these were flawed products. you came to an agency -- >> i wouldn't necessarily call it a flawed product, but it was a product that i was uncomfortable with, and i was influenced by the fact that the product had been in existence for more than 20 years with positive experience in west coast institutions. >> it was anathema to you. >> it was. it was foreign to me. >> it was anathema, not foreign. >> i grew up in an era where the fundamental principles of credit administration were character, collateral, capacity and conditions. >> you used the word anathema in your statement. >> i did. >> you have this procedure here, you have this approach which is anathema to you, one of a number of things which were anathema to you, but they're still in existence. as head of the agency, did you not just say, we're going to

change this? >> i could have said that. >> why department you say it? >> i chose not to because of the experience of institutions over the preceding 20-25 years. >> and you regret it? >> in hiepped sight, i great it. >> not in hindsight, you believed it was wrong. coming in you believed -- >> we were at a point of hindsight today, and i regret it. >> i'm afraid this is -- what kind of efforts did you make to change these practices? did you say we're gonna -- did you issue a temporary new guidance and let people -- >> no, no, i did not. as i said, i was influenced by the fact that there were 20 years of positive experience with these instruments. >> the -- so washington mutual, then, is originating hundreds of billions of dollars in these adjustment rate mortgages, ots allows them to engage in a set of high-risk lending practices

in connection with the loans. you've got low teaser loans, as low as 1% for one month to entice borrowers. you've got you're qualify -- they were qualifying borrowers with lower home payments they might have to pay, you're allowing borrowers to make limited payments relating in negatively-amortizing loans, on and on. then your people in the field make these kind of findings. and this is exhibit 1c, 1d and 1e. and i'm going to -- were you here when i read these findings in the field? >> i was not. >> all right. let me read them to you. i'm going to, again, read them in the somewhat longer contexts these are from, exhibits 1d and 1e.

1d, in 2004 underwriting of these residential loans remains less than satisfactory. level of sfr underwriting exceptions in our samples has been an ongoing examination issue. that means you were -- ots was unhappy with them for several years. and one that management has found difficult to address. then next, still 2004, this is what your folks found. residential quality assurance review of 2003 originations disclosed critical error rates as high as 57% of certain loan samples. 2005, single-family residential loan underwriting has been an area of concern for several exams, that means several years. securitizations prior to 2003 have horrible performance. we have, continuing reading down

under 2005, concerns regarding the number of underwriting exceptions with issues that evidence lack of compliance with bank policy. next, still 2005, we remain concerned with the number of underwriting exceptions and with issues that evidence lack of compliance with bank policy. the level of deficiencies, if left unchecked, could erode the credit quality of the portfolio. our concerns are increased, but the risk profile of the portfolio is considered and, boy, it was risky. including coxation and option a.r.m. loans, in loans with subprime or higher risk characteristics. 2006, next page, underwriting errors continue to require management's attention. overall, we concluded the number and severity of underwriting errors remain at higher-than-acceptable levels. '07, underwriting policies,

procedures and practices were in need of improvement, particularly with respect to state t income lending -- stated income lending. i mean, your people, you know, they're finding all this stuff. based on our review of 75 subprime loans originated by long beach, we concluded that subprime underwriting practices remain less than satisfactory. how's that for an understatement? given that this is a repeat concern, we informed management that underwriting must be promptly corrected, promptly corrected. or heightened supervise ri action would be taken. no, it wouldn't. year after year after year it wasn't taken, why should they believe it was going to be taken now? 2008. highest single-family residential loans losses due in part to downturn in real estate market, but exacerbated by geographic concentrations, risk layering, liberal underwriting policy, poor underwriting.

that's 2008. july. and in exhibit number 1e, 2006, within the employment risk management, fraud risk management at the enterprise level is in the early stage of development. heck, they're just beginning to manage the fraud risk in 2006. 2007, risk management practices at the home loan group during most of the review period were inadd -- inadequate. we believe more aggressive action should have been taken by management. how about more aggressive management by your agency? as previously noted, the risk missed representation. here you go, now you're talking fraud. stated income loans has been generally reported for some

time. some time this has been going on. what? on and on. year after year. so what, what do you do about it? what does ots do about it? not one single formal enforcement action against wamu from 2004 until 2008. >> that's not correct, mr. chairman. >> so the under 2008 is correct? there there was a formal enforcement action for bsa and flood insurance violations that led to, which was a formal action and included -- >> that's an overcharge for flood insurance. that's not what we're talking about -- >> civil money penalties. >> that's not what we're -- >> but it also included bsa and money laundering violations. >> that's a money laundering violation. we're talking about what they were doing in terms of the underwriting practices, the credit practices here, the

mortgages they were issuing. no board resolutions required, no memorandums of understanding required, no fines. so the bank -- i forgot what the number was that came out, i think senator coburn use a number as to how many warnings, how many findings, how much deficiencies year after year after year. >> i think he cited the number of in excess of 500 -- >> yeah. now -- >> -- items. >> is that, apparently, normal for ots? >> is what normal? >> what i just described? you go year after year after year of these kind of findings, and you don't have any formal action taken. we've told them they ought to do better, they say they're going to do better, and they don't. >> my response to that, mr. chairman -- >> you're the cop on the beat, supposed to be. not a ticket? not a fine for this? how many years would it have taken if they didn't go under before you would have acted? is this acceptable to you?

>> washington mutual was a 2-rated institution until early 2008. >> well, it took you long enough. >> typically, formal actions are not utilized in institutions that are one and two. >> well, that's in your hands. that's your decision not to give them -- >> i think that's a fairly common practice. >> maybe common, but that's ots's determination not to take any kind of formal action, and the two is your decision. >> that's true, but -- >> and you were reluctant to increase it to a three even though the ftc was pushing you to do it. and when you did final, final, decide in early -- finally decide to push it to a three, you didn't even then do anything publicly. you then violated your own policy issuing a memorandum of understanding instead of you had board action which is public -- private, excuse me, instead of a memorandum of understanding which is public. even after all these years of all these violations, you

finally decide in early 2008 you're going to push them from a two to the three, you then don't make that public, you don't do what policy indicated you to traditionally do which is to have a memorandum of understanding which is a public document, you delay that for months, then you apologize in an e-mail. i'm so sorry, you say, you're so sorry that you have to write him with an e-mail. you've tried him twice on the phone. now, i've got to tell you, it is not only feeble enforcement, it is pitiful enforcement. you want to defend it? go ahead. >> i would simply point out that the fdic had a resident examiner on premise at washington mutual throughout the entire period of time that you're talking about and that there was no ratings disagreement of washington mutual being a two-rated institution until 2008. >> and then there was a disagreement. you disagreed with them so for

another six months did they make these kind of findings year after year after year, the fdic? >> i think -- >> that was your agency. don't try to say the fdic was sitting there. your agency had primary responsibility, not fdic. as a matter of fact, you even pushed them away, your people, because they department have primary responsibility. you pushed them away, you didn't want them to have a seat at the table, you wouldn't even give them a desk. but your people made these findings, not fdic. you didn't want fdic to be meddling around in the your backyard. now, let's go back to your agency. year after year you make these findings. is that, in your judgment, adequate regulation? >> those are all items that are taken from examination reports, and they're sort of taken out of context -- >> no, they're not. i read the context. i gave you the context on these. >> the, i believe the 2006

examination report states that in the coffer letter -- cover letter that risk management practices and internal control environment continue to improve in 2005. and then in the -- >> well, i read you 2006. >> right. >> okay. so it says it hadn't. they remained. >> the 2007 general comments for the year 2006 and through the first quarter of 2007 indicated that there were continuing credit challenges that operating results improved, that there had been a cease and desist order with bsa, aml -- >> that was the money laundering issue. >> that's correct. >> yeah. i wouldn't cite that in defense of your feeble enforcement order, but at any rate, let's talk about what they were doing with mortgages. >> it said asset quality was

satisfactory and trends were negative. >> you're using that as a defense? >> i'm not using it as a defense, i'm simply pointing out that the examination results in sum indicated that the institution still deserved for the years up until 2008 the two rating that it was given by the ots, and that was agreed to by the fdic. >> isn't the fdic in february of 2000 they finally persuade you, and they made an effort for some time to persuade you to go to a three, but nonetheless, finally in february of 2008 you've got a three rating. and what happened? why then is there not the usual traditional memorandum of understanding so-called made public? why is it then? >> i don't know, to tell you the truth, i do not know why it took so long to implement the mou. i do not know.

>> why don't you know? this is a huge issue. you know you're coming here. why don't you know that? i mean, you use that as an excuse for no formal enforcement action that they were a two instead of a three. then you come in front of us and you say, well, you don't know why it took so long when you finally decided to move them to a three to have a memorandum of understanding which is public for failure for another, what, seven months from february? and you don't know why. >> i knew there was a great deal of back and forth -- >> not with fdic. they were pushing you hard to go to a three. so who's the back and forth with? >> between the ots, the fdic, and, perhaps, regional management on the west coast. >> it wasn't fdic. they were pushing you hard. are you at all embarrassed by this? >> i am. >> good. >> i am -- >> you ought to be. >> i am by nature, mr. chairman,

a humble person. i am a casual person and an informal person, and it's not at all unusual for me to address the people who run the institutions that i supervised, was responsible for supervising by their first name if i know them, particularly if i'm ten years older than they are. >> the apologetic nature of that e-mail -- >> i'm not disturbed, i make no apologies. >> [inaudible] >> make no apology for that e-mail whatsoever. >> do you make any apology for the six month delay -- >> i regret -- >> the public making -- >> i don't know if apology is the right word, but i regret there was a six month delay. >> and you don't know why? >> i don't recall now. it's been two years and i can't remember yesterday, let alone two years. but i regret that it took so long. >> this was not some ordinary institution, by the way. as you know, it's the largest, the largest institution that's

ever been taken over by fdic, bank or thrift. so this is not something which sort of asking you to kind of look back at some institution which was some small institution you can't remember. this was an, this is the biggest bank failure in history. >> that's true. >> so when you tell us you can't remember why it is that at a critical time you did not, you can't remember why it is -- >> i was not personally involved in the negotiation of the components of the mou, and i do not know, i do not recall, don't think i ever knew exactly the reason for the length of time that it took. >> well, mr. doko, maybe you can tell us. why did it take so long? >> my recollection that the interim downgrade was done on an

interim basis. this was before the examination results were completed, this was before the examination findings had been written, this was a proactive move, quite frankly, to move this institution from a two to a three based on what we were seeing -- >> fdic wanted to do it a lot earlier than you did, right? there i don't have that recollection. my reck elections were that any differences we had were in late 2008, mid 2008 writing between a three to a four, not to a three. i think there was general concurrence based on my recollection, and that was a proactive move to do it before the examination had concluded. and a board resolution was required. now, you can argue that the board resolution may have been stronger, but remember, this examination was ongoing. examiners were still developing facts and we were working towards an enforcement action. >> well, i have to go back to

mr. reich, his own memo here in july. this is july. i've been wrestling with the issue of an mo u-verse us a board -- mou versus a board resolution. i've decided that mou's the right approach for ots to do in this situation. we almost always do an mou for a three-rated institution, and if someone were looking over our shoulders, they would probably be surprised we don't already have one in place. you betcha. july 3rd. wasn't until, when, september that that mou was finally made public? so here's another july, august, september, another couple months. but, you know, mr. reich, this is your memo, this is your e-mail to carry.

you'd like to be able to say a board resolution's the appropriate -- so apologetic, and you don't even see that. and then he says the investment community would be surprised to learn that one doesn't already exist. now, you can, you can say whatever you want, mr. dochow about this was something in progress, this was interim, there was a decision that was made in february, was that thatt true? wasn't there a decision made in february to move them from a two to a three? >> yes. >> okay. >> mr. chairman -- >> sure. >> my recollection may not be precise here. it's been quite some time, and i've had some, some limitations on access to documents, but i believe the ots policy at that point in time did not require

the initiation of an mou. but, instead, at that point in time the ots policy was consideration of a board rez ruse or an mou and that the policy requiring an mou came into place after that time period. >> i'm just reading the memo from mr. reich to mr. killinger. kerry, if someone were looking over our shoulders -- which i sure as hell wish they were -- they would probably be surprised we don't already have one in place. i mean, that's your e-mail. pretty good evidence contemporaneously. senator kaufman? >> thank you. mr. reich, what is a an income loan? >> i believe, i've been told that there's a little more documentation behind stated income, low-doc and no-dc oc

loans than is obvious. those are catch-all terms, they are catchy term, but it's my understanding that there's a little more documentation than is popularly the popular conception. >> in a panel the other day, i asked them where the only income is the stated income. >> i think in many cases there is background checking of reasonableness for the amount of income reported depending upon the person's -- >> that's your testimony is that that was background checking on stated loans beyond -- >> that is what i have been told j. yeah. and that's oar. >> now, i'm not saying that was the case in every stated income loan, but that there were, there were some procedures which existed by institutions that made stated income types of loans that relied upon other types of reporting agencies to

sort of verify the reasonableness of income for certain types of occupations. >> right. has it been your experience with -- >> i think mr. reich is very accurate here. stated income loans tend to refer to programs for stated income. >> right. >> they were originally designed for self-employed high-income individuals. they migrated over the years and they were offered inappropriately to some customers. but an institution should be getting, the expectation is they're februarying fico scores, checking appraisals, they're doing a reasonableness test. >> right. >> they have outside data sources for doing that, and that's what the examination -- >> right. >> -- process referred to. so there are additional checks. it is not a customer walking in that makes $100,000, give me a loan, that's just not the way it's done. >> uh-huh. you're saying that's the way it's not supposed to be done.

>> it's not supposed to be done that way. >> exactly. and why would you even have stated income loans? i mean, i go into a -- if i were to borrow money, i fill out this whole incredible form about where's my bank account, how much is in it, you know, how much i make, i have to provide documentation of what i make. i mean, it's not -- it's the one thing that i think everybody in america knows when you go into a loan, you've got to verify to the perp that's making the loan -- person that's making the loan what your income is. >> and i do the same thing, senator, and i think that's appropriate. i think we also need to keep in mind the way it's been explained to me is that stated income originally was for high-income individuals -- >> right. >> -- who had income that was hard to document through a w-2. >> right. >> now, what happened was over the years it became commoditized. >> exactly. >> ask the gses started

accepting programs. >> yes. >> even their automated underwriting were accepting more liberal perm terms. >> exactly. >> so it became a situation where the documentation kept in the file, quite frankly, sometimes was purged. as you heard earlier today. >> yeah. >> not because it wasn't considered, it was purged because the state income loan had to operate under a given program. >> right. >> in order to qualify for the program, you couldn't have that information on file. so i think -- >> how would you have a program that said you can't have the w-2 form in it? >> because that's the way -- the way it's been explained to me is that's the way the gses in second markets accepted those programs. >> they accepted anything. they were trying to make it all work. i'm just saying why would the ots accept that? >> i can tell you that it was standard practice that those

loans were made and that to the extent they were sold and to the secondary market without recourse or even with recourse, we focused on the recourse, quite frankly. >> sure. you didn't focus on the riskiness of the loans? >> we focused on the riskiness to the bank in terms of what it may have to repressure, what -- >> in other words, if someone, if some bank said, look, we're not going to use any of this program, we're just taking money in, you wouldn't look at that as something to consider in your oversight regulating an institution? >> no, no, i maybe misunderstood -- >> sure. >> -- the question. >> yeah. >> we, obviously, are concerned with an institution's ability to prove the ability of the customer to repay the loan. and that's why the agencies on a unilateral basis issued the subprime guidance to make sure you documented the customer's ability to repay. >> right.

mr. reich, i assume you agree with that -- >> [inaudible] >> so it started out 20 years ago there was a program for high , high wealth people. i don't -- let me just stop. i was going to go on, but i've got to stop on that. seems to me a high-wealth's person the easiest person to show you they're employed. obviously, they're going to be the ones with the biggest mortgages. the other day they were saying it started with people that were self-employed. i don't get the why someone -- what would you say a high-income person would be? >> well, senator, what i meant when i said high income, i was including self-employed -- >> what is a high-income person? >> it would vary upon the type of loan their getting. >> what would you consider if you started a program -- >> [inaudible] high six-figure. >> huh? >> high six-figure income.

>> i cannot believe i can't believe that anyone with a high six-figure loan comes in and doesn't give you documentation, at least a portion of what they're making. that's kind of hard to believe. okay. so it started out it was kind of one of those things you used in special cases. i think, mr. reich, that's what you said, it's a special case. the people the other day said we're going to start out using it with folks that are self-employed. so that's a good program, and it's working for 20 years as mr. reich says. what happens when you find out that 90% of all wamu's home equity loans are stated income, and you find out that 73% of all option a.r.m.s are stated income, and 50% of your subprime loans are stated income? i mean, wouldn't you stop at that point and say, what is going on here? mr. reich? >> i didn't know those percentages until i heard you

say them today. >> let me just make sure i get this in context. wamu was a big, wamu was one of the big thrifts that you were supervising? >> that's correct. >> in fact, they were the biggest, right? >> that is correct. >> and so, and they had, i think, at one point of the thrifts you were supervising 25% of the assets under supervision were wamu assets? approximately. >> do you think it's hard for me to believe that you department know that 90% of all the home equity loans they were i doing were stated income? >> i don't know if it's hard for you to believe or not, but i did not personally keep track of the composition of each segment of their portfolio. i was focused on asset quality overall and not within each component of the portfolio. >> mr. docho works?

dochow? >> the percentages are alarming. >> yeah. >> but i also think it's fair to keep in perspective different products -- >> i'm trying to keep this in perspective, i really am. >> let's take the home equity loans. >> sure. >> if you and i went into a bank and wanted a home equity line of credit, those become automated approval processes. >> right. >> much like a credit card. >> sure. >> you fill out your paperwork, you put down what your income is. the bank pulls your fico scores, your credit reports, the loan gets approved or disapproved. those programs lend themselves more to that type of underwriting. >> right. >> they're smaller in dollars, they're large in volumes, and the credit score, the credit reports, the loan-to-value ratios were historically the most predictive of ability to repay and those loans' performance. >> so why not just ask people what their income was and have

some verification for it? that's the part i'm having trouble with it. i've got all the rest of it. i mean, we could pool everybody in this room, i don't think anyone's ever going -- outside if they worked for wamu or some of the other banks in california which did practice this, mr. reich, you're right. what's your income and they said, okay, that's enough. i tell you what, i'm going to check your fico score and everything else, but you don't have to document where your income is coming from, you don't have to give me a w-2 form, you don't have to do anything else. i just don't think -- credit cards? i've never seen that as an experience for me. and, again, i realize it started in the this industry, and i think maybe it started for a good reason. but i'm just thinking at what point in your regulation capacity do you say, and i don't think, look, we do a lot of hiepped sight. i'm not trying to do, i'm really not trying to do hindsight, but

this is just so big. as mr. reich said, i think everyone would say this is an anathema. i think that's what most people say, i think the two regulators here earlier kind of went, wow. .. úw?w

option arms. keep saying these numbers again, i think they will change. 50% of subprime stated income loans. once it comes to light. everyone says. my god, we've got to stop this. mr. dochow with all due respect how this is loan could make sense, everybody said whoa, this has got to stop. and so mr. not my point we found at about it now we did it, my point sitting up here, you're trying to figure out how we stop this, what is the next stated income loan? do you see what i'm saying? what's the next program where they say, everybody credit default swaps,

everybody did xyz. everybody, took $500 out of the till every thursday before they went home. do you see my sense, my concern here? >> i understand your frustration. >> thank you. mr. dochow? >> you make an excellent point, senator. let me, get a little, if you will, flesh to hold on some of your comments, i think they're absolutely on point. we saw, when credit cards first came out as an industry that the modeling worked great for a few years, then failed miserably. we saw it with basel ii, the analysis that said these mortgages needed very little capital. there was very little risk. everybody was overcapitalized. what we find the financial system, to extent free market it develops products for the short term. >> yeah. >> that is very difficult.

because you have that balancing act between having a free market, capitalistic system and a safe and sound system. >> right. >> and to have someone rule this product's good, this product's bad has some consequences. it is very difficult dilemma. >> frankly i'm concerned because i don't want to see overregulation. i know you don't either. but when you have situations like this, like you say, it was systemic problem. and it was systemic problem right to the top. we're going to self-regulate the markets. we don't need any regulation. it was pretty widespread. let me ask you though at some point, mr. thurston said earlier this is like the fact that, these numbers, which i will not read again, certainly there was so many of these types of loans. as the chairman said, even have, specific cases where people went in and redacted the w-2. at some point doesn't this

begin to look like fraud on somebody's part? >> i'll comment, senator. >> sure. >> if i may. actually, i think it raises a difficult issue. >> okay. >> in addition to potential fraud. it raises the issue of income, and incentives. what i mean by that is, stated income programs generally gave the lending institution a higher margin. >> right. >> and even though the customer provided the income, even though the bank may have considered income. >> right. >> looked at those w 2s when they were redacted from the program the bank was entitled to higher income. >> right. >> now the customer may have come in and applied for stated income program and requested it and the bank had information, but the bank, i think the issue it raised in my mind when i heard that earlier was what's the incentive here? >> right. >> is the customer being

given a higher-costing product than they should have been given. >> right. here's my concern, this is, i was in hearing yesterday on afghanistan and national police and problem we spend $8 billion and we did nothing to show for it. there is a way to deal with this at such a high level we get away from kind of the cold-blooded what actually happened. oh, yeah, it was because of basel. it was because of national leadership in this country saying we should have a free market, we didn't have any regulation. that is equivalent to pulling referees off a game at football game. it will work, don't worry. we now learn that not a problem. now that was real problem. alan greenspan parents of this this caused a problem. causes me dismay this failed. we found out stated loan doesn't work. this is very cold blood level. in the end it took some people down in the trenches -- we know wall street people were coming in encourage people to give mortgages. we get mortgage-backed

securities and we know we can move them down the line and leave, like the chairman said, toxic waste flowing down the river away from us. in that kind of environment -- we have a compensation program you said, which is saying to people and chairman put up here earlier, you got a hell of a lot more compensation the more risky it got. this is all happening. but in the end somebody has to say, i'm going to break the law. i'm going to commit fraud. i'm going to do something, when you have 90% stated loans, by the way, from top of the firm right on down, everybody's got to know what is going on. these are not dumb people. that is what kind of my concern is, okay, i understand it. it was an environment. there's a bad irrelevant have. they weren't getting good guidance from national leadership. i understand that they were doing techniques that had been used as mr. reich says for 20 years and we're okay. and i know, my compensation is a way up, everybody's compensation is way up more

these things we do. wall street was singing siren song of mortgage-backed securities and we can all make a lot of money. but took some people in the building, as mr. thurston said, this was a target-rich environment, took people in the building to basically say i'm going to take the money. i'm going to put in stated loans. i mean there are cases where everybody involved, every loan, they go to some, there was a go to some place and say, hey, guys, tell me what you want, fill out the forms, we're off and running right? this is an environment -- what, as a regulator, if you were regulating this know and you knew about this thing, isn't it time to send some notices to the justice department about referrals? >> if we see evidence, evidences of fraud, we should refer to the justice department. >> all right. mr. dochow? >> in fact, senator, one of the things i've been known to do is to require

institutions themselves to make the criminal referrals also. >> right. that would be the best. but problem is when you have it like you said systemicly where people are -- mr. reich, you didn't know about this, 90%, 73, and 50% but, hindsight is 20/20, not saying today, if you were knew when you were there, 90%, these numbers, wouldn't you at least look into the fact that there might be fraud being created? >> i might have, had i known those numbers at that point in time. >> yeah. mr. dochow? >> the answer's yes. >> mr. carter, you've been sitting patiently through the whole thing. what do you think? >> i think we knew there was greater propensity for fraud in stated income loans from an examination standpoint. from examination standpoint we would look at fraud risk management practices from the institution from the top down. >> and if you saw this going

on you were aware of these numbers, you would have, at least asked them to make a referral to the justice department if they did not you would have referred it yourself? >> any time we saw any evidence of anything criminal we would require the institution to file a suspicious activity report. >> is it fair to say, if, since, the, at least mr. wright and mr. dochow, by the way were you aware of these numbers 93%, 73%, 50%? i don't. >> i don't recall those numbers. >> we're saying no one was aware of those numbers. if you did know the numbers you would at least in the first instance begin to look, i read, mr. carter, you would have looked into it? target-rich environment is not a bad phrase to use when you have 90% of your loans being stated income is that fair to say? >> we elevated our review, our review of fraud risk management practices as the market began to heat up. >> back in the fwining. this is what scares me. we started using things like

fraud examination, whatever you just said. sounds so nice and cold-blooded but we look down at this thing and you say, you look at this and you say, there is somebody committing fraud down here. it isn't just some clerk down at the bottom doing this. they're doing something that mr. reich is qualified as an anathema. everyone considered poor banking policy and doing it with 90% of their prime loans and 53% of -- somebody down there is doing something. and so, it doesn't matter whether you're making money or not to go back to the chairman's point. this institution is making money or isn't making mñ=ç@. you still look at this thing, say, whoa, whoa, what is going on here. and you would, if you knew that, i think all three of you agree you would look into it and i suggest if you looked on it based on what others have said, you would have found that, this just wasn't happening. this was not a coincidence. that's only point i want to

make, is that, is that, am i, making a fair statement? mr. reich? >> in our opinion our examiners on the ground were testing asset quality throughout all of their portfolio and they did that consistently year after year after year. >> right. >> and the institution continued to be 2 rated, which is -- >> now you know, and because you didn't have, you didn't know, and i'm not, you now know that all these stated loan things were out there. don't you have to, now that you know, say that at least you would begin to look into the possibility there might be fraud? >> i would agree with that, senator kaufman. but i think, also, we need to remember what the economic environment, the competitive environment. >> sure. >> analysis on the american dream, getting people in their homes. >> yep. >> finding, financing vehicles. that would enable them to do

that. >> yeah. but -- thank you. only point i want to make, we went through that. because saul ii. you know, where all these things were going on. in end that is what scares me, mr. reich. i'm getting okay and then you scare the hell out of me again. you basically say you got to understand the environment. it is environment. everybody was doing it. ted, you've got to understand that. my basic thing is, if that's what we are, then senator levin and i are on fool'ser and to try to straighten this out. if every time something is popular and every time people are making a lot of money, people were making a lot of money, my normal response would be i look at that that is not reassuring to me. >> senator, i think lessons have been learned from what we've been through. >> thank you. mr. dochow. >> one observation i would offer is, i always believed

that companies such as banks who are insured by the fdic, and taxpayer is ultimately on the hook, ought to have a special standard, a special creed of some type. and that their performance in part ought to be measured by that standard to the customer, to the public interest. i can tell you, in my career i've been dismayed at comments from ceo's and even small community banks say their only responsibility was to shareholders. >> right. >> i think that gets to the lynch pin. >> i think that's decent. i'm sorry to go so far over, mr. chairman. >> no, not at all. i'm glad you're doing what your doing. exactly on target. it's not just the, what you discussed. it is also the cultural environment inside the, regulatory agency. i want to read you a couple more e-mails about that cultural environment. exhibit 39. take a look at exhibit 39.

right in the middle there, it says, it says, to you, mr. dochow. we're going to have the same battle in the complaint memo although i still stand by the findings. since we weren't able to do separate evaluation process they will fight it. doesn't matter if we're right. what matters is how it is framed. all we can do, listen to this, is point to the pile of complaints and say there's a problem. that's not all you can do. you can do a lot more than that if you have the will to do it. take a look at exhibit 34. this one's really, pretty, pretty dramatic stuff.

exhibit 34. this is a, this is a time when there was ots was looking at an underwriting recommendation and they were going to be a little bit tougher than your recommendation. and they were talked out of it by the bank. take a look at page two. ots confirmed today that they will reissue this memo without the criticism. it will be a recommendation. so it starts off as a criticism. but then, ots is talked into making it less than a criticism. it is just going to be a recommendation. then if you look at the first page of exhibit 34, you will see a memo, good news. this is inside of the bank. good news. john, and that is robinson at wamu, was able to get the

ots to see the light. boy, you guys were really seeing the light a lot. revise the underwriting rating to a recommendation. our response is already complete. and then at the top of this memo, from the head of home loans, i bet you're a happy guy. well-done. they were too happy, too often with ots backing off from taking strong action. then take a look at if you would at, and by the way, while senator kaufman is here, i think that stated income loans are still not prohibited at all. we just heard that from the last panel. i think mr. reich, when you said that -- >> i thought it had been dealt with in the past year. >> not at all dealt with. it is still very open issue. it is reason why congress has responsibility to put

down some bright lines here. we can't rely on regulators. that is obvious from today's hearings seems to me. we've got to, should be able to rely a lot more on regulators but we can't. we've got to do some tough stuff. >> all the same, mr. chairman. good fences make good neighbors. i think good regulators work best when they have bright line rules what is okay and what isn't okay. >> they can point to them telling folks they're supposed to regulate, hey, this is the law. we're going to enforce it. there is plenty of discretion to do that which isn't used too often as we're seeing but nonetheless i think it will help pretty clearly if we have some bright lines. then we've got a, take a look at exhibit 19. ots examiners knew that washington mutual in long beach were notorious for selling bad loans. this gets to the point senator kaufman was talking about. just let them go. please see, now, exhibit 19. in 2005 you had an ots

examiner sending e-mail to coal leagues of this description of the long beach mortgage-backed securities. securitizations prior to '03 have a horrible performance. long beach finished in the top 12 worst annualized net credit losses through 2003. and on february, 05, long beach was number one. its delinquency rate was number one. you folks knew about this. now, ots apparently doesn't think too much about the impact of thrifts that you're supposed to regulate selling billions of dollars in poor quality, high-risk toxic loans on the financial markets. apparently that's not, you don't view that inside your jurisdiction. it could be very directly inside your responsibility because if those loans come back, that does have an impact on the institutions that you're supposed to regulate. would you agree with that, mr. dochow? . >> yes.

>> ots, on exhibit 17, in may of '04 issued a findings memo on excessive errors in the underwriting process. concluded that some of the reasons were sales culture, focused heavily on market share via loan production and extremely high lending volumes. ots recommended to wamu that it should compensate loan processors based on quality of the loans that they made, and on page 5, wamu laid out a set of corrective actions that it planned to take. but as is happening regularly, as we've seen wamu didn't carry out the plan that it was designed, it designed. and so, next year, exhibit 27, ots continues to find

high levels of errors in loan origination process. that's ots's words. we visited the problem of paying loan staff for quantity over quality. again, it asked wamu to reward loan processors based on the quality of the loans that they made. so, how about, mr. carter, do you know whether ots was more successful the second time around to pressure wamu to reward loan processors for loan quality instead of loan quantity, do you know? >> i don't recall specific what progress they made but they made steady progress throughout the examinations. >> they made steady progress on what? >> in addressing, in addressing many of our issues. >> what was the issue? we've gone through about 20 of them. what was issue you think they made greatest progress on? >> corrective action plans they would give us normally would involve changing management.

changing systems. bringing in new processes. >> and out put, the outcome? >> the overall outcome of improving single family underwriting was something they struggled with from exam to exam. >> struggled with bureaucratic euphemism meaning they didn't do much? >> i don't think i would go as far -- >> how far would you go? you say they struggled with it. you say they didn't accomplish very much. >> they were not fully effective -- >> how about saying not fully effective like more direct language like they were ineffective? i got that, not fully effective throughout your ratings here. they were not fully effective. how about saying ineffective. >> ultimately in redicing exception rates down to levels we thought would be satisfactory they were ineffective. >> they were ineffective. okay. mr. carter, take a look at exhibit 7.

this is more cultural problem. long beach you say in exhibit 7 was working deliberate, reasonable pace. that is at page, number one. and then, in exhibit 7, i believe this is where you said the natural evolution of, if i can find those words, would be sufficient. >> exhibit? >> natural evolution. we'll come back to that. i don't have the right number exhibit in front of me.

exhibit 7 is, take a look in middle of that, long beach. natural evolution internally will address a number of issues. well, it didn't. so you wrote on exhibit 32, mr. carter, in reference to wamu's request to move long beach mortgage under the bank, we are not comfortable with current underwriting practices, and you don't want them to grow, your words, significantly without having the practices cleaned up first. six months later, now exhibit 36, in response to the findings, long beach mortgage had not improved their practices ots wrote. it could not simply say to them, that you made a commitment and haven't kept it. why couldn't you tell long beach, simply, you made a commitment and haven't kept it? why do you say that you can't do that, exhibit 36?

why can't you tell long beach, hey, you guys, made a commitment, you haven't kept it? >> where are you, where are you on that page? >> page 30 six. -- 36. >> can you point me where? >> it's on, eight lines from the top. our findings are similar in some ways but i don't think we can just simply say you made a commitment and haven't kept it. i think 90 days to get a completely acceptable exception rate may also be unrealistic. mind you this is a promise they made six months before. my question, why can't you

simply say, to the people you regulate, you made a commitment and haven't kept it, that's my question? >> some of the difficulty, we were very focused on taking samples of loans and looking at samples of loans. and then we were focused on exception rates, how many of the loans had errors in them. how we defined exception was not always black and white. how you define an exception rate. >> you said they haven't kept the promise. why don't you tell them you haven't kept -- >> i think that we did tell them. >> no, you said you just can't simply tell them you made a commitment and haven't kept it. my question is why can't you say those words, like unacceptable, like why can't you use the word unacceptable in your documents? we were finally able to get you to say that here today. but your document, that is not the way you talk. my question is, why can't you tell someone you're

regulating folks, you made a commitment six months ago, and it was conditioned, our determination that you could become part of wamu was dependent on you making that commitment. you haven't kept it. my question, why can't you look people in the eye and say you made a commitment. you haven't kept it? >> i think, that overall, when you look at single family underwriting we told them that. >> you said here you can't tell them. >> this is not single family underwriting overall. this is looking at a specific action plan. >> okay. >> where they had made promises in the past. >> they hadn't kept them. >> we had to judge how much progress they made on that action plan. they didn't do nothing. i think that is a double-negative. but they had made progress on the action plan. we had to make a judgment call, did they make sufficient progress, that we would say, if it was adequate, did they make so insufficient a progress we would say they were totally

inadequate? >> don't have to be totally. just inadequate. >> i think what i said here that we couldn't, we could not conclude that their progress was wholly inadequate because they did make some progress. >> i'm not saying wholly inadequate. can you use the words, folks, your progress is inadequate, are you able to tell them that? >> i think for this specific action plan, for their progress on this specific action plan i didn't conclude we could tell them that. >> that it was inadequate. >> that's right. >> you could tell them it was not wholly adequate? >> yes. >> but not inadequate? >> i don't think i could say it was wholly inadequate. >> i didn't use the word wholly. you can tell them it was not wholly adequate but you could not tell them it was inadequate, that's what you're telling us? >> yes. >> that's the kind of bureaucratic speak which i think sends the message to people you regulate that,

hey, folks, you're making progress. instead of telling them, it is inadequate, speaking clearly and directly to people that you have a responsibility to regulate. i think that's, it goes, frankly one of issues i've seen throughout these documents is that kind of not clear statements to people you regulate. and it's, i won't go over a lot of them because we're obviously running late. but, there's lot of them. exactly like that. . . 7(p&c @&c

>> on an ots one and two-rated exam, is that correct? that's not against regulations. >> i'm not sure i'm the right one to be answering that. >> all right. who is the right one here? mr. reicn is it against your regulations that they participate or is it just discretionary? >> we have an agreement between the agencies as to when it's appropriate for back-up examinations. >> okay. >> and that agreement applies main ri to three, four, and five-rated institutions and not one and two-rated institutions. >> now, there was a 2002

interagency agreement, was there not, with fdic? >> that's correct. >> and there was a protocol. >> that's right. >> and it permits ots discretion, does it not, in allowing -- >> it does. >> that's my question. you had the discretion to allow them to do it. >> we did. >> that, that's the message. >> well, may i expand? >> oh, sure. >> crystal clear. no participation on any ots one and two-rated exams. this is 2006. okay? >> there are reasons for the policy as it exists. and one of the reasons is that, first of all, the primary regulator is the primary federal regulator, and when another regulator enters the premises, when the fdic enters the premises, confusion develops about who is the primary regulator? who really is calling the shots? who do we report to, which

agency? so there is the statutory authority that congress has given the primary federal regulator, there is the desire to avoid confusion with the institution, and thirdly, when the fdic enters an institution if it is known sometimes as examiners of the primary federal regulator or not identified as being fdic examiners but if it is known that they are, alarm bells can go off both within the bank and the community where the bank is located. >> and you have discretion to allow them to enter. >> we do. >> and you didn't exercise it there. instead, it was a series of e-mails here showing some real turf battles. >> this was at the very outset of my entrance at ots, and i was, i mean, i have no recollection of -- >> well, maybe mr. dochow does.

if you look at exhibit 45, this is your feeling about fdic, and you wanted to share this mou we've talked about with them. and why it went to fdic, because i committed to them to consider their comments in a letter to minimize their posturing. you viewed fdic as someone who was doing posturing, is that accurate? >> i have always believed in sharing in full information with the fdic. >> uh-huh. >> i've always been guided by agency policy and the interagency protocol. the issue with the mou was to make sure we had the full fdic comments. this is july 2008. >> oh, i know. >> this is a time period where the agencies were struggling to determine if be the three rating or the four rating was the appropriate rating.

and historically the fdic had written a number of memos back in the, i understand, in the early 2000s doing one-sided documentation of issues. and it -- >> one-sided documentation? >> one-sided documentation of issues. and so i had worked very hard to develop a strong relationship with stan ivy who was the regional directer -- >> could you explain what is a one-sided documentation? >> ignoring the primary regulator's views and simply stating speculation or conjecture or their analysis. >> so you wrote in '08 to sheila bair at fdic, exhibit 66 -- >> 66? >> yeah. >> dear sheila, you really know how to stir up a colleague's vacation.

i do not under any circumstance want to discuss this on friday's conference call. i want to have a one-on-one meeting with ben bernanke prior to any discussion. i want to have a meeting be with paulson. i should not have to remind you the fdic has no role until the primary regulator, ie, the ots rules on solvency and pfr utilizes pca. so no role for fdic. now, this is a bank. if this bank goes under, their insurance fund is wiped out. they have about one-third of the money in their bank m the insurance fund that they would have to lay out if this bank goes under. but you're telling her, head of fdic, i should not have to remind you that fdic has no

role -- which is not accurate, they have a back-up role, surely, to protect their insurance fund. you then, scott writes to you that he has read the attached letter from the fdic regarding supervision of wamu and once again i'm disappointed the fdic has confused its role as insurer with the role of primary federal regulator. and now going to july of '08 you've got your letter saying that they are posturing. that why you sent the mou to them. so you think they are exceeding their jurisdiction, and you think they're posturing. is that fair? that's what your e-mails show. at that time you thought they were exceeding their jurisdiction. >> that's not my e-mail, mr. chairman. >> which one? >> exhibit 66. those aren't my e-mails. >> well, 45 is.

let's go to the posturing one then. you thought they were posturing. >> no, what i thought was by us being cooperative and fully sharing the memorandum of understanding we could get their views, it would avoid posturing. >> yeah. but that means you were afraid they would be posturing. you had a fear they were going to be posturing. >> i don't express it that way. >> i went to fdic in an earth to minimize -- effort to minimize letter writing and posturing. you had a fear of their posturing. >> i had a concern that they would be posturing. >> you had a concern, not a fear? >> not a fear. >> but a concern. >> yes. >> and what was your concern? >> my concern was that they would start documenting the files with information that we would then have to respond to, and it would drag out the process. therefore, we wouldn't be effective in getting the supervision enforcement in place. >> okay. >> in a timely manner. >> and, mr. reich, you wrote

that memo to sheila bair in august saying they have no role, don't they have a back-up role? >> they do have a back-up role. >> so why say no role? >> well -- >> kind of over the top. >> it was in the context of what was going on during this period of time. i didn't mean to imply -- >> you're not implying. you're not implying, you're stating. >> obviously, they have a back-up role, and they have an on-site examiner at wamu, so they do have a role. >> well, not at that time. you wrote her in august. you must have been upset. you reminded her that the fdic has no role. those are your words, not mine. >> these were tense times. >> okay. i'm sure they were. so what was the tense, what was the tension between your agency and fdic here?

your folks wouldn't even give them a chair in the office, a desk. >> i don't think that's accurate. >> all right. we'll hear from them later. what was the tensionsome in well -- tension? >> well, rome was purpose burning. >> i mean the tension between the two of you. >> going to hell in a hand basket. >> what was the tension between the two of you? you treated them instead of as being collaborators against, to try to address a common problem, you treat them as though somehow or other they are to be shoved away. what, what caused this? i mean -- >> i think, basically and fundamentally, it was who was the primary federal regulator? >> it was turf. in a word. >> i think ots is had the responsibility as the primary federal regulator. >> turf. >> we had the statutory

responsibility. >> yeah. instead of going at this as partners. >> you know, i have more than most an understanding of the role of the fdic and their need to participate. i've been there. >> let's take a look at another one of your e-mails, exhibit 68. >> she wanted to -- chairman bair writes ots that she informed wamu of a ratings

disagreement. you expressed, i cannot believe the continuing audacity of this woman. what's audacious about fdic telling wamu about a potential downgrade? just telling wamu? why is that so awe dishes that you can't believe the audacity of this woman? >> again, it relates to the fact that ots was the primary federal regulator -- >> i understand. >> -- and i thought ots ought to be the agency that relayed the grown grade in -- downgrade in rating to the new ceo who just took over. >> turf. >> characterize it as how you may. i have the highest regard for sheila bair. but these were tense times, and people's blood pressure increases under situations like this, and sometimes we say things that we wish would not appear in print.

>> what really, really strikes me throughout here is that we have a situation where we have two regulators, both clearly have a stake. you're the primary regulator, but it's clear that fdic has a significant interest. if this bank goes under again, their insurance fund is wiped out. so it's -- instead of supporting each other, instead of supporting with open arms, saying hey, let's proceed together on this, let's do this together, instet of try -- instead of trying to i've got your back, you've got my back, let's go after a common goal, it's back biting that i read in these e-mails. >> chairman levin, if the i may -- >> well, no, let me finish. >> okay. >> instead of kind of collaborating with fdic we've

seen how ots collaborated with the people they're supposed to regulate. just collaborating all the way. working, working with them instead of taking action when it was due against them. act against them directly. so you see all that collaboration between you and the people you're supposed to regulate, but when it comes to collaborating with another agency to go after a problem which threatens this economy, we see this kind of e-mail traffic. and i've got to tell you, i think the american taxpayers and the american people expect a lot more from their regulators than what we have seen in this situation. now, you can -- >> well, first of all, i think taking and publicizing an e-mail that's taken totally out of context is -- >> that's the whole e-mail. i read the whole e-mail. >> it is a very short e-mail message -- >> how can it be out of context?

>> but it doesn't in any way describe the context of the environment that took place. but i want to say -- >> i read the whole e-mail. >> i want to say -- >> you really know how to stir up a colleague's vacation. i do not want to discuss this on friday's conference call in which i may or may not be able to participate depending on cell phone service, availability on the cruise ship location where you're at. instead, i want to have a one-on-one meeting with ben bernanke prior to any such discussion. i also may or may not choose to have a similar meeting with secretary paulson. i should not have to remind you the fdic has no role until the primary regulator, ots, rules on solvency. i'll tell you, that's the context. i'm not taking anything out of context, i read the whole thing twice. >> well, it's not all of the context. i volunteered to have the ots make a presentation in depth to

the board of directors of the fdic during this period of time. i don't remember now the date that it took place, but there was such a briefing, and it would led by daryl dochow, and he did an absolutely outstanding job presenting an in-depth picture of the situation at wamu. it was at the same board meeting that a presentation took place by another agency on another institution. which was far less informative and far less in depth. >> that's the context? >> that's part of the context. >> well, from what i can see and we've looked at plenty of context, we've got 500 pages of context, about the only time ots showed back bone was against another agency moving, in the your view, into your turf. boy, that really got your dander

up. that got your blood pressure up. i don't see your blood pressure getting up against a bank which is engaged in the kind of dangerous practices that that bank engaged in, dangerous to their solvency, dangerous to their investors, dangerous to their noter thes, dangerous to this economy. i never saw that blood pressure come up until you're in some kind of a turf issue with fdic. that's the way i think any fair reading of these documents lead one to. anybody want to add anything before you're excused? thank you. thank you for being here today. we'll go to our next panel. we'll take a ten-minute break. ccccccccccccgccccccccccccccccccc

>> so a short break in this hearing on wall street and the financial crisis. we'll return in about ten minutes and continue with panel three and panel four. panel four we'll hear from fdic chair sheila bair. while this break is underway, we'll go back to earlier today

and hear some of the floor debate, some of the debate that took place in this hearing. >> today's hearing asks why federal bank regulators saw the shoddy lending practices, saw the high-risk lending, saw the sub standard securitizations, understood the risk but let the banks do it anyway. washington mutual was a thrift, so its primary federal regulator was the office of thrift supervision or ots. wamu was the largest single financial institution that ots oversaw with $300 billion in assets, $188 billion in deposits and 43,000 employees. wamu's fees alone paid for 12-15% of the ots budget because wamu's deposits were insured. the federal deposit insurance corporation, the fdic, served as a back-up regulator. like other bank regulators, ots

was supposed to serve as our first line of defense against unsafe and unsound banking practices, but ots was a feeble regulator. instead of policing the economic assault, ots was more of a spectator on the sidelines, a watchdog with no bite. noting problems and making recommendations, but not acting to correct the flaws and the failures that it saw. at times it even acted like a wamu guard dog trying to keep the fdic at bay. to document what happened, we are releasing today another big book of documents as well as a joint report by the treasury and fdic inspectors general examining shortcomings in ots and fdic oversight of washington mutual. together they disclose an ineffective bank regulatory culture hindered by lack oversight and agency infighting. before it fall, washington

mutual held itself out as a well-run, prudent bank that was a pillar of its community, but tuesday's hearing showed that behind, excuse me, closed doors the bank's management was surrounded by deep-seeded problems including shoddy lending practices and poor quality loans. this chart, which is exhibit 1i from tuesday's hearing, shows how over a five-year period from 2003 to 2008 washington mutual and its subprime lender long beach loaded up with risk. the bank dumped low-risk 30-year fixed loans in favor of high-risk subprime option a.r.m. and home equity loans. low-risk loans slunk, as we can see from thattart,rom two-thirds of the bank's originations to one-quarter. high-risk loans grew from one-third to three-quarters of the bank's home loan business. those high-risk loans were problem plagued. tuesday's hearing examined voluminous evidence of wamu

internal reviews finding poor quality loans, fraud, errors and other deficiencies. in one instance a year long internal wamu probe found that two of wamu's top loan-producing offices were issuing loans with fraud rates of 58% and 83%. another wamu investigation two years later found that one of the office's fraud rate was 62%. at still another loan office, a sales association acknowledged, quote, manufacturing documents to support quick loan closings. washington mutual's shoddy lending practices affected more than it own operations. wamu and long beach sold or securetized most of their loans. as this chart shows, from 2000 to 2007 wamu and long beach securetized at least $77 billion in subprime loans stopping only when the subprime secondary market collapsed in september of 2007.

wamu sold another $115 billion in option a.r.m. loans. together, wamu and long beach dumped hundreds of billions of dollars of toxic mortgages into the financial system like polluters dumping poison in a river. so where were the bank regulators? the painful fact is that they had a front row seat to washington mutual's high-risk lending strategy, its poor quality loans and substandard securitization practices but did little to stop it. the documents reviewed by subcommittee show that ots knew all about washington mutual's high-risk lending strategy. in fact, it was ots that required the bank to get board approval of it in the january of 2005. ots knew about wamu's shoddy lending practices having repeatedly identified problems with the bank's operations in examination reports year after year. every time ots listed a problem, it also told wamu to take

corrective action, but when the problem didn't get fixed, ots failed to force change. instead, ots wrung its hands as the bank sank deeper and deeper into deeper and deeper waters. this chart, 1c, provides a quick summary of some of the findings made by ots over the years regarding failings in the underwriting -- meaning lending -- practices at washington mutual. now, these are not all of the findings, but here's a few. start with the year 2004. quote, underwritg rains less than satisfactory. quote, not successful in affecting change. then in '05, quote, underwriting exceptions. evidence lack of compliance with bank policy. increases with risk profile of the portfolio. deterioration in these long beach older securitizations. now, those 2005 findings came from a report on examination which dated more broadly, quote,

we remain concerned with the number of underwriting exceptions and with issues that evidence lack of compliance with bank policy. quote, the level of deficiencies, if left unchecked, could erode the credit quality of the portfolio. our concerns are increased when the risk profile of the profile is considered including concentrations and option a.r.m. loans higher-risk borrowers in low and limited documentation loans and loans with subprime or higher risk characteristics. closed quote. now, unfortunately, the level of deficiencies were left unchecked. in fact, those deficiencies continued to run rampant. here's 2006. ote, continuing weakness in loan underwriting at long beach. quote, numerous instances on underwriter exceeding guidelines and errors. quote, now 2007, too much emphasis on loan production at the expense of loan quality. quote, subprime underwriting practices remain less than satisfactory.

quote, underwriting exceptions and errors above acceptable levels. and finally, quote, not in compliance with the interagency guidance on nontraditional mortgages. quote, actions should have been taken sooner. now, those are not all of ots's observations about problems at wamu, excuse me, let me start that again. those are all ots observations about problems at wamu year after year. in 2008, the year the bank collapsed, ots said, quote, actions should have been taken sooner. well, actions should have been taken sooner also by ots. ots raised the concerns listed on this chart with wamu's top executives and board of directors for five straight years. each year wamu promised to do better, but it department. and ots never took action to change that. in our tuesday hearing even wamu

officials expressed surprise at ots' reluctance to ask. the chief risk officer, jim vanasek, testified that, quote, what i cannot explain is why the superiors in the agencies didn't take a tougher tone with the bank. given the degree of negative findings. now, this is wamu's own risk officer. there seemed to be a tolerance there or a political influence on senior management of those agencies that prevented them from taking a more act i stance -- active stance. he said, i mean putting the banks under letters of agreement and forcing change, closed quote. mr. vanasek's successor at wamu testified on tuesday, quote, the approach ots took was much more

light-handed than i was used to. it seemed as if the regulator was prepared to allow the bank to work through its problems and had a higher degree of tolerance than i had seen with other regulators. now, regulations work best when regulators stay at arm's length from those that they regulate. but too often in this case wamu's regulators were not at arm's length, they were arm in arm. over time ots allowed washington mutual and long beach to load up on risk and engage in a host of unsafe and unsound practices. this chart, which is exhibit 1b, lists some of them. targeting high-risk borrowers, steering borrowers to higher-risk home loans, offering teaser rates, interest-only, negative amortizing loans. not verifying income. offering higher pay for making higher-risk home loans. that's to their staff -- >> we'll leave this testimony from earlier today to go back to

the derek seven senate office building for live continued coverage of the senate hearing on wall street and the financial crisis. this will be the third of four panels. the fourth panel will include sheila bair, fdic chair. this is live coverage on c-span2. >> we would ask you both to rise, raise your right hand. do you solemnly swear the testimony you're ant to give -- about to give will be the truth, the whole truth and nothing but the truth so help you god? were you here when i described the timing system? >> yes. >> yes, we were. >> okay. so, mr. corps son, we'll have you go first and then mr. dohr. >> thank you, chairman levin. i appreciate the opportunity to testify on my role with the fdic regarding washington mutual bank. on behalf of the corporation, we have submitted to the subcommittee a written statement that respond to specific issues that were requested by the

subcommittee. in addition, allow me to briefly introduce myself and my roles and responsibilities at the fdic. i'm john corston, acting deputy directer for the could consumer protections financial institution branch in the washington d.c. i have a leading role in this branch since 2005 after working in three different regions in various capacities related to bank supervision. i started as a field examiner with the fdic in 1987. an element of my duties as acting deputy directer of complex financial institutions is to oversee the large insurer depository institution program. also known as lidi. broadly, forward-looking assessment over $10 billion, provides highly-experienced technical experts to provide on-site support for the regions,

operations continuance presence at the largest insure ised institutions and assisted in developing and recommending strategy to the division directer and the chairman regarding specific institutions. with regard to washington mutual, i work with technical experts on my staff and coordinated with the region to evaluate c.a.m.e.l.s., analytic ratings and supervise ri strategy including enforcement actions. why the region is primarily responsible for these areas, input played a significant role in the decision making process. i also worked with my washington-based counterpart at the office of thrift supervision on lidiic cruding washington mutual to resolve issues regarding fdic's actions or conclusions not resolved at the regional level. one of the roles of the fdic complex institution branch is to

identify risks that impact large institutions including lending strategies such as those that took place at washington mutual. to do this, we have technical experts on site at institutions, we have identified through the lidi review process that are considered to possess higher levels of risk. for instance, we place staff on site at countrywide, indy mac and washington mutual to identify high-risk activities and measure their impact on the financial condition. my branch's responsibility is to examine financial institution and gain an awareness of the speed in which the institution could deteriorate, determine it sensitivity to market events and analyze it exposure to loss so appropriate and timely responses can be developed. i thank you for the opportunity to testify today, and i'm pleased to answer any of your questions. >> thank you very much. mr. dohr? >> chairman levin, i'll be even

more brief. i appreciate the opportunity to testify on my role with the fdic and the supervision of washington mutual bank, wamu. i am george dohr, deputy regional directer for the fdic in san francisco, a position which i have held since june of 2007. i've been with the fdic almost 40 years from september of 2002 until june of 2007 i was assistant regional directer for the fdic san francisco regional office. the san francisco region covers 11 states, washington, oregon, california, arizona, nevada, utah, idaho, wyoming, montana, alaska and hawaii. in addition to the territories of guam and american saw mow samoa and also micronesia. as assistant regional directer in those years among by responsibilities was our regional large bank program which included wamu. the three matters the subcommittee asked me to be prepared to address with respect to wamu are, one, nontraditional

mortgage guidance, two, wamu's condition as assessed through the c.a.m.e.l.s. ratings and, three, fdic's large insured depositories program and ratings. on behalf of the corporation, we have provided discussion of these three matters in the written statements submitted to the subcommittee. thank you again for the opportunity to testify, and i'm pleased to respond to any of your questions. >> thank you both. mr. doe rr, first, take a look at exhibit 51a, if you would. >> okay. >> it's entitled possible housing bubble on washington mutual, and in this memo the fdic wrote an analysis of the

single-family residential loan portfolio focusing on low-doc loans -- which means number of document loans -- payment shock and geographic concentrations. now, if a single-family residential lending was traditionally safe, what were the risks that fdic saw with these aspects of wamu's lending that made it less safe than historical times? >> well, we were becoming concerned with what would happen were there to be a dramatic, you know, downturn in the mortgage industry and with housing in general. in fact, that -- the effect that sort of downturn would have on the mortgage industry. >> and loans were risky, were they? they had multiple risk factors laid on top of each other, is that not true? payment shock increase default risk, geographic concentrations were vulnerable to high housing rate increases, were they all true? >> that's correct.

>> all right. the ig report, and that's exhibit 82, page 9, option a.r.m.s were 47% of the loans in wamu's portfolio. so now in light of the elevated risks in that memo, low documentation, payment shock, geographic concentrations, did fdic or ots discourage these products, and if not, why not? >> well, we did not specifically discourage those products. i, i for one can see a problem with certain of those products. you have been talking during the hearings with stated income loans, and i certainly see some holes in this those. but as an agency, fdic did not take the position to prevent institutions from making those loans. what we, what we did do, we

provided nontraditional mortgage guidance in october of '04, and what we set out there was that we specified certain safe and sound principles under which institutions could approach this. these nontraditional mortgages. one should not qualify borrowers -- one should qualify borrowers at the fully-indexed rate, not at the teaser rate. evaluating a borrower's capacity to handle increased amounts in a loan that are accruing in a negative amortization loan, you have to evaluate the borrower's ability to pay the loan through to maturity. avoidance of the ability to refinance, that was a big mistake that was made by a number of firms. and when it comes to risk layering, which you mentioned, what we did do is encourage quality controls and risk

mitigation for such risk layering items such as stated income loans, no-doc loans, high loan to value, high debt to income and those sort of items. so that was the -- and that was an interagency statement. >> right. now, that interagency position is not binding, is that correct? >> it's not a law. >> no, is it binding by regulation? >> it's not. >> should it be? >> well, we might consider that. we might consider that. >> what would it take, i mean, given, i think, what we've, we understand the risks are here i'm just wondering whether or not it shouldn't be more than just guidance. >> as fdic, we expected our institutions to be in compliance with that guidance and be in compliance with it right away. >> without it being stated as

being mandatory. you view that as an expectation. >> yes. >> and ha that expectation -- has that expectation been lived up to, do you know. >> been lived up to -- >> well, has it been followed? has the guidance been followed? >> it hasn't in some institutions, and it has not in others. >> have you or will you remind all institutions about your expectation? >> that is our expectation. >> but will you remind the institutions? how will they know unless you send them frequent reminders of it? >> i think it would be a good idea that, perhaps, we might. that's a policy item for our washington office, but i would agree with you that would be a good idea. >> mr. corston, you can jump in here, too, if you would. >> absolutely. we certainly have concerns over any loan product that, again, the less information that is incorporated into the

underwriting process layers on more risk. in the case of -- in this case we came out with guidance to provide examiners some guidance and industry some guy dance when the race -- guidance when the risk became very apparent to our agency and others. >> on 51b if you'll take a look at that exhibit, this is a 2005 memo titled insured institutions exposure to a housing slowdown. mr. corston, what were the fdic's concerns about the structure of the loans that were popular at that time? what were the risk of those loans? and in bank portfolios? >> the concern we had with these loans was the attributes were such that when you have option payments it becomes far more

difficult to determine performance whether you're a bank or whether you're an examiner. many of them became collateral dependent, and when you are only depending on one source of repayment, again, the risk goes up, and we became very concerned about the housing market in general and the volume of loans that we had that appeared to be dependent on the values of the underlying real estate as opposed to the underlying capacity of a borrower to repay themselves. >> on page 4 of that memo, you wrote about washington mutual, among others, and you, you wrote there what they held in option a.r.m.s and that 70% of option

a.r.m. customers only make the minimum payment each month. do you see that on page -- >> yes, i do. >> this is a memo, by the way, from you to michael sam or sky, right? do i have that right? >> that should be the division directer. >> he's the regional directer? >> he would be the division directer. >> okay. >> i'd say that's correct. >> okay. what consequences can you expect when most customers only make minimum payment in terms of the borrower's reaction to payment shock? what consequences can you expect to negative amortization to the safety and the soundness of institutions that hold these kind of assets? >> it suggests the inability to repay the loan out of their payment capacity which turns reliant on the underlying

collateral. and i think we've seen the results. >> now, several ots officials told our subcommittee that single-family residential lending compared to other types of lending was historically very safe, so that's how they judge wamu's lending. is that a fair comparison given that wamu's lending practices departed radically from historically-safe products and practices? either one of you? mr. doerr, why don't you start. >> no, there's definitely a problem there. what we would expect is strong underwriting to take place, to take into account the ability of a borrower to handle a payment shock. if you're going to give them a teaser rate to attract them into the institution, that's fine, but you have to qualify them to be able to pay the loan as it resets. >> mr. corston? >> with, in the case of if washington mutual, certainly the standard 30-year fixed rate

amortizing mortgage is generally not a problem. any product that you can have that has amortization built in and a steady interest rate that does not vary with the, you know, the capacity of the borrower to pay and generally from an underwriting standpoint is not a problem. that the not what 70% of these products were. >> now u, as wamu's condition continued to worsen in the summer of 08, the fdic conducted a capital analysis recommended that ots that a four-rating was warranted. and if you take a look at exhibit 51c --

[inaudible conversations] >> yeah, that's the wrong number. i'm sorry. take a look at 63. >> yeah. do you see that? >> yes. >> this is from sheila bair to john reich, and i should have asked mr. reich about this. sheila, in my view rating wamu a four -- this is now august of '08 -- rating wamu a four would be a big error in judging the facts of this, in this situation it would appear to be a rating resulting from fear and not a rating based on the condition of the institution. wamu has both the capital and

the liquidity to justify a three rating. and then a letter back, e-mail back from ms. bair to mr. reich, we will follow the appropriate procedures if the staff cannot agree. you asked me to hear out wamu, i hope that you would also hear out our examination staff if it comes to that. then later next month in september after a lot of back and forth, ots followed fdic's lead and agreed to a four rating. why was ots resistant to the fdic's tougher stance? >> well, we found that very puzzling. we, we made a recommendation in may to the o texas s concerning -- ots concerning capital.

we presented to them a stress capital analysis. we sent it to them a day ahead, and then we held a conference call with mr. dochow, and when i say we that's the regional directer, stan ivy, and me. we held a conference call with him to discuss that. his reaction was this was not g.a.p., generally-accepted accounting principles. it's not a g.a.p. analysis. it says that the institution is going to need capital, more capital to be able to manage itself through a stress scenario as embedded losses begin to become real losses. it's under the principle that reserves are there to handle expected losses and capital is there to handle unexpected losses. so it's a different, it's a different item entirely. we wanted to follow suit with

that and get capital addressed in some form of action. ots was going to do an mou we became aware of, and we contacted mr. dochow and wanted into the process so we could get capital addressed in that mou. we -- as far as the rating goes, we had our dedicated examiner tell the wamu board on july 15th that it was, that in fdic's view this could be a four. we had not made a final decision at that point -- >> you had not made a final decision? >> we had not -- >> but it could be or should be? >> could be. but by the end of the month we had made that decision. >> what month we talking about? >> july. july of '08. on july 31st we briefed chairman bair. mr. corston was on that, and she went over to tell directer reich

that very day, that same thing. >> mr. corston, anything you want to add? >> the only thing i'll add is the capital analysis does show a capital deficit, and that was our concern. any institution that was showing a deficit in capital to the magnitude that we were estimating, and it was approximately $5 billion, we felt in no way we could justify a three rating of composite. [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> mr. doerr, you've been in management roles in the fdic's west division since 1989, and as i understand it, your division was responsible for wamu. through 2005, if i'm correct, the fdic's working relationship with the ots was a positive, cooperative relationship, is that correct? >> that's correct. >> now, if you look at 51c, this is your examiner, mr. funaro. he wrote the following to you --

>> i'm sorry, i have to find the page. >> yep. that's okay. [inaudible conversations] >> okay, i've got it here. >> okay. if you look near the bottom there, it says darrel dochow contacted me today, and we arranged a meeting for september 14th at 9 a.m. he mentioned he would coordinate for the fall visit, and he would update me on wamu since i haven't had access to the wamu examiner's library since the end of the second quarter. why did he not have access to

the wamu be examiner's library since then? >> chairman levin, he was supposed to. initially, this tied into the fact that washington mutual management was moving to a new tower, so there was different space to be provided for the examiners, and we fully understood that. that was in july. but the situation -- but ots was to make provisions to provide mr. funaro with space in the building. this, this dragged on and on. they promised that they would take care of it, there were calls, there were meetings. i was involved in one call where mr. dochow in august promised that he'd take care of this, absolutely no problem. so that every time this came up we were promised it would be corrected.

it dragged on, it dragged on, it dragged on. we finally got to -- this is in september -- and it's still not taken care of. in fact, we got another e-mail come october, and it was still, it was still an outstanding issue. >> what was the reason? >> i can't explain what the reason was. i personally think they didn't want us there. i mean, we were denied physical access and the access to this examiner library that's an electronic, it's a library of electronic materials that wamu puts together for the regulators, for both the ots and the fdic. and he had temporarily lost that as part of the move, but you shouldn't have to go four months without having to have that. we have a dedicated examiner arrangement with, for the large banks with all of the other regulators, and part of it is sharing information. so he should have had access o o -- to that. >> and it was essential that

mr. funaro have access to that library in order to get information about the washington mutual? >> absolutely. >> now, was it an explanation given to either of you about that at any time? as to why that was? >> why that delay happened? >> yeah. >> i have -- i never received an explanation, no. >> did you get involved in that, also, mr. corston, i believe? >> as far as an explanation? >> were you involved in this issue -- >> oh, in this? >> access issue? >> i was definitely involved in the access issue at certain stages. ..

our routine request next exam site targets. this fall. mr. fan says, know, totally contrary to what vanessa and i discussed with deputy balco, august 17th. so here is another situation that cannot where there is refusal on the part of ots to do something jointly with the fdic and again that a two of this exhibit 51c in september 2006. can you tell us, what fdic was

seeking to do and why and what do you know as to why ots was not permitting you to do it? >> we were seeking to join our examination, we followed our normal protocols under the interagency agreement and on august 14th reset the ots a letter and asked to join the under that interagency agreement and we were surprised, we got a better back dated september 1st and it's sad that ots position was that fdic needed to establish a basis on which we can join examination, they knew of no disagreements between the agencies and without a disagreement we have no basis to be there and we were not invited to be on examinations. >> was important in order for you to have a basis that you have access? >> yes. >> is a chicken and egg issue. >> we need access to determine

condition of the institution and they are saying we have no disagreements. the institution is sound and so there's no basis. >> i might have some background, we dedicated examiners and six of the largest institutions at the time, washington mutual was warm and our examiners, the dedicated examiner's work regularly with a primary a federal regulator and participated in examinations and the reason was so we have a good idea of other risks in those institutions. the only way this agency can get that information is acquire its three really direct onsite access to the information. this was a unique situation where we were receiving it pushed back from the primary regulator if. >> did ots continue to have this posture toward the fdic requests

to look through files? mr. corston? >> yes, they did a. >> do you have examples of that? >> george would have the best example. >> yes, we did. we actually got a resolution to this 2006 matter both to join examination and the access it is in november from fifth several months in the very that ots did not allow us to look at files for snafus have put us into a fat files half of an office lott wanted to fight behalf faddists in that post have in this

intense pavlov with this thesis to the fifth half if you just described advice you have fat is fat debt are in san luis fifth side-by-side with who want to with some files behalf you believe sg have a substantive reason for the positions that if evidence of funds have access to behalf i also received an eye on its behalf in europe is that if it was a turf battle. >> that is a description of its. >> now, there is a fine defensive youth and which remains iffy sealed itself if because of -- it is a sealed so

that file 60. vftice the reports. dave mr. corston this is fine to be for you if your if you explain with this liddy rating scale is speed and essentially we have a scale that flows from eight to eat and what we tried to do with that scale dismayed the level of of institutions. it does not have necessarily to

when you get to the levels. that it can include rated institutions and the reason washington mutual with in food if levels of this is the fifth is based on seventh of 2007 is at this 55 d.c. they defy death mephitis flat plate and if

the credit ratings went down. is that correct. >> correct. >> this is the information in the second quarter of a 08. >> correct. >> as of 08 at the credit ratings continue to go down two not investment in september, but how important for those rating agency downgraded its between those two documents? is that significant? >> it is significant in the fact

that the funding mechanisms that institution had had some traders have to be triggered by the on-site credit rating agency is so when we looked at washington mutual we had to consider the use credit rating agencies because it could impact its access to liquidity. >> so is it fair to say that those credit rating agencies, ratings were of great significance to you? you put great stock and significance in them? >> absolutely. >> now, what is the relationship between asset quality and liquidity? >> it has everything to do with liquidity. if you have strong quality you'll not have liquidity issues

because your assets tucana barrel against them, or you can sell. if you have weak asset quality you'll have liquidity issues at some point. >> there are some that said that wamu liquidity problems were unexpected and were the result simply of market forces. isn't the case however looking at these documents that since liquidity is based significant measure on asset quality that the wamu liquidity problems arose at least a significant part because of bad quality of their mortgage loans which were the bulk of their assets. >> correct. >> do you have a conclusion as to why washington mutual failed? >> asset quality, weak asset quality brought liquidity problems. >> that lack of sufficient

capital was something that reflected embedded losses in their asset portfolio? >> as discussed earlier with the option allenby it in their payments structure and their assets, they are extremely hard to value and that makes it difficult for us in the short to deal with but also makes it difficult for investors to value the company and put capital in, so the type of business they were involved made it difficult for them to go out actually and raise capital and then, when the liquidity became and squeezed the assets again when the asset quality figuration and they could not find themselves for. >> filiform finally found i think this will be my last question is on exhibit one be. this is a chart that we have

used, shows some of the high-risk lending practices that are going on not just in washington mutual and other lenders across the country. bank regulators allowed views on safe on sound mortgage practices to go on. now, it is in your book and you will be able to read that unless you have a phenomenal eyes which you probably do giving your occupation, as least you used to. >> i can read the chart. >> it is in your book, 1b. these are some of the practices that we have talked about, what is loan documents loans. teaser rate loans, stated in town loans, interest only rate loans, negatively amateur rising loans, and those five that i just rattled off what is the

status of those practices today? are they permitted? are they frowned upon? >> they certainly are frowned upon to the degree, you it may speak not traditional loan guidance. the extent that it is being at this point there is much market acceptance. a lot of these types of characteristics were targeted toward securitization market that doesn't exist anymore. >> but that could come back again so the question is what in the rules guidance and regulations is there today relative to those five elements? >> there is nothing to prevent them. >> r. they encouraged -- discourage? >> unless there is stronger risk mitigation there is a wrong and right way to make those loans and -- ig if the borrower has the financial capacity, you can

verify that to pay that loan through to maturity, that's okay and if all you are doing is finding a way to get them alone and not worry what gets later that is wrong. it's a question of not strictly discouraging all -- loans but there has to be right way to handle them. >> stated in callowness. >> stated in come loans, if you went back to what was mentioned about high network are worse and is limited to that, i can see the circumstances for a person has $400,000 worth of securities fat they own free and clear, you might not worry about what their income is fifth situation like that stated in town is probably not, right. >> under no circumstances '50s be considered a acceptable to the level of bad washington mutual was putting these loans on the books.

these are situations 552 that necessarily, but this is an acceptable structure for an institution to do any type of volume. we've seen the type of risk and the results if. >> since there is no regulation on the books for this kind of risky practices how do we get them on the books? how are the regulators going to go into the books that you can obviously there may be circumstances where you can have a stated in come loan and the kind of circumstance liftoff edolphus if tenafly the fifth half of important practices and policies in place. they are not there now? should we legislate classify and 10 to 5 feet 5/8 255 iffier hooley amortizing loans, they have plenty of assets and securities and you may want them for some reason. i can't imagine -- lee amortizing loans, but should we

legislate? spin-off that is not my expertise but as an examiner an institution and a tool such as regulation and is fairly easy to support. guidance, you can support its but it's not as strong, just general practices again it becomes more something you need to influence. so it is something certainly from a rule standpoint obviously needs to be looked at. from examiner standpoint it's a challenge. >> unacceptable structured wamu as you said and so why wasn't it changed? what were the reasons it was not changed from what you heard if? is it that there were fleer guidance and wasn't good common-sense use to? what were the reasons? fess feedback fess the time when the examiners were in these institutions we knew when the

first memos you brought up we saw the issues, but it became a very hard in to influence institutions to change to these practices, they certainly were competing against each other and their institutions outside the insured environmental influencing the underwriting all so and it became difficult from an examiner's pointed you as they want off like washington usual when there are other institutions in which they competed that made it a challenge and i would say when we were dealing with these institutions at the time that's what we were facing. >> after a while -- i guess it was october of 06 -- there was non-traditional mortgage and agreed upon. i don't know why it was guidance and instead of the forcible regulations, you talked about

that. there wasn't a clear and effective date but i understand fdic and the federal reserve treated the guidance as effective immediately,. is that correct. >> correct. >> a year to implements fly don't think that that is dealt with n.i.n.a. loans? >> well, that is probably what you call fleer risk and would probably be in there, one of the elements for. >> feliz document loans fife. >> the same dress keith. i guess one of the issues obviously will be a low-fat in the next two hearings -- 55 riss flows into the financial system as a whole. looking at the up street, one of bank, a big bank, these mortgages and that being a lot of a toxic mortgages created and

put into the commercial string. next week we will be looking at credit rating agencies, how were those mortgages faithful love with a secure to rise to the failures and flaws in shortcomings in that process and in the week after feared the investment banks and the securitized in the selling of those securities and what were the failures and inadequacies in that process that led to such a terrific outcomes for our economy. in but what role if any, should the regulators have? what guidance should terrify official institutions dumping these kind of toxic mortgages into a financial system? >> they can come back and bite the institutions themselves

obviously if they turn out to be flawed and there is a claim back on the institution, so that's one area while i would hope regulators see that something needs to be done in that area, but in general i thank you know exactly what i'm driving at. what if any guidance should be given to institutions by regulators relative to that issue as to of putting into this stream of consciousness -- commerce the mortgages of which are bad mortgages? >> i don't deal directly obviously with policy but i know there are efforts to have institutions have what they called skin in the game, but i think the most important thing is that the loans that are underwritten and should be underwritten and the same as a few portfolio on your balance sheet as opposed to pushing them off your balance sheet?

>> how do you write that in guidance? should that be a standard? should that be checked in the institutions? should your regulators or some regulator depending on who is go to institution and say this is the guiding principle from aphis if you're keeping you're of portfolio fifes fifes a fifth of a specific amount of skin calved in the face affleck even prison 5t foul for a regulator check that out to see whether that kind of guidance is being followed for phone mack as though you are going to own this instead of dumping into a street? >> through this same process now. we can see the underwriting standards and we can sample them so in the same standards you are now using to check the process could be effective in and adding that one element of guidance.

>> that is correct. it's consistent underwriting on both sides of the equation for the portfolio loans and securitized loans. >> thank you both, did you want to add anything? thank-you, appreciate your coming. we are going to have a fourth panel. [inaudible conversations]

our final panel this afternoon sheila bair, john bowman of thrift supervision, we are grateful not just for your being with us today but for your voluntary or involuntary patients. i thank you both know what our rules are so under rule six our witnesses, all of them, they are sworn in so we would ask you to raise you're right hand. do you solemnly swear the testimony you're about to give will be the truth, the whole truth and nothing but the truth, so help you god?

ms. bair, why don't we ask you to go first? >> chairman levin, i appreciate the opportunity to testify regarding the role of regulators and supervision of a wamu. the fdic shares the subcommittee concerns about issues associated with the prairie regulation a large and complex depository institutions, that pose risks to the deposit insurance fund and the fdic role as back up supervisor. and to assist the fdic in carrying out its deposit insurance responsibilities congress has given the fdic backup authority to examine insured banking organizations like wamu and have different agency as primary federal regulator. we often use this in a collaborative process to convince the regulator to require corrective measures. however, when the collaborative process fails our ability to independently access information is governed by 2002 interagency

agreement in which the fdic agreed to conduct special examination only one institution represents a heightened risk to the deposit insurance fund. as we learned in the case of wamu this is a self-defeating requirements as you must first gain entry before we can establish the triggering conditions exist. and, for example, in 2005 and wamu management made the decision to changes business strategy from conventional single-family loans to non-traditional subprime loan products, ots determined in fdic should not actively participate in ots examination sat wamu citing 2002 interagency agreement and subsequent years the fdic faced resistance to efforts to fully participate in examinations of wamu and even as late as 2008 problems becoming more apparent ots management sought to limit the number of examiners and did not permit the

fdic to review those files. in the spring of 2008 wamu riss additional capital but the amount raised prove to be insufficient. and virtually all other high-risk mortgage lenders had closed, gone bankrupt or chosen to be acquired by other institutions. wamu board rejected acquisition offer from large commercial bank in favor of capital infusion that allowed wamu to retain independence and management to stay in place by a limited future options for raising capital. in both july and september 2008 wamu suffered a substantial runs and acquitted the dissipating quickly. by september 24th cash on hand had declined to $4.4 billion and dangerously low amount for $300 billion institution that has seen average daily deposit withdrawals exceeding 2 billion in the previous week and the next day the ots closed wamu. it's been extraordinarily challenging time for the nation's banking industry and we all learn lessons at many

levels. i'm very proud of the fdic role as an early advocate for banning unaffordable abusive lending practices for fighting against large bank productions and most importantly for maintaining confidence in the banking system by resolving failed institutions in orderly way and ensuring that the insured depositors had seamless access to their money. however, we are learning important lessons from the crisis and a central one is that we need to be more proactive in using our backup authority particularly for the larger institutions where our exposure is the greatest. we welcome finding and recommendations of the inspectors general of the fdic and treasury from their wamu review and began in number of those suggestions. in addition the fdic strongly supports pending legislative reform efforts to address the orderly resolution of financial organizations, the ability to resolve in the same way that smaller banks are treated as with wamu it is essential to end a bit too big to fail doctrine.

the fdic also strongly supports the need for independent regulator, product and practices as your personal wealth and undermine the foundation of the economy. finally would support legislation to require that issuers of mortgage securitization is retained scan in the game to provide added discipline for underwriting quality and, in fact, to the fdic portable consider a proposal to require insured banks to retain a portion of the credit risk of any securitization is a sponsor. the fdic would always like to see trouble institutions return to health and safe and sound practices however as was the case with wamu when institution is no longer viable closing resolution represents the best course. for the delay by the government would have significant erased a cost to the fdic and those losses on uninsured depositors and expose creditors to greater losses. the resolution went smoothly, the ftse was able to preserve all of wamu deposits insured and uninsured and the resolution

left branches open and preserved many jobs and allow for seamless transition to wamu customers the day after the bank was closed and those of wamu was saved. as with all fdic resolutions it was not buildout but did to the private sector. we're able to sell it at zero cost of the deposit insurance fund and in contrast have the fdic been forced to liquidize it would have been lost $41 billion. thank you for the opportunity to testify and am happy to answer questions. >> thank you very much, ms. bair. mr. bowman. >> good afternoon, my name is john bauman, career federal employee a little over one year ago. during the height of the financial crisis after about five years at the agency chief counsel. it's not a role that i sought to but i'm honored to serve. ..

>> of the collateral represented by the homes than on the borrowers documented ability to repay. as home prices continue to rise these practices supported a widely praised initiative to increase homeownership in america. yet, as we now know,

homeownership reached unsustainable levels and became too much of a good thing. like all of the players and home mortgage market, bank managers at wamu and elsewhere mistakenly believed that they were effectively of earning risks by moving lohse off their books and securitizing them. similarly, homeowners received little risk and adjust will rate mortgages because they thought they could sell their homes at a profit before rate resets kick and. investors believe mortgage-backed securities carried little risk because credit rating agencies raided them highly. those beliefs proved misplaced when the real estate market collapsed. the secondary market pros and the rest turned out to be all too real. the fallout hit financial institutions large and small, with state and federal charters overseen by every banking industry regulator. since wamu's failure the ots has taken lessons to heart from our own internal review of failed

thrifts coming from the treasury inspector general reviews. we have made strides to address the resulting recommendations. we have instituted controls to better track problems, identify their examination reports, and take time effective action when necessary. we have established a large bank unit to keep close watch over our largest regulated institutions, strengthen oversight of our ots region, enhanced supervisory consistency among regions, heightened scrutiny of problem banks and set deadlines for taking action after safety and soundness downgrades. in short, we have made meaningful changes. although some thrifts help overinflate the housing bubble, traditional thrifts stuck to their conservative business practices of lending to people they knew and keeping loans on their books, whether this economic storm and continue to

provide badly needed credit in their communities. because consumer and committee lending remains important for american families, i continue to and believe in a thrift charter to have a separate regular. with the changes with institute, i believe we have made the ots significantly stronger for the future. thank you again, mr. chairman, and i'm happy to answer your question. >> thank you very much, mr. bowman. throughout the last years of wamu's operation, the fdic it is the backup regular has made repeated requests to participate in ots exams. we heard in the second panel how the fdic sought to produce the in ots exams of washington mutual with limited in terms of staff for file review. for periods of time, the ots bloc fdic access to examine material. mr. bowman, are you for my with that? is that the right course of action?

>> i can't say that i'm fully with it, mr. chairman. given my responsibility prior to coming the acting director, but i but enough about them and i've been watching these proceedings to have a sense of what went wrong. >> what is your reaction to? >> twofold actually. when is the two people who were, the two most senior people within our organization for both prior employers at the fdic, john reich hughes poker was the vice chairman of the fdic for five years. scott polakoff was the senior deputy director had served the fdic i think probably in excess of 25 years, including that as a regional director of chicago. my sense was they knew what the issues were. their perspective, i assume, would be as close to the fdic as anyone within ots. so i followed their lead. >> why should it take the fdic for months to get a desk or access to the examiner's library with wamu documents?

doesn't make any sense to you? >> that sort of a specific allegation that i don't have any response to. >> did you follow the e-mail traffic back and forth or? >> no. >> well, -- fdic was going to discuss with wamu the recommendation that is going to make to downgrade its standing. from a to 203. -- a to 203. ots got wind of it and said quote i cannot -- this is from rich and polakoff, i cannot believe the continuing audacity of this woman.

the audacity being they're going to sit down and discuss the recommendation. to downgrade wamu. what, you know, why is that so audacious? >> are you reading from a particular e-mail? >> im. exhibit 68. >> all right. so the question again? i'm sorry. >> was audacious about the fdic seeking access to -- not in this case, sitting down with a bank,

which has the kind of problems that that bank had, and to tell that bank, or recommend the downgrading in the rating? why is that so audacious? >> well, i think you probably have to ask john reich debt. i don't mean to make light of a, but i'm not sure exactly what else might have been going on with a director at the time, what this recession was, what his perspective was and why he would've put it in an e-mail like a. >> in terms of access to files being, sitting next to ots when you do your examinations, is there anything particularly problematical about that? >> you know, i don't think so. >> did that happen? should that happen speak was that fdic should sit next in ots examiner? >> no, that they should be rejected when they try to? >> the difficulty i'm having with the characterization with rejected is i am looking at the

fdic report which is issued as part of this. and that seems to indicate that, in fact, in the end, and i'm going now from page 45 of the report, in the end the information obtained from invoking back of examination of going to not brought fdic to challenge ots's composite rating of wamu in may 2008. so that to me indicates fdic got its information. >> it took four months. >> maybe not in a timely fashion. >> mr. bowman, there is a problem. >> a desk? >> yes, from your offices. and fdic offices -- excuse me. >> long as officers. >> no, ots's office. and wamu's office. excuse me. wamu's offices where ots said, had space, it took four months for fdic to get a desperate now there's a problem here. there is a turf war going on. it's obvious. they couldn't get to the examiner's library. we had testimony here today. did you hear that testimony?

>> i heard some of the, yes or. >> should that haven't? >> depends upon the circumstances. >> do you know anything about these circumstances because i know there was a dispute going on in terms of how the 2002 agreement should be implemented. yes, sir i know that. >> and do you know that mr. to go in july of '08 sends a message about that memorandum of understanding that was finally issued relative to this bank, first thing he wants to know was how come that went to the fdic he for it came to me, but the answer that he gets back, that mr. dochow sends he apologize, since the m.o.u. and he says the m.o.u. came up yesterday with a call i had with mr. reich, mr. paul calls, it went to the fdic because i committed to the fdic to consider their comments in an effort to minimize their letter writing and posturing.

fdic's posturing. this is an e-mail traffic between your people. does it bother you? that there is this feeling that exists here, that there is a rejection of access to files, doing an examination with the fdic sitting next to it, that memorandum of understanding, which is shared with the fdic, the the fdic has you does being a posture, and that's what it was essential try to avoid the posture? is that kind of something that folks in your agency feel about the fdic? does it trouble you if they feel that way? how do you cure it? >> well, i'm not sure what other people within the agency think about the fbi's. i know what i think. >> but your people. this is -- >> does it trouble you is my points. i have to respond is, to the extent that an employee of the ots, and i say that as the

acting director, uses that kind of language in an e-mail correspondence is inappropriate. number one. number two, to the extent that it reflects other issues that may have prompted that light which, there has to be a way to work those issues out. >> with the fdic, when they were not given the access to the files, they were given space and ever asked for reasons, they are not even given reasons. they couldn't -- were asked what was the reason given, by ots, they said we weren't given any reasons. then you have the interagency memorandum, which has now been entered into. as i understand this, the agencies, negotiate this memorandum, there's a standard and, therefore, fdic's access and fdic involvement.

is this interagency memorandum, and i asked this of you, ms. bair, is this memorandum sufficient now? is it being renegotiated? what's the status of this memorandum? >> no, it's not sufficient and it is being renegotiated. >> why isn't? >> because i think as was reported it is cercla, that requires us to show risk before we can get access. and frequently we need access to prove the risk. so we really need much broader authority to be able to go in. when we feel it's necessary to protect or gauge our risk. >> mr. bowman, what your reaction to that? renegotiation. >> i have a couple of thoughts. what is going back to your question about information, the access to information. my sense is, and again, i go to the report of the fdic ig that was issued today. in the document, it states categorically that the fdic had sufficient information to arrive

at and concur with the c.a.m.e.l.s. rating that the ots had entered into. that's a significant amount of information. in terms of who got to sit which is going to got to sit out which chair -- >> no, no, no. will not which desk. >> whether they got a desk or not a whether they had to stand in all. >> the question here is access. >> it appears they got the access because they came up with a c.a.m.e.l.s. rating. >> mr. bowman, it took four months to get a desk with your folks. they were denied access for four months at a critical moment of a bank that was in deep deep trouble. i hope you're not going to justify the. i hope you'll look into what happened and why haven't. >> i will surely look into. i can't justify because i don't have knowledge of it other than what is being presented here today. >> i think your folks did have knowledge of it long before today and i think you should have looked into it long before today's. >> two of those folks who spoke to no longer work at the agency.

>> but your legislative folks have access to this material. >> okay. i should also point out, sir, the process of information i'm being asked about in terms of this here was what was place on the desk in front of me. we asked access to it so i could perhaps be a little more helpful yesterday and was refused. >> these are your documents. >> well, you know, probably have a different documents turned over? >> according to my staff these are documents that were shown to your in your interview. we had an interview with you expect the number of documents shown to me in the interview, 10. i see a significant number of tabs beyond 10. >> how many do ask your former staff about today? more than 10? >> i don't know if. >> let's take a look at something accounts we are documents which i've asked them about. these are ots documents that these are excerpts from documents. i don't know if i want to read

music and. i don't think you were here earlier. if you want to look at one d. in your book. this is the pattern. underwriting of loans, '04, remains less than satisfactory. level of underwriting exceptions in our samples has been ongoing examination issue. in other words, a problem for several years. and one that management has done difficult to address. residential quality assurance of 200 -- 2003 disclose critical error rates, 57% of certain loan samples. sfr loan underwriting. this has been an area of concern for several exams. securitizations prior to '03 come horrible performance. these year after year after year. these are the findings, and yet

no formal action taken. by ots against this bank. that was a problem. i don't know whether -- i guess you didn't hear me ask questions about it before, but this is not effective regulation. it is people regulation. year after year after year. the inspector general's report is highly critical. i don't know if you read that report or not, did you? >> i actually read the report prior to providing the management responds in which i said i accepted his report. and we impact of our top of the one recommendation that was made in that report in terms of further changes by the office of supervision, which was the implication of a system to track responses which had been put in place in october of 2007. >> so you have read the critical reports to? i have read and fdic's as well.

>> mr. bowen, are you willing to work with the fdic to come up with an interagency memorandum which women to possible for the fdic to probably access information about insured institution whenever it finds the need for information? >> sir, up until whenever it finds the information i was revered as a yes, i would be prepared to work with them on with the federal reserve board, the occ, which are the four regulars. i should point out that my only hesitation in saying that whenever they would like to get information, is that we do have a statutory structure which assigns it certain responsibilities to different agencies. the fdic's authority as it relates to the federal reserve, the office of compo conservancy and is that of a backup regular. one of the complaints and i

think one of the reasonable complaint by congress coming out of this crisis is that there was no one to provide or assign responsibility to. there was no one in charge to the extent that we mixed up or tried to shave over the primary regular is i think what it is us into trouble again with that same kind of charge. if we are responsible for, if we made a mistake we should be held accountable for it. we can work with the fdic, and i'm committed to making sure we work something out so that we don't have a situation like we apparently had with fdic and ots as it relates to wamu. >> you know, any reason since they are a backup regulator that's got a major skin in the game, as one would say, given the fact that they ensure these firms, these banks, is there any reason why they cannot work -- you cannot work together cooperatively without mixing of your roles in terms of accountability? >> as you also know, as the

acting director of the ots, i'm also director of board of directors at the fdic. so the answer to your question is there's no reason why we can't work together. >> any reason why we can't assign principal responsibility to you if we wanted to, or any other regulator if we wanted to without having that kind of cooperative relationship with the fdic? in other words, you can assign responsibility to someone and still have them act in cooperation with somebody else, write? >> absolutely. >> so the fact that we repeated in these e-mails, we got principal responsibresponsibility of fdic doesn't, i mean, we went to these e-mails earlier today. just want to remind the fdic, we are the principal regulator. so they didn't know it. that's what's so darn troubling here. it's critical times in terms of this bank and depositors impact on the economy, investors and so forth. we didn't see that.

we didn't see that kind of cooperative, and i can still not understand what the reluctance was. i don't understand why it was, why fdic was apparently rejected where it sought access to materials, access to join examinations. [inaudible conversations] [inaudible conversations]

>> let me ask both of you about some of the risky practices that we have talked about in these hearings. stated income loans, negative advertising loans, teaser rates should these practices be banned, either by regulator or by congress. ms. bair, you talk about one of them i believe. >> yes, we have the speed go with all of them. >> we have. we are opposed on a policy level. we are opposed to stated income. were opposed to teaser rate underwriting. where you underwrite fully indexed rate. we think you should document and can. you should document the customer's ability to repay. not just the introductory rate,

but when you get to the adjustable product when it resets as well. in 2008, the federal reserve board does have one of the things that complicates is that we can only reach insured depository institutions. and a lot of is, the majority of this was done by non-banking institutions that would not be subject to potential standard for consumer standards of the bank regulators. the fed under hope does have the authority to apply consumer living standards across the board. in 2008 we found a strong comment letter urging the fed to been stated income to acquire an ability to repay to require underwriting fully indexed rate, for all of higher mortgages, not just subprime or high rate mortgages but also option a.r.m.s, interest only loans them in a nontraditional mortgage product. the fed did finalize ruled that the only apply to the high rate loans that they don't apply to

the negative amortization loans. they're out for comment again on this issue. we bought another comment letter suggesting that these types of standard should apply to a nontraditional mortgages. i think given the deterioration they should consider applying them across the board to all mortgages. but the authority is there now. and we strongly encourage the fed to use that it would be happy to make a comment letters available. >> do you have the authority as well as because we have the authority for insured depository institutions under safety and soundness rules, yes. >> you have agreed to act at all those items you enumerative? >> that's right. for insured deposit. >> and you make recommendations to your board, have you? >> we have. we join the interagency guidance. web instructed which was a negotiated document. it did not completely ban the stated income as our standard indicated cabinet typically we think that should be the exception, not the rule.

i would be willing to go for it and eliminate it. i think if you provide flexibility in terms of the types of documentation that could be provided, whether deposit slips or w-2s or a tax return, fine, any third party good verification of income, can be allowed. but some, verification should be made. i frankly don't think personally think there's any reason for stated income loan. and we would be happy to apply rule-making across the institutions. but again only getting part of the market if you don't allow the non-banks as well. you do give this arbitrage problem the more standard to put on banks, you have non-banks doing lose her underwriting and they draw marketshare to them. >> well, that's exactly the kind of testimony which i think will be very, very helpful to us as we proceed with the legislative response. mr. bowman, what would be your answer to my questions do? i would agree with everything that chairman bair civic

unfortunate the ots doesn't have separate regular responsibility of regular red riding as fed, hoepa. and in terms of guidance versus regulation, regulation is the way to go. in that regard. the only difficulty in the only caution i might have, taking chairman bair's point is one, it has to be applied across the board, both to regulate depository institutions as well as what you have referred to as the shadow banking agencies or the shadow banking industry. that's number one. number two i think we also have to be careful in terms of, you know, right now we're getting lots of indications, there's a credit crunch going on in our country. consumers, small businesses, individuals don't have the kind of access to credit that they believe they need. some of that may be an overreaction to the response to what happened in the 2003 through 2007, but the more prescriptive we become in terms of the kinds of products that

are made available to consumers, i think it could have an impact upon the ability of credit. >> subject to that risk is important though that we be clear in prescriptive? >> beg your pardon? >> subject to that risk which you just outlined, in support of which ms. bair said? >> yes. >> did you comment on the negative amortizing loans, chairman bair? >> yes. we think again that they are a product that -- well, that in his own that has adjustable features, must be underwritten with the issue of alone should determine not just whether the borrower can make the payment at the initial introductory rate, but when it resets. these option a.r.m.s are terrible products. in a case of wamu posted institutions that made it, the vast majority of borrowers continue making the minimum payment. building of not only negative

amortization but also they have an interest-rate increase when the loans reset. our expense with no banks is these option a.r.m.s all as always go bad when they hit the reset very. so i think the way they were underwritten, they were not, none of them that we see now, where underwritten at the full indexed rate. we've encourage the fed to expandable so that it applies to all mortgages and not just subprime raise. >> mr. bowman, anything else to? i agree with that. >> you indicated that you already sent public comments? >> yes. >> if you assure this committee we would appreciate. mr. bowman, we would appreciate from you as well. and we -- i think on that positive note we will and rather than try to summarize the long hearing. i don't think, it's obvious we had a situation where a bank was

riddled with unsafe and unsound lending practices. the regulators saw them, understood them, and did not act to stop them. and that was part of the problems that we've had, a big part of that other parts will be taken up next week. when we look at the credit rating agencies, what their failures were. contribute to this economic disaster, and the week after will be looking at the investment banks and what their major contribution was to this economic disaster. but today's hearing w thanks. >> thank you, mr. chairman. [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations] >> senate banking committee chair christopher dodd is developing a different bill. while negotiations continue on that the senate will begin the week with a number of president obama's judicial nominations. in the house and will consider getting the health bill gives the same voting rights as he represented. that measure also includes provisions to repeal many of

d.c.'s gun control laws. and $18 billion bill to extend long-term jobless benefits until june 2 is now law. president obama signed it last night just hours after congress finished work on it.

>> now a house hearing on efforts to prevent home mortgage foreclosures. top executives from some of the nation's largest banks testified before the financial services committee. the chairman is barney frank of massachusetts. this is an hour and 45 minutes. >> the hearing will come to order. i apologize for the slight delay. the ongoing question of how do we deal with the foreclosure crisis is the fourth. and i should be clear. our motivation here is the

ongoing problem of mortgage foreclosure damages the national economy. this is a fundamental problem that we got, and it is a consensus that one of the obstacles through the fullest recovery that is possible is the overhang in housing area. we have no magic wand to wave or buttons to push, there are a series of reference. one of the things and became close to us as we talk about it is the question the in relation to the first mortgage and second mortgages. and we have been talking to investors who hold first mortgage is to servicers the institutions are have a significant number of second mortgages that they own. and would like to find out what can be done to help us solve

this crisis with regard to second mortgages. and we want to know what people plan to do about them and if there are obstacles in doing something, how can we even be helpful or maybe persuade people to do more. and i will now reserve the bounds of my time and recognize the gentleman from alabama. >> thank you, mr. chairman. i thank you for holding this important hearing on the issue of modifying mortgages on properties. having multiple debt obligations or second liens. i would also like to thank our witnesses for being here today. we look for to hearing from her testimony. preventing a foreclosure is a serious issue for homeowners that has a great impact on our economy, and on the community in which those homes are located. the leading credit research provider estimates that the four institutions testifying before the committee today hold 423 billion home equity loans,

including 151 billion in loans to borrowers who are either under water or close to it. further research shows that at least 51% of first liens also have a second or subsequent lean. this presents real problems for homeowners with multiple liens on their property, as well as from bank balance sheets and securitization market. it also impacts our prospects for housing market recovery as the chairman mentioned. mr. chairman, many of the well-intentioned foreclosure mitigation broke rams have already failed to accomplish their mission. and many believe that this latest attempt by the administration to quote fix the h.a.m.p. program will do little to stem foreclosure and help troubled public constant shift in direction have great uncertainty on the market and encourage homeowners and servicers to wait for the next best offer. rather than take action to address problems related to

distressed mortgages. additionally, many americans continue to be concerned about the inherent moral hazards of these foreclosures mitigation programs. it is fair to provide taxpayer -- is it fair to provide taxpayer funds to overextended homeowners who have fallen behind on their mortgages while homeowners who have been struggling to stay current be their commitments and receive no help? i think not. it also, i think that ignores the problem that many homeowners do not even have a mortgage, or second liens. and most do not have second liens. and inherently unfair to ask them to guarantee our participate in it program to help others. critics of the h.a.m.p. program's argument it mocks the hard work and foresight of those who have made larger down payment or took out smaller mortgages to buy more affordable homes who now struggle to make

their monthly payment. now these responsible homeowners are forced, as taxpayers, to foot the bill for wrestling their less prudent neighbors. and once again, the administration intends to use tar funds to pay for these newly announced initiatives designed to pressure banks to modify troubling loans. ending government interference and allows must end. it is particularly troubling to me that banks are being told to forget principle when many of them have said they would rather reduce the interest rates when the government gets into that detail and trying to force banks golf course them into forgetting principle, i think that's a slippery slope. instead of new programs and new bailout, congress should focus on job creation policies as the best way to help homeowners make their payments.

prevent more foreclosures and get our economy back on track. that includes reducing our debt, which will keep interest rates low. the market needs to find its own footing free of government intervention and manipulation so we can revive our economy and get on with a full housing market recovery. now, i know it won't be easy. i thank him again, the witnesses today for being here. i yield back the balance of my time to. >> the gentleman from north carolina is recognized for three minutes. >> thank you, mr. chairman. before banks represented a service about two-thirds of all distress home mortgage loans. the same for banks on between 40,500,000,000,000 in second mortgages, secured by the same distressed assets. was to be directly assessed affected by decision to modify the first mortgage or to foreclose or to extend and pretend. it is hard to understand why servicing a first mortgage on

behalf of investors were holding a second link on the same property is not an irreconcilable conflict of interest. between services and investors. why is this not a breach of fiduciary duty which is wrought under the common-law? it it makes no sense as the testimony today will tell us on that second mortgages are performing better than first book is that that makes no sense for the homeowner. services are telling homeowners to pay the second mortgages before the papers so they can only pay one. congress and the industry investors should begin by asking whether if it is in plausible way to permit services to secure a mortgage that they also service. hearing none so far, i have introduced with mr. ellison legislation to prohibit one day, one entity from doing both. thank you, mr. chairman. >> the gentleman from texas. three minutes. >> thank you, mr. chairman.

today we will examine the fifth or sixth generation of the same failed foreclosure mitigation plan, offered by the obama administration and congress. it is a policy that still throws mud on the walls to see what sticks. very expensive mud that belongs to someone else, and by the way, none of it is sticking. we still have one of the highest default rates in our nations history. by the administration on mission, they have never structured 169,000 permanent modification out of their stated goal of three to 4 million. both studies show that at least 50% of those who have their mortgages modified will again redefault. the citing a highly ineffective program it is an unfair program that it is yet another chapter in america, the bailout nation, as co-authored by the president and by speaker pelosi. it takes $50 billion from taxpayer, or borrowers the money

from the chinese to bail out banks that made bad loans, and to bail out many who bought more home than they could afford, speculated in residential real estate or use their home equity as an atm machine. we must remember that 94% of americans own their home outright. they read or they are current on a mortgage and they're being asked to bail out the other 6%. it's a policy that says to the citizens who work hard, who live within their means, who saved for a rainy day, you are a sucker. when you're struggling to pay your own mortgage, you should be forced to pay your neighbors as well. the program is unfair to taxpayers according to the congressional budget office, general accountability office. they say that h.a.m.p., t.a.r.p. to debug your program, was 100% of the taxpayer investment. although i tersely note under the majority memo for this hearing, under this subchapter

entitled who will absorb losses, to say the word taxpayer is never mentioned. finally, the program hurts our economy. it fails to recognize the only effective foreclosure mitigation plan is a good job with a steady paycheck and a bright future. unfortunately, under the policies of this administration and of this congress, over 7 million of these jobs have now been lost. by creating an unpredictable artificial market investment capital remains on the sidelines, that is h.a.m.p. is hampering economic recovery. finally, as our nations were at brown in a sea of debt i think we can better use the 50 billion to put forth to a plan, to pay down the debt and put the nation on the road to fiscal sanity. that would create jobs and thus have effective foreclosure mitigation for the nation. i yield back the bows of my time. >> i will yield myself 30 seconds and then yield for his final statement, the german from texas but i just think when the gentleman from texas docs about

the bailout of the partnership between the present and speaker pelosi i gather he was george bush nancy pelosi r-rated. every single bailout described now began at the credit the request of president bush. >> has not the present continued these policies because the excuse ago i just said continued by president obama. so i would be and give myself another 15 seconds. every single bailout in america that we're undergoing that was begun at the request of and in some cases the unilateral decision of president bush. what we didn't have with president obama is containing those bailout. that's what i was saying. >> could i have 30 seconds? >> i will yield to the junk. >> mr. chairman, i think the american people at this time, they're not interested in whether it was president bush, weather was president obama or whether it was democrats, republicans, congress or whether

it was the administration, even whether it was wall street that i think their main concern is where do we go from here. and so i think we are to focus -- >> i would've been more press with that if the gentleman had said, the gentleman from texas, many president obama and speaker pelosi. yes, i agree. i did not get into it into the gentleman from texas said this is depressing, i assume he meant president obama and speaker pelosi. so i appreciate the general must comment. it was too late. i'm sorry, the gentleman's time has expired. >> having been here, mr. chairman, when the request was made for a toxic asset program to be implemented and having seen the capital purchase program implemented, i do have some degree of institutional knowledge in terms of what actually occurred. and my hope is that we can get

beyond the finger-pointing, but my sincerest thought is that we will not. hence, the truth has to be told. and it is only by telling the truth that we will make it clear to future generations what exactly occurred. to point. one, we do have to concern ourselves with what we call moral hazard. but we also have to concern ourselves with the immoral hazard. the moral hazard has to do with the possibility of persons a advantage of a program specifically designed to help persons in times of need. the immoral hazard has to do with doing nothing after having seen millions, more than six, go into foreclosure, do nothing and watch millions more go into foreclosure. that is an immoral hazard. we have a great challenge before us. if we do nothing, the impact of

the economy can be devastating. if we do nothing, the moral hazard will be secondary to the immoral hazard of having done nothing, at a time when we are called upon to do much. i think we have to simply understand that we are here for a purpose. we are here to make sure that the moral hazard are avoided, and to make sure that we don't engage in the immoral hazard of doing nothing but i will yield back the bows of my time. >> all time is expected will begin with the statements and we begin here with barbara desoer. >> thank you, chairman frank, breaking memorandum was of the committee. thank you for the opportunity discussed bank of america's low modification performance. providing solutions to distressed borrowers remains a critical focus and in the past two years we have helped more

than 560,000 customers with a permanent modification, including 33,000 under the home affordable modification program. modifications efforts have been successful in helping many customers stay in their homes, but there is a limit to what the current programs can accomplish. today, i'd like to discuss a number of customers that we believe we can still assist with h.a.m.p. as was focus on the role of principal reductions and second liens. in our total portfolio, 14 million phones, bank of america has 1st million mortgage customers who are more than 60 days delinquent. of that number, 621,000 customers are eligible for a mortgage modification through h.a.m.p. we arrive at that number by subtracting customers for whom h.a.m.p. was not intended that this includes those with non-on occupied or vacant homes, the unemployed, and customers with a debt to income ratio less than

31%. for those customers who fall outside the scope of h.a.m.p., bank of america continue to offer proprietary modifications solutions. to date, we have made trip a grand h.a.m.p. trial offers to 391,000 customers. howevercustomers. however, despite aggressive outreach including face-to-face visits to customers homes, we have not expressed the kind of response rate we anticipated. in addition, a significant number of customers from the trial modification period are not complete the requirements to obtain permanent modifications. now we continue to look at ways to 8-ball for programs to achieve higher customer acceptance rates. principal reduction, and second liens are examples of those. bank of america is a part of principal reduction for customers who are expecting hardship, and have extremely high loan to value ratios. we recently announced

enhancements to our own proprietary national homeownership retention programs that include an innovative earned principal forgiveness approach with strikes we believe mr. alice between customer and investor interest. we understand that there are questions about the impact of second liens -- bless you -- on low modification and the use of printable reductions. second liens need to be a part of the modification process. however, we believe broadscale extinguishment is not the solution because the majority of the second do impact have i. out of 2nd million loans and bank of america portfolio, only 91,000 our delinquent and also behind a delinquent first and not supported by any equity. now important to note in our first mortgage portfolio, we have already been modifying first, including principal

reduction, regardless of whether or not there is a second lien behind it. we've also modified many second liens loans and bring down a significant number of second liens loans as well. now we recognize that more needs to be done, particularly when the first lien is held by a different investor. and we believe a solution is contained within the treasuries secondly program known as 2mp. with a 2mp, the holder of a second lien is required to forbear a similar percentage as the first lien holder. we would advocate working on a similar industrywide process that would require the second lien holder to take a principal balance reduction proportionate to the first lien holder. bank of america is a proud participant in to impede, and unable first became the first major loan servicer to begin mailing trial modification offers to home equity customers under the program.

now, despite his considerable effort, not everyone will be able to afford to stay in their homes. given the depth of the nation's recession, a considerable number of customers will need to move from homeownership to rental and other housing solutions. bank of america is committed to passionately and responsibly helping our customers make this transition. we recently launched the treasuries home affordable foreclosure alternative program, on april 5, and have implemented our own expanded short sale program to help customers avoid the statement of foreclosure and reduce the damage done to their credit. for those not interested in the short sale process as an alternative, we are stepping up efforts to provide incremental cash -- and coppel funny, stupid, for our casualties program and in deed of lou program. we will continue to partner with public policy officials, committee group, and most

important our customers to provide a dignified transition were required. at bank of america, we're working to balance the needs of customers, investors, shareholders, and the communities we serve. we take very seriously our role in helping customers, as well as restoring confidence in the u.s. housing market. we appreciate the leadership of this committee and will continue to work with you to develop solutions on these critical issues. thank you. >> i should play we have asked the for banks to send a high rank officials, if they wish to bring within someone who can do technical backward. we in this committee are well aware of the importance of -- [inaudible] >> i thought i had done. i am just explained will be going on every other witness because we have high ranking executives and their a company but other executives who have

the kind of knowledge that will be helpful together in answering the question. so our next witness is mr. sanjiv das was president and chief executive officer of citimortgage. >> chairman frank, ranking member bachus, and members of this committee, thank you for the opportunity to discuss the citi's efforts to help families stay in their homes. i am sanjiv das, ceo of citimortgage. join me is steve hemperly, head of the citi's default services operations. and i'm honored to be given the chance today to describe our efforts. at citi, we owe a debt of gratitude to the american taxpayer, and we believe it is our responsibility to help american families in financial distress, and in particular to help families stay in their homes. we are committed to modify loans for borrowers facing hardship while providing new loans to help americans in this difficult

time. i joined citi in july of 2008. and in my role as head of citimortgage, i managed these efforts to help families pursue their dreams and buying a home, making homes more affordable, or assisting those families who may be facing financial hardship. citimortgage has a long history of helping homeowners. just last year, we originate mortgages to approximate 336,000 homeowners, totaling $80.5 billion. also, last year we held a private 270,000 borrowers refinance their primary mortgages. and in the midst of this housing crisis, we have put considerable resources on helping our customers for facing financial challenges remain in their homes. we describe our lending and foreclosure prevention efforts in detail in a quarterly report that we released publicly and post on our website.

citi has worked closely with the u.s. treasury in developing and executing the making home affordable programs. since 2007 we have helped more than 825,000 families in their efforts to avoid foreclosure. we now have over 1400 new employees dedicated to supporting our foreclosure prevention efforts, and have trained more than 4000 employees to assist borrowers. our focus has paid off. we are pleased to be ranks consistently among the top, if not, at the top of treasuries rankings for h.a.m.p., and a the fourth quarter of 2009, we've able to help families in the efforts to avoid foreclosure by a ratio of 15 to one. our goal is to work with our customers to find the most affordable solution. and to assist those who are in need. at citi we have address affordability with programs which go beyond h.a.m.p.

we believe these programs are responsible, timely, and most importantly, effective. our programs address core issues which borrowers face, such as unemployment, imminent risk of default, and the need for alternatives to foreclosure for those not able to afford owning a home. we have used and continue to use principal reduction as a solution. to date with been able to address the needs of a borrowers on a case-by-case basis, tailoring solutions to a family's unique needs and to deliver an outcome that is affordable and lasting. we do not believe there is a one size fits all approach to affordability. the proof of this is in our little redefault rates. which continue to rank significantly lower than industry average. we caution, that applying principal reduction on a broad scale could raise issues of fairness among consumers.

we have also signed for the treasured second lien program and support recent changes to h.a.m.p. first lien program. we expect exchange and more principle reductions going forward and will continue to be thoughtful in how we implement these programs. just as h.a.m.p. is not the only solution for consumers, we believe printable reduction is not the only solution for those who are expecting financial hardship. while we have made progress, i fully appreciate there is more work to be done. we are staunch supporters of treasuries programs to help consumers because we believe that action among all banks will prove to be more powerful than ultimate more effective than individual bank action. in addressing consumer financial hardship. let me conclude by restating our own living commitment to helping american families to a challenging time. all of us at citi remain focused on achieving affordability in a

responsible matter what helping families stay in their homes. thank you, mr. chairman, and ranking member back as for the opportunity to speak before you and the members of the committee. and it will be happy to answer any questions you might have smacked next we have mr. david loga chief executive officer at jpmorgan chase home lending. >> chairman frank, ranking member and members of the committee, thank you for the opportunity to appear before you today. my name is dave loman and i'm the chief executive officer of the homes and businesses of jpmorgan chase. i enjoyed today by my colleague molly sheehan. jpmorgan chase ensures your commitment to helping homeowners in stabilizing our and nations housing market at case we're working hard to help families meet their mortgage obligations and keep them in their homes by making their home payments

affordable. today with help prevent over 965,000 foreclosures through h.a.m.p., our own proprietary modification program, and other programs. in addition with refinance nearly $16 billion of loans under h.a.r.p. h.a.m.p. modification performances have been strong in helping hundreds of thousands of homeowners achieve affordable mortgage payments. at chase we are now completing more than 10,000 permit modifications per month, and on average homeowners are receiving a monthly payment reduction of $548 through their h.a.m.p. modification. that represents on average a payment reduction of 29%. in addition we are adopting and implement the home affordable foreclosure alternative program, and the second link modification program to help more home owners. would actively use temporary forbearance agreements for unemployed bar was similar to the program being contemplated by the administration. you have asked us to focus our testimony on the second liens

and principle forgiveness and i like to make a few points on these topics. we have given these issues a great deal of thought, and my written testimony contains the results of our extensive and else's. there been many questions about the role of secondly to the process of helping borrowers. we estimate that 70% of the first liens in our servicing portfolio are unencumbered by a junior lien. 95% of our second lien borrowers continue to pay as a greed. even among loans that are underwater, 95% continue to pay as a greedy. more than 90% of the customers with loan to value greater than 125% continue to pay as a greed. in our extensive second liens are not impediment to the first lien modification to our h.a.m.p. first lien modification completion rate is virtually the same whether or not we are aware of the existence of a second lien. it's important to distinguish

between them a priority a priority. and almost all sinners, second lien holders have rights equal to a first lien holders with respect to a borrowers cash flow. the same is true with respect to other secured or unsecured debts such as credit cards or car loans. generally consumers can decide how they want to manage their monthly payment. it's only at liquidation or property disposition that the first lien investors have priority. we routinely modified our second liens, whether or not we own the first mortgage. we've offered almost 54,000 secondly modifications over the last 14 months, 12,000 of which have been made permanent. approximate 45% of these were on those what we did not service the first lien. on the topic of principal reduction, there are certain individual cases or even segments a borrowers were principal reduction may be appropriate. last year would begin testing targeted pretzel reduction programs for certain high-risk

borrowers to see if a principal reduction program would be effective. once we see the result of these tests will be able to better if i'd with the effectiveness of a broader printable reduction program. but we are concerned about large-scale broad-based printable reduction programs for both first and second leading mortgage loans, and particularly for current borrowers with an ability to repay their obligations. our first concern is that such programs could be harmful to consumers, investors, and future mortgage market conditions. and should not be undertaken without first attempting other solutions, including more targeted modification efforts. broad-based printable reduction could result in decreased access to credit and higher cost or consumers because lenders will price for principle forgiveness risk. less affluent borrowers will likely be harmed disproportionately. there's also an important issue of cost, a broad-based principal reduction program could have an

industrywide cost of 700 billion, to $900 billion, by irs estimate. the cost of fannie mae, but. >> an fha loans would be in the neighborhood of $150 billion. in addition let me emphasize that we have contractual obligations to investors including fannie mae and freddie mac that generally do not submit principle reductions that responsible lenders and major services are offering programs that will incorporate principal reduction features for borrowers who most need that type of assistance based on the characteristics of a particular portfolio of loans. we believe these types of targeted solutions are more appropriate. thank you for your attention, and i will be happy to answer any questions you may have. >> next to mr. mike heid who is copresident of the wells fargo home mortgage. >> chairman frank and ranking member, and members of the community. i am mike heid, and i'm here

today with kevin moss, executive vice president of wells fargo home equity group. i'd like to begin by stating what we at wells fargo believe is an overarching issue that requires constant consideration. while very difficult to achieve, the needs and interests of homeowners in financial distress must be balanced with those who have remained current in their mortgage needs. while much focus is directed to consider is behind on payments, we cannot lose sight of the 91% of our mortgage customers current on their loans and the fact that just 3% of our home equity customers are two or more payments past due at the end of 2009. with that perspective in mind let me address the programs already underway in the program announced an concept of march 26. . .

granting immediate and permanent principle forgiveness over time. on average customer is received a 15% principal reduction on on $50,000 and when combined with a rate reduction and term extensions dropt monthly payments by 25 percent irrepressible forgiveness is not an across-the-board solution and not everyone with home loan falls behind on their payments. most are doing what is necessary to stay current on their pension obligations and in so doing

protecting credit standing. for this reason principle forgiveness is used in a careful and focused manner. through our experience we found its best used to assist in areas with severe price declines and little prospect for full recovery of home values and further they've suffered financial hardships but continue to have sufficient incomes to a ford lora modified home payments and long to remain in the home. 2009 the read default rates on these loans for less than half the rate for similar rights in our industry. in 2010 we expect use principal forgiveness on the same basic tennis and in addition when available we will review the new h.a.m.p. program details to confirm our understanding absence unexpected legal regulatory or accounting issues we plan to implement the enhancements for first and second means modifications as rapidly as possible. with respect to h.a.m.p. in general from the beginning we have said it's only part of the store when it comes to helping

homeowners. since the beginning of 2009 we initiated or completed more than half million workers modifications, three-quarters of which were done outside of the h.a.m.p. program. wells fargo is doing three modifications were ever completed foreclosure as a standing practice before foreclosure sale and insure all other options exhausted. with respect to a judy finance program announced in concept on march 26, implementation will require significant work. as one of the two largest fha lenders we offer this and plan closely following the guidelines by first lien investors including fannie mae and freddie mac. in our home equity portfolio we stand to ensure second liens do not prevent such refinances from occurring. in closing, our efforts to assist customers are very different than they were a year ago. for instance we have assigned one person to manage loan modification so by june a customer will know where they're dealing with from start to

finish. we hired 10,000 home preservation staff for 17,400, expanded 27 home reservation centers to provide face-to-face help and is 25 de credit decision turnaround for customers providing all of the required documents. wells fargo remains committed to working with this committee and others of a balanced initiatives that consider the needs of all customers, are investors and our country. thank you and i look for two questions. >> thank you. >> mr. chairman, prior to the five minutes each i want to say this and i'm going to complement shoot, i'm not sure it was intentional thing but we have this hearing at 12:00 o'clock instead of 10:00 o'clock. the testimony usually comes in at night or late afternoon as io read the testimony. this morning prior to the hearing which was a great help and it makes for a better hearing. >> i appreciate that and i don't know if we want to set the

precedent of member is reading the testimony. [laughter] i was able -- that clearly was on the the riot -- we're able to do in part to but we have a hard time accommodating them all and they put a strain on the people who work for us. what i did today was we're not voting until 630 so that's why we're able to do that at noon if not interrupted and as members know i feel terribly guilty when busy people private-sector or public sector, nonprofit, profit, volunteer, when they sit for an hour week commemorate them before the house. and so i was able to move it to that time and we will work together as we have done to pick some other days when members are coming and we start early, but that was made possible that we didn't have many votes.

let me begin with an agreement that yes not everybody who is in default is going to get help or should be helped and our people who made mistakes and misjudgments. and i have long felt we were pushing too many people into homeownership and not doing enough for rental housing. that was no favor to anybody. i also believe it, yes, talking about people who had a loan and took out a home equity loan and enjoy the fruits of that, those are not great jobs -- optics of sympathy were people cash out. on the other hand, there are categories of people -- let me talk to any of you differentiate based on unemployed in? i think that's what we should do, you can talk about people who were because they were persuaded to or made misjudgments or some combination of all this is one thing but there are people who are

unemployed and can't pay your mortgage out of unemployment. those people seem to be no one should be arguing would be -- i don't use moral house third, just so he can get a mortgage reduction. amigo down the list. do you differentiate based on unemployed through no fault of their own? >> yes, we do and under the guidelines there is a standard of three to six months of forbearance. >> let me ask, three months -- i wish i could say unemployment was so transitory that tremendous made a difference. i'm disappointed in the obama administration, that sense of mission. do you go beyond that? >> each one is really a very customized solution so it depends on the state of delinquency of the time that the request was initiated and that sort of thing so occasionally we do, but usually within that timeframe and also there are regulatory issues. >> i don't see any reason for

being, not being very sympathetic to unemployed. >> chairman frank, you raise an important point. the unemployed group are essentially hit by a double-whammy not only with house prices going down but losing their jobs and they had a the perspective of an advantage because we launched unemployment last month so we learned a few more things prior to the administration's new program. what we learned was that three months between three and six months in the points she made earlier we didn't want a program to be so long that it would change people's employment seeking behavior's and what we have learned is it actually doesn't change its. >> summit is not going to try to get back to work. >> and that was our experience that people work -- look for work and more importantly many of them found an alternative

solution in terms of h.a.m.p. with us so i would strongly recommend that. >> mr. lowman at. >> chairman frank, as i mentioned in my testimony, we have had a program that provided forbearance to unemployed or worse and it's been a part of our practices for a while. we obviously embrace new changes in the h.a.m.p. programs that provide the same. >> mr. heid. >> yes, we have done this for years and i think in addition to what's been said the key is to make the customer desire to remain in the home and. >> the question of fairness to people pay their mortgages seem to be substantially received when you talk about people unemployed and i agree, we do give money to people on unemployment insurance and other thing. i would hope we would be forthcoming. let me ask quickly, if the

holder of a the first mortgage is ready to do sama principal reduction and you hold a second mortgage separately from a bad, are you prepared to do a proportion of production? mr. heid. >> especially of the program mentioned earlier that would read required in the 50,000 a principal forgiveness modifications we did as a first lien holder. we did not petition that based upon what any second lienholder -- >> not everybody is as nice as you may be so you would accept a portion if there was reduction of the first? >> yes. >> mr. lowman at. >> as part of the program we would consider the same. >> actually reducing the fdic program and in the fdic program when we modified the first on our books we automatically

modify the second. >> i know -- my time is expiring and i would ask to let me know of any circumstances in which there was a reduction that was going to be made but would not accept portion of reduction of the second. i would like to know if there's category of cases, where there was separate for the first and the second. you own the second and not the first, other cases of categories for you would resist a portion of reduction because if there were that would trouble me. the gentleman from alabama. >> thank you. mr. chairman, i will say this to the panelists, what we are talking about is forgiveness and talking about is of benefit to war really a modification of the contract. and i think it is important for all of us to know that any time

you create a benefit for an entitlement and what ever you colleted you create a need. congressman hensarling often says if you build it they will come. and that's one of my concerns here. mr. lowman said 95 percent of borrowers are current so my first concern is a social cost. are people going to say it's not fair to me? somewhere down illini have to pay for this so that would be one of my concerns. equal treatment -- is it going to create more and really late payments and things of that nature. the second to is a the cost of mortgages going forward are going to be greater, it's impossible to start modifying

contracts without that showing up in subsequent contracts because people are going to protect themselves from the risk that wasn't there before. and a lot of this actually jpmorgan shays testimony with ms. sheehan and mr. lowman was very good and it was a thoughtful analysis that there is going to be everyone else in this. of the third one and this is something that we ought to all be concerned about, i think the greatest cost is going to follow on those with less than perfect credit in the future. and because it's going to raise what their down payments, some of that maybe could put some of it may make it very hard for them. it's going to increase the cost to those with less than perfect credit going for it. because sooner or later they're going to have to shoulder the benefit and these are people that probably would not have defaulted.

so my questions are going to concern those things. a first, mr. lowman, you talked about industrywide cost of 700 to $900 billion and that's a large cost. how will the industry work through, work through it. it's under water and in the near term are really may be a better question, will this cost necessarily be incurred or passed on to other atmar worse in the future? how will it be made up? >> i think the cost obviously is great for everybody that holds loans. every type of investor or private investors or what have you. to the extent we were required in to forgive those loans is certainly would be a hazard and a risk that we wouldn't have to bear in the future and as a

result we would either do one of two things: we would increase the down payment requirements to protect ourselves from that in the future or raise the prices or both. so i think the cost of home ownership in the future would be greatly increased as a result. >> to the other three institutions agree with that analysis? >> yes, i would agree if there were wholesale reductions but i think that is the total amount and i do that as hypothetical because constraints that exist that i believe would stand in the way of ever reaching that number of making 100 percent of the borrowers. >> i would agree with that and say that the only other issue i agree with brit is it is, in fact, hypothetical but expect to increase and in trying to solve the false would increase, and the cost would be higher.

>> yes, they are very real and need to be taken into account. >> thank you. i am also likely to hear from the regulators. i don't know that bank regulators would want lenders to take such risks, some of the risk that may be associated with this type of program. it's certainly will have an impact on the financial, the finances of the company. let me ask all of you this in conclusion -- the rollout of this program will not be effective until september of this year. but under this program is servicer cannot execute a foreclosure until all available modification options have been tried and i know the chairman's ask you to write a letter basically saying that you agree to that. does this cause particularly

with the september 10th rollout, does this basically really operate almost like a six month mortgage foreclosure moratorium? >> i will take out one. the two mp operates as modification of a second deed of trust after the first mortgage has been modified to permanent modifications of the foreclosures event is passed as long as that first mortgage modification continues to perform and then just a difference in timing between the modification of the first and second. >> as a practical matter will this be viewed as a mortgage moratorium foreclosure? >> noaa. >> how about the other institutions? >> i think that is getting lost in some of these broad sweeping delays on foreclosures, the fact are a number of properties also swept up in that so communities are being harmed by the fact there is a vacant properties

sitting there and can't move the process ford and i don't believe that was the intent but that's one of the casualties of the process. >> so it does have tendency to slow the foreclosure? >> yes. >> will the gentleman yield? i wasn't calling for -- mine was contingent. were the first is modified and the second -- that doesn't impose modification requirement. they could do that in and out of it. >> so it was still be voluntary on everyone's part? is that correct? >> well, as i understand unless we change the law it is voluntary i voted for bankruptcy but it did not win his. >> we have a tendency to all was said and say you have a commitment to do something and i didn't know whether these letters -- when you say assurances i don't know what that means going forward.

>> the gentleman from pennsylvania. >> thank you mr. chairman. i'm sitting here asking myself the question why are we here today. it seems you all are very happy with what's happening in 64 percent of the market that you control and i haven't heard anybody make a suggestion that you have a plan or you're able to put a plan together better than what's presently being implemented, is that a correct hearing and what your testimony is? >> i would disagree with that. the kinds of recommendations are to embrace the programs that have just recently been announced and launched to mp, we started mailing our first-round modifications under that program april 1st. the home affordable towards sell program just went into effect april 5th so there is new performance that will indicate whether, in fact, there is further impact that can have a and finally the principal reduction and things like the

fha, refinance went recommended on go into effect in the fall so i think there is certainly more that needs to be done. i think in our testimony -- >> that's the question, and limited in my time. do we have to do the extra work in the congress or is the private sector able to come up with solutions to this? it seems the four institutions at that table can get together and conspire but if you came up with good ideas and implemented them it wouldn't require the congress to take any action. >> that is already occurring. each of us stated the number of loan modifications happening outside of the various government programs so i would say private-sector is stepping ford. >> very good, the only question, it doesn't seem the numbers are very high with what's being done as of this present time and there are a hell of a lot potential for foreclosures out there that maybe coming about because we quite haven't arrange

things. is that incorrect impression on my part? or do thank you are at the absolute, some level and nothing more to do and what you're going to do satisfies the market because i want to make the observation, we've talked about certainly we want to help homeowners stand their homes if they want to and are disposed to do so but let's not miss the fact that we're trying to get the economy stimulated and if we can get homes being sold again and finance again, we can change the recession to a recovery and we can be on our way to some good times. but i'm getting the impression from the testimony of the witnesses that everything is hunky dory and we don't have to do anything. i'm wondering why the chairman got me back so early today for this hearing. >> if the gentleman would yield because i sometimes find having called a hearing things get hot conquistadores between the time the hearing is called a time we had the testimony. >> good observation mr.

chairman. mr. miller in his introduction talk about the internal conflict between the servicer and the owner of a lean position of. quite frankly maybe you are marvelous in your approach and the private sector that that conflict never arises, but i have a hard time believing match. i'm wondering do you see a need for us to address the issue of separating and taking away that conflict of interest? either you can be an owner of a lean or you can be a servicer of a mortgage but you can't be both. can i just have your expressions on matt? >> i do not feel that is required. when you look at our portfolio first mortgages about 30 percent of them have a second lien behind them, about half of those is another investor and i think heard another competitor say similar statistic so, but if i

mentioned in my own testimony and written testimony that we're doing modifications. but the issue is a holder of a first an investor would not want to make a principal reduction that could benefit the cash flow of the bar worse if that turned around and used the cash flow to pay seconds. that's why our recommendation in the testimony is two further its fans to mp from principal forbearance on a shared percentage basis across the first in the second to principle forgiveness across the first and second and similar percentage would help resolve mad. >> i would add to that. we all have requirements on us to service the first mortgage appropriately. so i think that topic and that issue is getting lost in the mix here that i do not believe is appropriate to legislate this matter. i think the customer's choice -- choice is really the missing piece in terms of where the cash

is being sent and not because there is a shifting of cash between first and second portfolios or anything of a sort. >> do younk that customer has anything to do with servicing the mortgage? >> the customer's choosing which bills to pay. >> paying the bills but not under the advice under the servicer or not with any coercion or thought process? >> that's my belief. >> i would say that the modification on a first mortgage which happen to be the single biggest debt for most consumers has been the one that has been opposed to what the investors might want in this case but i think that what we've tried to solve here is solving the greatest source of distress for people and so help keep them and their own homes. the issue in separating the two is as we know there's about $440 billion in second mortgages and just wouldn't be enough

liquidity if we didn't have a the same services in the first and second so there is a certain amount of liquidity capacity that needs to be looked at but there's no conflict. >> the gentleman from texas. >> the gentleman from illinois. no, the gentleman from texas. >> thank you mr. chairman. >> the gentleman -- that's the list i got. >> thank you. so when i listen to your testimony as you went down the line there we heard you talk about some of you participated in the h.a.m.p. program and others have done things and i thank you were used the word proprietary. what i also heard was the h.a.m.p. program has been overwhelmingly received more effective up to this point so i guess the question to go down the road there, why isn't the

h.a.m.p. program working and are your proprietary solutions better than the h.a.m.p. program? >> it very much depends on the circumstances of the borrowers. the advantages of the h.a.m.p. program for the industry and establishing standards that enable us to apply a programs across the portfolio has been a real advantage but there is no question there are certain borrowers -- borrowers, a jumbo mortgage as example and not owner occupied property and fha loan where h.a.m.p. was not built to modify those loans and that determines the need for special fha programs or special proprietary programs so the two working complement and i think as an industry we're trying to get the message across that both our effective for whom their target in act. we agree that we are disappointed in the polls three rate to permit modifications.

and under h.a.m.p. our performance so far and we've been working on fixing but both are required because the portfolio is there. >> mr. das. >> i have a different view on h.a.m.p.. if you recall this time last year there were a lot of proprietary programs that all those banks had it and consumers were confused. this is a large-scale problem and consumers need to know what options were available so i think h.a.m.p. provided the standard view of what the consumer could expect when they call their banks so we took it very seriously and so we walked out of the treasury office design the program and decided to adopt its spirits. we ended up with 52 percent of eligible porfolio and what we're finding is compared to 29% for the rest of the industry, it depends on how you adopted. i will give an example. 33 percent of all the portfolio loans have been at h.a.m.p. by

city. compared to four and a half percent share of loans we have. our experience on booking rates is pretty good. we have been constantly contacting our customers to make sure that they understood what they were signing up for and the documents needed to come in and with respect to on occupied that is our number one priority. we need to keep people in their homes and i think that h.a.m.p. focus was good so it gets an unfair share of publicity on the that but i actually applaud the treasury for having come up with a program. >> mr. lowman. >> we believe h.a.m.p. is a good program. i think one thing that we just need to remind ourselves of, we put a program in lightning speech from the time it was announced to the time implemented and it took a lot of

processes, new site for people to fit in and thousands of people. and we had a lot of learning along the way. and i think we continue to be able to shape the future of h.a.m.p.. i think the new requirements just announced that require the documentation of the borrowers situation prior to the commencement of the trial will prove to be really effective h.a.m.p. mr. heid. >> i would add the discussion around h.a.m.p. has also encouraged consumers to reach out and make contact with their servicer and that's a been a positive development in addition to the standardization. if anything is lost in discussion i think the peace getting lost is the fact industry is doing substantially greater number of loan modifications and outreach efforts and providing assistance in ways that go will be on the h.a.m.p. program. >> diving bell was part of my point.

my time will run out, but here is the whole scenario. i don't know that the government needs to be sending a signal when politicians get up and say no one should lose their homes so that raises expectation level that all i need to do is call my lender because the president said no one should lose their home. here's the thing i want you to think about is when a customer calls you and he and his neighbor bought the house of the same time and that started saving money and put money behind and now their neighbor is leveraged up their house and bought a boat and charged up with a second loan on their home and now they're going to get a participation and production inc. equity by either federal program and the guy next door is out of a job as well. he is using his savings to make his payment. again, we are going down this road where we keep having the government pick winners and losers and unfortunately in this

case the people making their mortgage payments are going to be the losers. there something wrong with a system that supports that. .. for each of the four banks represented here, do you support income verification requirements and dependent on the housing

prices, however firms changed her underwriting crack at to support the borrower's ability to repay? >> yes, we do believe it was part of the documentation process. and as you know, most of the production being done in the market today is the gics are at an jay which of those requirements as well, but we also took our own portfolio. >> we do the same. we continue to do that for all. >> yes, sir? >> would begin requiring full documentation in late 2008. we have no programs that don't require and we fully support it. >> we publish a responsible lending principles on their website back in 2004. and we believe very strongly in the ability to repay and fully support documented. tonight thank you. in an article in american banker last week they said quote we

support the idea of the consumer protection and i.t. consistent with the federal preemption and believe they may need regulation should focus on activity that would apply evenly to all residency focused on particularly entities. i share that in the efta another senate committee to return to pre-2004 preemption standard. balancing the need for states enforcing consumer protection applause and a fair uniform standard that provides across the country. representative, fairford before the full house approved the bill. to confirm your statement, the dfa improved provisions a couple with the pre-2004 branching statement and want stronger confusion help mitigate against a future waiver foreclosures and housing bubbles. >> i see the statement that her

spokesperson made her bank of america about the sport and i do believe that a level playing field regulation in the consumer would help avoid problems in the future, yes. >> okay, any other comments? [inaudible] >> as every of the tuition should take our responsibilities very carefully by our ceo in the context of the responsible finance in the company. tonight thank you, sir. >> our chairman has also spoken extensively on the need for regulatory reform. and so we would support comprehensive reform. obviously, he is also reiterated that the details --

>> with the national access to financial products is critical to successfully achieve it in the national standards and relative regulation he needs to be to make sure the regulations apply for work to date on regulated institution. tonight thank you. and one concern is that some homeowners may not be aware of foreclosure opportunities need to offer voluntarily by financial institutions to work through government programs like hamp. and i think maybe if you spoke through this before but the four banks represented here, what is your bank statement in anything you could do to which authorities say to make people aware of this opportunity? >> extensive contracts and creative way to go to soundtrack contracts using local communities, nonprofit organizations for someone might be more familiar and still more comfortable in responding to someone, participating in housing events across the country, participating in the 250. last year it was to attract

consumers and borrowers to a place where we have representation to support those telephone contacts, e-mail contacts, text and contacts them are trying to be as creative as we possibly can. >> thank you, mr. chairman. i see my time is expired. thanks to the members of the panel. >> thank you, mr. chairman. i've got two questions. first of all, i would like to know -- you know, we're hearing about the regulators coming in and saying to the banks you have to write down certain loans because they will not be good in a year or two. in order to see how this affects or if you're hearing from regulators about the potential write-downs associated with the second lien program. is there concern about how this will affect your balance sheet in the near-term?

would anybody like to answer that? >> i can take that. i think the concept of ranging down aris distinguished second mortgages needs to be re-examined and i believe it has been. i would say that where we do our modification, we should look at potential loss of income in the case that we should really be accounting for. i think we may be going too far to the extreme and saying that the second mortgages are worth nothing, but also the statement say by a large they are performing really well. and the reason they're performing really well is because borrowers tend to look at them as an important source of cash and to not to think about than in terms of how much collateral they have in the equity in their home. they're almost behaving like an unsecured line of credit and i encodings to be taken into account. >> do you think that that will

affect her availability of credit for consumers than? will this have any effect? >> no, i think the way it's structured right now is we are lending prudently between customers. but i think that taking it too far to the extreme could have the potential of limiting the number of economic developed consumers. >> anybody else? >> thank you. i think the totality of all the programs and all the changes that are happening and yet to have been, i think all of that will certainly get back to the credit's decision the future. >> then, just another question, with the fha refinance program and tend to write down the total debt obligation, the primary margin in the second liens to 115% of the current value, do you have any concerns about the

appraisal of these properties? how are they going to determine what the current salary is? the incentive is unknown right now but say use comp. will it require an upgrade appraisal and what's going to happen with that? >> well, this would be under a standard of fha financing that exist today, which requires an fha appraisal to do an updated appraisal and the industry -- with a $370 billion of new for your donations all of which had an appraisal associated with them, so we are finding our way through a difficult period of time to establish cons of that sort of thing, but it is happening day and day out and that would be required under the fha. >> is there kind of a percentage

of lowering what was originally to your perusal on the house? >> no, it would be whatever the independent appraiser of the appraised value of that tone is today. >> anybody else have any? >> the details of the refinance programs have been provided. but to the extent that the ultimate program details follow the standard fha program as it now exists, there is an established mechanism creating property values, using appraising that type of thing. i would anticipate that being a problem as long as the new fha refinance program follows as closely as they cant the standard department. >> thank you. i yield back. >> the gentleman from north carolina. >> thank you, mr. chairman. i know that the idea of taking a pro rata reduction from the reduction principle from the second was supposed to sound

generous, but first lien holders and forgiving holders don't have a claim to the collateral the way the law is supposed to work is the first mortgage holders get paid everything between a second mortgage holders get paid anything. second mortgage holders lose everything before the first mortgage holders lose anything. so, suggesting that a service or, agreeing to a pro rata reduction principle, the second that they hold, that he owned to go with a reduction principle that they agreed to on behalf of dan best or his strikes me evidence of a conflict, not an absence of a conflict of interest. and mr. lowan baby testimony, he said the pooling and servicing agreement for private label securitization of mortgages as well as the creditors to a large extent would require change of

the agreement to make it legal to modify to make reduced and it's useful. and that was very useful to agree to get that kind of an amendment, agreement basically by everybody and everybody's interest to different -- there've been a lot of proposals for how to cut through that kind of legal problems. and i have thought that there had to be something in voluntary to do it, whether with purchasing, having the government purchase in the domain and then modifying ourselves, which is similar to what the corporation did in the great depression. our modification in bankruptcy. citigroup came to support that two years ago, which i appreciated. bank of america went to the brink, but never quite got there. what is your current condition? >> thank you. our current position is as was untrue the lessons willing for

modifications and other programs there's probably some segment of paros for whom that would be an appropriate alternative. so that is her position at this point in time. >> said he would support that in some circumstance quite >> in some circumstances, yes. >> okay -- >> it would have to be modified to allow that circumstance, so we should make clear that we can change the law. >> it was supported legislative change in the passage of the law to allow the modification of home mortgages in bankruptcy. >> yes, and i believe there is a figment of borrowers who that is the appropriate alternative and subject to them having gone through qualification for half or something like that and failed, that there is a figment who that might be an appropriate alternative, yes. >> there is also -- the customers are already getting assistance in terms of his pro-program. so you have to ask yourself

whether the bankruptcy laws really the best way and fastest way to find assistance. >> were trained to find other without much to show for it. the stress test of a year ago assistance now i'm having meant assumed that second mortgages held by the 19 banks were worth 85 cents on the dollar. other analysts have said that the 40% to 60% is more a realistic number. how are you valuing your second mortgage portfolios now and was distressed test and accurate or should there be a second stress test? >> i can take it. the evaluation of the value of a particular asset is based on the expected losses and distressed under economic situations as being what the effect of losses might in a certain situation and

reevaluate them based on modern standards, the expected losses. the disconnect in the sense that it is not based on the performance, but on the basis of the exiting of people's homes. we believe there is a disconnect between the market and what they're doing on the books. i mean things happen sometimes when they disconnect with what was on the boat. as we saw in the case of nonperforming last year, nonperforming loans were at one end and we have valued them and another and an day converge towards the end of the year to a point where it was very similar to what was on our books. >> a 15% plus off par for a second mortgage issued his and evaluate evaluation? >> the gentleman from texas. >> thank you, mr. chairman. i have no doubt that in this economy there is a lot of pain

and misery that has taken place throughout. i'm still curious though why we are examining a program is seemingly will bail out banks who make bad loans to people who may have purchased more home than they could afford. yet, someone who invested 100,000 from their 401(k) is decreased by $100,000 plan for them. somebody who decided to with their primary residence, invested money perhaps in a real estate investment trust. so $100,000 loss there. there's no program for them. so again, i question the fairness of this particular approach, again noting that 94% of america either owned their homes outright, rants or is current on their mortgage. be it as it may, i believe i heard the chairman and others have said that they want to persuade you to modify more

mortgages. i know in that regard, there's a number of carrots and sticks floating around here, particularly one. who is having fha insured these mortgages so that the taxpayer, you, surely we are all aware that soon we make conference a capital markets reform bill that could have a lot to do with your bottles long and there are sticks floating around there as well. but i want to talk a little bit about and continue on with this particular metaphor about the organic carrots that are already out there. he previously served on the congressional oversight panel for the t.a.r.p. program and in testimony that we were seeing before that panel, october, november 8th in the west, i know we're different academics and people familiar with the market, because typically the average foreclosure could cost

you anywhere in the neighborhood of 60,000 to $80,000. is there anybody on the panel who wishes to disagree with that assessment? those good numbers, is that it ballpark range? i see some heads shaking in the affirmative. does anyone care to shake their head? >> we have very good record it, but they don't make their way in yet. >> mr. chairman, for the benefit i will note that this particular member at least observed an affirmative headshake. i guess that begs the question i'd have a built-in assessment to modify a number of these. i'm not sure how much more is taxpayer and some of you want to have, much less need. clearly, there's a large large concentration i suppose i'm on your banks of second glance. i assume there's a fear of

impairment of a regulatory capital. but i also question why, their legal impairment for practical impairment from the homeowner, the first landholder lien holder contracting with the second main folder and older for writing down some principle for them to receive a contractual equity participation in any potential upside appreciation of the fair market value of the residential collateral. i think the gentleman from pennsylvania noted on another market solution. is that not a market solution? is there a legal practical employment there that this number out to be aware of? if anybody cares to handle the question. >> i think your point is a very good one and that there is significant incentives already that exist for all of us to do what is right for customers. >> okay, thank you heard recently there was an article in "the wall street journal" i'll quote from ousted the moral

hazard question for the treasury department officials say some borrowers get their principle reduced. even borrowers who weren't behind, who will stop pain unless they get the same break, unquote. for arguments sake, let's say the argument is "the wall street journal" got it right. i don't think i've heard you address it specifically. does anybody care to comment on this particular article? >> congressman, the only thing i would say there is fraud is quite likely. a lot depends on how a principal reduction for a particular form of modification is detect it. for example, you could have a principal reduction or you can have a principal reduction words taken off -- >> but clearly it's not done properly. you could provide incentives to people.

>> were going to mention earlier some form of depreciation and then perhaps i could be mitigated to some extent. but they are is no doubt italy to some issue. >> i see my time is expired. thank you. >> the institution specific question i was going to ask if it will take a little bit more time. >> thank you, mr. chairman. mr. chairman, i like to ask all the witnesses a question. and the question is, was it appropriate and necessary for the government to intercede with the $700 billion bailout? if you don't didn't so, do you think that we should have done nothing or would you just simply raise your hand? i'm going to take it from the absence of hands that there is a belief among the witnesses that there was a need for a bailout.

that's the terminology that were using nowadays, so be consistent so that we can communicate. mr. reid i believe it is, you indicated that there is enough incentive to, i believe, you said to do the right name for your customers. maybe it's not really read, heid. is there enough incentive for you to do the right thing for the economy? >> i guess the way i think of it is if we do right with our customers, we are doing what's right for the economy. >> and if you find that it is not necessary to make modifications, then you have customers are going to foreclosure and that it the economy in an adverse way. have you done the right thing?

>> the factory done a substantial number of loan modifications, the fact we have done a substantial number of loan modification principles and shows we've done everything we possibly can to stabilize. >> what consideration a substantial? >> about 2% of the overall portfolio on an annual basis is what ultimately worked his way through foreclosure. >> have you recently got into that plateau? >> summer on an annual basis you >> 2% have been foreclosed. >> 2% of the americans tends to go through the foreclosure. >> i understand. what percentage of your home that are in foreclosure have you modified? >> a couple ways to answer that. you could look at the hand -- >> no disrespect. i'd like you to give a percentage if you would.

>> i don't know the specific answer to your specific question. >> i think most to examine these numbers have concluded that we have not significantly impacted the number of homes in foreclosure. would you agree with this contention? >> no. >> do you think you significantly impacted? if you have come everything to me you be prepared to talk to us about how you have performed this significant feat. >> let me answer with this. certainly, there's no question more needs to be done. >> more needs to be done? you say it as though if we do something else, will make a great difference. a lot more appears to me should be done because we are facing a lot more foreclosures. what are we going to do about this? let me just excuse myself from you for a moment if i may care

to notice respect for you, but i do have to go to ben for america. let me compliment you on this principal reduction program. i think when businesses do well, we have to acknowledge it. and you should be complemented. >> there'll be no demonstrations. >> tell us briefly why you see principal reduction as a significant means by which we can impact? >> because there are some borrowers for whom the offers we have extended so far have not been generous enough. and in order to enable who truly want to stay in their homes. >> when they go a step further because i'm about to lose my time. would this also impacts the overall economy, what you're doing? >> we believe that bringing stability to neighborhood by ensuring that homeowners who want to stay in the homes can

get you an affordable payment and have sort of a vision for the future of that homeownership is important. at the same time, we do believe that there are some borrowers for home being able to afford stand and not told is not a viable alternative heerden so, we need to work with them to transition them out of that home and signify as much as possible ideally without having to go through foreclosure, but a short sale or some other alternative into a number housing alternative. >> thank you, mr. chairman. >> the gentlelady from illinois. >> thank you, mr. chairman. thank you are witnesses for your testimony today. it was almost two years ago that we had a hearing about would have been the looming foreclosure crisis in this committee. we were concerned that the debt-to-income ratio, was to value ratios word sustainable and at that time were reproduced at the committee level was hope for homeowners which was

providing for these to those who found themselves upside down while also protecting taxpayers against moral hazard by requiring those to pay the taxpayers, by sharing any upside in equity appreciation back with the government. clearly, the hope for homeowners program has had little to zero participation from organizations like yourself. so, my question is, why? and recognizing there were some compliance issues that we later addressed about a year into the program. does that include the sakhalin treatment and how it's different than it does hamp program. and i guess my other question would be, would you agree that a shared equity approach does shackle moral hazard by discouraging homeowners from potentially defaulting because they think they're going to get it deal if they have to share equity later that would

discourage them but it also encourages those that are in a troubled situation to stay in their home because they have a more realistic potential at some equity appreciation than just adding all their dead down at the end of the day. is there anything precluding u.s. servicers for marty netting at your own chair of the arrangements from good borrowers and is there something we can do as an enhanced program relative to that. [inaudible] >> please identify yourself for the record. >> i'm jack schakett. the homeowners program created agencies on a political point of view it's very nice, but the idea for sharing appreciation future look of the homeowner a chance for appreciation in the investors a chance to share in that and make it appealing. but every program as operational concerns and will probably hurt

homeowners the most was because it was a significant deviation from the standard fha pro-program acquiring pieces lectured appreciation the operational homes to put in place is very difficult. we've been working on a rolling effort for homeowners for quite some time. if you look at the new program for the fha, which actually some point is simpler, like eliminating shared appreciation will be much more operationally easy to roll out and much more effective from that point of view. >> all right, thank you. >> i would say that homeowners further obligated program and how it could be executed. i generally tend to be a little bit more in favor of shared appreciation because i believe that there is some sharing of the upside that the whole notion of sharing on the downside. i'll defer to my colleague if yes additional comments. >> hi, i think i would tend to

agree with mr. schakett for the comment and i would look forward to introducing the new fha program as well as hope for homeowners. >> converse woman, this is a very complex program and one that we have wrestled with. we are in the process of doing what's necessary, changes to her system to be able to allow it and we spent a lot of time in washington this summer. >> i think the new fha financed program has some real advantages over the hope for homeowners. it's a sensitive program. it's what we know but so far using standard fha requirements. the approach between first plans and sakhalin to the more equitable sharing in the programs that has advantages to it. we intend to make sure that are secondly not create future hazards. >> and i also asked by maybe a nod, is there anything

precluding for work in a shared equity arrangements with borrowers now? on your own? so in tandem are you doing those in some situations? >> we really do need responses. >> we are not doing that, but we've introduced the concept of principal forgiveness into our principal production program. >> we currently don't have any programs operational that includes shared equity, but we do have in the process of constructing them. >> we currently don't have a program. and we've been using principal forgiveness is part of the program starting in june 82,009 as a way to get customers hope. >> thank you. >> the gentleman from indiana. >> thank you, mr. chairman. in yesterday's wall street journal, a bank of america

spokesperson was quoted saying its efforts to avoid a foreclosure sale, then we do reserve the right to recover the end pain balance on the second link is permissible by state law. however, our practice has been to only pursue recovery in situations where we believe the customer has sufficient non-retirement assets to satisfy their debt obligations, and quote. can you expand on the process your bank goes through in determining which customers they deem appropriate to collect on the second liens? >> yes, it's part of the evaluation of underwriting to determine the hardship where we look at verification of income and other assets that the borrower might have. in order to mitigate risk of moral hazard, we try to draw that line to determine who is eligible to answer programs based on the hardship. and if they are not eligible for that hardship, that we might reserve the right to pursue other asset or to income and

their ability to afford the payment, the right to do so. >> i yield back. >> i would like to go to mr. hensarling. i may ask mr. lowan, i was approached yesterday a blip in my office and it didn't buy these people who are in modification programs with chase chase and i still given collection letters. i'm wondering if you would know about that or how to resolve that? i assume that's not appropriate. >> we do make mistakes. we're dealing with a lot of customers and a lot of transactions. i would be happy to -- >> along the same lines, i've also been told by the national organization that they've had some difficulty in getting some answers on pending request for

modification and what do people do when they don't get the answers that they thought they were can i get. who do they talk to? >> where the special group that deals with pathetically community groups including naca and through those channels -- >> if channels don't work, is there an appeal or what to do they do with the appeal and questions? >> come to me. >> okay. and your first name is? >> mali. molly she and from chase. >> she would be the one who we could talk to. and the gentleman from texas. >> thank you, mr. chairman. there've been a number of editorials written about the approach of the administration on foreclosure mitigation.

u.s.a. today wrote on the first of this month quote helps irresponsible vendors, borrowers, unquote. the wall street journal road instead we are heading towards their five of the housing recessions of washington proposing even more ideas for lonely agony. one single banking regulator we talked to cause it quote pretending -- excuse me, extending and pretending. the question i have pasted part of the congressional recess over easter, speaking to a number of private equity funds, banks, within the dallas metropolitan area, which i have had the opportunity to represent a section of the city of dallas and congress. and there is great concern that the government is artificially propping up values in a marketplace to create

uncertainty and the private pools of capital on the sidelines. now, i admit most of my evidence is an total, but i hear it over and over and over, that people are afraid to invest in pools of residential mortgages because number one, they don't know that the market has reached his true value. and second of all, they don't know what the next public-policy shoe to drop may be. and so, at least in my mind, i'm not sure that washington is being helpful at the moment. they may be more hurt full. i would like any comment on the validity of the observations made by a number of people in the investment and banking communities in dallas, texas. anybody care to comment? mr. heid. >> i would say is a general and statement, it's certainly something for the investor

community. >> with your permission, i would say that some of us, we are actually saying that in certain markets there is in fact improvement in markets, genuine improvements in market with federal markets in california and civilizations. i think were to point b. infection right now on the market pledge and the government is welcome in terms of getting off together and i don't think that intervention in forcing us to create artificial pools of such opportunity for capital. i believe it's important to dabble in second mortgages to create an important set of actions that will detonate the market. >> and then my last question, i guess i'm looking to be persuaded as a member of congress that this is a good investment of the taxpayer's

money. i know there's a $50 billion pool manager and i'm the chairman and i have this exchange earlier. i think as a matter of fact the hamp program was a creation of the obama administration, be it as it may. there's a $50 billion pool of money. we know that we are a nation that today is on an unsustainable fiscal path, that's my language i believe that comes from dr. elmendorf of the congressional budget office. chairman bernanke has said that economist paul santa mail has said we have a fist will cancer that could threaten our nation, that's a paraphrase, i don't have the quote in front of me. but already we're looking at levels of debt to gdp going from 40% of the economy to 90%. were looking at a budget that's going to triple the national

debt over the next 10 years. we're look at almost a trillion dollars interest payment alone at the end of the decade. and so, the question i have when everybody from the cbo to omb, to the president director of onset is an unsustainable fiscal path. why not give one of these $50,000 that you are earned or incentive to do is supposed to pay off the national debt? >> if i see no enthusiastic takers of the payment, i will yield back. >> the gentleman from illinois will have the final questions. >> thank you, mr. chairman. my last question was one of the things i hear from my constituent services in my

district is those people who have been trying to get three months, a number of them have been approved for temporary modification while on unemployment insurance. but then they are disapproved for permanent modification because they don't have employment. can someone explain to me why you would be able to get into a temporary and not a full modification? and should we be using the same criteria? >> yes, and there's a change in the program, so the only way i believe that that could potentially have been business and establishing that customer into a trial modification, we ask what their income was, but we do not ask the source of their income. and we verbally verified that they could meet the requirements, put them in a trial modification. and once we got documentation of incomes and understood that it was going to be in place because

the intent of the programmers to make a long-term affordable payment, that that's when the disconnect will potentially happen. >> so is unemployment income qualified in either case or neither crazed? >> it is qualifying income, but it's only for nine months. so you have to see the path to either another member of the household having income that would be part of the equation are not. >> so you have to understand the specific circumstances the something more specific. >> the unemployment allows for to be considered, but there at least nine months of unemployment insurance/good as barbour said, if they stated income in the first place because now we're requiring documentation we didn't before. we didn't know if that appeared. without that qualified them we saw they only have six months remaining in the would've qualified under hamp.

>> it would be the same issue. it would pretty much be the same issue and i think that issues fixed significantly mitigated. >> thank you. >> hearing is adjourned. [inaudible conversations] senate leaders are bringing a new leaders on the financial floor

to cover security costs and the modernization project. justice clarence thomas and stephen breyer testified on capitol hill thursday about the budget request. this is about an hour and a half. >> the committee will come to order. just a personal note to the beginning, number 42 is in honor

of the people 15th, 1947 for those of you who are little young and the crowd. that's the day that a man named jack roosevelt robinson stepped on a baseball field for the first time. in my opinion, in the process not only integrated baseball, but integrated american. we honor him for a major league a. flamenco befitting to have a number 42. either way, a good story about mariano rivera be the last in the yankees in her chair and is the story. >> and what is the come if i may ask, the yankees record so far come mr. chairman? >> you're out of order. [laughter] >> also would like to know before we begin this hearing, there has been a change in the court, which has special meaning to the court to the american society in general and to me personally because sonia soto

mayor on the south runs that i represent, the area that i grew up in and her parents that were born in the same island of puerto rico that i was born in. so of course it was a special time to see her become part of the very honorable court. this morning we gather to hear about the fiscal year 2011 budget request in court. we have the distinct honor of being joined by two distinguished justices of the supreme court regarding the appropriations request for the upcoming fiscal year. as we do so at a time of the court longest-serving member, justice john paul stevens has recently announced that he will retire as the core finishes the work for the summer. i know that i speak for every member of this committee when i ask the justices here today to pass along the subcommittee's appreciation and thanks to justice stephens for his decades

of service to our country. these annual hearings are aware an important opportunity for two branches of to interact. congress, of course, have a constitutional responsibility for federal spending, which includes appropriations for the rest of the judiciary. although i always have some concern about asking the third branch to come and testify before us, these hearings provide a valuable chance, not just to help us understand the supreme court's budgetary needs, but for the nation's highest court to discuss issues affecting the judiciary as a whole. hopefully her two branches get to know one another a little better as well. meeting the needs of the judicial grants of the priority of the subcommittee of course have a vital role to play in our society, where the rule of law is a core principle. we need to be sure that the courts have the resources they need to defense justice with reasonable speed and care as well as properly abide the right

of the defendant in that against the needs of society. at the same time, we must also exercise matters and balance the needs. in some years, the percentage increases requested by the coors has been substantial and also have many agencies. as we put together a plan for fiscal 2011, we face a moral environment for nonemergency spending. we look for today to a discussion of the budget needs of the supreme court as well as a broader conversation about the federal judiciary as a whole. our witnesses are justice clarence thomas and justice stephen breyer, both of them who have appeared before the subcommittee previously. in fact, i think justice thomas is on his way to setting a record for appearing before the committee. we'll have to put up your number. justice thomas was nominated to the court in 1991 by the first

president bush after serving as assistant secretary of education for civil rights. chairman of the equal opportunity employment commission as a judge on the court of appeals for the district of columbia among other precision spirit we welcome you again to the committee may say that with great admiration and i say that she's been here so many times before us. to share with us. just as breyer joined the court in 1994. his nominee of president clinton. before that he was a professor of harvard law school, staff member for the senate judiciary committee and judge and then chief judge on the court of appeals for the first segment. we welcome both of you today. well glad that your previous appearances before the subcommittee. requires you return for repeat performances. thank you for joining us today and now i turn to my colleague in our ranking member. >> thank you. welcome justices thomas and breyer. we really appreciate so much that you come before us today. an independent judiciary trusted

by all citizens and committed fairly and judiciously revolving this controversial questions with us in the mental institutions for a nation. although the supreme court budget that's not large in comparison to other federal programs, at least you are here today and recognize the importance of her testimony and appearance before the subcommittee. outside of the confirmation process, which we have no opportunities participated, which should be quite interesting. today's interesting as one of the few instances when the supreme court and the legislative ranch interact and it is in my opinion they were the interaction of the recognize and appreciate and respect the prerogative of each branch. i look forward to hearing from you both about the resources necessary for the operation of our nation's highest court as well as any thoughts y'all might have regarding our judiciary system as a whole.

as the witnesses are aware, the federal deficit is projected to be $1.6 billion this year in the congress is going to have some difficult spending decisions to make, not only this year, but for many years to come. please note that i work with chairman serrano to make sure y'all have the necessary resources to failure constitutional duties. thank you all. thank you are a match. >> thank you. by the way, the question of the yankee record was cardinals. >> the cardinals are doing phenomenally well. >> there was always september. >> that's what happened last year. but for now i'm enjoying it. >> justice breyer, the floor is yours. as you know your written testimony will be printed in the hearing record. please pursue with whatever oral testimony you want to make and then we'll have some questions. >> good morning, chairman serrano, ms. emerson, members of the committee. i'm justice breyer and i are

pleased to return. we will pass along your dear colleague justice stephens we will certainly miss him. he's a wonderful man. we have with us today a number of members of the supreme court staff. we have the clerk of the court, mr. bill souter. we have martial tamala thompson and the counselor to the chief justice, jeffrey fear. i am looking in the right direction. and we have our public information officer, kathy r. berg and our act and budget manager, we need to act dress. as i said, we are pleased to be here and we have submitted a statement for the record as our custom. and you're right, mr. chairman, i may well be the longest-serving member.

i think it's like 15 years now. maybe i'll get off for a good time for good behavior. the court's budgetary needs as you indicated or alluded to a tie, but we understand this is a superior austerity and as we have in previous years and very serious about our responsibility to review our budget needs. and i emphasize the word made to be with god to look at this as a wish list. in the years i've been before the committee, we have only asked for what the court is needed. in some years, in my opinion, we haven't even asked for the. the largest request is your remember was actually had to do with the modernization project, which is simply a matter of keeping the building from falling down around us.

the budget request as in previous years has been to par. it's the salary -- we have salary and expenses to which we will justice breyer and i will address and we have the building and ground, which the act team architect of the capitol stephen ayres will dress. on that latter category, let me make a comment. and i'll be brief. the modernization commenced in 2003, fiscal year 2003. and there's some confusion about the year simply because the first portion of the modernization actually had to do with the construction of an underground facility and that was necessary to handle portions of the building that were going to be occupied with construction initially for change. with respect to the completion date, we had some initial

slippage to the modernization project. since then, it has been timely. it is scheduled to be completed this summer and was because i goody's finishing early next calendar year. with respect to our salaries, and intrinsic request, that portion of our total budget this year request is $77,758,000 for fiscal year 2011. that's an increase of $3,724,000, 5% increase. now 70% of that increase is not discretionary, it's mandatory. it is basically what is required to continue operating at our current level as we have as an adjustment to our pace. there are increases in salary that's mandatory and increases

that are mandatory good and there's an additional 173,000 but simply for inflation to cover inflationary increase. last year, we asked for an increase of $799,000 in addition to those space adjustments and we did that to hire personnel and to get the appropriate equipment to bring the -- our website intact. that has been an early success. in the first two weeks, took a system that the website has been up, we've had 25 million hits from around the world. as you remember from our earlier discussions in the early years, we were ecstatic about 1 million hits and a blog. and we only see it's been well received and universally praised. and this allows us now to make adjustments to things that we talked about early on.

and if you visit it, you'll see so much better site. things that used to take several hours to get on-site changes, that cannot be made within a matter of hours were not made it all, are now made in a matter of minutes, three to five minute. as i indicated last year though, there is one area where we would probably cut back this year to ask for some and we do this again with somebody like this. they're recognizing in our candor that this is a neat. it involves the security area. i think in part in last year i was asked whether there was one area in which i thought we could have additional needs beyond technical area. and i said it would be superior. what we did is we had our security personnel do a complete review of our need.

and there is suggestion their request, which was pretty well documented was that she needed 24 additional police officers. and the reason that you need the additional police officers wasn't opening of the building after the construction, we will have more pedestrian. in addition to that, we will have, in the entrance to the building, and underground entrance that was closed and did not need to be policed in the way that the other entrances were police. that will require additional police dollars. we also have additional needs at our command center. now, rather than coming here with the request as required or the personnel or security people asked for, we're going to ask for half of that. we're going to last for 12 rather than 24 and make do with

that. but as i indicated, that is a request that our security personnel feel pretty strongly about. that again, will result in an $886,000 increase in our non-adjustment to the base request. with that, mr. chairman, i would just simply respond to your questions as appropriate. that's the first time he's ever agreed with me. [laughter] well, it's not the first time. >> i agree with him all the time. [laughter] >> my first question would be one that you've touched on, but i just wanted to really clarify. do you believe that the modernization project will be completed on time this summer?

on time as is currently project did, not for the initial -- we are your behind. >> i'm talking about last year's testimony. >> is expected to be done this summer come with the close of the two biggies drifting into the early part of next year. >> i think it's basically we've got some grounds on perimeter work to do. we also have some cleanup to do, removal of construction trailers, et cetera, all sorts of things. >> overall, how would you characterize the cost experience with the modernization of projects with adequate budget resources on the destruction of any to the courts operation? >> from my perspective, i think it's been spectacular. in any big projects, we have a choice. we c m