Press Conference with Senator Charles Schumer (D-NY) Subject: Countrywide and Subprime Loans

Statement

PRESS CONFERENCE WITH SENATOR CHARLES SCHUMER (D-NY)
SUBJECT: COUNTRYWIDE AND SUBPRIME LOANS

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SEN. SCHUMER: Hello everybody. Hope you all had a good break, if you had one. I did. I recommend hiking in the Adirondacks.

Anyway, I'm here today to talk about the subprime crisis, but I know there'll be questions on the attorney general issue, which I'd be happy to answer, too.

But on subprime, I want to make two points today. First, our country is the greatest country in the world for business to develop, prosper, profit. I believe in the free enterprise system, in the capitalist system. It's great. But when corporate profits are earned as a direct result of misleading individuals into purchasing high- risk, high-cost loan products that have a high likelihood of resulting in the loss of their homes, something has gone very, very wrong.

Recent reports of subprime business practices of our nation's largest lender, Countrywide, paint a picture, frankly, of greed motivating widespread irresponsible lending that have contributed to what could have been the largest home foreclosure crisis in our country.

And I'm here today to call on that lender, Countrywide Financial, to take immediate steps to end its abusive lending practices and help reverse the damage already done.

First, we know the subprime crisis -- well, I'll get to that in a minute. Recently, startling reports have shed light on how Countrywide has led the industry in profiting from steering borrowers into risky subprime loans. We have learned that Countrywide's promise to give borrowers, quote, "The best possible loan," unquote, has been nothing more than a commitment to squeeze every dollar possible from homeowners. In fact, Countrywide's lending business model prioritizes fees and commissions over the financial viability or performance of the loans they write.

As I said, I'm proud of our free enterprise system, and I support it. But sometimes, its excesses, even legal excesses, turn your stomach. We have learned that Countrywide brokers issuing subprime loans can earn an extra 1 percent of the loans' value in a commission if they add a three-year prepayment penalty to the loan they issue, telling people they can't prepay on a loan they can't afford, which is exacerbating the subprime crisis now, they get an extra commission.

In addition, they earn higher commissions for higher reset rates built into adjustable rate loans after the teaser period expires. In other words, they tell you as a broker working for Countrywide, you'll make more money the higher the interest rate -- not you'll make more money the better loan you issue, but you'll make more money with the more dangerous loan you issue.

Is it no wonder that we have found out that 40 percent of all those with subprime loans who are about to be in foreclosure could have qualified for prime loans? Isn't that amazing? Forty percent? Why? Because the brokers who work for Countrywide and many other companies were given an incentive to charge not the best rate of interest for the borrower, but the highest rate of interest for the borrower.

And if it's 1 percent, for instance, as for the prepayment penalty, you're in California, a typical home sells for $500,000, the broker makes an extra $5,000 for doing those things. In the midst of today's lending crisis, business as usual is not acceptable, Countrywide's most lucrative brokers are those that make bad loans that are largely designed to fail the borrower.

So today, I am calling on Countrywide, as our nation's largest lender, to bury its bad business practices and reverse some of the damage it has already inflicted on our housing market. First, brokers across the industry should have the same compensation or commission, no matter what rate of interest the loan they issue is at. I am asking that Countrywide stop its practice of paying brokers higher commissions and fees for higher interest rate loans that reset after an initial teaser period ends. If Countrywide will do this, many other companies will follow their example. It's essential.

I am asking that Countrywide stop rewarding brokers for steering borrowers into subprime loans, even when the borrower qualified for a prime or an Alt A-type loan.

I am calling to Countrywide to end the practice of charging prepayment penalties which are targeted at subprime borrowers. And existing subprime borrowers who face prepayment penalties should have those prepayment penalties waived; in other words, if they can find the money to get a lower interest rate loan because their credit allows them to, they should not be locked in to the higher interest rate loan. And Countrywide can do that immediately.

I also call on Countrywide to end its practice of charging above- market fees for credit checks, tax obligations and flood certifications for borrowers.

Finally, it's imperative that Countrywide do what it can to modify the unsuitable subprime loans it has already made in order to prevent more unnecessary foreclosures to minimize the damage done to the overall housing market. Countrywide ought to take the lead, along with Bank of America, who just lent them a whole lot of money, in helping re-finance the loans at a rate that people can repay.

The founder of Countrywide, Angelo Mozilo, made $129 million in stock sales; he sold the stock of his company in just the last 12 months. That's one-third of the entire amount he's profited on stocks in the last 23 years. It's time, given that Countrywide, in my judgment, helped cause this crisis, that they give something back, and most importantly, stop immediately the practices that led us into this problem. That's point one.

Point two is this -- and we have some letters that -- we don't have here yet, but they're on their way. We do have them? Shortly. I am concerned that the regulators and the administration have focused on the credit aspects of our financial crisis but not directly on the mortgage aspects.

There is a fundamental problem, and that is that the mortgage crisis is going to get worse. And until the mortgage crisis is solved, the credit crisis will not be over. We saw what happened in the stock market yesterday. There is still a fundamental lack of confidence, and it's not because the Fed is being too stingy with the amount of money they're putting into the system; they're putting plenty of money in the system. But it won't affect the great increase we will have in foreclosures in 2008 and 2009 unless we get directly at the crisis.

I wrote a letter which explains all this to both Secretary Paulson and to Chairman Bernanke last week, and I talked to them on the phone about this. I said solving the credit crisis is not enough. Solving the mortgage crisis, which is at the root of even the credit crisis is essential.

And there are many steps that can be taken to prevent the number of foreclosures in the subprime and even the prime market from greatly increasing next year. Both Secretary Paulson, who sent me back a short letter, and Chairman Bernanke, who sent me back a much longer letter, agreed. And I'm hoping that Chairman Bernanke, when he addresses the people at Jackson Hole on Friday, will address the mortgage part of the crisis, which is the part that hasn't been adequately dealt with.

You'll get these letters, you'll get their answers -- I think they show some interesting things -- but the fundamental problem is this. The fundamental problem is that when you are a homeowner who can't afford to pay because you've been given a loan with dramatically increasing interest rates -- and you may not have even known about those -- there's no one to help you work out of the problem.

There used to be bank standing by. But because the market's become so fractionalized, there are no banks. A country (sic) like Countrywide sends it mortgage broker in to use the kinds of practices we've been talking about -- so selling people a loan at higher credit than -- at higher interest rates than they actually need -- then they sell the loan off into the secondary mortgage market, and there's no one around to help out the borrower.

In the old days, the bank would be there, because the bank would hold the mortgage -- the bank didn't want to see foreclosure -- and they'd work with the homeowner so they could repay. That's gone. We need to find a new mechanism to do this.

That's what I've suggested in my letter to Chairman Bernanke and to Secretary Paulson, and they have some answers in the letter that I will distribute to you, which deal with FHA reform, which deal with Fannie and Freddie and deal with both the public, quasi-public and private sectors stepping into the lurch because the mortgage market has so changed in character where you don't have one lender give the mortgage or the money and stick by him or her for the duration of the mortgage.

I'm ready for your questions. Yeah, Jessie (sp).

Q What should Congress do, in the meantime, while the Fed and the Treasury Department work this out?

SEN. SCHUMER: Okay. I have -- I have talked about this before, but I will mention it again. I have a proposal -- and I hope that Chairman Dodd will move it quickly in September; he's told me he looks favorably upon it -- to regulate mortgage brokers so that the kinds of practices that we're talking about that Countrywide did cannot happen on into the future.

Second, in the transportation appropriations bill, we've already allocated $100 million to go to nonprofits to help mortgagors, homeowners who are in trouble work out their mortgages because there's no bank around to help them the way the mortgage market works now. We need much more than $100 million, and I am hopeful that Congress, the administration and the private sector will get together and put more money into this so that these mortgages can be worked out, and that's for the good of everybody. It's for the good of the mortgagor who will keep his home. It's for the good of the borrowers -- or the lenders, sorry -- because when there's a foreclosure they lose far more money than when there's a workout. And it's for the good of the overall economy.

Yes?

Q You know, last week after Dodd, Bernanke and Paulson still seemed to hesitate from committing to doing a broader predatory lending, subprime bill -- (off mike) -- reform. (Off mike.)

SEN. SCHUMER: Well, I believe strongly -- I can only speak for myself and I guess my two cosponsors, Senators Brown and Casey -- and we believe that we have to do something in terms of predatory lending, and do it soon and quickly. And Senator Dodd hasn't committed to that, but he's entertained that notion. We hope to persuade him to do it quickly.

Yes?

Q How do you incentivize Countrywide to crack down on their mortgage -- (off mike)?

SEN. SCHUMER: Well, you know, again, we will try legislation, but Countrywide has made such large profits, starting from a small, little company, mainly on these practices, that we hope to use some moral jawboning here. I think it's just so wrong for Countrywide to continue these practices when they sort of led the charge -- and there are others even worse than them, but they're the biggest one, and they've institutionalized this practice. If you read Sunday's New York Times, they document it from brokers who said we were told to get the highest interest rate you can, not the lowest interest rate, for the homeowner -- potential homeowner.

Q Doesn't the public have to bear some responsibility for this? I mean --

SEN. SCHUMER: Okay, have you -- did you -- do you have a mortgage on your house? Did you read the whole mortgage document?

Q (Off mike.)

SEN. SCHUMER: Okay, well, the problem is for many, many people, particularly people who refinance, who don't have the knowledge, the sophistication -- I read -- I'm an attorney. I tried to read my mortgage document. This was 20 years ago, it was with a bank, and they were honest, Independent Savings Bank. We paid off our mortgage. But it's very hard to understand.

And when there's fraud, when there's duplicity, when they tell you that they don't tell you what your monthly rate will be, when they don't tell you if you fall behind you can't prepay, that's against the rules, and it's certainly against good practice.

So does the borrower have some responsibility? Yes. In a theoretical world, perfect knowledge in the economy, everyone would know exactly what's in each mortgage document. But it is a myth -- it is basically 1890s thinking to say it's just complete caveat emptor. We might have no regulation of medicine. You say, well, you get sick, you'll learn. It's the same thing with mortgages.

Yes?

Q (Off mike.) Countrywide's already pulled back from some of its lending because they're going to do -- (off mike) -- GSE- conforming -- (audio break) --

SEN. SCHUMER: (In progress from audio break) -- and the administration to help fill the void in terms of who is going to come in and help the homeowner refinance. Most of the homeowners are not sophisticated, and there's no local banker, no local mortgage officer on the scene anymore, as I mentioned. So we need to find a new mechanism.

Now, in speaking to Chairman Bernanke, he says one tool you have is that those who manage the payment schedule, that's a lucrative -- that's lucrative, you know, the fee -- the payment contracts. I forget what the technical term is. We have -- is -- someone here? Maybe you'll remember what it is; it's slipped my mind. But -- servicing contracts. The servicing contracts are lucrative, and maybe people can step in because they want to do these servicing contracts and help refinance. But you need some encouragement and you need the government to step in here not to bail out the people at the top, but to help refinance, which was normally done by the banks in the past, but the banks aren't on the scene.

Yeah, Tom.

Q Can we switch to attorney general issues?

SEN. SCHUMER: Sure, yeah.

Q What's the latest you've heard on -- (off mike)? And do you think that the administration -- the White House might slow-walk this?

SEN. SCHUMER: Okay, well, that's a good question.

In terms of the candidates, there are a lot of names out there. Some are public, some are private. My basic view is if the administration wants to come to an agreement -- a happy agreement -- with the Senate, it can because we want to. In other words, there are a whole range of candidates who have an ideology closer to the administration's but put rule of law first -- put rule of law above politics. And a candidate whose ideology is closer to the administration's but who puts rule of law first I think would be looked upon very positively by the Judiciary Committee and by the Senate.

We know -- we Democrats know we're not going to get someone who has our views. That's not how the Constitution works. But we do believe that there's an obligation for -- particularly for the Office of Attorney General to put rule of law first.

And I have talked to Fred Friendly (sic/Fielding), the counsel. I have suggested some names to him. I'm not going to make those public because I think you negotiate these things in public they fall apart, and I think that there is at least a large faction in the White House that wants to not have the confrontation but sit down and work with us, and I think there's a very large faction among Democrats in the Senate that want to do that as well.

As for the sort of slow walking, I believe the president has an obligation to name a replacement candidate sooner rather than later. It's just not acceptable to let an acting attorney general sit around without Senate approval month after month after month, and a recess appointment, of course, would be completely inappropriate for this very important position, where advise and consent has always been the watch-word.

Now, if the president wants the acting attorney general, Paul Clement, to be his nominee, he should formally nominate him, and we should put him through his paces. And I would say this about Mr. Clement, he has an excellent reputation. He seems to understand the importance of rule of law. It is too early to tell, but he might -- and underline might -- be the kind of compromise candidate we're talking about. There are obviously some questions about him as well that would have to be answered.

But speaking for myself and some of my colleagues that I've spoken to, a good number, we're not itching for a fight here. We would much rather come to an agreement with the White House on an attorney general we would both find acceptable -- and then all the various investigations; they wouldn't be dropped, they shouldn't be dropped -- but with an attorney general who puts rule of law first and puts openness and is -- to quote somebody we all know -- "a unifier, not a divider." These investigations could be dealt with, I think, with some degree of dispatch. We figure out what went wrong, figure out how to correct it and move on.

There are so many -- there are so many issues ahead of us that just spending all our time pointing fingers back at what happened in the past isn't going to be as productive as we would like.

Q Senator?

SEN. SCHUMER: Yes.

Q I realize that you're not the chairman of the Senate Banking Committee.

SEN. SCHUMER: I'm not. I'm chairman of the Housing Subcommittee for whatever that's worth.

Q You have pending a GSE -- (off mike) -- subprime proposals -- (off mike). We have a pretty full agenda.

SEN. SCHUMER: We do.

Q It needs to get done. But is possible to get on with --

SEN. SCHUMER: Yeah, I've talked to Senator Dodd, and I think he does intend to have a very, very busy -- you'll have to ask him -- but he intends to have a very busy September on the Banking Committee.

Q (Off mike) -- Judiciary Committee. Do you see a real bankruptcy bill -- (off mike) -- in light of some of these subprime --

SEN. SCHUMER: Well, re-opening -- I mean, there is the provision about when you go into bankruptcy, it seems very unfair to the mortgagor, and that's something that my friend and colleage, Senator Durbin, has spearheaded that I'm favorably disposed towards. I think that is a possibility. I think there's a possibly at looking at different tax treatment because when you renegotiate because you're in a hole, they sometimes try to make you pay the tax. So there are a number of different legislative approaches that we can help with.

But fundamentally, in answer to your question, Jessie (sp), unless the administration and the regulators take a lead and fill that void on how to do refinancings for people who deserve to have refinanings and in the normal world would get them, we're going to continue to have trouble.

Yes?

Q (Off mike) -- on Larry Craig, specifically, but Idaho --

SEN. SCHUMER: No.

Q -- red states --

SEN. SCHUMER: No, I'm not going to discuss that either at this point.

Q (Off mike) -- candidate. Is it possible?

SEN. SCHUMER: Well, again, I'm -- to me, we'll have to -- we'll discuss that in future weeks, not right yet.

Q Can I get a question on Iraq?

SEN. SCHUMER: Sure.

Q Given the reports of some in the military -- (off mike) -- Iraq, do you perceive that that would have any impact on the Democratic strategy in the short term --

(Cross talk.)

SEN. SCHUMER: Well, you know -- okay. To me, first of all, we have had temporary gains, military, in the past. Other provinces, other cities were regarded as, "Oh, they're safe and cleared." And then a few months later, it reverted back. If the past is prologue, these military advances are often undone as the forces who are against peace go to other places, other provinces -- we saw the explosion in Mosul.

But more important than that, when the president announced this surge, the reason for the surge was to bolster the government, the Iraqi government of Prime Minister Maliki. That was the purpose. Even assuming the surge has been successful, the government of Maliki is even weaker.

So by the president's own stated purpose, the surge has been a failure. And until there's some even dim light at the end of the tunnel as to what's going to happen with the government, how are the Sunnis and Shi'ites and Kurds going to live together and work together under one government? All the military success in the world isn't going to solve the problem, and even General Petraeus has said that.

So I think the president keeps changing the subject. He talks about Iran yesterday but makes no logical argument about how the -- policing a civil war in Iraq affects Iran one way or the other. He talks about a military victory but can't address the reason he said we increased the number of troops, which was to strengthen the government. And I don't see any real progress in terms of having an Iraq that can govern itself that's been made in the last six months.

Q What sort of emphasis for votes -- (off mike) -- would you -- (off mike)?

SEN. SCHUMER: Well, you know, we are certainly going to have a very active September in terms of trying to change the course of direction in Iraq and forcing the president, frankly, to move away from policing a civil war and much more towards a much more narrow mission with many, many fewer troops, focused on counterterrorism only.

Q (Off mike) -- upwards of $200 million.

SEN. SCHUMER: Well, again, if you don't think Iraq is succeeding, it's very painful to see all of that money going there. It's even more painful to see the lives lost, of the Iraqis and particularly of our troops, lost. We will never leave the troops in the lurch but we're going to try mightily to change the course.

Yeah, everyone's asked one, so we'll go to -- (off mike).

Q When you -- going back to the attorney general situation, when you talked to the White House, did they give you any indication of when to expect a decision? And did you suggest names to them? Did they suggest names to you?

SEN. SCHUMER: Okay, this is a good question.

Q And if they went both ways, did any of the names match?

SEN. SCHUMER: Okay, well, I'm not going to answer the third question, but I will say this.

I have had calls from the White House in the past, which they called consultation, like on Supreme Court justices. And it basically was a 30-second conversation -- said, "Well, who do you think would be good?"

And I'd name three names. They'd say, "Thank you." Boom. And of course the names would never be seen again.

This conversation -- the conversation I had a few days ago with Counsel Fielding was totally different. We did discuss a whole variety of names. We gave our different viewpoints on some of those names, and there seemed a real desire, certainly on the part of Counsel Fielding -- hopefully on the part of the president himself -- to at least try and come to an accommodation here. Whether it'll happen, I don't know, and from what I'm told, there are obviously factions in the White House, some of which want to do it a different way and some of which want to go back to the old playbook, which is we're picking our candidate and tough luck, Congress.

But, you know, my view in general is I am hopeful with the departure of Karl Rove and now Attorney General Gonzales and the ascendency, if you will, of the Bolten-Gillespie wing, that maybe the president's decided to change his MO, and he's much more interested in working with the Congress and coming up with some solutions rather than just fighting with us and say, "It's my way or the highway," which has been for six years their basic way of operating, with occasional exceptions such as No Child Left Behind.

Certainly Ronald Reagan did that in 1987. Certainly the administration's way of proceeding thus far hasn't helped them. And maybe they're ready for change. It's not too late.

Q So when would you expect a nomination to --

SEN. SCHUMER: I'd hope in the next two, three weeks.

Q The next two, three weeks?

SEN. SCHUMER: I hope. I can't tell you -- we did not discuss -- you know, I expressed that hope, but we did not -- I did not get any answer, and obviously they have to find a candidate they're comfortable with.

You know, many people were surprised that when they announced the attorney general stepping down that they didn't announce a new candidate with him. But I think that shows you the degree of dissension there is within the administration right now, and, you know, there aren't that many good candidates out there anymore who would want to do the job.

Last two. Go ahead. Go ahead. It's up front.

Q I was going to ask you -- when you talked about regulators and the administration, you need to fill the void to help with refinancing -- (off mike) -- can you elaborate more on how you think they should do that?

SEN. SCHUMER: Yeah, and it's in my letter at some degree.

The group who can best do this -- there are two groups. One, as I say, are the people who might want to service the new mortgages, because that is lucrative.

And maybe something can be worked out and structured where people who service are given some ability to go in and help restructure, even though they don't control the mortgage themselves.

Second, there are nonprofits that do a great job here, and they're all over America. And this is their job, to counsel people who are in trouble. But they're now overwhelmed because we have so many more foreclosures. Bolstering and strengthening those nonprofits -- as I said, I was able, with Patty Murray's help -- she's chairman of the subcommittee -- to get $100 million in the transportation appropriations bill to do it, but we need more than that -- the administration, the GSEs, the private sector, if they would match and kick in some money there.

The nonprofits -- I've talked to them at some length; as you know, I work closely with them -- are ready to fill the void. And they have the experience to do so.

So those are two possible ways.

Q I mean, given, like you talked about, the packaging of all of these products, I mean, these mortgages are defined iterations down the --

SEN. SCHUMER: Yeah, but they're being serviced right now. In other words, the mortgagor pays, and somebody says, "Okay, a dollar goes to you, and $4 go to you, and $12 go to you."

Q So regardless of all the derivative products based upon -- you know, that use that one mortgage, you think you can still unwind that and --

SEN. SCHUMER: Not on every mortgage, but on many, many, many of them. Yes.

And as I said, this is an astounding statistic that no one pays attention to. Forty percent -- not of the subprime borrowers; it's probably higher with subprime borrowers -- 40 percent of the subprime borrowers who are in foreclosure or about to go in, which means they're more than 90 days delinquent, would qualify for prime loans. That shows you what Countrywide and others did to this country and to those homeowners.

Thank you.

END.

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