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>> i do think for the commission this impact of this april 2004 decision with respect to leverage limits at the broker-dealers, and how that affected the bank holding company -- the investment bank holding companies, i think a clear explanation of that in writing would be very helpful. because i think we still want to see exactly the lifting of the limits on the broker-dealer, what effect that had on the overall entity. >> i would be happy to do that. and to be very clear, the limitations were not change. it was really and have a net capital was ultimately calculated at the broker-dealer level versus the holding company

level which has been discussed as not subject to any regulation until 2004, or any capital requirements at all. we will be happy to have that. >> and the difficulty, hartley, is you have one that was an one that wasn't. dayshift. and explained all that, how did we wind up with, i assume, good many people restructuring something for something positive with what we got. i think we want to get a sense of whether that was a critical decision and whether that, in fact, did increase the risk profile of those entities that subsequently collapsed or might have collapsed, but for extraordinary government assistance. thank you very much for your testimony today. we will take a 10 minute break, and we will start promptly at 11:55.

[inaudible conversations] [inaudible conversations] >> welcome back. we will now go to the second session of our public hearing today. and i want to welcome the individuals who have come here from around the country to talk to us about the investigations and actions that have been taken around this country with respect to the financial crisis. as has been our custom, as i announced at every session, we will be swearing all witnesses that come before us.

and so consistent with that i'd like all of you to please stand. and be sworn. do you solemnly swear or affirm under penalty of perjury that the testimony you are about to provide the commission will be the truth, the whole truth, and nothing but the truth, to the best of your knowledge? thank you very much. let me also announced, commissioners, you may notice that mr. holtz-eakin is now sitting to my right. there has not been a few. what, in fact, has happened is mr. thomas has had literally a prior commitment that goes back one year, and he had already altered everything to be able to be with us yesterday and today, but he has had to depart for the west coast. so mr. holtz-eakin will be sitting in the vicegerent seed and working with me any allegations or time for

commissioners. so let me start this by reminding witnesses first of all thank you for your written testimony. it was very well done and we appreciate the effort you made. we will ask each of you to give us a statement of up to 10 minutes, and then we will go to commissioner questions. and we will start today with the attorney general of illinois, ms. madigan. so if you would please begin your testimony, that would be terrific. >> thank you, mr. chairman and members of the commission for inviting me to testify before you today. my testimony is going to focus on my office efforts to combat the predatory practices that grew rampant in the mortgage lending industry over the last decade and are at the root of our country's financial crisis. the state attorneys general who served as first responders with problems in the marketplace emerge for our consumers were keenly aware of the widescale abuses in the mortgage lending

market. and we were taking aggressive action to stop them. many years before the housing bubble bursting. my testimony will also address what i see as the failure of federal regulatory oversight and the need for a robust state federal enforcement regime to protect consumers in the future. i have served as the illinois attorney general for seven years, and from day one i have focused on protecting homeowners and borrowers from unfair and deceptive mortgage lending practices. since the late 1990s, illinois often in conjunction with other states, has investigated some of the largest subprime lenders in the country. first alliance mortgage company, household finance, ameriquest, countrywide, and wells fargo. and after uncovering and document their predatory lending practices, we sued these lenders for putting homeowners into risky loans that they didn't understand, could reasonably afford, and couldn't get out of.

our investigation of these lenders and their brokers revealed a pattern of editorial in the practices that would eventually permeate and destroyed much of the mortgage industry and our economy along with it. the predatory practices were driven largely by the rise of the mortgage securitization process which allowed lenders to bundle and sell off home loans and to shed all liability for their sound is. once lenders were free from responsibility for a loans failure, common sense underwriting standards quickly deteriorated. mortgage lending had been turned on its head. lenders made more money selling high-cost risky loans than sound loads. for the simple reason that wall street paid more for subprime loans and loans with expensive risky features. so we see that in 1999, subprime loans were only 3.8 percent of the market, and all payloads were only 1.7%. but by 2005, at the height of the lending frenzy, almost

50 percent of the loans originated were either subprime or alt-a. to respond to wall street's growing demand, lenders created compensation structures that incentivized mortgage brokers and loan officers to add risky features to loans. in our investigation, we examined rates each lenders use to determine compensation for mortgage brokers and loan officers, and what we found was alarming. lenders pay brokers and loan officers more for loans with low intercountry teaser rate, that set borrowers out for payment shock and ultimately foreclosure. when their rates reset upwards or lenders also paid rocard more to put borrowers into no documentation or no documentation loans which allow brokers to simply state or inflate a borrowers income on the loan application without verification. this type of underwriting permitted lenders to place large numbers of borrowers into high-cost subprime loans without revealing their ability to repay them. according to one report, like

2004 no doc loans comprise 41 percent of the subprime market. brokers are also paid more for putting borrowers into loans for 100 percent of their homes value. leaving the borrowers with no equity in their homes. in fact, the percentage of non-prime loans increased dramatically from 2000 to 2006. additionally, lenders paid more for a number of other risky features. such as higher interest rates, payment options that didn't even cover principle or the interest that accrued on the loan, and prepayment penalties that trap borrowers in their loans. all of these risky features were common in the loans we reviewed during our investigations. in addition to reviewing loans, we have talked to thousands of homeowners struggling to pay their mortgages. the stories we have heard from these homeowners and to the picture of the lending industry's predatory practices. time and again we hear from borrowers who didn't understand the terms of their loans.

for example, many borrowers thought they were being sold a load with a fixed rate only to be present at closing with papers for a loan with an adjustable-rate. worse, some borrowers didn't even know their mortgages had an adjustable rate until two or three years later when their interest rates reset your borrowers have also told us the most complex financial transactions of their lives took no more than 15 to 20 minutes to complete. additionally, based on a study of high-cost loans in the chicago area, and many of the borrowers we have heard from, we have found that the lending industry's predatory practices were often concentrate in minority communities. i and other states attorney general have been aggressively pursuing predatory lending practices for over a decade, and we continue to pursue them in the aftermath of this crisis. but there's a parallel story to the record of the states, one that is equally critical to a full understanding of this crisis. in the years preceding the

crisis, federal regulators often showed no interest in exercising their regulatory authority, or worse, actively hampered state authority to the federal reserve, four double, had yet questionable of three to tighten underwriting standards for all loan products in all lenders but it chose not to exercise that authority until after the market collapsed. in 2006, the federal regular is finally addressed for underwriting standards by putting out guidance on nontraditional mortgage products, but the bulk of the damage had already been done. even as the fed was doing little to protect consumers and our financial system from the effects of predatory lending, the occ and ots were actively engaged in a campaign to thwart states efforts to avert the coming crisis. this culminated with the occ's issuance in 2004 of sweeping preemption rules that purported to overturn the well-established legal principle at the federally chartered banks or generally subject to state laws. in the wake of the federal

regulators wish to curtail state authority, many of the largest mortgage lenders to shed their state licenses and sought shelter behind the shield of a national charter. and i think that is no coincidence that the era of expanded federal preemption gave rise to the worst lending abuses in our nations history. a major lesson to be drawn from these crisis is that federal charters must not be mistakenly viewed as giving lenders a blanket exemption from state exit prosecution. in conclusion, some lessons to be learned are to preserve sound underwriting standards. which evaluate the borrowers ability to repay no loans. and not to compensate mortgage originators more to place borrowers and loans with risky features. there are signs that federal regulators recognize at least some of the lessons to be learned from this crisis. last year the federal reserve finally put in place stricter underwriting standards for higher cost loans.

unfortunately, though standards while they would apply to subprime and alt-a loans will not apply to prime products, including pay option arms, riskiest and most complicated product we have seen, and the one that will constitute the next wave of foreclosures. i believe the common sense dictates that we need strong federal underwriting standards that apply to all home loans. in addition to the federal reserve has recently proposed a rule that would ban for the broker compensation that provide incentives to please borrowers in riskier loans. eye, along with 17 other ag, drafted and submitted comments strongly urging the federal reserve to adopt a dual. this crisis resulted from a combined failure, a financial institution, the regulatory system and government, in its resolution depend on the willingness of every participant, federal and state, public and private, to commit to commonsense reforms. the states attorney general in their ability to investigate and

prosecute fraud in mortgage lending must be vigorously preserved. our strong record pursuing predatory linden practices and respond to the problems of our consumers makes us a necessary part of any future solution. thank you, and i'd be happy to answer any questions you have. >> thank you very much, general. attorney general souther's of colorado. >> chairman angelides and members of the commission i appreciate the opportunity to appear before you today and described activities of my office, much smaller office and generageneral magic and. in the midst of an in response to our country's financial crisis. i've had the honor and pillage of serving as colorado's attorney general since january of 2005. that means i came into office just as we were starting to hear rumblings about problems to come in the colorado housing market. in my view, which is largely hindsight, the states were not well equipped with legal tools to deal with much of what has

transpired. over the ensuing five years. like many states, colorado had passed legislation in 2002, dealing with so-called predatory loans, model in part after the federal home ownership and protection act of 1994. unfortunately, like its federal counterpart at the time, colorado's limits on balloon payments and prepayment penalties and its prohibition on negatively amortized in mortgage loans apply to such a small subset of the highest cost loans that it proved to be very little deterrent to abusive lending practices. loan originators were able to push ever more exotic loan products whose introductory rates with significant cost paid outside of closing took those products be on the coverage of such laws. in 2005, colorado was one of only two states that did not regulate mortgage loan originators. while we now have licensing of individual brokers, we are still

one of the few states that does not regulate most of the mortgage lending activities of non-depository lenders. with respect to the laws we did have in place back in 2005, as general madigan indicated, we were largely powerless to enforce those laws against national banks and their lending ability and subsidy is due to the aggressive stance to federal regular took to preempt state law. even with respect to discriminatory lending and deceptive advertising. and i joined general madigan and encouraging you to carefully examine the advisability of federal preemption in financial industry regulation. as things began to unravel my office joined a law-enforcement task force and coordinate our enforcement efforts with colorado's district attorneys and united states attorney in colorado to ensure various cases were pursued by the most effective means. given our resource constraints and jurisdictional limitations, my office focused on enforcement efforts on deceptive advertising

by local loan originators and don't egregious cases of mortgage fraud affecting colorado consumers. in late 2005 in early 2006, we examined the advertising of dozens of local loan originator for federal truth in lending act violations. cease-and-desist letters went to those advertisers who would either not disclosing an apr in their print advertising or who were disclosing an inaccurate apr. by late 2006, our newspapers were full of advertisers from loan originators hocking option payment are blogs, most of these advertisements emphasize low teaser rates and failed to close the negative amortization that borrowers would expect if they made only the minimum payments. home owners were led to believe that the were being buying a fixed interest rate loan when in fact, only the first monthly payment was at the advertised rate. we issued subpoenas to all of these advertisers and conducted numerous depositions of loan

originators. the witnesses told us that teaser rate really, quote, made the phones light up, unquote that it was clear that thousands of colorado borrowers got into these loans without knowing the true nature of the teaser rates, the significant negative amortization that they were adding to the principal balances, and that prepayment penalties that came with these loans. a number of these loan originators ultimately went out of business, and we eventually reached a summit with seven companies. several companies refuse to settle and we were successfully sued them for deceptive advertising. also brought a series of civil and criminal actions against lenders and loan originators engaged in descent or fraudulent transactions, and against individuals engaged in fraudulent real estate schemes. we have summarized these in the written testimony. we joined with illinois and other states in multistate actions against ameriquest and countrywide. we were also aggressively

pursued local companies in colorado. and would aggressively pursued criminal cases. i think the fact that we got sentences up to 30 years in mortgage fraud cases indicates how egregious judges felt this conduct was. i want to turn to current trends. over the past two years, my office has seen a dramatic shift in consumer complaints. we are receiving fewer complaints about mortgage originators, and we now have voluminous complaints about mortgage servicing and foreclosure release scans. in addition to working with loan services on an individual complaint on behalf of colorado consumers, my office is participating in a multistate effort to work with loan servicers to encourage loan modifications and other sustainable long-term solutions. the state foreclosure prevention working group, is comprised of 15 state attorneys general and the conference of state bank supervisors. formed in the summer of 2007,

this group met early on with representatives of the 20th largest loan servicers in the united states. since that time the working group has been collecting data from 13 of these companies in an effort to verify the performance of their foreclosure avoidance programs. i'd indicate you that the majority of the seven who are not disclosing the information are claiming several preemption, and no requirement to do so. this data collection effort has led to publication of three reports during 2008 with a fourth report covering 2009, to be released shortly. unfortunately, each of the first three reports revealed a wide and effective loss mitigation efforts with as many as seven or eight out of 10 stories we delinquent borrowers are not in any loss mitigation process. those number are believed to improve over the last year, there are still far too many delinquent answers we delinquent

borrowers who either are not aware of loss medication alternatives to foreclosure or who are frustrated by the delays in working out a non-foreclosure solution. foreclosure release scans are a very significant problem for the states. shortly after i came into office i was approached by a number of our local county officials handling foreclosures called public trustees in colorado. about a rapid increase in the number of individuals who were soliciting homeowners in foreclosure for a variety of foreclosure release services ranging from refinances and loan modifications to investment schemes designed to allegedly save the home from foreclosure. i formed a task force of public and private parties to look at this problem, and in 2006 this task force was instrumental in drafting and securing passage of the colorado foreclosure protection act. the act prohibits foreclosure consultants from collecting up front fees, from taking a financial interest in a homeowner's property, it requires that foreclosure

contracts contain language designed to protect consumers. investors referred to as equity purchases under the act, are subject to strict written contract procedures, a three day cooling off period during which no documents covering the property can be recorded in special unconscionability provisions relating to the sale of these back transactions. not surprisingly, over the last two years, complaints about scams have outstripped all of the mortgage complaint into my office. delay would homeowners are besieged with solicitations arriving at the door in the mailbox, over the telephone, and on the internet. we have now taken action against a total of 33 foreclosure rescue and loan modification firms. we also have investigations underway against dozens of additional companies that are aggressively advertising colorado homeowners facing foreclosure. many of these complex are located outside of colorado. many of these countries are located outside of colorado. 17 of these actions were

announced as part of two separate suites in july and november of 2009. that approximate 25 state attorney general offices coordinated with the federal trade commission. let me briefly touch on other continuing concerns. as more colorado consumers have fallen behind on their mortgage payment, we have seen an increase in the marketing of other services to those same consumers. in addition to the foreclosure release solicitations we've seen an increase in payday and other high-cost loans and an increase in debt settlement and credit repair frauds as well. under colorado law, payday loans are limited in amount, finance charges and ration. in 2002, the total loan amount affordable i license payday lenders in colorado was 245.9 million. by 2007, that number had increased 160%, to 639.5 million. and these figures do not take into account unlicensed payday lenders operating primarily or

exclusively on the internet in attempting to avoid state licensing. let me say a word about debt management scans. are also very problematic since colorado's first of the uniform debt management services act took effect to in 2008 my office has investigated take a disciplined action against 26 and debt management companies, and has issued 22 additional cease-and-desist orders. violations included to make mandatory disclosures, and charging excessive fees. we've require debt management companies to refund more than 1.3 million to colorado consumers and assessed fines and penalties of $135,000 against them. also -- i will wrap up by saying we're seeing a lot of credit repair scams. let me conclude by suggesting the cause and effect of our current financial crisis, as you folks are finding out, are varied and complex. we in the states are dealing with the following -- with the fallout. and that means the effects of

record home foreclosures spiraling credit card and other high-cost debts and a forgery the significant growth of other, perhaps, less reputable industry to take a dish of the financial struggles of our good, honest citizens. thank you. >> thank you, general. ms. crawford? >> good morning, mr. chairman, and members of the commission. i'm ms. crawford, president of the north american securities administrators. >> can you lean a little into that force, ms. crawford? >> sherpa guide to texas securities commission and m. president of the north american securities administrators association, also known as nassau. i am very honored to be here today. in thinking about the world that state enforcement authority it is instructive to examine the regulatory responses to the major financial scandals of the past decade. from exposing securities and complex and market timing and mutual funds, to the auction

rate security cases, state securities regulators have consistently been in the lead and did, in some cases the time the states begin their investigation, it was unclear whether the federal regulars intended to pursue any investigation at all. the most recent example is what the auction rate securities, ars or millions of dollars of the these securities were sold to investors, by major broker houses as cash alternatives. in february of 2000, the market collapsed. investors were left with your liquid securities. in june of that year, state regulators in massachusetts brought a civil action against gps securities charging that the firm with false representations. a month later new york filed its own lawsuit against ubs. in july, a similar action was filed by merrill lynch against merrill lynch. and on august 7, nasaa announced

the first ars settlement which was with citigroup pursuant to an investigation led by the texas state securities board. under which the company would fully reimburse its 40000 customers who had been unable to sell their auction rate securities and pay civil penalties of $100 million. significantly, the sec took no public action with respect to ars. until august 17, 2008, when they announced a preliminary settlement with citigroup comparable to the agreements already reached with members of nasaa. sadly, state investigations into corporate abuses that federal officials have missed through the years have resulted, not in reform at the federal level, what in criticism of the states. some federal agencies have responded by issuing regulations broadly preempting the state law, or even bringing suit against state officials. states have found themselves in

gate with a battle against certain federal agencies simply to retain the authority to protect the interest of investors. the national seekers aboard improvement act of 1996 significantly impacted the role of the state regulars. it preempted many state regulations and enforcement provisions. it also prohibited the states from taking preventative action in areas that we now know have been substantial contributed factors to the current crisis. congress, federal regular tour agencies and the quartet created gaps in which securities laws, and the entire investor protection regime. my written testimony provides several examples of problems with regulation rule 506 added an investor to the texas state securities board. in the final analysis, news via abstract state to go to investigate known security flaw bilayers when they become part

disappearance and subsequent offerings. by way of example, another recent enforcement enforcement is in texas is worth mentioning. investors in a company called national life settlements, nls, recovered nearly $20 million or 69 percent of the amount they invested, most of these investments were retirement funds. is rare to have such a large recovery and a securities case. and in court the receiver told the judge the texas state security security court had acted in this case before they even had a single complaint. investigations such as nls are trademarks of state security regulators. no lead is too small to warrant at least a cursory review. the failure at times is to see similarly swift action on the part of the federal regulators. state security regulators enforcement statistics show our effectiveness.

from 2004 through 2008, we conducted more than 11004 actions. which led to over $230 million in monetary fund and penalties, and more than three points $7 billion ordered returned to investors. we are also responsible, and this is significant, forcing that defendants in these cases were sentenced to more than 4000 years in prison. 4000 years. the cause for preemption, or for more sro authority at the expense of state jurisdiction defy common sense, if only because of the evidence clearly demonstrates that state securities regulators in their structure actually work. i'd like to make a few recommendations for your consideration. first, state securities regulators have observed a steady and significant rise in the number of offerings made

pursuant to this rule 506 i referred to earlier. that have later been determined to be fraudulent. although congress preserve the states authority to take enforcement actions after the fact in these cases, that power is no substitute for a states ability to scrutinize these offerings in appropriate cases before they are actually made. the sec does not review the form he filings and rarely investigates the rule 506 offerings with which they are connected. the preemption of state regulation, therefore, has created a huge regulatory vacuum which is highly significant because these deals are often billion dollar deals that have an affect on our economy. today, no one regulates these offerings. nasaa believes that congress should reinstate the regulatory authority at the states and all rule 506 offerings. since the repeal of the glass-steagall act through the

enactment of gramm-leach-bliley, we have seen excessive risk-taking emerge within institutions with federally insured deposits. which you examined yesterday. key activities of investment banks are incompatible with the special character of commercial banking. these include underwriting and dealing with securities, derivatives of such securities, principal invested -- investing and managing an house hedge fund. i believe that a non-bank financial intermediation industry would quickly emerge following glass-steagall type reregulation. but it would be one that was populated by tranced parent firms that lend themselves to straightforward oversight by regulators in tandem with the systemic risk regular. third, as evidenced by the inspector general's report on the madoff affair, and the testimony of chairman schapiro and sec staff before congress, the bulk of the federally

covered in dust and advisors, i ayes, are examined in frequently. a clear oversight and gap has existed for some time and is now emerging into public view. nasaa members are fully prepared to fill this gap accepting responsibility for the oversight investment advisers with up to $100 million in assets under management. nasaa members possess unique qualifications that ensured that permanent closure of this gap will be made, or geographically near these folks. it's more economical and easier for us to go out and look at them, and this is the trend, the industry is moving toward investment advisers and moving away from the broker-dealer business model. because i a regulation is complex and substantively different from the regulation of broker-dealer, the expense of nasaa members is all the more critical in this area. forth, individual behavior is not reliably rational during

just those times when systemic safety is in jeopardy. nasaa believes that ultimate -- optimal kidney patient associates a systemic risk can best be a commerce by establishing an independent systemic risk council. here, both federal and state regulators need to be represented, and they need to undergo analyses, risk assessments and recommendations. this would effectively established a crisis management protocol with clear and regular lines intimidation among all regulators. the complexity of the financial markets has exceeded that competency capacity of federal regulators providing evidence for the need for state banking insurance securities regulators on the systemic risk council. fifth, the current levels of funding for state and federal law enforcement agencies is low. increasing enforcement to more

effectively deter fraud is much more cost effective than after the fact compensation of victims and economic damage repair. in conclusion, the unique experience as a state securities regulars on the front lines of investor protection have provides a framework for my testimony. as the regulars closest to investors, we provide an indispensable of protection. as you continue to examine the causes of our current financial crisis, and develop recommendations to prevent a recurrence, i respectfully suggest that you strongly consider the restoration of state authority that was preempted over the last 14 years. our presence did not contribute to the crisis, rather the fact that i'll regulatory enforcement roles have been eroded was a significant factor in the severity of the financial meltdown. thank you very much. >> thank you for summing up.

mr. theobald? >> good afternoon, mr. chairman and members of the commission. i want to thank you for the opportunity to testify before you today. about the miami-dade police department effort to combat mortgage fraud. facing a wave of mortgage fraud investigations by mad county mayor carlos alvarez established the mayor's mortgage fraud task force in september of 2007. this public-private partnership used a comprehensive approach that blends legislative change, prevention, enforcement, regulation and prosecution to reduce mortgage fraud and prevent victimization of individuals and businesses. according to fincen, mortgage fraud is one of the fastest-growing white-collar crimes of the united states. for '06 to '07 florida held a dubious decision of breaking first in the nation in mortgage fraud. according to the mortgage asset research institute, otherwise known as mara, miami-dade county leads the state and incidence of mortgage fraud and ranks in the top five major metropolitan areas hit by that crime. the number of suspicious

activity reports from financial institutions reported by fincen more than tripled from all four windows over 17000, to over 64000 in 2008, and it is closing in on 70000 in 2009. mari estimates that 70 to 80 percent of all those foreclosures contain some type of mortgage fraud so it seems clear that foreclosures in mortgage fraud are intertwined to some degree. in both '07 and '08 florida ranks second in the nation in foreclosures with miami-dade again been hardest hit area in the state. traditionally the fbi and the hud inspector general's office handled mortgage fraud investigations. in many areas the fbi's threshold for handling these cases is set at certain dollar amounts and cases that fall below these thresholds must be handled at a local level that the fbi miami office had a 1 billion-dollar threshold that close to 98 percent of all the cases did not meet. so compounding that problem, that was the fact that no state

statute existed to address mortgage fraud as a crime and local law enforcement investigators and prosecutors did not have sufficient knowledge, experience, or training in taking on mortgage fraud cases. in addition, the combination of questionable mortgage industry professionals, the lack of appropriate resources for state regulars to a coppers the legal mandate of the office and the relaxed lending requirement like many institutions lead to a rapid increase in mortgage fraud that has had a detrimental affect on miami-dade county, the state of florida and the entire country. our response because local law source and have lacked the authority and the ability and the tools to investigate and charge subjects with mortgage fraud. the task force drafted and lobbied for the passage of a florida state statute which allowed local law-enforcement throughout the state to arrest perpetrators for the crime of mortgage fraud. this legislation formed the cornerstone of the task force. nevertheless a multifaceted approach was necessary because the mortgage fraud crisis was not created by one or two

different components gone wrong. but an entire breakdown of the real estate industry. to address the various strategies for reducing mortgage fraud, the miami-dade police department consulted key stakeholders including county and state elected officials, leaders of local government, business executives, law-enforcement profession, prosecutors and reform fica base. the first committee was the law-enforcement community that's responsible for detecting and investigating, apprehending and prosecuting mortgage fraud subjects and enterprises. the committee comprises largely investigators and supervisors from the miami-dade police department economic crimes bureau, detectives have worked with other local, state and federal law-enforcement to solve cases and apprehend subjects. the state attorney general's office, u.s. attorneys, and miami-dade attorney's office prosecuted the case is that the legislative committee, which enhances current laws creates new laws and ordinances several of the task force members are state legislators who have

assisted in sponsoring and passing state laws to achieve the task force's goals. the regulatory committee which enhances and enforces regulation on all parties involved, the business partnership committee, which creates and transmits effective business practices and ethical code of conduct to enhance cooperation with law enforcement and different professions involved in a mortgage to attack the problem and stop fraudulent loans from actually being written. and in education to vote. which helps law-enforcement prosecutors and industry professionals build awareness about mortgage fraud through extensive committee visibility and guest speaking is, discomforted for major suites, rest and new legislation. today, mayor alvarez passport is one of the few public-private task force is at the county level in the entire united states and it has a tremendous impact on the way mortgage fraud has been viewed in florida. the law-enforcement committee has a shoulders a number and a lot of the word and in achieving this goal. there have been several thousand

reports and inquiries and currently 682 investigations are active. the economic crimes bureau has made more than 189 felony a rest, which represent more than 60 million in losses. we have created a training manual and train more than 400 investigators and prosecutors in the state of florida. as far as legislation goes, the legislative committee crafted new legislation and enhance the current mortgage fraud statute which was sponsored by a state representative carlos and are state senator. these bills were signed into law by governor crist in effect july 1, 2008. they enhanced the law-enforcement ability to notify the county property appraiser's office wind and effective property has shown mortgage fraud and there's probable cause that a mortgage fraud occurred. this is important is the property appraiser's office is now required to reevaluate not only the affected property, but the properties around that

particular home or that condominium. this will reduce the taxes and has reduced the taxes of all the properties affected by the fraud that not only the individual property but everyone involved in the scheme. the bill also created a second degree felony for the mortgage fraud that occurs over $100,000. into those made at the federal level, house resolution 6853, a nationwide mortgage fraud task act was passed in the house of representatives and it was amended as a nationwide mortgage fraud coordinator act of 2008. and ran at a time in the senate but was filed against on january 142009, as a charm 549, the nationwide mortgage fraud test act of 2009. the legislation modeled after miami-dade mortgage fraud task force to address mortgage fraud of the united states. on may 20, 2000, president obama signed public law 111 to 22 a sense of congress encouraging the creation of a nationwide

mortgage fraud task force back. the act which was set at 896 was sponsored again by congressman began senator bill nelson, both of florida. as far as regulation goes, followed the recommendations of the task force regular tour committee, the florida office of financial regulation and department of business and professional regulation enacted regulations to ask the emergency hearings to suspend the licenses of real estate agents and mortgage brokers involved and arrested for mortgage fraud or other related fraud. the immediate suspension will prevent the agent or broker from victimizing unsuspecting home purchasers. regulations also require background checks and licensure for all loan originators. a complete overhaul of the state statute regulating the mortgage industry was in this year's legislative package. the business partnership committee created real estate best practices manual to distribute to miami-dade county realtors. the committee also sought and received private funding from florida bankers and other professions involved in the

mortgage business to assist in financing the cost involved in investigating and prosecuting mortgage fraud. the education committee has created a public complaint form with a website access to report mortgage fraud and it's on the ms. website. there is also an established database of speakers available to appear at engagement and speak on behalf of the task force. in conclusion, mr. chairman, the task force is committed to making a difference in the quality of life of the citizens of miami-dade county by reducing the number of incidents of mortgage fraud. although this is a tremendously large problem in the united states, the steps have been taken in miami-dade can be duplicated elsewhere in florida and throughout the country. the task force of comprehensive old i disciplinary approach that has proved to be successful in miami-dade county is being sought at a model for attacking mortgage fraud in the united states at the task force and its incompetent can provide a solution to the national

financial crisis. with the task force model, hard work and perseverance by dedicated public servant and industry professionals can unravel the mess that was created by greedy lenders and fraudsters. i look forward to working with you and other members of the committee on solving this serious threat to our nations economy. thank you for allowing the opportunity to testify before you today, and i look forward to taking your questions. >> thank you very much it will now start the questioning. i will leave off your. attorney general madigan, i want to talk about deep systemic failures at the federal level. let me first visit this issue of the combined lack of federal enforcement, coupled with than efforts to preempt. tell me just a bit about your visits with, you're talking with the federal regulars. you have been on the scene now for seven years. did you go to the federal reserves, did you go to the occ, did you go to other federal regulars and tell them about

what was happening? can you tell me what kitty kelley would have? >> i have spoken to people and this would have been, you know, 2005, 2006, if memory serves me correctly, about the problems we were sitting. particularly with subprime loans. particularly with low doc, no doc loans. you know, those are very specialized products that until this crisis really got underway, were very rarely use. neighbors use for people in general who had good credit, but may not have an active string of income. so let's use the example of a medical student. recently graduated, secured a job, you know, wants to purchase a home but doesn't have any income at that point. but recently you could look and see that that person will. that was the intent of, say, a low doc, no doc loans. when you look at what happened in the lending industry, those

types of loans became almost standardized. in large part because there was a lot of money to be made by putting people in those loans because it would cost a little more to put somebody in that loan so they would be a greater revenue stream. and therefore, more interest and more ability to sell that off to wall street. and unfortunately, there was a lack of either appreciation or interest in the problems that were occurring on the ground not just in the state of illinois, but throughout this country, with those types of risky loans. in addition to the dish can i ask you specifically, did the state attorneys general visit with occ, federal reserve and visit these issues? >> i think in 2005, you might be aware there was an action brought against at the time attorney general spitzer by the occ attorney general spitzer at that time had attempted to

initiate fair lending investigation of a number of national banks, and the issue of preemption arose then going all the way up to the united states supreme court. it was resolved earlier this year. so the occ was well aware, and we did obviously make the occ aware that we were looking into not just their lending practices, but other practices of the lenders in the effort to combat the erosion of underwriting standards. they just had a different agenda. >> let me ask you about this notion of a higher payments for riskier loans. that's because what mortgage brokers were being paid higher amounts to peddle these loans, or was it that commissions were based on interest rate structures which by their nature, overtime or higher? what was it, tell me the correlation between risky loan, higher payments, or making those

more attractive for wall street. i want to understand that as best i can. >> ultimately you're looking at what he income straight out of that loan. so the higher the interest rate is, the higher the income stream should be, the higher those payments will be. and so brokers, as well as as well as loan officers, in house lenders, as well as originators, as well as independent brokers who were selling loans, were incentivize to put people into high-cost loans, and then to complicate the problem, add risky features to the politics of the prepayment penalties, the balloon payments, things of that nature, that would trap people certain with the prepayment penalties into those loans, yeah, insuring an income stream in the case -- >> so those were tech lead into the income streams? >> they would be. and here's what you are concerned about their bearcat played into what the payment is going to be to the broker or the

loan officer, and so that was the incentive that we've seen. as i said, we have seen the rate sheets so the amount that brokers and loan officers were paid, based on the features of the loan, based on interest rates of those loans. >> you can provide those to his? >> it was part of our litigation with countrywide to i can see if i can. >> all right. ms. crawford, you've been in your job for 28 years as texas securities regulator. what kind of grade would you give the federal regulators are the specifically, your greatest interaction with was as easy? >> guest. >> what kind of grade would you give them for the last decade? >> for the last decade i would have to give a grade of approximately d. and the reason that the grade is the minus is because there have been some actions on the part of the sec, but the problem is that they missed the boat with regard to the most dramatic threats to

the investing public. there seems to have been a lot of activity there, but the activity has not been focused in a meaningful way in addressing these problems as they relate to individual investors. and really, large investors as well. so there has been a lack of leadership. much has been said about the lack of resources, but the problem with that argument is that there are never enough resources. and what has to happen is that you have to have good people who will strategize to deployed the limited resources they have in the most effective way to protect investors. and that is the mission of the sec, and is at the forefront of what they are supposed to be doing. we found on a number of occasions that they just weren't there. these major frauds that i

mentioned before that turned out to be systemic and would have been exactly the kind of systemic national problem that the securities and exchange commission would have been expected to address, was not address. and therefore, the state securities regulators had to step up to the plate and fill that void. that is not the kind of thing that i want to be doing on a daily basis. >> was a collaborative, has there ever been a collaborative relationship with the sec and you talk about limited resources, it would make sense organizationally if i was in the sec, which i'm not, to look at counterparties across the nation on a regular basis talking about what they are seeing in the field and in a sense coordinating enforcement that has ever been that kind of relationship? >> mr. chairman, that kind of relationship does exist at the regional offices of the sec. the regional offices, i would give probably an a+ grade because they work very closely

with their counterparts in the states. they work collaboratively with state and federal prosecutors. it is really a beautiful business model for regulation on the regional level at the sec. is only in washington that we've had this problem. and it's not always been the case. prior to about 10 years ago, the sec was, in our estimation, the crown jewel of federal agencies. they knew what they were doing. they knew what they were supposed to do. they knew how to work with all the other players to get the biggest bang for the buck. so it's been very disheartening for all of us, state securities regulators and others, to see this occurring. >> okay. mr. holtz-eakin? >> thank you, mr. chairman. and thank you to the witnesses for taking the time to be with us today.

let me begin with the standard admonition that we thank you very much for your answers to the questions we get to ask now, but we would as your cooperation as well in answering questions that we would submit in writing after this hearing and look forward to working with you. i have a couple of questions that are going to reveal that i know nothing about the kinds of things that you do, and i guess the first one goes to you, attorney general madigan, which is it seems to me very common sensible that someone would pay more for a mortgage that is more valuable to them. so what's wrong with that? >> what is wrong with that is that at the broker level, they were no longer looking to determine as part of the underwriting practice, whether or not the borrower could actually afford to pay the loan. >> so it's not so much the fact that you pay more for a mortgage that geisha greater income stream. it's the underwriting standards have deteriorated? >> correct. there was an incentive to put people into higher cost, riskier loans when they were not

appropriate to be in those loans because they ultimately may not be able to pay them off. and as we've seen, that was in fact the case. >> okay. and can you -- i guess this would be a general request to everyone. if you have information, again, on the pervasiveness of fraud and mortgage origination, i think this is central to the investigation, what fraction of mortgages, by value or number, were affected by fraud over the period from, say, 2000 to the present? getting a sense of the magnitudes i think is imperative. >> i think it is essential when you ask that question to decide what you mean by fraud. i think you will find, if you include deceptive advertising, as fraud, you're going to have a very high percentage of the problem attributable to fraud that if you actually get into

fraudulent mortgage schemes, some of these complicate things, may not be a percentage. but in terms of the number of borrowers that got into these things as a result of the teaser rate, as a result of not knowing what negative amortization was and all that sort of thing, i think you got a very high percentage of the loans. >> we will try to do our best job of analyzing that for you. >> i appreciate that very much. i did want to ask you a little bit of a follow-up to the issue of loan modification, because it wasn't clear from her testimony, at least to me, whether these were instances of illegal actions regarding loan modification, or simply the failure to act in some way. we are not asserting widespread fraud in loan modification? >> no, commissioner, we're not. what we're talking about is all of a sudden pressure from all sorts of places, the federal government, state governments, let's get into loan modification process. our personal belief is the loan

services were absolutely overwhelmed. they were not geared up for this. and i also believe that despite our best efforts through for closure hotlines and every thing like that, we have a very small percentage of all the people, maybe it's our fault in terms of our ability to outreach, actually trying to get into this modification process that i am not alleging any wrongdoing in that process. i'm guessing that our hopes, our hope for situation with lots of people participating in the process, at least up until recently, and i haven't seen the latest report, has not fared very well. >> thank you. ms. crawford, i want to get back to the securities because that was one of the really moment of the financial crisis, both in its shocking magnitude and its duration, the market stayed frozen completely for a long time. i think i understand your complaint about the absence of,

after the fact action by the part of the federal level officials. what was there something that you can identify that could've been done in advance to avoid the freezing of the market, or was it going to be one of those pieces of the fallout of the crisis regardless? >> well, one of the problems that has not been discussed is the privatization of governmental functions. and in the case of securities regulation, we do have an entity called fenner that is a private entity that is responsible for actually looking at broker-dealer operations. and they tend to focus on the very large ones, because that's where the sec emphasizes its regulatory authority. however, for what ever reason, fenra failed to uncover these unsavory practices here at all

of the major wall street firms. and i think that if fenra had done a better job, or better yet, if the sec had assumed the responsibility and the accountability for looking at those firms and/or practices, perhaps we could have stemmed this early on. >> thank you. mr. theobald, i guess the question i have for you, game goes to these magnitude issues. the number you quoted in her testimony was that 70 to 80 percent of those mortgages that are in foreclosure show evidence of fraud. i think this is from the mari folks. does that mean the foreclosure process is fraudulent or does that mean someone in the chain from origination all the way through there was some evidence of fraud? >> what we found is that somewhere in the chain, and the number was quoted by marty because what they're talking about is either fraud for profit or fraud for housing. and again, you're talking about two different animals that someone might fudge the numbers

to get into a topic that they will can't afford. so that in essence is a fraud. however, it's not something that we are really going after. were going after the fraud for profit. and the criminal conspiracies that are involved in that. >> i see. thank you. that's all. >> let me on my time ascot is a follow-up to this, which is let me understand it. in the 70, 80% number does include both the fraud for profit, conspiracy for profit, as well as the fraudulent documentation. >> that's correct. but what's happened is the fraud for property has actually hurt the market and hurt the economy as well because now you're looking at all the foreclosures that have occurred because of that. >> and i do want to emphasize i think whatever data you can provide us on the pervasiveness of fraud, and i want to direct our staff to make this a work item. i think one of the things, there's a term i think it's controlled fraud, which is

sometimes used entities, the very nature of which is from start to finish what they're moving into the market place is something that's fraudulent, nonsustainable. i be interested in particularly i think the nonfinancial institution mortgage originators, these monoline originators, i would be interested in some stats from our staff on the extent to which there was kind of a widespread failure of mortgages. naturally directed to the staff, to look at some entities to seed were there certain entities in the marketplace, the very product of which was unsustainable. all right. let's go to questions from commissioners. ms. born? >> thank you very much. i am concerned by your testimony relating to preemption. of state law in areas of

financial regulation and regulation of market participants. during the last two days, we've been hearing testimony about weaknesses and federal regulation. for example, the failure of the federal reserve system to institute effective predatory lending bans. problems with the sec's oversight of asset-backed securities. problems with the sec's oversight of credit rating agencies. . .

>> i am not the best advocate for pre-emption so i don't know if i will give you a satisfactory answer. from our perspective over the last decade in this financial crisis, there needs to be -- everyone posted this -- there needs to be a strong system that includes federal regulators. we are the front lines. however, there are arguments at the federal level that in banks

in particular they don't want to contend with 50 different state laws. in many areas they deal with 50 different state laws but if there was one strong standard that the states would enforce there would not be a need for different state laws. it was an experience in illinois that we went to our legislature and said we have to change the law to require a fiduciary duty to ensure they are putting our orders into loans and that they can reap a as the best possible loan for them. very difficult to pass those laws when brokers and lenders can say if they are not doing it at the federal level that doesn't need to be done here and

this isn't a problem. pre-emption as i said in my comments parallels the rise in high-cost loans. in large part because we think there was the ability for us to go after all of the participants. we could put our finger on the crack in the wall. >> would you comment? >> entity to entity. in the case of the occ i believe it is a regulatory -- they want

to capture all of that. with regard to the sec inside the beltway, sometimes beer can be a good thing. it can be a motivator. i believe in regulatory competition to the extent that it results in better protection of our nation's investors. that is a significant problems so washington worries about that. reason is they don't worry about it at all. they want to work collaborative lead to get the job done. there is a bit of politics there. the last thing a want to mention that is rather insidious is federal agencies do suffer from regulatory capture. they have become so close to the

entities they are sworn to regulate and so much moving back and forth between those entities and the regulators, a revolving door system, lost in the process. some of that has occurred in the sec. >> would you want a couple minutes? >> i would like to let attorney-general -- >> i watched the arguments about federal pre-emption for many years and the proponents tell congress that subject thing our industry to 50 different state regulatory schemes will interfere with commerce and congress bases that preemption on their powers over interstate commerce. what has bothered me, we have a

knee-jerk reaction to fight pre-emption, a lot of lobbyists and industries come to congress have a knee-jerk opposition to any state regulation and seek pre-emption. the extent to witch any state regulation would interfere with interstate commerce. keeping us out of pursuing these companies for their deceptive advertising. at the front end would be very beneficial for us to not just pursue those entities we have jurisdiction over but it was very aggressive in stopping any efforts by the states to get into these areas. >> just to clarify one thing.

are you suggesting that the major arguments and pressure are coming from the regulated industries, either their advocacy before congress or their advocacy before the occ. >> i certainly am. >> i have seen your testimony and you make very strong cases that there is very substantial abusive management going on in your states and that is probably true if we had 50 of your counterparts here. i want to stress our job is to report to congress and the american people about what

caused the worldwide financial crisis and that is why it is so important if you can to provide us with information to assess the dimensions of the fraud problem in relation to the entire sum prime lending problem. there are probably ten million some prime loans. that is a huge number that is well over a trillion dollars that we are talking about in terms of potential losses throughout the world financial system. to the extent possible we have to get that information the chairman has asked. they are skilled and good investigators and they find this data where it exists. if you have that data anywhere within your jurisdictions, that would be exceedingly helpful to

us and in particular i would like to ask you in your role with the north american securities commissioners to see what they might have within their jurisdiction because they cover all of north america and if there is something in their files and studies have been done that might give us a sense of the dimensions of this we very much appreciate it. i would like to give you the opportunity to tell me if there's anything you know of, any place you think we should go to find this information. we will be asking you as the chairman and others have suggested asking in writing for this material. we have a chance to think about it. if there's anything you can think of now it would be very helpful. >> let me direct the

commissioners, there is a report that came out on july 28th, 2009, regarding the performance of non prime mortgages and a lot of information that would be very useful to the commission. it may not cover, categorized as prime mortgages that are defaulting in record numbers. they have to find additional studies and provide it to you. >> only one other question. i think you mentioned in your statement that a option arms or explosives loans built by wall

street? >> the most complicated and risky loan product we have ever seen. we are talking about low introductory teaser rates and pay out an arms can be as low, that all lasts 90 days. the borrower has the opportunity, it doesn't cover your principal in have the option of paying a 30 year amortized payment, 15 year amortized payment and one option i am forgetting, we have seen the vast majority of people who took out these loans that were

originally intended only for very sophisticated investors. the majority of people didn't fall into that category and they are treating their home mortgage loans of the same way they would treat their credit card payment so they're making only a minimum monthly payment and a real concern is within three to four years those loans will be larger than the actual value of the home. when that happens the borrower makes a fully amortized payment. in the countrywide complaint that we filed, there are quotes indicating that he was unsure how all borrowers were going to pay these loans. >> that was a good answer but i have a more specific question.

the question is those loans sold to wall street? >> i would have to look at what percentages. sub prime loans were eventually securitized and allegedly the quarter that weren't had different values. they were not as concerned about shedding risk on those. >> in the normal securitization that wall street did they were assuming interest was going to be paid on these loans and one of the reasons they were paying up for some prime mortgages, in answer to the commissioner's question, they were looking for that stream of revenue.

the pay option arms, any of the negative amortization loans wouldn't support that idea. i am trying to find out whether that was what wall street was buying. >> looking at the equity stripping scheme, as long as many of these loans, vp a option and some prime loans, lot of the promotion of them was if you do have a problem we will fight you. when we had equity when we got into trouble they were able to fly into another loan product which would give more money or fees and continue to feed the beast. that is the situation you would find putting people into pan

option arms. low teaser rates, people making minimum payments. if they got into a problem, credit was no longer available and home values no longer going up. >> let me respond to that. i know my time is up to. >> 43 seconds. >> the question i had assumed what you were talking about but when one of these loans that is refinanced disappears from the securitized pools so that it is a problem for the secure a kaiser to have these loans refinanced, they prefer loans that would not refinance quickly. that is one of the issues we should be looking at. >> you need to look it the securitization contracts because there were provisions and i don't want to say i am an expert

on this but there were provisions on the warranties that if there was a loan defaulted on, it could be flopped out for a new loan. you need to look at individual contracts to see what was allowed what wasn't allowed. >> thank you. >> to a certain extent peter stole my question but i want to see if i can give my version as well from the staff and if you can help us at all, think about something quite close to what he was thinking about. i look at this as the universe of foreclosures we have. there is a baseline level of foreclosures that naturally occurs in normal times and obviously we clearly saw a dramatic increase in foreclosures. i am interested in the components of the baseline level

of foreclosures and the increase in foreclosures and if you look at those people, in my simplistic way i divide them into four groups. the weaker -- the first group are victims, those succored by some bad lander, someone fooled them into taking a mortgage they should never have taken. these are people we clearly feel sorry for especially on the back end when their property is being foreclosed on and they are being hit in all sorts of ways. the second are knowing but unlucky people who understood they were taking a risk. they understood what they were doing. they wanted to get into the home. the mortgage was available. they knew they were taking a risk and the economy tanks or they lost their job so they are about to lose their home. the third are gamblers, people who were in knowing and

intentionally speculating on home prices continuing to appreciate. there were more of those in certain areas of the country than others. the fourth category are the fraudulent individuals. the people who were doing the fraud from the borrowers's side rather than the fraudulent activity on the lenders's side. they're relying in terms of information being provided. i think of it from the standpoint not of the universe of mortgages but if you look at a universe of 100 people facing foreclosure what is the breakdown? if this is 80% of victims that says one significant thing about how we should be thinking about foreclosures. what should you tell us about what you see and how that might influence our understanding of the relative components of the universe of people who face

foreclosure. sorry if it is too complex a question. can i add two more categories? >> that is a very good question. folks that were knowing, got into those properties knowing they couldn't afford them in the first place but they fudge the numbers. you put them in one of the other categories, they did commit fraud because they gave false information on their application. >> i have that person in category iv, i have no sympathy for them. >> what happened is the phenomenon of the artificial increase in the property valuations. folks got into properties and paid more money than they were worth and when the bubble burst and those properties went down, folks are folding half a million

dollar mortgages on not thousand dollars property. their best move is to go into foreclosure. that brings us to the next wave of fraud because now they are identifying a party to sell that short sale at the lower rate and cleaning the property back over. in essence doing $300,000 from the lender. >> let me focus on the universe of fraud you are dealing with to the relative balance of fraudulent lenders, i am thinking of these as firms using deceptive advertising practices and folding borrowers versus individuals taking advantage by other individuals for lenders. >> there are a number of folks that are part of the industry is at work in different various aspects on the mortgage industry that have been involved in this

maybe knowing or unknowingly by the lending institution. those people are the ones that caused the most damage because they were able to approve or allow those fraudulent loans to go through. it is a myriad of folks who are involved in this. folks who are real-estate agents, mortgage brokers, fraser's, title attorneys, everyone involved. >> all of those people are on the industry side. it is bad behavior by people in the industry rather than a guy who wants to get into the half million dollar house so he fudges numbers. sounds like you are saying that universe of individuals who are lying to get into homes is a small proportion of the total amount of fraud. >> that is a significant portion

because of what happened to the market. they couldn't afford to live in florida due to the increased taxes and insurance. >> to make sure i understand. in florida in particular there were a significant number of individuals who were not affiliated with the industry who were in a position they felt they had to behave fraudulently. >> there was nothing that increase the valuation of the properties. it is just that the speculation on the properties and condominiums and single-family homes went up to a point where

folks could not afford to live so they had to do something. that is where you see the sub primes and everything else. >> the housing price bubble encouraged bad behavior by some people. >> it exacerbated the problem. >> mr. thompson? >> i think you all brought some texture and color to the shape and nature of the problem not just in 2006/2007 but the problem that lives today in our communities around this country. you also represent what we all know about first responders. we think first responders are firefighters and what have you but in this particular flight you are the first responders for

us. i am struck by the pre-emption problem because it represents a real conundrum for us because here we sit in a time when funding for state and local governments is under enormous stress so even if we were to say let's clear away the conflicts and put more authority in the states how are we a shossured t there will be funding -- i would like you to describe for me what are the conditions under which we can have a more cooperative relationship between state and local government and the federal regulators that you interact with recognizing there will not

be infinite funding or significant changes in law that will shift these things but we have to fix what appears to be a broken interaction between the states and the federal regulatory process. >> i appreciate the question. one of the things that has occurred in this past year has been an increase in the level of cooperation, in particular with the federal government and state attorneys general. in number of meetings have been had to discuss these very issues as well as what john w. struthers talked-about which is the concern we had about the foreclosure rescue fraud. as we speak there are a number of task force working groups to contend with mortgage fraud in a whole series of different areas, whether it is the originations

or the back end or discrimination. we have been working with the attorney general holder and timothy geithner and the hud secretary when we look at the modification program and how they need to be improved. we have been working with the ftc which is a longstanding relationship invigorated over the past year to look at a lot of fraud that has taken place. from what i have been told -- my counterpart in iowa has been the attorney general for 28 years and what he has said, it is unprecedented to have this type of relationship with federal regulators. we are heartened by the change but as proposals are made to congress to prevent this from happening in the future we know that right now in terms of

putting in place consumer financial protection agency a large part of the argument is whether state level enforcement will not just remain but be expanded to where it should be in recognition for the work we have done and recognition that resources are limited and more cuts are being -- to deal with these problems. >> can i hear from you? >> you raise a very important question and right now there is a higher level of cooperation because there is a great deal of fear. this is a huge problem and it is beyond the ability of federal regulators or state regulators to address. the fear factor has caused greater communication and collaboration. the problem is going to be on a going forward basis where the

fear level is not as high, how do you ensure there are mechanisms in place that won't allow for this same sort of situation to develop? i think the system acroic risk out great opportunities. it is mandated that those folks speak to each other and we work together going forward. the probability of a major systemic crisis. >> isn't it the case that the push for extensive securitization of these mortgages enabled in a certain sense the proliferation of

mortgages some of which were motivated by fraud and others which simply never looked to be able to be paid back. let me be more precise if i can. once you buy a or pool of mortgages and securitized them everyone involved in that process gets paid when the security is sold. the lawyers who write the prospectors and the auditors who write the financials and the underwriting investment bank and the ratings agencies that issue them. none of those parties retain the risk, the failure of the underlying mortgages will imperil the securities themselves. that risk falls exclusively on the purchasers who were customarily pension funds and other investment vehicles that have accumulated the potential retirement benefits of others.

my question really is when you talk about the option, please pick your payment mortgages, at the end of the day, who if anybody has undertaken responsibility to pick up the pieces of those lost opportunities and once they are purchased, i don't really know what the assumptions are made as to what the amount of interest that will be generated by those loans, what assumptions are made in the security, will they pay 1% for three month? will they move to 12%? could you speak to what the accountability -- the ultimate accountability question may have motivated the underlying fraud? ..

>> so what we have seen is that the breakdown, right? securitization process allowed everybody along the chain to make money, and none of them to have to deal with the consequences of the risk. except as i mentioned on the front end and a backend. >> when commissioner henke gave

his breakdown of categories, victim, knowing but unlucky, that's exactly what occurred to me. i do think there's a large at unlucky category here, people who knew what they're getting into but still shouldn't have been getting into it. and no one had the incentive to keep them out of it. i really do believe that, that this is a big part of the problem, which goes to exactly what you're describing, the lack of risk for the people who are putting them in this. >> commissioner crawford? >> i think you've done a superb job in articulating the nature of the problem, and the things that's very disturbing is that almost any product can be securitized. so it's very possible that down the road, or even as we speak, the great minds of wall street are figuring out new products that could be securitized in a similar fashion. so that as long as we have the situation where you can offload

100 percent of your risk at each stage, we face the possibility of another financial meltdown. so this is a serious problem, and it does need to be addressed. >> just very briefly. >> take two more minutes. >> thank you. i just want to say that i appreciate your commending me for my questions, and i guess i would return the compliment, in that i know the national association of attorneys general with whom i've worked extensively, and a north american security administrators association, are on top of this and a whole bride of other things. i guess i would remind all of us as commissioners how important it is to empower the front line and the local officials. i don't mean to not include you, mr. theobald, to empower people who actually the closest to the

problems. because you are the early warning systems in many respects for these issues, which ultimately make him to federal attention at some point. but abuses are more quickly identify to you and the problems are brought to you at the local and state levels, and securities and attorneys general, and law-enforcement authorities. and i guess i think that we need to examine the extent to which we've, you know, we've reduced the authority of the locals to the point where we create a greater systemic risk. as a result. thank you, mr. commissioner. >> thank you. ms. murren? >> thank you, mr. chairman. i have a question for commissioner crawford. if you could talk about whether you believe there were any specific actions that might have been taken over the course of

the last several years that would have led to a diminishment and what you characterize as being regulatory capture. >> yes, i do. i think there is a problem that when you go to work for federal agencies, particularly the sec, there are no revolving door prohibitions whatsoever. and if you work for the sec, you can immediately leave and go represent wall street firms, work on wall street. and what i think that that does is it tends to have a chilling effect on the zeal with which you regulate those people across the table from you. in addition, i think that there are some systemic issues that need to be looked at by all the federal regulatory agencies. one of the problems with

washington, and we hear this over and over again, is they are too removed from what's actually happening on a day-to-day basis. and it makes a big difference if you're a regulator and somebody literally walks in off the street and sits down and give you their documents and says, i think i've been defrauded. you have to deal with them. that doesn't happen as often in washington, d.c., because people don't ordinarily get on a plane and fly to washington and lay out their problems for representatives of federal agencies. now, that's probably always the way it's going to be, but i think a recognition of that fact is so important in terms of trying to keep financial meltdowns from occurring in the future. and that's why i really do hold out great hope that the systemic risk council will enable local

first responders to interact with their federal counterparts in a way that creates a sense of urgency, and humanizes issues that we all need to be addressing. >> thank you. attorney general madigan, you had mentioned in your testimony that it is your belief that consumers require and need to have more protection, and certainly i think all of you have described a lot of reasons why that's the case. but do you believe if we were to fully maximize the effectiveness of the regulators that we currently have, that that would give consumers the protections that they need? or do you feel like we need to do something different? >> excuse me. i think the current proposals that are being talked about in congress are very important. i also -- the other panel earlier today had different views on what the model should be. should await the one

consolidated regular, should be a pal who worked together? the concern that i think we as state attorneys general who are really the front lines of enforcing consumer protection laws in our states have is that there has to be somebody who's primary or sole responsibility is consumer protection. because we have seen that when that is not a component, we've seen what happens. and we have a flood of foreclosures across this country. and so it depends on what the ultimate structure is going to be, whether or not it would be sufficient. i think at this point it is safe to say that there is no federal regulator who was involved, whose primary responsibility was consumer protection. occ, ots, federal reserve, all of them could do work on consumer protection, but that is not their primary or sole

responsibilities. so there has to be a consideration, not just given, but responsibility given and prioritization of consumer protection. so we will see how that plays itself out. >> thank you. and just one remaining question. >> take a couple of minutes. >> mr. theobald, could you talk about perhaps anything that has lingered that you might be saying, since you are on the front line, you have ideas edenic for the job of being able to pull together your task force for mortgage fraud. and all of you have identified the fact that there were some early warning signs about the problems inherent in that. i'm wondering if there's anything that you are seeing today that continues to concern you as we look at our financial system going forward. >> actually, there are a lot of concerts, and one of the most particular concerns is the state and local folks working with our federal partners. pushing the work out of the

state and locals is the only way that we are really going to get on top of this mortgage fraud. there's far too many cases to handle for the fbi or hud inspector general. they have to push this down. in order for us to move forward, we need training for local law enforcement, and we need to do these things. we are accomplishing that to the department of justice and you're of justice by pushing the training. but as far as trends that we're seeing right now, we are seeing a lot of loan modification fraud, and that is coming from businesses that are opening up shop. these are people that are behind on their mortgages and they can ill afford to pay 1500 or 2000, to hire someone to help the modifiable deck and all they're doing is taking that money and doing nothing. so that's the next wave we are seeing, the short sale fraud which i described before, as far as folks they got into the property back when they pay too much for the property and are trying to unload it at a short sale price, but didn't sign it

over and quitclaim it over to a friend or a relative calm and didn't have it back against. >> thank you. >> senator graham? >> thank you very much. ms. crawford, a couple of questions. first, your organization starts out north american securities. does that indicate that canada is also a part of the association? >> yes, sir, it does. all the canadian provinces and territories, mexico, guam, puerto rico and the virgin islands are members of nasaa. >> among the economies of the world, the canadians have stated to have been one of the least affected by the financial crisis. has -- had they done anything in this particular area of mitigating housing fraud that may have some lessons to the united states? >> i think there are a number of

lessons from the canadians experienced. and this commission maybe want to even explore that. of course, they have had problems in canada, but not nearly as severe as what we've had in the united states. and i don't consider myself an expert with regard to their regulatory regime, how they do things in canada. but it might be worthy of exploration. >> i'd like to ask if you would come into wooden overburden you, if you would develop some lessons that we might learn from our neighbors to the north. >> absolutely. >> let me ask a second question, which i asked of the earlier panel. back in 1995, congress passed legislation on litigation relative to the securities industry, which was intended to raise the bar, make it more difficult for a private litigant

to bring a case of securities fraud. in your written testimony, you allude to this. what's been the effect now, some 15 years later, of this legislation, and would you have any thoughts as to whether it should be modified, repeal, or otherwise changed? >> i am thrilled that you asked me that question, because we have very strong opinions on that. it's impossible for regulators, either federal or state, to address every single fraud. private enforcement at the securities laws is absolutely essential. and it's pretty clear that the legislation that you refer to has had such an overwhelming, chilling effect on the ability of people to bring really good cases, but they are stymied because of the requirements to

get into the courthouse. that is detrimental to all of us. we can't be there all the time. taxpayers cannot fund every effort to bring about justice. and these cases are vitally important, and i'm hoping this will be root revisited by congress. >> mr. theobald, as someone who was born in and still lives in miami-dade county, i was particularly interested in your commentary. we look forward to discussing this with you prior, further. the legislation that was passed in states that those, a person of law-enforcement official who comes into contact with some fraudulent activity is to report that to the county property appraiser's office. do you know how many cases of fraud were, in fact, reported to

the county property appraiser's office? >> yes, senator. and if i could for a second, i don't know to remember but 16 years ago he would doing jump out with me in one of the roughest neighborhoods in miami-dade. this is a lot -- >> thank you for covering my back. >> yes, sir. but so far today, we have delivered over 100 cases to her property appraiser's office. and the significance of that is with the fraud that occurs in neighborhoods, the fraudsters were having to have two comparables in a particular neighborhood. and those two comparables grazed the valuation of properties in that entire grid that the property appraisers used. so all the other folks that were not involved in fraud, their taxes went up because their homes were artificially inflated by the fraudsters. especially in condominiums and miami-dade county, and you know better than anyone down in a court or just south of the city of miami, there are 25%, 30%

foreclosures in buildings in that neighborhood. attributed from these fraudsters. >> this is to all the panelists. many other people who are involved in these activities are licensed professionals, realtors, in most dates, mortgage brokers are required to have a state license, etc. how effective have the professional regulatory agencies been ineffectively prosecuting cases of licensing removal or other form of sanction against these professionals? >> in florida, the statute was on the books to have these hearings. however, the personnel that is assigned to these regulatory agencies is a very minimal, at best. and they don't have the resources, or the personnel to do it. however, since the heightened

awareness and the mortgage fraud crisis that we've had in the state of florida, the increase in the licensure of removals and suspensions has increased, because we are now constantly communicating with those agencies. and they're having these hearings now to pull folks licenses. and again, prevent them from victimizing other people. >> senator, we were one of the states that until recently did not licensed mortgage brokers. and interestingly enough, when the department upgraded or agencies looked around the country, foreclosure rates and other problems associated with air was full licensing in our state, where there wasn't, there was a whole lot of difference. but one of the things that we have noticed is that there is an amazing number of felons who are now unable to get, at least when people were applying for mortgage licenses, were being disqualified as a result of having criminal records. so at least there was a subset of this group that actually had

criminal records, and is now being excluded. i will tell you that since this occurred, this collapse, one of the things that's gone on in colorado is an incredible increase in the scrutiny of appraisers. we have greatly tightened our laws, and as a result of the problem with what the fraudulent appraisal of conservation easements, we are now suspending high numbers of appraisers in colorado. >> thank you, mr. chairman. >> if i could take the last little bit of my time. i just want to go back to that last question and make sure i understand. a characterization often given of the mortgage crisis is that it occurred in certain states. california, nevada, arizona, florida, bubble states. and that it was the states

specific licensing and oversight of the mortgage brokers that is -- should be the focus of attention. that it really wasn't anything to do with federal policy, it was the states. so what i want to be real clear about is the licensing clearly was in the state's domain, but with a preemption from either the 96 law or the comptroller of the currency 2004 action that inhibited your ability prosecute and generally oversee mortgage brokers conduct in your states? >> let me do two things. let me give you some statistics, and they let me also respond maybe more directly. we obviously hear this all the time, the contention from chairman dugan at the occ that this wasn't a problem with national banks. and in fact, national banks funded 21 or 25 largest subprime

issuers that were doing business that led up to the crisis. and it was national banks and federal threats and other of their subsidiaries that were responsible for almost 32 percent of subprime mortgage loans, 41 percent of the alt-a love, and 51 percent of the payout option in interest only arms that were sold. and that's for 2006. i believe that information comes from, i will find out where comes on for you. and so yes it's been recognized that some states, there are very few resources, and so while enforcement actions are taking place, and, they are a drop in the bucket in terms of the entire problem. but that doesn't mean enforcement actions were not taking place. when i looked across the country, we see that enforcement actions were taking place against every single participant in the chain. this was taking place at a state level. and again, not being supported

by the federal regulators. and in fact, oftentimes being challenged by, and so to the extent that this problem existed and was funded by national banks and thrift, then just went down the chain, very hard for states to go after that problem when arguably we had to decide are we going to spend our limited resources on fighting the preemption battle, or are we going to go after the lenders that are operating in our state? >> i would agree with general madigan. >> great. thank you. >> i want to ask a follow-up bill on the percentage. you said 32 percent of the subprime loans, is that a national figure? >> i believe that is a national figure. >> that was 32 percent of subprime loans were originated by, say it again. >> national banks, federal

threats or their subsidiaries. >> the balance, the other 68%? >> not depository lenders most likely that had state charters. >> not depository lenders. yes, absolutely. we have eight minutes and 38 seconds to use it all up. >> another follow-up question. when you encountered these cases involving federal institutions and where preemption was lodged, did you hand the file over to the federal agency that was asserting preemption, and if so, what action did the federal agencies take with those files? >> what i can tell you, income is that when these cases initially tend to come to states the way it was described in texas, so every year we take in illinois attorney general's office approximately 30000 consumer fraud complaints, whole variety of the. some section of them are going

to be related to consumer debt to. so when somebody comes to us with their stack of mortgage documents, and we review those, and then we start to see patterns, that's when we start our investigations. and so what we do is make a determination, is this somebody, is this, you know, an organization that we have the legal authority to do something about. when we do, those tend to be the ones that we decide to pursue versus the ones we are arguing were preempted. yes, there are times when that information has been given to federal regulators across the country. and we can probably work to try to get your examples of that and report that back to the knish and. i think it would be viable for you to have. >> and particularly what did the federal agencies to when they were so alerted? >> we can include. i can say that in 11 report i have read, that between a belief in his 1995 to 2007, i believe it is the occ initiated 13

consumer protection actions, publicly. 13 over that time period. >> editorially, it seems to me that the corollary of preemption is the assumption of responsibility. it's not just to advocate to the bad people and give them a free firing range to operate upon. and it would be interesting what was the response of the federal agencies when they were given the opportunity to carry out the other side of preemption, which is responsibility. >> commissioner wallison, an and additional two-minute. >> i don't know if i need two minutes but i wanted to clarify something, if i understood it. you said that 60 percent of the mortgage fraud was subprime lending or alt-a lending, came up through -- >> subprime lending, correct?

>> wasn't subprime. >> i think it was 68%, 32% was national, banks and thrift, which means 68% would have been other. >> okay. for the 68%, you do have authority. it was the preemption occurred as to the 32%. let me just check to make sure that everyone is on, the panel here, has jurisdiction over non-preempted organizations such as mortgage brokers, nonbank, non-federally regulated bank institutions. is that correct? >> i actually do not have that authority over that particular group, because we are restricted to securities. but i can tell you in my state, there is an entity that does. >> okay. there is at least in your state, mortgage brokers are regulated?

>> yes, attorney general. >> commission, those are the entities that we went after. we went after the largest and subprime lenders so at the time we were investigating households, ameriquest, countrywide. they were the largest subprime lenders in this country. and we direct our resources towards him. what's also interesting to note is that when we started doing these investigations, particularly out of illinois with countrywide, almost immediately they change their originated. they were no longer originating under their state charter, and moved to find a protection under the federal charter. so there are very few, if any, state-chartered entities left out there doing mortgage origination to. >> thank you. >> i just have a couple of wrapup questions. you mention in your testimony, commissioner crawford, the national securities market

improvement act in 1996, they always have such nice names, commodities future, modernization act. but you talk about how some of the authority, oversight authority over the rating agencies were pulled away. from states. no longer registered investment advisors. was there any practical effect? preimposed, was there a different real level of scrutiny in terms of rating agencies? were states bringing actions? >> quite honestly, no. but if you remember back in 1996, it was just before things started going downhill in terms of there being very, conflict being pointed out. people were beginning generally aware that it was an inherent conflict to pay for your rating. and i won't say what we would have done had we had the chance, but the fact that there was no

backstop there in the states is not a good thing. >> so maybe the only observation is no backstop versus practical or measurable effect? >> i think that is your. >> attorney general madigan, i want to just clear by one more time when you are talking about more payment for the riskier loans. i can understand obviously, maybe the desire to have, quote unquote higher fees. it turned out not to be at the end of the day. but we also have seen mortgage brokers, the fees paid to mortgage brokers, that that was the rage at your talking about. if i'm a mortgage broker, the not depository financial institutions telling me if you originate a b. and c. here, you get paid more. we are in sending you because of the stuff what. >> exactly. >> okay. but that doesn't necessary apply to the no doc loans. >> no, no doc essentially you're looking at somebody who probably has good credit.

you as the borrower will end up paying more because there's no documentation. so ultimately, yes, you as the probe will get paid more if you're in one of these no doc loans. >> there's the compensation for the no doc. all right. which is -- i want to observe on the fact it wasn't to cover the additional cost of the documentation. all right. and then i don't know if commissioners have any other questions. i have one last. i guess i have an observation, which is as much for the commission as for all of you, is that sitting here today, one of the things that strikes me and it's actually been striking me more as i myself have learned about the fbi warning in 2004, is one of the things i think as a commission we look at, as we look at the causes,