Panel I of the Hearing of the House Committee on Financial Services
Statement
PANEL I OF THE HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBJECT: LEGISLATIVE AND REGULATORY OPTIONS FOR MINIMIZING AND MITIGATING MORTGAGE FORECLOSURES
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REP. CAROLYN B. MALONEY (D-NY): Thank you, Mr. Chairman. I welcome all the witnesses, particularly Secretary Paulson, a former constituent. New Yorkers are very proud of you. And Chairman Bernanke, we thank you for your leadership and guidance, not only on safety and soundness but consumer protections, also.
We are really at a critical juncture, and this committee is working incredibly hard to prevent foreclosures and to help borrowers stay in their homes. The chairman -- I believe it's his top priority, and this article appeared in the Boston Globe this week, and I would like unanimous consent to place it in the record.
REP. FRANK: Without objection.
REP. MALONEY: Okay. Just this week, Tuesday, the House passed legislation to modernize FHA to serve more subprime borrowers. We also worked to help servicers be more able to engage in workouts with strapped borrowers. We worked hard and pushed FASB to clarify its Standard 140 rule to allow for modification of a loan when default is reasonably foreseeable, not just after default.
But there is much more we can do. If there was ever a time when there should be more liquidity put in the market by Fannie and Freddie, we should be doing it. We should raise the cap on these entities' portfolio limits, at least temporarily, and direct all of those funds to help borrowers who are stuck in risky adjustable-rate mortgages refinance into safer mortgages.
And we should eliminate the cruel law under Chapter 13 of the bankruptcy code which allows judges to modify mortgages on a borrower's vacation home but not the home they actually live in. This would allow families to stay in their homes while new loan terms are worked out. And we need reforms to contain this crisis and for the future.
Our regulatory system is in serious need of renovation to catch up to the financial innovation that has surpassed our ability to protect consumers and hold institutions accountable. Even though the Fed regulators have put out interagency guidance on subprime loans to improve standards, some three-quarters of the subprime market does not have a federal regulator. We need to extend the guidance to create a uniform national standard to fight predatory lending and a single consumer protection standard for the entire mortgage market.
I like very much the idea proposed by Professor Elizabeth Warren to create a financial product safety commission, and I really support the simple one-page form as proposed by Andrew Pollock of the American Enterprise Institute which could provide the basic facts about mortgage loans to borrowers. I would like to put his form in the record. I think it's extremely --
REP. FRANK: Without objection. And the gentlewoman's time is expired. (Strikes gavel.)
REP. MALONEY: I look forward to the testimony.
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REP. CAROLYN MALONEY (D-NY): Thank you. Thank you very much.
Chairman Bernanke, thank you for your guidance on the subprime crisis. But according to Secretary Jackson, the initiatives we put in place will only keep 260,000 people in their home. But some economists are projecting 2 (million) to 5 million Americans may lose their homes. So I am interested in further guidance on what we can do to keep these people in their homes that helps them and helps the economy, either in writing or in building on your suggestions that you gave today.
But the question that I hear from my constituents the most on the subprime crisis is the credit crunch, the credit crunch in the financial markets that literally shocked investors this summer. Some of the most sophisticated investors in the country were really caught off guard with this credit movement. And even now there seem to be lots of questions about who holds subprimes (sic) mortgages in their portfolios and what the impact is going to be going forward.
Specifically, what is the role that hedge funds have played in this? And are we at more risk today than before because of the proliferation of these sort of exotic financial instruments?
And some economists have suggested that the financial markets could actually melt. And what can we do to prevent that?
Related to the question is, do you believe that regulated institutions have proper valuation policies in place? How could the credit rating agencies be so wrong, consistently -- wrong on Mexico, wrong on Asia, wrong on Enron, wrong on subprimes? And do you think we need more of a focus on how we are rating these products?
And do these questions about valuation policies reflect why the LIBOR spreads over Treasuries remain at unusually really high levels? And why is there that spread?
MR. BERNANKE: Congresswoman, there are a number of questions there.
On helping more people, I think that FHA reform could be pushed even further. I think risk-based premiums would help differentiate among different lenders.
I think more flexibility in designing mortgages would allow for more affordable mortgages, say, with a shared appreciation or where there's a variable maturity. My sense is that, as we go forward, that lenders are not going to want to be in the position of foreclosing if they can avoid it, because it's very costly to do so. If the FHA can provide affordable housing products that will be attractive alternatives, then the lenders will themselves be willing to forgive principle, assist the homeowner to move into those products because it's cheaper for them as well. So I'm still a little more optimistic, I think, than my colleague here is about what the FHA could possibly do if these conditions worsen.
On the question of hedge funds, hedge funds have not been, for the most part, a major component of this recent problem in particular. We have not had any significant counterparty losses arising from the hedge funds, and so in that respect, the market-based regulation that the President's Working Group described in its principle seems to be working reasonably well. Where the issues have arisen more is in the so-called structured credit products, which are complex instruments that combine many different types of credit and many different types of credit guarantees. And we are finding that they are somewhat opaque and it's been difficult for investors to evaluate exactly what those products are worth. And we're -- part of what's taking so long here is for this process to go forward as banks and investors work through these products and figure out what's in them and what they're worth.
The credit rating agencies raised a number of issues. There's been some recent legislation of course by the Congress to try to make their ratings more transparent. We'll see how that works in the future. But I'd only want to add -- and perhaps Secretary Paulson would amplify -- but the President's Working Group is going to make a high priority to be looking at that issue and try to understand if there are improvements that could be made.
Thank you.
SEC. JACKSON: Let me augment this, Congresswoman.
REP. FRANK: Very quickly, Mr. Secretary, please.
SEC. JACKSON: Yes, sir. You said -- we said that FHA Secure would save somewhere between 200,000-250,000 families; once the legislation has passed modernization, we will be much higher than that. We'll be somewhere between 500,000 and 700,000 that we'll be able to save, so we have to have the legislation.
REP. FRANK: The gentleman from California, Mr. Royce.
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