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Hearing Transcript on Subprime Mortgage Crisis and America’s Veterans.
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SUBPRIME MORTGAGE CRISIS AND AMERICA’S VETERANS
HEARING BEFORE THE SUBCOMMITTEE ON ECONOMIC OPPORTUNITY OF THE COMMITTEE ON VETERANS' AFFAIRS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS SECOND SESSION FEBRUARY 28, 2008 SERIAL No. 110-74 Printed for the use of the Committee on Veterans' Affairs
U.S. Government PRINTING OFFICE For sale by the Superintendent of Documents, U.S. Government Printing Office
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CORRINE BROWN, Florida |
STEVE BUYER, Indiana, Ranking |
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Malcom A. Shorter, Staff Director SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Veterans' Affairs are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. |
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C O N T E N T S
February 28, 2008
Subprime Mortgage Crisis and America’s Veterans
OPENING STATEMENTS
Chairwoman Stephanie Herseth Sandlin
Prepared statement of Chairwoman Herseth Sandlin
Hon. John Boozman, Ranking Republican Member
Prepared statement of Congressman Boozman
WITNESSES
U.S. Department of Veterans Affairs, Judith A. Caden, Director, Loan Guaranty Service, Veterans Benefits Administration
Prepared statement of Ms. Caden
Center for Responsible Lending, Ellen Harnick, Senior Policy Counsel
Prepared statement of Ms. Harnick
Freddie Mac, Donald J. Bisenius, Senior Vice President, Credit Policy and Portfolio Management
Prepared statement of Mr. Bisenius
HOPE NOW Alliance, Larry Gilmore, Deputy Director
Prepared statement of Mr. Gilmore
National Association of Realtors, Anthony Agurs, ABR, CRS, Member, Board of Directors, and Realtor, Agurs Group, El Cajon, CA
Prepared statement of Mr. Agurs
UniCredit Markets and Investment Banking, Roger M. Kubarych, Chief US Economist, and Henry Kaufman Adjunct Senior Fellow for International Economics and Finance, Council on Foreign Relations
Prepared statement of Mr. Kubarych
SUBMISSIONS FOR THE RECORD
Iraq and Afghanistan Veterans of America, Todd Bowers, Director of Government Affairs, statement
Mortgage Bankers Association, Kieran P. Quinn, CMB, Chairman, statement
Veterans of Foreign Wars of the United States, Justin M. Brown, Legislative Associate, National Legislative Service, statement
SUBPRIME MORTGAGE CRISIS AND AMERICA’S VETERANS
Thursday, February 28, 2008
U. S. House of Representatives,
Subcommittee on Economic Opportunity,
Committee on Veterans' Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:00 p.m., in Room 334, Cannon House Office Building, Hon. Stephanie Herseth Sandlin [Chairwoman of the Subcommittee] presiding.
Present: Representatives Herseth Sandlin, Donnelly, McNerney, and Boozman.
OPENING STATEMENT OF CHAIRWOMAN HERSETH SANDLIN
Ms. HERSETH SANDLIN. Good afternoon, ladies and gentlemen. The Committee on Veterans' Affairs Subcommittee on Economic Opportunity hearing on the subprime mortgage crisis and America's veterans will come to order.
I would like to call attention to the fact at the outset that the Iraq and Afghanistan Veterans of America and Mortgage Bankers Association have asked to submit written statements for the hearing record, I ask for unanimous consent that their statements be entered for the record. Hearing no objection, so entered.
[The statements of Iraq and Afghanistan Veterans of America and the Mortgage Bankers Association appear in the Appendix.]
Ms. HERSETH SANDLIN. In July 1943, President Franklin Delano Roosevelt recognized the need to invest in our Nation's troops after their service to our country by highlighting that, "The members of the Armed Forces have been compelled to make greater economic sacrifice and every other kind of sacrifice than the rest of us and they are entitled to definite action to help take care of their special problems."
One year after this speech, President Roosevelt signed the "Servicemembers Readjustment Act of 1944," which included readjustment benefits to help our veterans with education, housing, and employment opportunities.
Sixty-four years later, we on this Subcommittee, find ourselves reevaluating that law and others to address the needs of today's servicemembers, veterans, and their dependents.
While we have held at least nine Subcommittee hearings on education and employment issues, today's hearing gives us the opportunity to assess how the current housing market affects our veterans and determine if the U.S. Department of Veterans Affairs' (VA's) Home Loan Programs have a role to play in addressing the foreclosures affecting our communities.
This past Tuesday, Realty Track, an on-line retailer of foreclosed properties, released its January 2008 foreclosure report that highlights that the foreclosure rate has increased 57 percent when compared to the same month in 2007.
It might be safe to say that no one on this Subcommittee has seen more recent foreclosure rates in his congressional district than Congressman Jerry McNerney in his metro area of Stockton, California, which had the second highest rate of foreclosures in 2007.
As we will hear from our distinguished panelists today, data specific to veterans does not exist or is limited in scope leaving us with an incomplete puzzle. This makes it harder for us to get a good idea of how current mortgage problems are affecting our veterans.
However, many of us have heard from returning servicemembers that we represent and veterans back home about the problems they have encountered. Problems such as that expressed by Mr. Marty DuBois, a veteran concerned about losing his home because he does not qualify for a VA home loan due to equity requirements.
We have also heard several complaints from veterans residing in high-cost residential areas in which the current VA home loan is insufficient and this will effectively price them out of the market.
As you can see on the television screen above, veterans have been caught in the mortgage crisis and some economic projections suggest that we should only expect the problem to worsen.
The image of Mr. Hector Masas, a veteran emotional after telling Senate Hillary Clinton about the difficulty he has with paying his mortgage, was posted on yesterday's Washington Post Express. Mr. Masas, and thousands of veterans like him throughout our country, deserve better and we must do better to ensure that they are afforded the protections they need as they adjust to life after their military service, which includes the stability and security of home ownership.
I look forward to working with Ranking Member Boozman and Members of the Subcommittee to continue to improve readjustment benefits available to all servicemembers and veterans.
I now recognize our distinguished Ranking Member, Mr. Boozman, for any opening remarks he may have.
[The statement of Chairwoman Sandlin appears in the Appendix.]
OPENING STATEMENT OF HON. JOHN BOOZMAN
Mr. BOOZMAN. Thank you very much, Madam Chair.
The topic that we are going to be discussing and hearing more about today certainly is a very timely topic for today's hearing. Every day the media reminds us of the difficulties facing our national economy because of the subprime mortgage crisis.
It is clear from reading today's testimony that America's veterans regardless of whether they have a subprime mortgage or not, whether they are current in their payments or not, will be affected in some way by this financial mess.
It is also clear from our witnesses' statements that there is plenty of blame to go around. It appears that every level of our national economic structure has played a role in allowing this to happen.
It would be easy to blame just the borrowers who fooled themselves into believing they would never be faced with increased payments or the lenders and brokers who encouraged such behavior with highly-speculative mortgage products or big investors in Wall Street financial services giants who appear to have demanded increasingly risky transactions. I guess you could say there was enough greed to go around.
So the question before us today is what can VA do to help veterans stuck in the mess that they are in. Under current law, their options are limited, but we must be careful here. The VA wisely has maintained its underwriting standards and as a result, taxpayers are not seeing their funds wasted.
The VA Guaranty Program is solvent and does not reflect the difficulties in the subprime market. As we will hear from our witnesses, the mortgage business is very complex with multiple levels of markets, borrowers, lenders, and investors, and the potential for negative unintended consequences is significant.
So we want to work hard, you know, to keep the VA program stable and financially viable so that tomorrow's veterans will benefit just as yesterday's and today's have.
So I look forward to any suggestions from our witnesses that they may have to ease the situation.
Thank you, Madam Chair.
[The statement of Congressman Boozman appears in the Appendix.]
Ms. HERSETH SANDLIN. Thank you, Mr. Boozman.
I would now like to welcome those on our panels today who are testifying before the Subcommittee for the first time. We appreciate your insights and the written statements that you have already submitted.
I would like to remind all of our panelists that your complete written statement has been made part of the hearing record. Please limit your remarks to five minutes so that we have sufficient time to follow-up with questions we may have once everyone has had the opportunity to provide their initial and opening testimony.
Joining us on the first panel, and I would like to invite them to the witness table as I introduce them, Mr. Roger Kubarych, Chief U.S. Economist for UniCredit Markets and Investment Banking, and Mr. Donald Bisenius, Senior Vice President of Credit Policy and Portfolio Management for Freddie Mac.
Please let me know if I am not pronouncing your last name correctly. I appreciate both of you gentlemen being with us here today. We will start with you Mr.—
Mr. KUBARYCH. Kubarych.
Ms. HERSETH SANDLIN. Kubarych. Okay. Very good. I have the emphasis wrong. Kubarych. Very good. Mr. Kubarych, thank you for being here. You are now recognized for five minutes.
STATEMENTS OF ROGER M. KUBARYCH, CHIEF US ECONOMIST, UNICREDIT MARKETS AND INVESTMENT BANKING, AND HENRY KAUFMAN ADJUNCT SENIOR FELLOW FOR INTERNATIONAL ECONOMICS AND FINANCE, COUNCIL ON FOREIGN RELATIONS; AND DONALD J. BISENIUS, SENIOR VICE PRESIDENT, CREDIT POLICY AND PORTFOLIO MANAGEMENT, FREDDIE MAC
STATEMENT OF ROGER M. KUBARYCH
Mr. KUBARYCH. Madam Chairwomen, thank you for inviting me and Members of the Subcommittee.
Veterans are affected by the subprime mortgage crisis and the broadening financial turbulence that has developed in at least four ways.
First, some veterans are directly involved because they bought homes financed by subprime mortgages which too often contained a raft of abusive terms and conditions and now they are unable to meet their obligations. Some may already be facing delinquency or even loss of their homes through foreclosure.
Second, many more veterans are impacted indirectly as a result of persisting declines in home prices. One recent survey say they are down 9 percent over the last year. It is not good. So the equity they have in their homes is contracting and standards of living will take a hit.
Third, all veterans are hurt by the diminished availability of credit because of the squeeze on banks and other financial institutions who made unwise investment decisions, suffered losses that are now straining to repair wounded balance sheets.
And, fourth, veterans along with the rest of us are facing higher costs of energy and other imports as a result of the decline in the value of the dollar and the rise in commodity prices, both traceable in part to the erosion of confidence in our financial markets and our currency. These are big negative effects and they could lead to a business recession.
I have been asked to try to give some historical perspective of how we got into this mess and I have just a few simple points that are not so simple.
One, securitization of mortgages is not new. Securitization, the pooling of thousands of individual mortgage loans into mortgage-backed securities that can be sold to institutional investors in the marketplace, got started in the early 1980s. It was so good that within a few years, it had caught on so that over half of all mortgages were securitized. And since 1995, it has always been over a half.
Secondly, securitization done prudently provides immense benefits to nearly everyone, especially borrowers. It is more efficient than traditional lending done as a single business when you separate out the business into three: origination of mortgages, loan servicing, and investing. That allows mortgage market participants to amass expertise, advanced technology, and to operate on a national, even global scale.
Three, securitization could not have thrived without indispensable government support mainly from Ginnie Mae, Fannie Mae, and Freddie Mac originally. These were government-sponsored enterprises (GSEs). They facilitated the bundling of loans into mortgage-backed securities by taking over the risk of loss or default of individual homeowners and setting high credit standards.
Four, subprime mortgages represented an almost inconsequential part of the mortgage financing system until early in this decade. The pivotal event was when Fannie and Freddie, now stockholder owned and privately managed since the early 1990s, lost control of their operations and were forced by Office of Federal Housing Enterprise Oversight (OFHEO) to shrink.
Private mortgage banking stepped in, but not always prudently. And as a result, we saw a development of a lot of terms and conditions which on the face of it none of us would recommend our own children or family members would take, but people did in massive amounts. They were securitized and resecuritized into mortgage-backed securities, collateralized debt obligations, and other forms and by last year had reached 20 percent of all holdings of mortgage securities.
Growth of these mortgage-related securities created a time bomb. We know what happened. It started last July and it has gotten worse.
The next point is that U.S. financial regulatory system was ill-equipped to deal with abusive lending practices of many financial institutions. Too many just fell through the regulatory cracks.
Number eight, the rating agencies made poor judgments and they awarded high ratings with little or no evaluation of risk.
Nine, institutional investors were lazy and cheap, lazy because they did not do their own due diligence, cheap because they did not hire other outside experts to help them.
And, finally, many borrowers overextended themselves by assuming that the housing price boom would go on forever.
What do we do next? I do not have any big program to recommend, but I do think that there is a role for specific government support over and above the voluntary programs that are now in place.
[The statement of Mr. Kubarych appears in the Appendix.]
Ms. HERSETH SANDLIN. Thank you.
Mr. Bisenius?
STATEMENT OF DONALD J. BISENIUS
Mr. BISENIUS. Thank you, Chairwoman Herseth Sandlin, Ranking Member Boozman, and Members of the Subcommittee.
Good afternoon. My name is Don Bisenius and I am the Senior Vice President for Credit Policy and Portfolio Management at Freddie Mac. Thank you for the opportunity to address the Subcommittee today.
Freddie Mac is a government sponsored enterprise or GSE created by Congress with a public mission, to bring liquidity, stability, and affordability to the Nation's mortgage markets.
Today's conventional conforming market that is supported by the GSEs and the government market for mortgages backed by the Federal Housing Administration (FHA) and VA are the only well-functioning segments of the mortgage market.
The GSEs like the VA do not originate mortgages. We do not control the loans that the primary market originates. What we can do, however, is to define the mortgages we are willing to purchase and guarantee. And because of our size and continued presence in the marketplace, the GSEs can influence the primary market.
Freddie Mac has participated in the subprime market as a responsible and prudent investor. We have not historically purchased or securitized subprime mortgages directly, but, instead, limited our participation to investing in the least risky segments of the subprime private label securities market.
This participation reflects our charter objectives to bring additional liquidity to the market. It has also been an important contributor to our efforts to meet our U.S. Department of Housing and Urban Development (HUD) mandated affordable housing goals.
In addition to providing liquidity, Freddie Mac has taken a leadership role in addressing some of the excesses of the subprime lending market.
Last winter, we were the first to announce that we would restrict our subprime investments in securities backed by short-term, adjustable rate mortgages (ARMs) to those that have been underwritten to fully indexed, fully amortizing levels, meaning we limited our purchases of the 2/28s and 3/27 ARMs that were made to borrowers that were qualified at the highest interest rate for the full length of the loan.
Last April, we also pledged to buy $20 billion in consumer-friendly mortgages that provide better choices for subprime borrowers. We have already exceeded that pledge. Since May of 2007, we have bought $42.5 billion of prime mortgages that financed borrowers whose credit profiles would have otherwise relegated them to the subprime market. That helped almost a quarter of a million families.
As to the data related to veterans, we do not track whether mortgages we buy go to veterans. Further, I am not aware of any data that would tell us how many veterans have subprime loans. But I think it is fair to say that the impact of this crisis is at least as severe on veterans as it is on other borrowers.
When the subprime crisis erupted as a national issue over a year ago, the conditional wisdom blamed the structure of the short-term 2/28 and 3/27 subprime ARM, products where interest rates are fixed for the first two or three years and then adjust, the cause of the problem.
The theory was that exploding interest rate resets caused large increases in payments and made mortgages unaffordable. We have come to understand that the resets are not the only, nor necessarily the most important, element of this story.
More fundamentally, the subprime foreclosure crisis derives from a combination of looser lending underwriting standards and subsequent house price depreciation that makes it impossible or uneconomic for stretched borrowers either to sell or to refinance into new higher-balance loans as they might have in the past.
Unfortunately, there are too many borrowers stuck in subprime loans who simply cannot qualify for prudent, sustainable mortgages.
For example, as part of our subprime commitment, we developed our Safe Step subprime alternative product. But when we required originators to validate the borrower's income, the property's value, and other information, borrowers simply could not qualify.
At Freddie Mac, we spend a fair amount of time thinking about how to address this situation. And like almost everyone else, we have concluded that there is no silver bullet.
Nevertheless, let me quickly suggest some things that can be done to mitigate its effects. Focus on servicing practices to keep borrowers in their homes whenever possible. At Freddie Mac, we have found that early intervention can help borrowers avoid foreclosure and last year, we helped nearly 47,000 borrowers keep their homes through early intervention.
Help some borrowers refinance into more sustainable mortgages such as Freddie Mac Safe Step or the FHA Secure.
Support community stabilization efforts of local and national nonprofits and State and local governments hard hit by the crisis.
And, finally, help families transition to more affordable housing. Despite all of our efforts, not all borrowers can afford the house they are currently living in.
The housing crisis is going to be painful and take time to resolve. Freddie Mac remains committed to working with Congress, the Administration, our lender partners, and other industry participants to find and implement effective solutions to this vexing problem.
Thank you for the opportunity to appear, and I would be happy to answer any questions.
[The statement of Mr. Bisenius appears in the Appendix.]
Ms. HERSETH SANDLIN. Thank you, Mr. Bisenius.
Let me start with a question to you both based on, Mr. Kubarych, what you said that we have to do something beyond just the voluntary steps that may be taken by certain lenders, certain banks.
In each of your opinion, who is best equipped and in the best position to provide for loan modifications, for repayment plans, and any other foreclosure prevention initiatives? Some of which, Mr. Bisenius, you described as early intervention. Is it the lender? Is it a different entity? Should it be mandatory? What steps should we be taking in terms of an appropriate Federal Government response?
Mr. KUBARYCH. So we started out with a program, basically voluntary work-outs which is affecting a relatively small proportion of those homeowners at risk. Until we stop the rise in delinquencies, there will be continued downward pressure on housing prices, particularly in those parts of the country where subprime was particularly, let us say, overused, California, Florida, Detroit, northern Ohio, and so on.
Now, we can identify quite easily the people who are most at risk. And my simple suggestion is the U.S. Government is now borrowing money in the markets for five years for about 3 percent. And the same people, if they had to borrow on their own five-year money, it would be about 12 percent. There is a big spread there.
If the U.S. Government utilizing existing agencies, FHA, VA, and so on, were simply to set up a program to extend loans to individuals so they could take the money and repay abusive mortgages, they would be in a position to retain their houses and to maintain the debt service on those new loans.
And the taxpayer would be a beneficiary of two things. One, less downward pressure on everybody's home prices, which will otherwise suppress the economy a lot, and, two, there will be a reward to the taxpayer from the operation of such a system. It is not as extensive as what we did in the depression. That was much more elaborate and I do not think we need that much.
But in that expended role, for the U.S. Government would take a voluntary program, add a specific government lending program to it that would be tailored for low- and medium-income people for the houses that they are living in, not for speculative or second homes, and all it would require is the ability to prepay those abusive mortgages.
Mr. BISENIUS. I have maybe just two additional thoughts to his comments. One is what makes this problem particularly challenging is the nature of the market. Historically, with Freddie Mac and Fannie Mae being the two largest participants in the overall market, we were very capable of being able to define servicing standards, foreclosure prevention standards that effectively became adapted as an industry standard.
In the private-label securities market, where most of the subprime mortgages exist, there is not one entity. There are a collection of investors who each have to independently decide what they want done with the loans that they have invested in.
What we have observed is that many of the private-label security investors are actually suggesting, and at times requiring, that their servicer follow the standards set out by Freddie Mac and Fannie Mae. So in some sense, they are migrating to adapt our servicing standards both because they have observed that they have been pretty effective at loss mitigation and at helping homeowners stay in their mortgages.
So there is not one entity that can dictate in the private-label securities market, but we are at least seeing a migration of people adopting Freddie and Fannie type standards.
Ms. HERSETH SANDLIN. Thank you both for your insights.
Mr. Boozman, do you have questions?
Mr. BOOZMAN. Yes.
Mr. Kubarych, could you comment on a statement that the GSEs lost control of their operations. I think you mentioned that and it was in your written testimony.
Mr. KUBARYCH. When they first started out, they basically were facilitating securitization and providing comfort to investors to buy those securities.
They got involved in buying their own paper and investing in mortgages and they got to the point where they were one of the biggest mortgage holders in the country. Some years, they were buying more than half of the product that they were generating and holding it themselves. They would finance that quite readily because they had almost as good a credit rating in the capital markets as the U.S. Government.
But this exposed them to enormous market risk, the technical term is convexity risk, which has to do with the fact that you cannot really predict the repayment rates of the mortgages that they were holding. And they became one of the world's biggest users of financial derivatives.
Now, that is a very tough business and they got involved in accounting problems that led to a couple of Chief Executive Officers leaving, a couple of Chief Financial Officers being fired, and fines and other constraints by the regulator, OFHEO. And that is how they lost control.
And only yesterday those handcuffs have been taken off. So now they are viewed to have made tremendous progress toward putting their houses in order.
While they were under these handcuffs, that was a great opportunity for good institutions and bad to rush into the mortgage market and do all kinds of lending which probably would not have met their high standards and led to this problem.
Mr. BOOZMAN. How do you respond to that, Mr. Bisenius? In your testimony, to me, you did not seem to acknowledge any blame at all.
Mr. BISENIUS. What I do is I separate out the phenomenon that was described and suggest that while it is true that the operating systems of Freddie Mac were not sufficient to be able to properly account for the nature of the business that we were taking on, that that actually had little to do with the developments that went on in the subprime market. In fact, what we observed was that there were investors who were willing to take on loans that were riskier and underwritten to looser standards than what we historically would buy.
That market developed outside of us and even if we had had perfect financial books and been able to have been active, our standards would have been ignored over the last three or four years as other market participants either thought they understood the risk better or who were willing to put capital at risk more aggressively than we were.
What we have seen over the last year is as those investors have lost money, more and more have come back to say we now want to originate to the standards of Freddie and Fannie.
So I do not believe the accounting issues that Freddie and Fannie had are directly correlated nor causal of what went on in the subprime market.
Mr. BOOZMAN. Mr. Kubarych, you mentioned regulated and unregulated financial institutions. Can you give us some examples of each one of those?
Mr. KUBARYCH. Well, one example is New Century Financial. Based in California, but operating in many markets, it went bust a year ago in February. And if you were to ask who is the regulator of New Century Financial, I think that around the main banking regulatory organizations a year ago, they would have scratched their head and eventually maybe said that there must be somebody in California that was the primary regulator, but nobody really knew.
That was one example. There were many others. There have been about 200 failures of mortgage banks of varying size not all of which had any regulator and some who had regulators that were unskilled in dealing with the kind of rapid growth in the business they represented.
Now, Mr. Bernanke, Chairman Bernanke, has testified, and I have listened in on a number of them, where he has pointed out that the Federal Reserve had the responsibility for setting certain rules for consumer protections and other rules of the game, guidelines for mortgage activities and abusive tactics and so on, but they do not have the enforcement powers. And, you know, basically nobody really wanted to take the initiative to say we want enforcement powers.
Mr. BOOZMAN. Thank you, Madam Chair.
Ms. HERSETH SANDLIN. Thank you, Mr. Boozman.
Mr. McNerney?
Mr. MCNERNEY. Thank you, Madam Chair. I want to thank you specifically for holding this hearing and for bringing to light the severity of the problem in my own district.
Mr. Kubarych, I am going to follow-up on Mr. Boozman's question a little bit concerning how we got into this situation.
You mentioned that there was a change in behavior at Fannie Mae and Freddie Mac. What caused that change in behavior? Were there new products out there? Was there a different economic theory or was there a loosening of regulation on the Federal level? What caused these managers to start making those kinds of investments?
Mr. KUBARYCH. I think that they underestimated the risks and they thought that they could earn higher rates of return for their shareholders and get bigger bonuses. I mean, I think that is what led them to be putting more and more of their own product on their own balance sheets. And I think they were kind of caught by surprise, blind-sided by just how risky it is.
I have been managing, off and on, mortgage portfolios a good part of my career. It is very tough, very, very tough. It is one of the hardest things in the fixed-income markets to do. And they did it very well for periods of time. But then as the volatility in the markets increased in this decade, it became very difficult for them to do it as well as they should have.
So I think that has been cured, but it was not easy and it has taken a long time.
Mr. MCNERNEY. So it is just a difference in philosophy? I mean, maybe new managers came in and saw that there was some—
Mr. KUBARYCH. I think a difference of incentives. I think we were in a period where the incentives were to take more risk because the shareholders wanted you to carve out rates of return on equity that would drive the stock price up.
Mr. MCNERNEY. Thank you.
Mr. Bisenius, you said that you did not track veterans that are using the services. Is there some reason that that is not done? Do you think it is a good idea and if it is a good idea, what are the obstacles to doing that?
Mr. BISENIUS. I do not have a strong view on whether it is a good or bad idea. We have never been asked to in the past. We have not. The only obstacles would be whether the originator in creating the loan captures that as a data field and is able to deliver it into the delivery systems.
Mr. MCNERNEY. So you do not have any specific ideas on that? Do you have any specific ideas on how we can help veterans specifically that are caught in this kind of a foreclosure situation?
Mr. BISENIUS. Well, I think it is two-fold. The good news is we do not differentiate either and as such we are helping all the people who take out loans that Freddie Mac invested in, veterans as well as nonveterans. And, therefore, we make available to them all the loss mitigation efforts that I described in my testimony.
My understanding is that the VA does similar types of loss mitigation, foreclosure prevention type efforts. So I think both the VA themselves, as well as Freddie Mac and Fannie Mae, are taking similar actions with veterans as they are with other borrowers in the products that we invest in and guarantee. Whether those same activities are occurring for veterans who are part of subprime or private label mortgage securities, I do not know for sure.
Mr. MCNERNEY. Thank you.
One more question. How helpful do you think it would be to help families transition to more affordable housing or to get them out of their expensive homes?
Mr. BISENIUS. How helpful would it be?
Mr. MCNERNEY. Yes.
Mr. BISENIUS. I think it would be tremendously helpful.
Mr. MCNERNEY. That is basically the goal?
Mr. BISENIUS. Right. When we look at the underlying homes and the incomes of the borrowers who are facing some of these foreclosure situations, there is no way they have the income with almost any amount of modification to be able to afford the house that they are currently in.
Mr. MCNERNEY. So we might look at that in terms of veterans as a part of our Committee.
Thank you, Madam Chairwoman.
Ms. HERSETH SANDLIN. Thank you, Mr. McNerney.
Mr. Donnelly?
Mr. DONNELLY. Thank you, Madam Chairwoman.
This first question, if you could just give me a quick answer to. We are into this process now of working through these loans. How much longer do you think this process is going to go?
Mr. KUBARYCH. You want my guess?
Mr. DONNELLY. Yes.
Mr. KUBARYCH. Two years. Yeah. I would bet somewhere between two to five years.
Mr. DONNELLY. You figure we are about 25 percent into it right now, 20, 25 percent? When you figure the overall total is, we are going to hit about a $1.5 trillion of loans on this or about $1 trillion and that we are about $300 billion into it right now?
Mr. KUBARYCH. Well, I figure there's $2 trillion in loans that are at risk, that delinquency rates will get in the 20 to 30 percent range. So take 30 percent of $2 trillion.
Mr. DONNELLY. Okay.
Mr. KUBARYCH. Of those that go delinquent, not all of them will end up in foreclosure. And I think the number that seems to be a good one is about a third.
Mr. DONNELLY. Okay.
Mr. KUBARYCH. So a third times 30 percent times $2 trillion. Then take 50 percent of that because about half the value of the house is erased in a foreclosure and there are costs and all that kind of nonsense. And that will give you an estimate of the dead weight loss on the economy, but that gets multiplied through all the leverage in the collateralized debt obligations (CDOs).
Mr. DONNELLY. Right. The next question is, you had mentioned a concept, and forgive me if I phrase it wrong, but you are here to correct me, the government is borrowing about 3 percent.
Mr. KUBARYCH. Yes.
Mr. DONNELLY. Some of these loans are at about 12 percent.
Mr. KUBARYCH. That is where they are going.
Mr. DONNELLY. That is where they are going?
Mr. KUBARYCH. Yes.
Mr. DONNELLY. Your idea is let us use some of this government lending or borrowing power—
Mr. KUBARYCH. Right.
Mr. DONNELLY. —to try to get reduced rates for the homeowners?
Mr. KUBARYCH. That is right.
Mr. DONNELLY. Okay. Now—
Mr. KUBARYCH. I put strings attached on the loan.
Mr. DONNELLY. Right. And what I was wondering is, I have got so many questions, I am trying to get them into my time here, what are some of those strings and then would the government continue to handle all the loans as well or would we have private servicers who handle it for us? What is your vision on that?
Mr. KUBARYCH. I think the government is perfectly well-equipped to service the loans.
Mr. DONNELLY. Okay.
Mr. KUBARYCH. That is the least of our problem. I am sure there are many servicers that would be delighted to bid for the right to actually do the computer work. The strings are very simple. Limits on the ability of the homeowners that do this to borrow on their credit cards or entertain other kind of debt.
It really is very similar to what we are familiar with in debtor-in-possession lending.
Mr. DONNELLY. Okay. And what that would do is some of these people who are going to bounce from 5-percent ARMs to 12 percent will be able to keep their homes?
Mr. KUBARYCH. Yes. That is the idea. I do not know what to do about people that are so under water that they have huge negative equity. That is beyond the scope of my limited idea.
Mr. DONNELLY. What you are looking at is a process where there is equity, where you look and you go this person with this income can handle this house—
Mr. KUBARYCH. They can carry the 5 percent, but they cannot carry the 12.
Mr. DONNELLY. Right. Okay. Next thing I wanted to ask you about is, or this is almost a statement, one of the things, Madam Chairwoman, that is so disturbing to me in this past year or two is in disability claims that veterans make.
We have a lot of vets coming back from Iraq and Afghanistan who wind up making a disability claim who are injured and cannot go back to their jobs and find themselves in this ARM situation—
Mr. KUBARYCH. Yeah.
Mr. DONNELLY. —where they have this going off in the next four or five months and they cannot get a hearing on their disability claim for another seven, eight months. So they do not even have money to pay against where they are now and they have got this ARM going off. And it is almost a hopeless situation that these vets are put in in some proportion because of the disability situation that we face.
Mr. KUBARYCH. As a taxpayer, I just think it is a waste of my taxes not to be doing that for them.
Mr. DONNELLY. It is approximately 188 days now, I think, that it takes. So you can come back injured from Iraq or Afghanistan, not be able physically to handle your old job, and then you do not even have the money to make present payments on your ARM as opposed to the time bomb that is coming down the road.
And then just as an aside, I wanted to mention that we had veterans in my district who are losing their jobs this June at a Citicorp statement processing center. And the reason they are losing their jobs is because this statement processing center is closing down, one of the most efficient operations in the country, extraordinary productivity, they hit all their targets, hit all their goals, because of what Citicorp did in this subprime situation. They said, well, sorry. We screwed up here on Wall Street in New York and we are closing down your 200-person processing center in South Bend, Indiana. You guys did a good job. You are out of luck.
And so it is not only homeowners. It is the regular folks all throughout the country who have been working hard and have been devastated. As you said, what I see more than anything is the chase for a bonus. It is a chase if I can catch a couple extra points on return, we will get more in, my bonus will be bigger.
Mr. KUBARYCH. Yeah.
Mr. DONNELLY. Twenty million dollars is not enough. I need a $30 million bonus. I think that is what we are dealing with.
Thank you, Madam Chairwoman.
Ms. HERSETH SANDLIN. Thank you, Mr. Donnelly.
Mr. Boozman, did you have any further questions?
Mr. BOOZMAN. No thank you.
Ms. HERSETH SANDLIN. If I could just pursue this a little bit further, I appreciate your willingness to give us your estimates.
Mr. Kubarych, when you said, okay, if we could have a specific government lending program, five percent, borrow that at five percent versus the twelve. I know Mr. Donnelly probed some of the same questions I had, but I take it then that you think that there are a certain number of these borrowers, maybe a third of the 30 percent of the $2 trillion that is at risk, that are not necessarily in homes they cannot afford, but they just got a bad loan.
Mr. KUBARYCH. Right.
Ms. HERSETH SANDLIN. Do you have—
Mr. KUBARYCH. I cannot put it as precisely as a third. I would say somewhere between a quarter and a half are in loans that are defective—
Ms. HERSETH SANDLIN. Okay.
Mr. KUBARYCH. —with abusive conditions—
Ms. HERSETH SANDLIN. Okay.
Mr. KUBARYCH. —exploding ARMs, misstatement of terms, many of the things that you heard of before.
Ms. HERSETH SANDLIN. Okay.
Mr. DONNELLY. Madame Chairwoman?
Ms. HERSETH SANDLIN. Mr. Donnelly?
Mr. DONNELLY. This is to either of you and this follows up on the Chairwoman’s question. How many of these loans, what percent would you say, are simply you look at it and even if we fix it, the income just will not be able to carry it?
Mr. BISENIUS. My best guess it would be at least a half.
Mr. DONNELLY. So it is about half one way, half the other way?
Mr. BISENIUS. Right.
Mr. DONNELLY. Okay.
Mr. BISENIUS. Actually, a point relative to the earlier comment is, one, with all of the recent rate cuts, the amount of payment shock many borrowers are going to face has actually gone down pretty significantly. They will still face some, but the amount of shock that they are going to face today is actually less than it would have been, say, a year ago when rates were higher.
The challenge you have is many of these borrowers and the lenders working with them created loans where they could barely afford the payment at the start rate and, therefore, it is not just the shock. It is they could not hardly afford what they had and were hoping for house price appreciation to allow them to either refinance or extract equity. In the absence of that, they are now struggling just to make the payment itself.
Mr. DONNELLY. Do you figure that in terms of the housing market and housing values that it will stay either stagnant or fall more until we work through this $2 trillion?
Mr. KUBARYCH. The average will fall more. But the concentration of declines will still be greatest in those areas that have the disproportionate portion of subprime mortgages.
In other words, in South Bend, Indiana, my friend John Brademas used to be the Congressman from South Bend.
Mr. DONNELLY. Well, I have been blessed to follow him. And—
Mr. KUBARYCH. He is a wonderful—
Mr. DONNELLY. He set an extraordinary record.
Mr. KUBARYCH. He is an extraordinary man. Anyway, the volatility of housing prices in most of Indiana is much less than in the Miami area, or in Phoenix, or Las Vegas, or Los Angeles. There is no doubt about it.
But we are looking at a distribution. And there will still be parts of your district in which prices will go down 10 or 15 percent, even though the average only goes down 1 or 2 percent.
And that is the key point here. We have got a spectrum of outcomes, which leave a noticeable percentage of people disproportionately hurt. And my guess is a lot of veterans are living in those kinds of neighborhoods.
Mr. DONNELLY. Thank you, Madam Chairwoman.
Ms. HERSETH SANDLIN. Mr. Boozman?
Mr. BOOZMAN. Again, I apologize. I had to run outside for a second for a call. But the people that were making these loans, was it more in an effort to figure out a product where they could make loans to make money, or were the people that were making them not devious enough to, I guess, in the sense of figuring out a product so that people could qualify, make the loan, so that you could do business that way, and never really feel like the ARM would come into play like it is now? Or is it more that they were just devious, and really felt well, I am going to jack this person around down the line?
But to me that really doesn't make any sense, because that does have the potential of getting us in the—
Mr. KUBARYCH. They were in business to earn commissions. It was a commission-based business. They wanted to push out as much product as possible, because they were getting paid basically piece work.
Now what happened to the mortgages that they created was that they were getting securitized, but not with the oversight of a Fannie or Freddie with the strong credit standards.
They were being securitized. And then those securities themselves were not being sold. They became mortgage pass through securities. But no institutional investor was particularly interested in them, because they were—they were defective.
But then they were repackaged. Wall Street repackaged the mortgage-backed securities into collateralized debt obligations. They were able, with rating agencies’ advice and judgment, to package them in such a way that trenches, in other words, parts of the CDOs were judged to be triple A. And other parts were judged to be single A.
And lots of lazy investors, the world over and some very, very big, you know, well-heeled institutional investors in Asia and the Middle East and so on, were buying these tranches, because they were rated triple A without any due diligence of their own. They trusted the ratings. They trusted the salesforce of the Wall Street firms that were presenting them to them. Everybody told them this was a great deal.
And so nobody checked on the base. But it goes right back down on the ability of the individual homeowner to keep making the mortgage payments. And nobody asked that question.
And once they couldn't make the payments, the cash flows that were supposed to go into the mortgaged-backed securities, which went into the CDOs, they evaporated. And then everybody asked: Gee wiz, does my CDO have bad loans in it too? Sell.
And so then you had the normal market response to go to the other extreme. And that led to these fantastic losses. The Congressman, Mr. Donnelly, mentioned one institution involved in it. And that is why we had this gargantuan losses.
Mr. BOOZMAN. We have seen that there is a portion of that market that was actually stretching. I would say stretching for housing, right? There were consumers who were at the fringe. And you were trying to figure out how do I get them into the house, because every year I wait, house prices were going up. And they weren't able to get in. So the scenario that has been described clearly existed. There was also a subset of these borrowers who it was stretching for housing with kind of a hope that they could grow into the mortgage. And that hope got burst.
Mr. KUBARYCH. By the way, these people had an incentive not to qualify people for prime loans.
Mr. BOOZMAN. Yeah.
Mr. KUBARYCH. Their incentive was to put them into subprime loans with the higher commissions. Even for people who could have qualified for the prime loans, had they been encouraged to do things like give the W2 form, provide information on their bank accounts, etc. They were encouraged to say you don't have to give me any proof of your income and your assets. And I will be able to make your decision in a day. You don't have to wait a month or two. Lots of encouragement for people.
And, you know, obviously, you know, I have friends who say, "Well, it is the fault of the borrower. They didn't do enough work on it." But, all right, that is easy to say. We have to deal with the reality of the fact that people maybe they should have done more careful due diligence. But we are dealing with ordinary people not experts. And this was set up in a way with a lot of advertising and internet support and so on.
Mr. BISENIUS. It is—
Mr. KUBARYCH. It is a very—it is a very sad and shameful part of our financial history.
Mr. BISENIUS. It is a portion of those borrowers that has just been described are the ones that I mentioned in my testimony that we have been able to refinance into prime mortgages. They probably would have qualified before. They fortunately still qualified today.
Mr. KUBARYCH. Yes.
Mr. BISENIUS. And we were able to get them into a prime—
Mr. KUBARYCH. Yeah. And we would like to see more of that happen.
Mr. BISENIUS. Yeah.
Mr. BOOZMAN. Thank you, both of you very much. That is very helpful.
Mr. BISENIUS. Okay.
Mr. KUBARYCH. Thank you.
Ms. HERSETH SANDLIN. Yes. We all appreciate the insights and the expertise that you have brought to the table. I don't want to make any assumptions about what your response would be, so let me ask just one final question.
Do you think that there should be government intervention of some kind in regulating the market going forward to ensure that those who would qualify for a prime loan are always given the option, through disclosure requirements, that they would qualify, that they go through the steps to determine whether or not they are eligible for a prime loan?
Mr. KUBARYCH. I believe that if we go back to time-tested common sense banking principles, we can solve this problem. And government can really help get us on that route.
Mr. BISENIUS. I probably share the view that to the extent consumers could qualify for a prime mortgage, a GSE-eligible mortgage, it is in their best interest. And we ought to do everything we can to encourage that.
Ms. HERSETH SANDLIN. Okay. I think that is along the lines of yes. Right. I think what you are identifying is that we have had some actors in an unregulated environment whereby they are not only operating without a regulator. But they are also seemingly operating outside of the sphere of the self regulation within the industry in terms of what the best practices have been, either on servicing or on disclosure. Also in some of the—
Mr. KUBARYCH. Right.
Ms. HERSETH SANDLIN. —you said the core principles in banking.
Mr. KUBARYCH. You are right.
Ms. HERSETH SANDLIN. Whereby some government intervention may be necessary at this point.
Mr. KUBARYCH. Yeah. And we don't want to leave it just to the courts. That is not an efficient way to do it.
Ms. HERSETH SANDLIN. Thank you. Thank you very much.
Mr. KUBARYCH. Thank you.
Ms. HERSETH SANDLIN. We appreciate your time and testimony. We look forward to working with you in the future as we explore some of the proposals for further consideration.
Joining us on our second panel is Mr. Anthony Agurs, Member of the Board of Directors for the National Association of Realtors (NRE); Ms. Ellen Harnick, Senior Policy Counsel for the Center for Responsible Lending; and Mr. Larry Gilmore, Deputy Director, for HOPE NOW Alliance.
Welcome to all three of you. Thank you for joining us here today and providing your written statements. We will go ahead. Again, if you could keep your opening comments to five minutes, as you can tell we have got some questions. We will give you other opportunities after your opening statement to add further comments to questions that are posed or other testimony that is offered.
Mr. Agurs, we will go ahead and begin with your testimony, you are recognized for five minutes.
STATEMENTS OF ANTHONY AGURS, ABR, CRS, MEMBER, BOARD OF DIRECTORS, NATIONAL ASSOCIATION OF REALTORS, AND REALTOR, AGURS GROUP, EL CAJON, CA; ELLEN HARNICK, SENIOR POLICY COUNSEL, CENTER FOR RESPONSIBLE LENDING; AND LARRY GILMORE, DEPUTY DIRECTOR, HOPE NOW ALLIANCE
Mr. AGURS. Madam Chairwoman and Members of the Subcommittee, thank you for inviting me to testify on behalf of the National Association of Realtors.
My name is Tony Agurs. I am a 21-year veteran of the United States Marine Corps and a realtor with the Agurs Group in El Cajon, California.
The National Association of Realtors is a strong supporter of housing opportunities for veterans. We commend the Subcommittee for its attention to this important issues. I passionately believe that the American dream of home ownership is for anyone who desires to achieve that goal for themselves and their families. But especially for the soldiers, sailors, Airmen, and Marines of our Armed Forces who sacrificed so much in defense of the American way of life, yet we ask for so very little in return.
Unfortunately, like many Americans, our military families have been hit hard by the subprime mortgage crisis. These homeowners are in financial crisis and need our help, because no veteran in high-cost areas can use their VA Home Loan Guarantee.
We believe the Veterans Home Loan Guarantee is a valuable asset to help our Nation's veterans achieve the dream of home ownership in a way that is safe, fair, and affordable. The VA Home Loan guarantee Program is designed to provide veterans who are unable to qualify for a conventional loan with favorable terms. And I will go even further to say every veteran would rather use a VA Home Loan than a convention loan anyway.
A study conducted in 2004 found the program did just that. The percentage of VA borrowers who could not qualify for a conventional loan was 82 percent for first-time home buyers, 78 percent for repeat borrowers.
And in addition, the typical VA borrower could not qualify for an FHA loan. Sixty-one percent of VA first-time borrowers could not meet either the down payment or maximum debt-to-income ratio required to obtain an FHA loan. The VA program, therefore, offers unique and important benefits for helping our military families, veterans, and retirees achieve the dream of home ownership.
Despite offering borrowers a zero-down payment loan, one of the hallmarks of the VA Home Loan Program, the delinquency rate is extremely low. And according to the most delinquency rates survey published by the Mortgage Bankers Association, the rate was 6.58 percent, foreclosures was 1.03 percent. In contrast, subprime delinquency rates, which were a staggering 16.31 percent and foreclosures 6.89.
Part of the real reason is we are proud, we are disciplined, and we do what we are expected to do. In addition, the VA Home Loan Program offers protection for borrowers when financial difficulties occur by offering a variety of supplemental loan servicing programs that help military families avoid foreclosures.
In 2007, VA accomplished more than 8,400 successful interventions, which translated into saving the government over $181 million in claims avoided.
However, without reforms, this program has not served many veterans who could use its benefits. We urge the following three enhancements to the VA program.
Increase the VA Loan Limits in high cost areas. The current VA loan limit is equal to $417,000. States with the
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