AHGA commends the House Financial Services Committee for holding this hearing on mortgage reform, and specifically, on the Mortgage Reform and Anti-Predatory Lending Act of 2009. We strongly support this measure and commend House Financial Services Committee Chairman Barney Frank, Representative Brad Miller, and Representative Mel Watt for sponsoring H.R. 1728. We believe that this legislation will help curb future predatory lending, which has been a major factor in the highest home foreclosure rate in the nation in 25 years.

While lower income and less educated homeowners have tended to be the most frequent direct victims of predatory lending, the foreclosure crisis that has resulted has had terrible consequences for all American homeowners. Even though the majority of homeowners have never had anything other than a 30 year fixed rate mortgage, virtually all homeowners have lost substantial equity in their homes as a result of the economic downturn, which was precipitated by predatory mortgage lending practices. For most homeowners the equity in their home is their single largest source of savings and contributor to their net worth.

Many homeowners hold securities in mortgage lending institutions, either directly or as components of their mutual funds, in their investment accounts and/or IRA’s, 401Ks, or other retirement savings vehicles. Those homeowners had expected that the CEO’s of those lending institutions would be using prudent financial management practices consistent with the protection of their assets. Instead, American homeowners learned that those companies essentially abandoned sound underwriting principles. They qualified borrowers based only on their ability to pay initial “teaser” interest rates which only two or three years later were almost certain to rise substantially based on the their reset formulations. They lent out their stockholders’ money without verifying the borrower’s income. As a result of this gross mismanagement, millions of American homeowners will have to defer their retirement, and many of them will never be able to afford to retire.

It is critical to take steps that will prevent a recurrence of predatory lending. We believe that all the provisions in H.R. 1728 will contribute to that goal. A number of the provisions of the bill are particularly important. Among them are the creation of a federal duty of care that requires licensing and registration, as applicable, under state or federal law, presenting consumers with appropriate mortgage loans (i.e., loans that a consumer has a reasonable ability to repay and for which (s)he receives a net tangible benefit and that do not have predatory characteristics, making full disclosures to consumers, and assuring that lenders comply with mortgage origination requirements.

The legislation should establish minimum professional standards for entrance into the mortgage origination profession, strong sanctions for violation of the duty of care, and independent determination of fault. We had made that recommendation in our April 17, 2007 testimony to this committee, and we are delighted that some of those recommendations have been addressed. Because real estate agents and real estate brokers have also, in many cases, been accomplices to the predatory lending process this title should be expanded to create a parallel minimum professional standard for entrance into the real estate services profession, strong sanctions for violation of the fiduciary duty of real estate brokers and agents, and independent determination of fault. Currently, minimum professional standards in that sector are too low, fiduciary duty to their clients is often ignored or undermined by industry rules, and regulatory capture usually characterizes the rulemaking and standards enforcement in that field.

Requiring that the creditor must make a reasonable, good faith determination that the consumer has a reasonable ability to repay the loan at a fully indexed, fully amortizing rate is simply a requirement that sound underwriting principles be used in all cases. This is what lenders normally do and are supposed to do, and it thus imposes no new or unreasonable requirements on prudent lenders or their business partners. The net tangible benefit standard should prevent refinancings that increase consumer costs without providing any discernable benefit. The use of the potential proceeds from a cash-out refinancings should be taken into consideration in judging benefits, however. For example, cash outs can be used for meritorious purposes, such as home remodeling/additions or children’s education, which could not otherwise be financed as inexpensively.

The establishment of a “safe harbor” for qualified mortgages ( which should include FHA, VA, rural housing and mortgages purchased by Fannie Mae and Freddie Mac) serves the useful purpose of providing lenders guidelines they can rely on without fear of being second guessed. AHGA supports the stronger protections for tenants with leases and housing assistance payment contracts for Section 8 recipients. We also support additional standards and requirements designed to protect consumers, including mandating the availability of mortgages without prepayment penalties, advance notice of alternatives for holders of adjustable rate mortgages, prohibiting mandatory arbitration, requiring specific disclosures for loans that include negative amortization features, and prohibiting the creditor from directly or indirectly financing single-premium credit insurance in connection with a consumer mortgage loan.

This legislation should help trim the expense of high-cost loans under HOEPA through such practices as lowering the APR trigger from 10% to 8% over comparable Treasuries, lowering the points and fee trigger from 8% to 5%, prohibiting the financing of points and fees, prohibiting excessive fees for payoff information, modifications, or late payments, prohibiting practices that increase the risk of foreclosure, such as balloon payments, and requiring pre-loan counseling.

Also important are the provisions to improve the independence of appraisers. Part of the problem with predatory lending is the potential for unhealthy collaboration between different players who influence home buyers – real estate agents, mortgage originators, and appraisers. Those in all three fields who are willing to put their selfish interests ahead of their clients generally know who their unethical counterparts are in the other fields, and have no remorse for threatening to withhold future referrals to others in those fields whose ethical concerns can make it difficult to “grease” the transaction. Anything that can be done to assist home buyers in identifying the most qualified professionals for each of the required services they will need, as well as reduce the ability of unethical service professionals to exert a coercive influence over other professional involved in the transaction, will be a great step forward.

We also applaud the provision of additional disclosures of important financial information, and the creation of additional consumer counseling services. One of the lessons learned from the predatory mortgage lending experience is that many borrowers are financially naïve. While most nonprofit foreclosure counseling agencies are doing an excellent job under extenuating circumstances, many have become hopelessly overloaded by the foreclosure crisis. It is important to prevent these problems in the future through better advance consumer counseling.

We understand that many organizations in the mortgage finance sector have difficulty with some of the provisions in this legislation. Although we disagree with them on many points, we urge you to give their constructive suggestions careful consideration for several reasons. We know that supporters of this legislation do not intend that it limit reasonable options for responsible homeowners or undermine the objective of enabling beleaguered homeowners to refinance their homes. Some of the provisions create tradeoffs in that regard. For example, while a 5% credit risk retention requirement will encourage more responsible lending practices, it may also somewhat limit the availability of mortgage loans for qualified borrowers and thereby slow the housing market’s economic recovery. To the greatest degree possible, members of this committee should try to avoid unintended consequences from happening, and give regulators the ability to adapt regulations toward that goal while maintaining the protections against future outbreaks of predatory lending.

Additional steps will be needed to address the many problems in mortgage lending and other areas related to financial and real estate services. Some, like the bankruptcy reform bill, are clearly “shovel ready”, thanks to the good work already done by the House of Representatives. Members of this body have made all the compromises necessary with mortgage lenders on that bill – and probably more than were really necessary - to assure that the legislation helps rather than hurts mortgage lenders.

In many cases both the Administration and Congress may have to respond quickly to new information in the future. Thoughtful development of legislation under difficult circumstances will be critical, and that is a challenge in a fluid and high pressure environment. For example, financial services firms correctly pointed out that legislation to limit the bonuses of highly compensated financial services executives could have the undesirable potential for driving away talented executives who had nothing to do with determining the policies that have hurt homeowners and the firms’ investors alike. From our perspective the legislation also didn’t address the core problem which could easily recur in the future– terribly bad business decisions made under the incompetent leadership of those firm’s CEOs. In our opinion a better approach would be to require that any financial services firm that receives any federal funding as a result of its corporate mismanagement must agree to the orderly replacement of the incumbent CEO during the period the mismanagement occurred. There are many highly competent senior financial services professionals who had nothing to do with the problems caused by some companies, who can ably serve as the incumbent CEO’s successor, and they should be given the latitude and flexibility to use the federal funds in a constructive manner to benefit the company’s stockholders and the economy.

Earlier this week, Columbia University Professor and 2001 Nobel Prize recipient Joseph Stiglitz, testified before the Joint Economic Committee. He recommended that the government break the behemoth financial firms into smaller, more transparent companies. At the same hearing, Massachusetts Institute of Technology Professor Simon Johnson urged that our antitrust laws be overhauled to prevent the development of financial firms that are too large in the future. Professor Johnson also urged that the existing very large financial services companies be broken up. Our organization also believes that the biggest financial service organizations may well have gotten so large that they are at the point that any benefits of their economies of scale are more than offset by their bureaucratic inefficiencies and the potential drastic impact of their failure on the U.S. and the world economy. For that reason, the professors’ suggestions may have some merit, and we urge further study of these recommendations.

The Obama Administration and Congress are doing their best to address the housing crisis and the major challenges facing our economy. The challenges of addressing them in real time and while they are in a state of flux are enormous. No doubt additional adjustments will have to be made by Congress and the Administration under the best of circumstances. The American Homeowners Grassroots Alliance promises our support for this committee’s worthy efforts at this critical time in American history.