. The problem arose for many
when their minimum mortgage payment reset. If servicers would
consider leaving payment where it was prior to the reset, this
would help many avoid foreclosure.
Which leads us to one of our main suggestions to help the
crisis. In addition to the problems with the loan process in
the aforementioned section, a significant drawback of the loans
that have caused so much damage is the future that results in
very high margins that begin after the initial period of 2 or 3
years.
We have seen so many of the subprime loan programs, they
were fine for 2 years or 3 years, and people then, they get
reset, and the margins on some of these loans are 4, 5, 6, or
even 7 percent over the rate. So they come into the double
digits.
One way to stop the rate of foreclosures is to place a
temporary moratorium on the adjustment of adjustable rate
mortgage loans, keeping them at their start rates for 3 to 5
years.
Another option would be perhaps to place a temporary limit
on the margins of ARM loans to more than 1.5 percent, which
would have the impact of actually lowering the current rate
from the initial start rate on many ARM loans.
Many of these options are currently being utilized by
lenders. The problem is that the loan modification process is
bogged down with the ever-increasing numbers and lenders are
falling behind.
The second feature of our suggestion is saving
neighborhoods impacted by the high foreclosure rates. The
impact on neighborhoods is critical, as has been mentioned
before by several of the presenters, and one of the reasons for
that is because for closed properties, the appraisal value is
done by comparable sales. So if the only activity in your
neighborhood is foreclosed or short sales, and the property
values are so low, that negatively impacts and essentially
equity strips the value--
The Chairman. We need you to come to a close pretty soon.
Mr. Duarte. Yes, sir. Thank you. So we suggest to perhaps
have a second class and delineate the appraisals of distressed
properties separately from nondistressed properties; that may
take the pressure off.
In conclusion, I would like to thank the committee and the
chairman for the opportunity to offer our suggestions and
observations to the committee. Thank you very much.
[The prepared statement of Mr. Duarte can be found on page
75 of the appendix.]
The Chairman. Thank you. Full written presentations, of
course, are welcome.
Next, we have Carol Ornelas, the chief executive officer of
Visionary Home Builders of California.
STATEMENT OF CAROL ORNELAS, CHIEF EXECUTIVE OFFICER, VISIONARY
HOME BUILDERS OF CALIFORNIA
Ms. Ornelas. Hello, and good afternoon, Chairman Frank, and
members of the committee. My name is Carol Ornelas and I am the
CEO of Visionary Home Builders of California. We are a
nonprofit affordable housing developer and a HUD-approved
housing counseling agency here in Stockton.
We also serve various communities throughout the Central
Valley. We are here today to discuss with you the housing
disaster that has hit our community. I can best describe this
disaster by comparing it to Hurricane Katrina which hit New
Orleans. The only difference is that Katrina was an act of
nature while our housing crisis was manmade.
In neighborhood after neighborhood throughout Stockton, you
will find foreclosure signs, for-sale signs, and vacant and
neglected properties. Today, you had the opportunity to view
some of those neighborhoods. I can only tell you that you saw
the better neighborhoods. There are far more serious
neighborhoods suffering throughout the City of Stockton.
Last December, Congressmen McNerney and Cardoza held a
foreclosure event. Though December is usually a month of
celebration, outside this event center, homeowners formed a
line that wrapped around the building. When I walked into that
event and took a look at the sea of people, I remember looking
at my colleagues from the City of Stockton and saying, ``There
is a chill in this room. Take a look at this fine example of
predatory lending.'' Of the people who were there, 99 percent
were Latinos, African Americans, Asians, and our senior
citizens.
By the end of the day, I knew this problem was huge because
all of the families I worked with that day did not qualify for
the initial loan and now their payments were going up and their
incomes remained the same, and the housing prices had dropped
substanially.
How did we get here? The median income for the City of
Stockton, for a family of four, is $61,300. We are primarily an
agricultural-based community with few high-paying jobs. We have
an influx of Bay Area residents who could not afford to live
where they worked.
The Central Valley became a bedroom community for these
folks. Housing was affordable and clearly they were able to get
more home for less money in the valley. Builders stopped
building for our residents and built housing for the Bay Area
workers with Bay Area salaries. The demand was great and the
building industry was flourishing.
Today, we know that the Bay Area families did not qualify
for their homes, just like the residents of the City of
Stockton. They were lured in with high appreciation rates that
had been occurring for the prior 4 years. They were also lured
in with financially unsound loans which had low initial teaser
rates which only lasted for 2 or 3 years, or worse yet, option
ARM loans.
They are now victims of the subprime lending that hit our
community, and the burst of the housing bubble.
Home buyers in our Latino community often had unique
characteristics that made them easy targets. For example,
Latino families are more likely to have multiple sources of
income. A lot of lenders and brokers didn't want to take the
time to qualify Latino families properly.
Stated income loans were prevalent. In many cases, if these
families would have sat down with a housing counselor, they
would have gotten a prime product rather than a subprime loan.
What is the effect on our neighborhoods and our community?
There is a huge domino effect to this problem for us. Local
governments are faced with lack of revenue from property taxes,
construction, and sales taxes.
We still need to provide services to our citizens. Our bond
rating has fallen and the City is doing what they can to
survive in tough times. We hope we won't have to file
bankruptcy like Vallejo was forced to do. The blight and
vandalism in neighborhoods is evident throughout our
communities with little or no signs of recovery.
This will only add to the additional decreases in property
value.
The city of Stockton has passed an ordinance requiring
banks and lenders to maintain their properties or they will be
subject to code enforcement violations. We hope this will help
some of the neighborhoods recover from the eerie feeling you
get when you drive through the neighborhoods and see vacant
home after vacant home.
We must not forget that many of our investors who have
bought homes and then rented them to families have lost their
investment, and many of these renters have been caught off
guard. Even though the rent may be paid, the mortgage may not
have been paid. The sheriff knocks on the door and informs them
that they must leave.
These families are then left to deal with not receiving the
rent back, or the deposit. Remember, this crisis affects
everyone. If you take a minute and count how many jobs or
services are affected by our foreclosure, it is many.
We must remember the stress that has affected our families
and our community. Domestic violence is up. There is a greater
need for mental health services and medical attention for our
families and our children.
Our efforts today, including those by the industry, are not
working. My counselors face an uphill battle every time they
work with a family struggling to keep their home.
You have read the stories about our troops being sent to
battle without proper equipment to fight the war. Our
counselors have been sent into their own battle without much
help either. We were told that banks and mortgage companies
would work with us, yet somewhere along the way investors,
servicers, and loan mitigation departments failed to come
through.
National foreclosure solutions are not a one-size-fits all.
Northern California and the Central Valley have unique
challenges.
We need Congress to closely monitor the situations and be
committed to continuous action over the years. For example, The
Hope for Homeownership Act is a foreclosure rescue product that
will run through FHA. In order to qualify, the borrowers's loan
must have originated prior to March 1, 2008.
This program is slated to begin October 1st. Banks are
telling us it is going to take months after that date to get
ready. This program is voluntary, so banks and servicers may
not choose to use the program.
Here is how it will work in our community. The bank agrees
to write down the principal of the loan to 90 percent of the
current apprised value. They are allowed to go lower if it
makes the loan more affordable for the borrower. The borrower
is then refinanced into a fixed rate FHA loan program.
The borrower has to share a set amount of the appreciation
with FHA, which is understandable. But here is the catch. The
homes in our area have lost so much value, and families are
already so far underwater, that banks may not be willing to use
the program.
Here is an example. A house was purchased in 2006, valued
at $400,000, and the loan amount is $375,000. In 2008, the home
is now valued at $225,00 and the family still owes $375,000
because it was an interest-only loan; 90 percent of $225,000 is
$202,500. That means the bank would have to write off $172,500
to get the LTV back down to 90 percent. Because of the incomes
in the Central Valley, they may even have to go lower.
We will need to take a further look into this bill, and
hopefully amend the bill, to really help our communities that
were hit the hardest.
As with any disaster, we must begin the healing process. We
believe that the stimulus bill will be good for our community.
We must make sure that Stockton does receive adequate funds
that will be allocated to the communities hit the hardest.
I hope being number one will put us on the list of
receiving the allocation that is so desperately needed.
The $4 billion of CDBG funding that will go to the
nonprofits to rehab foreclosed properties is so important to
our community. As a nonprofit affordable housing provider, our
mission has always been to provide safe and decent housing. The
vandalism that has occurred in these foreclosed homes should
not be passed on to the new homeowners.
By purchasing these properties and renovating them, we will
pass the keys on to homeowners to enjoy their new homes,
instead of having a homeowner who is worrying about
unaffordable repairs needed for the home.
In conclusion, there is much to be done in order for our
community to bounce back from this disaster. I know our
community is resourceful, but we must learn from this lesson
and look to the future to avoid the pitfalls that may be
lurking.
Continuing homeownership education is crucial. Every
homeowner should be required to attend the workshops and meet
with a housing counselor to explore the options available to
them.
Every homeowner must be educated to understand exactly how
much mortgage they can afford in order to keep their home for
the long term, not just buying a home that they can only afford
to live in for 2 years, and then lose their home in a traumatic
foreclosure.
We must rely on the Government for greater accountability
in the mortgage servicing industry. Many of the efforts so far,
especially at the Federal level, rely heavily on the voluntary
participation of investors, lenders, and servicers.
Mortgage servicers are the lifeline between the borrower
and their rescue options. Yet our experience shows that many
servicers aren't willing to accept even basic modification
requests.
Others are slow to respond, leaving our clients to rack up
high fees while they wait. On the other hand, where we have a
servicer that is willing to work with us, it makes all the
difference. This is how we are able to save families from
foreclosures. We must take another look at our underwriting
criteria if we are going to move these homes from foreclosure
to homeownership.
The Governor recently announced a pool of funds to be used
in the hardest hit areas. To date, not one loan has closed.
Why? I believe we went from extremely loose underwriting
guidelines to very tightly regulated guidelines.
There needs to be a middle ground. We did many FHA loans in
the past, so let's look at what worked and what didn't work and
find the middle ground.
People are not perfect and sometimes there are bumps along
the way. But that does not mean that they cannot be responsible
for a mortgage loan.
I just want to share with you one highlight, if there can
be one in the midst of disaster. The City of Stockton has
always had a downpayment assistance loan program and has made
hundreds of loans to low-income buyers. All users of the
downpayment assistance program must participate in a homebuyers
education class provided by a HUD-certified housing counseling
agency. Throughout this housing crisis, we can proudly say that
out of hundreds of loans, there has been only one foreclosure.
We can attribute that success rate to the requirement of
housing counseling and the use of prime loans. And we must
applaud these families because they were all low-income
families. Maybe the market should take a look at this fine
example.
The task of cleaning up our neighborhoods will not be easy
and will take time, but we must learn from our lessons and move
on. We can bring back the dream of homeownership. Thank you.
[The prepared statement of Ms. Ornelas can be found on page
92 of the appendix.]
The Chairman. Next, we have Pam Canada, the chief executive
officer of the NeighborWorks Home Ownership Center here in
Sacramento.
STATEMENT OF PAM CANADA, CHIEF EXECUTIVE OFFICER, NEIGHBORWORKS
HOME OWNERSHIP CENTER, SACRAMENTO REGION
Ms. Canada. Thank you. I would like to begin by thanking
Chairman Frank and Chairwoman Waters, and the entire Financial
Services Committee, for their leadership in getting H.R. 3221
passed.
I would especially like to thank the committee for
including the allocation of $3.9 billion in CDBG funds, known
as the Neighborhood Stabilization Fund, to be allocated to
communities for redevelopment of abandoned and foreclosed
properties, investing in neighborhoods with measurable and
lasting impact. And the additional funding for housing
counseling through Neighborhood Reinvestment Corporation that
will provide help to thousands more families that are
struggling to preserve their homeownership.
Welcome to Stockton for this important hearing to address
the impact of the foreclosure crisis.
NeighborWorks HomeOwnership Center is a premier member of
the NeighborWorks network of not-for-profit organizations
chartered by Neighborhood Reinvestment Corporation. And we
carry out a mission of work to provide stable, sustainable
homeownership. H.R. 3221 included funding to support
foreclosure prevention counseling, and this meets a critical
need for struggling homeowners in Stockton, the Sacramento
region, the State of California, and across our Nation.
The most recent numbers show us that 1,300 homes go into
foreclosure every business day in California. Thank you for
including counseling funding that will allow thousands more
families to be served by qualified housing counseling agencies,
and undoubtedly preserve homeownership for hundreds of people
in the Central Valley.
Stockton and the Central Valley have been particularly hard
hit, as has been discussed here today, consistently listed in
the top of national rankings for the number of foreclosures.
There was a preponderance of subprime lending activity in
Stockton and minimal prepurchase education was offered or
available in the Central Valley to mitigate this predatory
practice.
Home buyers, up and down the Central Valley, and throughout
our Sacramento region, were told they better buy now or they
will miss out. So they grabbed the apparent opportunity to get
that piece of the American Dream and bought a home that was not
affordable for them. On the very first day they closed that
loan and moved in.
To get the home they wanted, buyers used available subprime
loan products with teaser rates and exorbitant adjustments over
a short timeframe. They got downpayment assistance funds that
inflated the sales price, and they used Option ARMs that were
affordable only for the first 6 months if they paid the minimum
amount due.
Rising home prices in the Central Valley created a sense of
urgency for new homebuyers and they were easy targets.
If more of these new homebuyers had received quality,
multilingual, nonbiased homebuyer education, such as that
provided by NeighborWorks certified home counselors, they would
have been equipped to make informed choices about their lender,
their financing options, and their affordability.
Prepurchase education is the ultimate foreclosure avoidance
action for homebuyers. We encourage the committee to lend its
support to this work. The challenge remains in Stockton and the
Central Valley, and indeed, across the Nation, to create
informed consumers and foreclosure-resistant borrowers.
This is accomplished through quality prepurchase
homeownership education. Funding for this counseling is minimal
yet its impact is extraordinary and should be central to all
housing programs.
One of the first large foreclosure prevention workshops
offered in the Central Valley was held here in the City of
Stockton and sponsored by Congressman McNerney and Congressman
Cardoza, along with State Senators Machado and Agazharian.
NeighborWorks was pleased to provide several certified
counselors to address the questions of some of the
approximately 500 people who attended that one workshop, and we
have continued to participate in many more workshops of this
type throughout our six county region.
Another event in Stockton with the Governor and Secretary
of Treasury Paulson, featuring one of th successful families
that had come through foreclosure prevention counseling with
our agency.
In early 2007, in response to an overwhelming demand on our
available capacity, we created a NeighborWorks Foreclose
Prevention Workshop that we continue to hold every single week
at our homeownership center, delivered in English and Spanish
and Russian. To address the diversity of our region, we have
partnered with another nonprofit to provide client referrals
along with translation services, which now allow us to provide
our education and counseling services in 10 different
languages.
Recently, we were an invited participant at a small
gathering of servicers and counselors, hosted by Commissioner
DuFuchard at the California Department of Corporations. This
was an open and productive sharing of challenges and solutions
between the represented companies, with everyone agreeing that
regular meetings and open dialogue needed to continue, and the
commissioner has offered to host quarterly meetings with
solution-oriented agendas.
We also met with HomEq Servicing, a large servicing company
that has an office in the Sacramento region. We spent 4 hours
at their shop discussing criteria for loan modification
considerations, challenges of counselors, borrowers, servicers,
and investor issues. And we have been collaborating with the
California Bar Association for legal assistance.
These examples of collaborative efforts with practical and
realistic sharing of challenges and solutions among invested
participants will help move us all forward towards diminishing
the foreclosure numbers in the Central Valley and the State of
California.
With respect to H.R. 3221, it is imperative that lenders
participate in the Hope for Homeowners Program. From the very
day this was announced, we began receiving many calls and
inquiries from homeowners who are hoping they can be included
in this program and keep their home.
There are eligibility criteria for the borrowers, as Carol
just mentioned, but it still comes down to the servicer and
investor agreeing to accept a principal shortfall. If we can't
get them to agree now to a reasonable loan modification that
preserves their principal, it seems unlikely there will be easy
agreement when they are asked to accept a significantly reduced
payoff.
We urge the committee to keep the dialogue going with
lenders and investors, as much as possible, so they can see the
advantage of participating in this important program.
The Neighborhood Stabilization Fund is an important
component of the bill and represents a significant opportunity
for the Central Valley and many other communities to take
action in areas that are now blighted by foreclosed and
abandoned homes.
We ask that the Financial Services Committee members ensure
that the best and most current data is used when developing the
formulas for the CDBG funds.
When thinking of solutions, one thing is clear. Homeowners,
working with certified housing counselors, need more time to
resolve these issues with their lenders. One such proposal in
Congress now is H.R. 6076, the Home Retention and Economic
Stabilization Act, sponsored by our local Congresswoman, Doris
Matsui.
It calls for a time out on foreclosure proceedings for
those homeowners who are current in their payments, giving
eligible borrowers a conditional deferment period and a window
of opportunity to preserve their homeownership. We encourage
you to continue to look at that bill and consider it
positively.
We request that you encourage lenders/servicers to
participate in bulk REO discounts for sale to capable and
experienced organizations such as NeighborWorks Sacramento and
Visionary Home Builders in Stockton, that would refurbish and
resell to low- and moderate-income families for homeownership.
This would reduce the inventory held by the lender, build
homeownership opportunities for low- and moderate-income
families, and address the growing number of vacant properties
that are lining our neighborhoods.
The negative impacts of foreclosure on communities are far-
reaching. Not only are people losing homes, communities are
suffering economically, physically, and socially.
Communities suffer from increased crime; having multiple
abandoned homes is proven to have a direct effect on the rise
of crime in communities. Cities and counties are negatively
affected, not only from the added services required, but also
from the lower property values caused by foreclosed homes, that
have led to a smaller tax base.
Area youth are displaced. A hard-hit victim of foreclosure
is the children. Parents' stress seeps down to their children
and manifests in many difficult ways, as was previously
discussed by the earlier panel.
Communities are blighted by neglect. Properties and whole
neighborhoods are deteriorating. These neighborhoods are
struggling to hold on as the crisis continues to threaten to
unwind their strides forward to a healthy thriving community,
and the investment that will be lost over the years.
Finally, we ask that you resurrect the antipredatory
lending legislation. Yes, area lenders have tightened their
underwriting criteria for now, and subprime lending activity
has been reduced, but these are cyclical, and if there is an
opening, when the market returns there will be nothing in place
to stop or monitor this destructive practice.
The Central Valley will benefit from the Neighborhood
Stabilization Fund, the housing counseling funds, and would
also benefit from the opportunity for REO bulk sales at
discounted prices.
We have hired and trained six additional counselors,
bringing our total now to eight counselors who are certified
and trained on staff, thanks in part to funding raised by the
California Reinvestment Coalition and from the National
Foreclosure Mitigation Counseling funds. We have partnered with
Washington Mutual, Citibank, Bank of America, and most
recently, Countrywide, to provide our counseling services in
Stockton. We have been working to build funding and resources
from area government and NeighborWorks America to allow us to
move forward with our plans to expand with a NeighborWorks
branch here in Stockton, in addition to our Sacramento
homeownership center, but funds are not fully available at this
time.
New interest is building again by first time homebuyers who
see the opportunity to buy. Our prepurchase education numbers
are rising. Last year, we funded $1.8 million in downpayment
assistance funds, and we are seeking more capital to fund this
program as now the market opportunity and affordability is
available for some.
Thank you for this opportunity to address this field
hearing of the Financial Services Committee.
[The prepared statement of Ms. Canada can be found on page
66 of the appendix.]
The Chairman. Our next witness is Patty Amador, the
president of Ambeck Mortgage Associates. Pull the microphone
closer. Just pull it closer to you. Don't lean forward.
STATEMENT OF PATTY AMADOR, PRESIDENT, AMBECK MORTGAGE
ASSOCIATES
Ms. Amador. Thank you. First of all, thank you for inviting
me to participate today, but most importantly, thank you for
your attention and your concerns regarding what is an extremely
critical situation here, in the Central Valley.
On August 4th, I sent an e-mail to our local congressional
office, for the attention of Congressman Dennis Cardoza. It was
subsequent to the passing of H.R. 3221 and the pending of H.R.
6694 as they were referred. I would like to share that e-mail
with you today:
``Hi Lisa. It has come to my attention that there is
legislation pending that would revive the use of the Nehemiah
and downpayment assistance programs, H.R. 6694. I would like to
take this time to voice my support for passing this bill. Why?
Not because I necessarily agree with the basis of the program.
``Having been in the mortgage industry for the last 30
years, and being old school, I believe that homebuyers are
better homeowners when they have to plan their finances and
save for the purchase of their homes.
``Unfortunately, right or wrong, within the last few years,
we have created a generation of home buyers who do not
financially plan or save for the purchase of a home.
``This not minimizing the desire to own. Programs such as
Nehemiah, as well as many more, have been made available,
eliminating the need for personal funds. The reason I support
the continuation of Nehemiah, at least at this juncture, is
that very reason. Potential homebuyers, at least first-timers,
are not prepared with the money it takes to buy. That doesn't
necessarily mean they can't afford or won't make the payment.
``I am extremely concerned about the current state of our
economy. I believe that if tools, such as Nehemiah , are now
eliminated, what recovery we may be experiencing because of
affordable home prices will be squashed.
``This will send our housing situation into further crisis
and ultimately further damaging our economy. Regardless of how
I may feel about the program, I have to say that I really
struggle with the logic, or the lack of taking the Nehemiah
downpayment assistance program off the table at this time, 10
years after its inception.
``If this decision was a measure taken to minimize the
default risk, I believe that prudent underwriting practices can
offset the majority of risk that may be considered inevitable
as a result of downpayment assistance. Perhaps this is where we
should now put more focus.
``I sincerely appreciate your time in considering my
concerns and ask that you forward them on to Dennis as well as
others who have the opportunity to protect the mainstay of our
economy, the housing market. Patty Amador, Ambeck Mortgage
Associates.''
I do appreciate the efforts of governments, both local and
Federal, in attempting to resolve this foreclosure crisis.
Personally, I don't have much optimism, and I am an optimist,
for the success of preventing what I consider to be, for the
most part, a train too far down the track.
The success of most programs developed to date is
predicated on lender cooperation and perceived value on the
part of the homeowner.
So far, we haven't seen much of either. There is no doubt
that some foreclosures will be prevented through the efforts of
these programs, but I believe that the true resolve is within
what we are seeing and experiencing in renewed interest and
activity with new buyers.
As devastating as this foreclosure market has been, it has
ultimately brought housing prices back down to realistic
levels, affordable levels, and there is renewed interest in
qualified homebuyers to purchase homes with stable, traditional
loan programs.
I believe that we are experiencing a turnaround in the
housing market. But as I said in my e-mail to Congressman
Cardoza, I am concerned about the attack on and the elimination
of programs buyers have grown to rely on.
I am concerned about the increases in downpayment
requirements, increases to closing costs, and increases to
monthly payments affected by increased mortgage insurance
lately, and each day seems to bring changes that limit lending.
I won't argue that lending practices and lending programs
have definitely contributed to the problem facing us today.
Unfortunately, a lot of these financing tools have been pegged
as the villain, the sole cause of this crisis. I can assure you
that the mere existence and availability of these programs was
not the problem.
We have had flexible loan programs in the past. They are a
lot of what brought us out of the housing crisis of the early
1980's, when prime was 22 percent and mortgage rates were 16
and 17 percent.
My message is that we cannot bring this market back by
shutting buyers out, by limiting their options, or again,
pricing them out of the market. Now is not the time.
Eliminating downpayment assistance programs and increasing
downpayment and closing cost requirements, will once again make
homeownership unaffordable.
I do understand the concerns of risk due to no or little
money invested, but can we be any worse off than the conditions
of today? I believe putting qualified buyers together with
reasonable but flexible programs, while utilizing prudent
underwriting, will stabilize values and encourage those who can
afford to stay in their home to stay, with the hope of
regaining value.
I believe the result will strengthen our real estate
market, our economy, and ultimately provide the basis to
resolve our foreclosure crisis.
Again, I thank you for your time and for this opportunity
to participate.
[The prepared statement of Ms. Amador can be found on page
58 of the appendix.]
The Chairman. I am going to respond. I am going to be
meeting afterwards with some people concerned about the
downpayment assistance program, and it has been mentioned
several times, so let me just make clear to people where we
are.
It has headstrong advocates. Actually, perhaps the unlikely
duo of Congressman Gary Miller and Congresswoman Maxine Waters
have teamed up to be very strong advocates for it. In the bill
that passed the House, there were no restrictions on it. When
it got to the Senate, they adopted a provision completely
outlawing it, partly at the strong urging of the Bush
Administration.
The Commissioner of the Federal Housing Administration,
Brian Montgomery, was very eager to have it banned, and the
Senate agreed with him. We did not agree, but in trying to put
a bill together, you can't always get everything you want, and
when we had the ardent opposition of both the Administration
and the Senate, we lost out.
At the same time, however, the Senate also completely
banned any ability on the part of the FHA to adjust pricing in
their insurance for risk. The FHA hated that. So the FHA loved
the ban on downpayment assistance, and hated the ban on risk-
based pricing. That seemed to me to offer us an opportunity.
So the bill that was referred to, H.R. 6994--we have copies
of it--will replace both bans with middle ground, and it will
pass the House, I can guarantee you.
What you want to do now obviously is talk to your Senators.
We think it has the approval now of the Secretary of HUD, and
it does reinstate the downpayment assistance program. What it
will say is this, but not exactly as it was, and it did have a
high default rate. It says that finance downpayment assistance
will be automatically okay for people who have a credit score
of 680 or above. Now that means you still have to look and see
if they make the payments, but a 680 credit score.
If you have between 620 and 680, you also will be able to
get it, but there may have to be some higher fees because there
is an insurance principle here, and in Fiscal Year 2010, which
will begin next year, it will allow loans below a 620 score if
the HUD Secretary certifies this can be done without the need
for a credit subsidy.
So it also requires anybody who wants to offer downpayment
assistance to make available counseling regarding the
responsibilities. It doesn't mandate that the borrower take it
but it does mandate that they be offered.
The House will pass that. It isn't everything everybody
wants, but nothing ever is. And I would say this: One, help us
by lobbying the Senate; and two, if we are able to get this
preserved to that extent, as I believe we will be, it will be
very important for people to make sure it is not abused. If it
is in place and it works well, we will then be able to go
forward with it. So that is where we are. With that, I am going
to recognize Mr. McNerney for the beginning of the questioning.
Mr. McNerney. Thank you, Mr. Chairman, for those comments.
Carol, I'm going to start off with you, if you don't mind. I
think you have done a great job in the community and it has
been a pleasure to work with your organization, and Pam, also,
in our workshops. You donated your counselors' time. So I
definitely appreciate that.
What challenges do you face, or have you faced, over the
past months in dealing with clients?
Ms. Ornelas. There are a lot of challenges out there, but I
think some of the items that we are really, really concerned
about are some of the modifications that are coming through. We
really weren't seeing very many modifications, clear up to
June, and then they started to creep in there. But we are
seeing, we first saw 1 year, then we saw a little bit at 3
years, and then very rarely do we see a 5-year modification.
And, of course, our counselors do counsel the families on,
you know, what is their best option, after seeing those
modifications, and to get a 1- or 2-year modification, I am
very concerned, because we are going to be in the same place
just 2 years down the road.
The 5-year modification? Well, you know, we really would
like to see more 30 years, you know, rewriting of the families'
loans, and that is a big challenge, and the fact that our city,
our house values have gone down tremendously, and the fact that
so many families did not qualify, initially, for that loan,
looking at some of their alternatives, there really aren't
alternatives for them. And that is sad to say, because we would
like to have a better success rate and say yes, we are putting
the families in a better situation.
But that is very, very difficult to say today.
Mr. McNerney. So it sounds like the biggest challenge is
that so many people really weren't qualified for the home they
were in. I mean, that sounds like the basis of what we are
talking about there.
One of the things that you said, that was fairly
impressive, was how effective counseling has been as a
preemptive situation. You said you only had one person, or one
family who went into foreclosure when they bought a house,
after being counseled on what was available, and I would like
to go to George here, and ask how much difference, in your
opinion, would it have made, if all the mortgage brokers were
CMC certified, or had some way to enforce counseling on
potential buyers?
Mr. Duarte. Thank you. It would make a tremendous
difference. One of the problems that occurred with the dropping
of the rates and the refinance boom, the whole frenzy starting
up, was that so many people got into the business at a very low
barrier of entry. Many people jumped in and became Realtors.
Many people jumped in and became loan originators for banks,
mortgage brokers, who had no intention of being professional,
and no intention of doing the right thing for the client, as
actually is required by the DRE license and the fiduciary
requirement that exists here in the State of California. Many
people just--and unfortunately, that environment encouraged
many quick buck artists who were only in it to maximize their
income for that transaction, and didn't have the intention of
doing the right thing for the consumer.
The problem with the stated loans, it occurred, it was easy
to get the loans, but many of those originators forgot, or
never intended to tell the consumer, that well, this is what
happens in the first 2 years, and this is what happens after
the loan adjusts. Can you afford the payment? They very
frequently forgot to ask that question. This is what the
payment is. Can you afford it?
Mr. McNerney. I mean, some of what we hear is that, yes,
these mortgages were bought and sold at a higher level, that
the people didn't really have a vested interest in seeing that
the loans were given to good borrowers. But what you are saying
is that there is a significant amount of cause also at the
local level, with nonqualified and nonprofessionals who were
acting as brokers or agents of some kind?
Mr. Duarte. That is correct. And one of the benefits is
that all these people now, or a very large percentage of these
people who got into the business are now out of it, or on the
way out of it, and the only people who should be in the
business of loan origination, and dealing with clients, are
people who intend to be professional, and who intend to stay in
the business for a long time, and have the intention and the
best interests of the consumer in mind at all times, and very
frequently--
Mr. McNerney. Is there, for CMC qualification, is there any
indication that they would put people in counseling who needed
it? Or I mean, how would that work in terms of getting the
people who want to borrow into the right loan, if they think
they can get something that they are not really qualified for?
Mr. Duarte. Well, actually, that is part of the whole
prequalification procedure, that a loan origination
professional would in fact do on a regular and consistent basis
in discussing with potential clients who wish to purchase a
home, what their resources are, what their income is, what
their debt is, and what their credit score is.
How much can they actually afford per month? And then base
the recommendation of a particular loan program or a loan
amount upon what they have to work with, and not necessarily
what conceivably they could get.
Mr. McNerney. So a mortgage broker would have to act as a
counselor is basically what you are saying.
Mr. Duarte. Essentially, that is true. A professional--
Mr. McNerney. Carol, do you want to comment on that?
Ms. Ornelas. I think we have to have the arms length. I
think the housing counselor is the housing counselor who sets
out the options to the potential buyers. One question that was
asked of me at one of our prepurchase counseling sessions was,
``Carol, how do you know who the good mortgage lenders are and
who are the good real estate brokers?''
And I said, ``Well, I don't really have an answer for you,
but I do have an answer that will help you out as a consumer,
and that is that, number one, you are here at this education
class, and at the end of the day, at the end of your training
here, we are going to have looked at your income, we are going
to have looked at your home, your score, your FICO score, and
we are going to have run a mortgage credit report on you, and
when you leave here, you are going to know how much you can
afford in a loan based on an interest rate that is fixed for 30
years. And when you go visit your lender and when you go visit
your realtor, you hand him this certificate and this is your
key to ownership. If they come back and tell you that they
can't find you something like that, walk away, because this is
what you truly qualify for.''
Mr. McNerney. So I mean, Patty, you mentioned earlier, I
think that you have an old school philosophy. Does that sort of
mesh okay with that philosophy?
Ms. Amador. The interesting thing with the business, and,
you know, those who are putting borrowers into loans that they
really don't belong in, is it goes really, really deep. I mean,
you can't believe the motivations. If you increase their margin
on adjustable rate mortgage, you make more money. If you add to
the prepayment penalty, you make more money. We have actually
seen where we have had Realtors approach us and say, if I send
you my clients, you know, what will I get out of it? Can I get
a fee?
Ms. Speier. Isn't that a kickback, though?
Ms. Amador. A kickback.
Ms. Speier. Isn't that illegal?
Ms. Amador. Oh, sure, it is illegal; but it is going on. I
mean, you know, you talk about prosecution. Well, it is only as
good as the consequences to that. You can prosecute them but to
what--
Ms. Speier. Would the gentleman yield for a moment?
Mr. McNerney. Yes.
Ms. Speier. I think this prosecution issue is really
important, because until we address that, bad behavior will
continue to go on, because as long as you have no skin in the
game, you don't care. And I would like to just suggest, that
one of the things we need to look at is very similar to what we
did in the area of child support enforcement. Until the Federal
Government offered inducements to local district attorneys to
go after the noncustodial parent who wasn't paying their child
support, where they would benefit financially, there wasn't any
enforcement.
We have to create, on a Federal level, some incentive for
local DAs and AGs to go after folks who clearly violated the
law, and so far we have done none of that. I don't know of one
mortgage broker, that there has been an action filed against
them in a court of law.
Ms. Amador. But it needs to go deeper than that.
Ms. Speier. All right.
Ms. Amador. Because what we have seen in our local areas,
we have actually increased the costs of our recording fees to
fund that prosecution for fraud, mortgage fraud and other
things. And they are prosecuted and they are found guilty, and
then they are sent home with ankle bracelets, and then, you
know, a couple of weeks later, they are out at the movies and
they are not being punished. There is no consequence. The
honest truth is, the only difference between an ethical lender
and an unethical one is conscience, because there is no legal
deterrent.
Mr. Cardoza. If the gentlewoman would yield? Patty, isn't
it true that some of these things aren't even illegal? Putting
someone into an ARM that is more risky is not any more
illegal--I mean, just the recommendation, or the influence. And
when there was a 30 year fixed rate available but they were put
into an ARM because they were getting more commission for that
ARM, that was a real challenge. And it is the ethics of the
individual broker. They weren't committing a crime by doing
that. It was just immoral to do that.
Ms. Amador. That is 100 percent correct. There is no law to
prevent that.
Ms. Speier. Well, there is a fiduciary duty, and I would
argue that a good attorney could argue that they were not
complying with their fiduciary duty, they could lose their
license, they could be banned from the practice for a period of
years, and maybe for their lifetime. You can create, and we
have done that in many professional settings, enough of a
stick, so that behavior is curtailed.
Ms. Amador. I would love to see a really big stick. But I
will tell you, in all honesty, we have had situations that have
been reported to the Department of Real Estate, and their
response is, you know, we really don't have the time to go
after those type of minimized things. We have bigger fish to
fry. And that is a quote.
Ms. Speier. Well, this is a real big fish to fry.
Mr. McNerney. Well, it is now. Madam Chairwoman, I am going
to yield back the balance of my time.
Ms. Speier. [presiding] Thank you. Congressman Cardoza.
Mr. Cardoza. Thank you. I want to start with Ms. Ornelas,
because the information that you provided us with, and Mr.
Frank has had to step out for just a second again, but the
point that you made, that the bill that we passed, it was the
best that Barney would get done, as I said in my opening
statement, but it won't work in our community because, you
know, the loan-to-value ratios have dropped so badly, that so
many of our mortgages are underwater by so much. The 50 percent
that is in Merced and San Joaquin County and Stanislaus County
just means that lenders simply can't write down that much--it
is so much greater than the 90 percent challenge.
I guess there are two questions. First of all, Patty and
Pam, have you seen much of that? Do you think there is much
hope that this is going to work out in many cases? There are
some cases where it might, but what is your analysis? This is
really important for the chairman to hear, so that he can use
it in his battle with the Senate. Because I will tell you, he
was advocating for a whole lot more. And he is a good, skilled
fighter, and we just ran into absolute roadblocks when it came
to making these corrections that he wanted to do.
Ms. Ornelas. Who would you like to--
Mr. Cardoza. Well, all three of you can comment.
Ms. Ornelas. You know, this is a really difficult situation
that we are facing here, because looking at some of these
loans, even if we spread it out for 50 years, we still couldn't
come up with the right payment that the family needs. To write
it down, we are still going to have difficulty with the income
that families have in Stockton. I am talking Stockton, San
Joaquin, and Central Valley. We have some of the lowest incomes
for the whole State. So, you know, that is a problem as well.
But what I say, more than anything, is shame, shame, shame
on lenders, because when they did put families into these types
of loan product, I go back and I tell people, how many of you
know, based on the job market, that someone is going to get a
$5,000 increase in a year? More than anything, you see people
fighting over 50 cents more an hour, or $1 more an hour. That
did not substantiate the increase that was going to happen in
these families, in this loan.
So is there, like we heard from our Congresswoman, a
fiduciary responsibility was heavily on those people who made
those loans, and I feel that they should be the ones that
should write down those loans to whatever is affordable.
So whatever it takes, this may not work, and that is why,
in my statement, I say we may need to look at the bill and
adjust it, especially for those areas hardest hit.
Ms. Canada. I guess I will sing the song again about
prepurchase education, because it does take a big stick, it
does take a lot of, sometimes, things beyond our control, to
get lenders, Realtors, mortgage brokers, and others, if they
want to do the wrong thing, they have ways to do the wrong
thing. But if you are an informed homebuyer, if you are an
informed consumer, and someone says to you, you can buy this
$500,000 home, and you are only making $45,000 a year, if you
have been through prepurchase education, you are going to take
a step back and say, whoa, how can I do that?
Well, you know, the lender can lay it all out for you and
you will know better. We have consumers come back, time after
time, after they have been through the prepurchase education,
and say to us, well, yes, but I like that house over there,
that four bedroom in the neighborhood that I like, and it is
above what you told me but this guy said he can do it for me.
And we show them again, we lay it all out--here is your
income, here is what you can afford, here is an adjustable,
here is these things. Informed consumers can make good choices,
and do we have control on mandating housing counseling for
prepurchase, especially if it is interest-only, if it is an
adjustable that adjusts any more frequently than 2 years, there
are requirements there that can be installed and I would
suggest that the committee look strongly at that.
Ms. Amador. My understanding of your question is basically
the programs, and the effectiveness of the programs in place?
Mr. Cardoza. There are so many questions I want to ask. We
have a long relationship. I was doing real estate when you were
starting out as well, and it evolved so greatly. We were so
tight, back when I was a Realtor, about how you qualify for a
mortgage, and it was about 90 percent of what I did as a
Realtor was qualify folks, because the Central Valley has
always been challenged, having folks that are on the lower
socioeconomic stratas and trying to get them into affordable
housing and all the rest.
And then now, when the values have plummeted, I just see
it--I mean, we did the best we could, considering the political
realities that we were facing in Washington with the
Administration's opposition, and all the rest.
But I don't think that we are going to succeed, and my
point is that I am advocating for--and the reason why I call it
the ``Katrina of California,'' and all the rest, is we are
going to need some very dramatic steps. Ms. Speier was
whispering to me, as a sidebar conversation, that this is never
going to be enough here, and could spread to be more a
calamitous situation if we don't solve it in those places where
it has really gotten out of control.
We can argue about what needs to be done, but certainly,
the resources need to be put in earlier rather than later. The
changes need to be made earlier rather than later.
Now we have political realities that aren't going to change
until January, one way or another. But we need to be prepared,
and that is why the chairman came all this way. And so I guess
within that context, Patty, give us the benefit of your
experience.
Ms. Amador. Well, I think there are two sides to it. You
know, you have the Government coming forward and really making
an honest attempt to put programs into place that are going to
benefit these individuals on the verge of losing their homes.
The problem is you have the Government doing one thing, and you
have lenders who are doing another, and what we find is they
will take these programs that you have implemented, and they
will either: One, say we are not going to participate in that,
we consider it to be too much risk-based so we're just not
going to play; or two, they again, as you are stating about
risk base, they will price them beyond the affordability of the
buyer. I mean, it doesn't matter whether they are in place or
not. They just can't afford them.
We found with the FHASecure, that they price them to the
point where they resulted in interest rates of 7 to 7.5
percent. You know, it wasn't a benefit. The same thing with
regards to the rescue, you know, program. We had someone say it
earlier--the phones were ringing off the hook when it first
came out.
Part of the problem is that the lenders, you know, how
receptive are they, the servicers, to taking not only 90 cents
on the dollar but paying a 3 percent fee on top of that. So now
you're looking at a 13 percent reduction, when they won't even
sit down with somebody who wants to negotiate and pay them a
100 percent. Renegotiate me at a 100 percent and, you know, I
want to stay here. I have somebody on my own staff, who bought
their home, put $50,000 down, they sold their previous home,
put $50,000 into their home, and, you know, they are in the
mortgage business, their income went down, and values, and they
struggled with the lender--let me stay, you know, let us
renegotiate. And they refused.
But yet they turned around and sold their home to somebody
else at current market value. You know, it just--
Mr. Cardoza. Doesn't make sense.
Ms. Amador. It doesn't make any sense. You know, you are
asking them to reduce their--by 90 percent. Take 90 percent of
appraised value today, pay a 3 percent fee, and, you know, I
don't see them highly motivated to do that when, again, they
are not willing to take 100 percent.
The other thing is, that is perceived on the part of the
homebuyers is, you know, with the participation for further
dollars, what we understand to be a 1.5 percent fee, I am still
not sure how that is going to be implemented.
You know, the reaction has just not been very strong
because they just don't see it as that great of a deal for
them.
And so as much as it is, you know, again, very respected
and appreciated that the Government is coming forward and
trying to do these things, it needs to be tweaked to the point
where it really makes sense for everybody.
I would like to address, you know, what you said with
regards to FICO scores. You know, FICO scores are very
subjective. They are based on employment and how it is
construed to be stable, and is based on the length of
employment. It is based on how much credit history that you
have or don't have. You know, some people aren't big users of
credit, which shouldn't be used against them, but it is because
it doesn't, they don't result in a credit score.
We are now seeing, in addition to what HUD is doing, Fannie
and Freddie are doing, we are seeing investors themselves
putting restrictions on programs.
We now have investors coming forward and saying we will no
longer accept nontraditional sources of credit. You know, what
that is going to do is eliminate some borrowers, particularly
Hispanic borrowers, because they are not big users of credit.
So like I said, as I said earlier, you know, it is
constantly, constantly limiting the lending ability. I just
don't see how we are going to come out of this, because as
these properties continue to come on to the marketplace, and
people are strongly interested in buying, how can they do that
if we continue to pull these tools off the table.
Mr. Cardoza. Mr. Chairman, I know I have gone way over my
time. I just want to make one point, and that is that I
introduced a bill right before the August recess that would
require NeighborWorks to make sure that the hardest hit areas
had sufficient counseling resources.
One of the challenges that we have had is that even though
we are the epicenter, we are ground zero, a calamitous
situation, there has actually been a shortage of folks who are
qualified to provide counseling services, and Ms. Speier and I
have been talking about mandatory counseling services,
especially for more risky types of mortgages that people might
get into.
But here, we have just had a difficult time. That is why we
have been intervening so significantly with these housing
foreclosure workshops. But that is really trying to close the
door after the animals are out.
We really need that kind of intervention and we need that
support as we go forward, to make sure that folks have the
ability to get those counseling services.
The Chairman. I did want to say to Ms. Amador, yes, we can
do a better job of screening, but I guess I disagree with you.
Your thrust seems to be that homeownership is this important
goal, and you are very skeptical of restrictions. I think one
of the mistakes we made was to encourage people to buy homes
who should not have bought homes, who were not either
financially or intellectually ready to do it.
And one of the problems we have had, and it has gone along
with the denigration of renters, and I hear people say, well,
you want homeowners because they care about their property.
Most people who are low- and low-middle-income, in much of this
country, are going to be renters. I wish it were the case that
everybody could be a homeowner. But I also wish I could eat
more and not gain weight. I wish a lot of things, and I get in
trouble if I act on my wishes without taking reality into
account.
And I think we have to understand that--and one of the
things we have done as a result is we have not done enough for
rental housing. Indeed, one of the things that we had in our
subprime bill--and by the way, I will say this one thing, Ms.
Amador. The Senate hasn't passed the antipredatory lending, and
we passed ours, but that does not mean that the field is wide
open because, to his credit, Chairman Bernanke of the Federal
Reserve has promulgated a set of rules which will be in effect
next year, which will do much of what we did, not everything,
but there will be serious restrictions.
As a matter of fact, if Chairman Alan Greenspan of the
Federal Reserve had done 8 years ago what Chairman Bernanke did
2 months ago, the exact same thing, we would not be in this
crisis now.
So there is some hope that is coming there. But we have
undervalued rental housing, and, you know, with some people,
even if they show they can make it, what happens when the roof
leaks? What happens when there are some other structural
problems that you have? So I mean, homeownership is a good
thing. But the other thing I would say is that you asked what
is the alternative.
The FHA will be there. One of the problems we had was that
the FHA, in 2002, issued 700,000 guarantees, and in 2007,
290,000. So we are going to get the FHA back in business, and
that will be helpful.
I believe that what the Secretary of the Treasury is
contemplating doing with regard to Fannie and Freddie will be
helpful, in that it will emphasize the housing mission over
their sort of private shareholder thing.
Yes?
Ms. Amador. I would just like to make one more point. First
of all, I don't believe in just opening up the floodgates
again. That is not the resolve. I am just trying to make sure
that we don't continue to constrain the possibilities. But one
of the things I think is to the benefit of the people trying to
buy today, is we need to remember, they weren't the people out
there trying to buy in those bad times, in those bad programs.
I think they should be given a certain amount of credit, that
they recognize that they were priced out of the market.
The Chairman. No question. I agree with that. The other
point, though, is we also want to separate out one thing. Right
now, there is a credit crunch going on that is a consequence of
this, so it is hard for anybody to borrow. I mean, actually
what happened is--look--the investor community overreacted.
First of all, they bought stuff they shouldn't have bought. Now
they won't buy stuff they should buy.
I mean, you know the story of the little kid who touches
the stove and gets burned; he doesn't touch the stove again.
The trouble we now have with the investor community is that not
only won't they touch the stove again, they won't go near the
bath tub, the refrigerator, or the toilet. I mean, anything
that looks like it, they stay away from.
So we have that short term. Going forward, yes, we want to
make this available, and I hope we can make the FHA, and the
combination of the FHA and Fannie Mae and Freddie Mac--but
recently, Fannie Mae and Freddie Mac, you mentioned some cost
increases, and they were among the ones that were doing that.
That is in part because they were in this crunch where they had
to appeal to the private market.
I am hoping that out of what the Secretary of the Treasury
is now talking about, that tension will be resolved in favor of
the housing market, so that there will be less need of going
into the private market, and not be under the same kind of
pressure.
So I agree, we don't want to do it excessively, but I still
think that clearly, a number of people who bought homes--look,
you gave some of these examples, and you talked about
counseling--the answer is they shouldn't have bought, and now
they bought the wrong kind of mortgage, and other things. But
yes, a smaller percentage of people should get into
homeownership, I think, than we had before.
Ms. Ornelas. Chairman Frank, I just want to leave you with
two schools of thought for today. One of them is that we must
understand income levels, and the people whom we were talking
about today, a majority of them were our working people in our
country. They were above moderate income for a lot of these
cases. They are not the low-income people of our communities.
Yes, low-income people did fall through to some of this but we
must remember that low-income people didn't create this
problem. It is our working people who really believed that they
are working to reach the American Dream. And the second thing
that I--
The Chairman. By the American Dream, do you mean
homeownership?
Ms. Ornelas. Homeownership or a decent place to live.
The Chairman. Okay. Can I just say, let's define it that
way.
Ms. Ornelas. Decent place to--
The Chairman. The dream should be a decent place for your
family, and that might be rental housing, because if we define
it strictly as homeownership, we are going to get ourselves in
trouble.
Ms. Ornelas. And that leads to my second thing. For our
community and the State of California, shame on us, because we
have a housing element, that we look for that stick but that
stick is not used. That housing element is a joke. We are
supposed to submit that housing element because that shows the
needs of our communities, and we should be building housing at
any income level--
The Chairman. I agree with that.
Ms. Ornelas. --so that people aren't starving to get into
something they really can't get.
The Chairman. Let me add to that, and you mentioned stick.
There is one other thing--and I work very closely with the home
builders and they have very very supportive, and I think they
recognize that if we want to expand homeownership beyond where
we now are, we have to do a better job of making manufactured
housing available.
One of the problems that I have found, and this committee
has been working on, in the bill that passed--it has a lot of
good stuff--one of the things it does is to make manufactured
housing fully FHA-eligible.
Because the model for housing was 30 years, the ownership,
etc. Manufactured housing doesn't meet some of the legal
issues. When I was in the State legislature in Massachusetts, I
found that a loan for a manufactured home was treated like a
car loan, and one of the things our community has been doing
has been to make manufactured housing more available. And then,
of course, you also have the zoning restrictions, and the
people who say, you know, don't put it near me.
So reducing the cost of housing is another way to do it. I
mean, the costs aren't always the loans, etc. The actual
physical basic cost has been a problem.
Ms. Ornelas. And I can tell you as a parent, because I want
to talk a little bit--our families in our community. I have a
son who is graduating from college, and I have a 9-year-old. So
I have a really, you know, different perspective here from
different levels.
But I remember looking at where housing pricing was going
here in California, and I was thinking, how in the world will
my son, whatever career he chooses to do, could he afford to
continue to live in California? Because those housing prices
were unrealistic.
And then I looked further, and I looked at my 9-year-old,
and said, by gosh, what will happen by the time he gets to the
point where he graduates from college and is looking at
homeownership?
We heard it earlier in the testimonies. That is what people
were saying. If I don't get in now, I may never ever be able to
get in there.
The Chairman. The 9-year-old is particularly important
because he is probably the one you are going to have to move in
with.
Ms. Ornelas. Exactly.
[Laughter]
Ms. Ornelas. Definitely.
The Chairman. Are there any further questions from any of
the members? I really appreciate this. This has been a useful
discussion as we go forward.
I thank all of the panelists, and I invite either the
panelists or the audience, if you want to submit anything to
us, the staff will be here, and you can also go through the
three Members of the House who are here, and we thank you very
much.
The hearing is adjourned.
[Whereupon, at 3:28 p.m., the hearing was adjourned.]
A P P E N D I X
September 6, 2008
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