HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBJECT: RECENT EVENTS IN THE CREDIT AND MORTGAGE MARKETS AND POSSIBLE IMPLICATIONS FOR U.S. CONSUMERS AND THE GLOBAL ECONOMY
REP. MELVIN L. WATT (D-NC): Thank you, Mr. Chairman.
I want to use -- actually we got exactly to the point where I wanted to pick up anyway because Mr. Dugan has on a couple of occasions used the benchmark as the conventional institutions that the comptroller of currency regulates have done much, much better in terms of in this foreclosure process than others, which I think is a relevant criteria but leaves open the question: How have those institutions done in this crisis in comparison to prior times?
Is the level of foreclosures as a result of this comfort with taking more and more risk, how does that -- how has that played itself out, not in comparison to subprimes but in comparison to historical patterns?
MR. DUGAN: So the question is on foreclosures generally across the whole mortgage market, how have they --
REP. WATT: Right.
MR. DUGAN: Well, I would say that clearly the trend line is up overall. It is not at record levels that we have seen in the middle of recessions like we have in 2001, for example.
REP. WATT: But the president told me we weren't in the middle of a recession, so in comparison to like times, did this comfort that Mr. Steel has described with taking more and more risk, did it result in the traditional mortgage market accepting more and more risk and in comparison to like periods of time in history?
MR. DUGAN: Well, I think if you look at the -- and I have a graph here that I actually could show you. If you look at the actual aggregate level of delinquencies and defaults, it hasn't gone up that much historically. The real spike has been more on the subprime area.
But you are right that that level has gone quite a bit higher than it has been in non-recessionary times, which is indication of the nature of these products, the lax risk underwriting that Secretary Steel was just referring to. So it's sort of a combination of both.
We have not seen the same leakage of problems to other parts of the prime --
REP. WATT: You make -- you made that point several times. I just wanted to make sure that in saying that we don't hide the fact that across the market the acceptance of risk has been, I guess, in the former secretary's (sic/Fed chairman's) words, there was an "irrational exuberance" in the mortgage or lending market for a period of time. Everybody -- is that generally accepted now?
MR. DUGAN: Well, I guess I would say that there were certainly parts of the market, not including the subprime, that we tried to address in the nontraditional mortgage guidance where there were certain features about negative amortization and interest-only loans and somewhat lower down payments that we were raising concerns about that we hadn't seen previously.
So to that extent, I would agree with you.
REP. WATT: Okay. And one of the concerns that some of us have expressed and tried to get to the bottom of is the extent to which institutions that are regulated by the OCC at some level are owners of or investors or have subsidiaries that deal in subprime mortgages substantially.
To what extent are you all monitoring that, because one of the concerns I had with one of my own institutions -- two of my own institutions from my congressional district -- buying into Countrywide, for example, was that they were going into an area of the market that might not be subject to the same level of regulation.
MR. DUGAN: Well, if it's a national bank or a subsidiary of a national bank, we regulate it the same. We regularly give it full- blown, onsite banking supervision.
If it's an affiliate of the bank through the holding company, then that's regulated by the Federal Reserve.
And in the case of Countrywide, that's a thrift and the entire organization is subject to regulation by the Office of Thrift Supervision.
So I can only speak specifically to the ones that we regulate directly.
REP. WATT: Okay.
All right. My time has expired apparently, so I'll leave that alone.