Predatory Mortgages And Foreclosures

Floor Speech

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Mr. AL GREEN of Texas. Thank you so much, Congressman Cleaver. I greatly appreciate the history that you have afforded us. It is meaningful for us to understand history, because in understanding history, we can understand the benefits that have been accorded by way of the CRA. The CRA has clearly been of great benefit to all Americans, because when you help some Americans, you really do help all Americans. Dr. King reminded us that ``life is an inescapable network of mutuality tied to a single garment of destiny.'' Whatever impacts one directly impacts all indirectly. So by directly helping some, we have indirectly helped all Americans.

And I regret that there are many who contend that the current credit crisis is based upon some of the actions that the CRA might have mandated, which is totally not true. It really is not. And there does come a time, there really does come a time when every woman and every man must on truth stand. So tonight, I appreciate what you have said because I think we have to take the ax of truth and slam it into the tree of circumstance. And we just have to let the chips fall wherever they may, because there really is some truth in the notion that the truth will set you free. So let us see if we can free some souls as it relates to the CRA and its benefits to all Americans.

You see, the truth is that the Community Reinvestment Act that Congressman Cleaver has given us a great recitation of its history, of the history of the act itself, the Community Reinvestment Act did not cause the current credit crisis. Now if you don't believe me, perhaps you will believe the Honorable Mark Morial. I have in my hand a copy of his testimony before the Senate Banking Committee on Thursday, October 16, 2008. In his testimony, he indicates that the CRA is not the cause of the current crisis. This may not be enough for some people. If you don't believe Mark Morial and you don't believe me, then maybe you will believe the Honorable Ben Bernanke, who is, of course, the head of the Fed. He has a letter that he has written to the Honorable ROBERT MENENDEZ, who is a member of the United States Senate. And he indicates that the CRA is not the cause of the crisis and that there is no evidence to support this.

And if this is not enough, then perhaps a summary from the analysts over at the Board of Governors of the Federal Reserve system. They have indicated by way of a report that the CRA is not at the root of the current crisis.

So the truth, you see, is this, that the CRA has been of great benefit, that it does not regulate lending, that it does not legislate and that it does not mandate. The CRA does not even apply to all financial institutions. And I can really understand how some people might conclude, based on some of the propaganda that I have heard, that the CRA regulates lending worldwide. But it really does not. It doesn't apply to all institutions within this country. For example, it doesn't apply to financial institutions like the defunct Countrywide, which at one time was one of the largest lending institutions with reference to mortgages in this country. It does not apply to financial institutions like the ruined Bear Stearns. It doesn't apply to AIG. It did not apply to Lehman's.

The CRA has been an institution and, if you will, it requires lending institutions to lend money into areas that had been redlined, as you indicated, and had literally been locked out of receiving the financial bootstraps that many communities receive so as to lift themselves out of poverty by way of wealth building through home purchases, as well as some other things that

transform houses into worthwhile neighborhoods to live in.

Approximately 70 percent of the foreclosure filings from January 6 to September 8 took place in middle to high income, non-CRA-related neighborhoods. Now it is important to note that the CRA, while it does encourage lending, it doesn't mandate it. And the lending that did take place with reference to foreclosures, 70 percent of this lending that took place between September of 2008 and January of 2006 was in higher income neighborhoods, income neighborhoods that the CRA did not address. I will call them non-CRA neighborhoods.

The CRA doesn't regulate. It simply says that banking institutions are encouraged to cover and relate to and lend to all segments of the communities that they serve. And they are to do so without goals, they are to do so without targets, they are to do so without quotas. The CRA doesn't encourage bad lending. It doesn't mandate bad lending. It doesn't condone bad lending. It doesn't generate any loans. The CRA does not regulate nor does it create any of these exotic loans that we are aware of. And many of them are at the root of this subprime crisis.

So I'm honored to tell you, Mr. Cleaver, and I thank you for your history, that the CRA has been of great benefit to us. And I regret that there is a distortion of the facts that relate to the CRA and what it has meant to us. I think that we have an opportunity tonight to clear up some of the confusion and to make clear what the benefits of the CRA are and to also talk about some of the areas wherein the other institutions, other than the CRA--and I call it an institution, it is really an act of Congress--but wherein other institutions have created products that have created a lot of the subprime crisis that we suffer from today.

So I will yield back to you and trust that as we go through this process tonight, we can talk about some of these products. And I'm prepared to talk about a few of them. I will go ahead and talk about just a couple if I may.

I will talk about the exploding ARMs that were not created by the CRA and not regulated by the CRA. You're aware of them, the 327s and the 228s wherein persons literally had 2 years of a fixed rate and 28 years of a variable rate. They had a teaser rate that would, at the end of 2 years, an entry level rate that was usually low, at the end of 2 years would increase to sometimes 30 to 40 percent of what that teaser rate was. And there were many other products like this that the CRA had nothing at all to do with that have helped to create this crisis that we have to contend with.

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Mr. AL GREEN of Texas. You are exactly correct. Poor people did not create this crisis, and people living in areas covered by the CRA did not create this crisis. Let us take a look at the yield spread premium. The yield spread premium says that if you are a seeker of a loan for a home mortgage and your originator can qualify you for a 5 percent loan, by way of example, if that originator can get you to take a loan for 8 percent when you qualified for 5 percent, that originator will get a lawful kickback by causing you to go into a higher mortgage than you qualified for, and never have to tell you that you qualified for the 5 percent premium.

That premium that is paid to the originator is a part of this process which we now call the yield spread premium.

This was invidious, and it did cause a lot of persons to take out loans that were much higher than the loans that they qualified for. But to further evidence the fact that poor people didn't create this problem, negative amortization, many people received loans that were negative in the sense that you could pay your principal, pay your interest, but if you didn't pay enough interest, you would find that that which you didn't pay would be tacked on to your principal.

So you had a loan where your principal was growing, and it was growing such that you could literally never pay for the loan and always owe more than you actually decided that you wanted to have as a mortgage amount.

We also had the situation with the no-document loans. Poor people didn't get a lot of no-document loans, loans wherein you didn't have to prove that you were working. Usually these were persons said to be associated with some sort of business and they had difficulty verifying income, but no-document loans were made and they were usually in the subprime market, they were either the Alt-A loans or subprime because they were said to be riskier. But these loans were not originated because of the CRA. They loans were not mandated because of the CRA.

I would also call to your attention prepayment penalties. There were loans that had prepayment penalties that coincided with these teaser rates. None of this was mandated by the CRA. The CRA did not require teaser rates. It did not require loans to have prepayment penalties at all. When these prepayment penalties coincided with the teaser rate, it simply meant that the person who wanted to refinance the loan when you were getting to that period or that time when the loan would adjust, would have to pay a large penalty just to get out of the loan into another loan. These teaser rates and prepayment penalties became a detriment to many people who were locked into these 327s and 228s.

I would call to your attention also the fact that there were loans that were interest only. The CRA did not mandate interest-only loans. These loans were loans created by mortgage companies. They were loans that were originated by entities that were not covered by the CRA for the most part. And these loans, if they were covered by the CRA, institutions that were regulated by the CRA, the CRA did not mandate an interest-only loan which means you would simply pay interest, not pay the principal and you would continually owe after some period of time what you started out with as your loan amount.

The CRA did not require credit default swaps wherein one party would agree to pay a second party if a third party defaulted. This is what AIG was infamous for, these notorious credit default swaps, not mandated by the CRA.

The CRA did not cause us to conclude that hedging was a good means of managing risk. The CRA didn't have any mandates with reference to hedging and hedge funds.

It did not require outsourcing as a risk management means.

Some of these large institutions were literally allowing credit rating agencies to manage their risk because they would ask a credit rating agency to give them an opinion about a certain instrument, and they were relying on that as their risk management tool. The CRA did not mandate any of this.

One really important thing, CRA did not create the circumstance wherein the lender was no longer concerned about whether the borrower could repay his or her loan. This was not in any way mandated by the CRA. It wasn't regulated by the CRA. It had nothing to do with the CRA. When this occurred, lenders no longer had to concern themselves with the liability associated with the loan if there was a default.

So originators started simply originating loans so they could put them in the secondary market, and by getting them out in that market, they would get payment for the loan itself. Somebody else was now responsible for the loans, and the loans were bundled. The CRA did not mandate nor did it require that these loans be placed in these bundles called securities and sold to investors. The CRA had nothing to do with any of these things. The CRA simply said if you are a lending institution covered by the CRA, you must lend to all persons within your area of influence.

And thank God the CRA did this because there are many persons who but
for the CRA wouldn't have homes. There are many communities that would not have been revitalized by dollars that were actually made available to communities to revitalize them. Nursing homes received CRA moneys by way of loan, and the elderly, homes for the elderly received CRA moneys. The CRA has been a benefit to all Americans, and I just regret there is this notion afoot by many that the CRA somehow created a crisis that it had absolutely nothing to do with. The empirical evidence is completely contrary to this notion that the CRA created the crisis.

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Mr. AL GREEN of Texas. Well, I thank you, my friend. I will pick up where you left off because I happen to have a copy of the letter that Chairman Bernanke sent to the Honorable ROBERT MENENDEZ. This ties into what you said as well, Congressman Cleaver.

In this letter he indicates, ``A recent board staff analysis of the Home Mortgage Disclosure Act and data sources does not find evidence that CRA caused high default levels in the subprime market.''

He also goes on to say, ``The CRA statute and regulations have always emphasized that these lending activities be consistent with safe and sound operation of the banking institutions,'' clearly indicating that the CRA is not at fault.

I would like to do this just for a moment and then we will come back to more of why it's not at fault. But I'd just like to say this. Assume for just a moment for the sake of wholesome argument and helpful debate that the CRA is at fault, just for a moment.

Then we have to ask ourselves: As those who, by the way, have been saying and continue to say that it's at fault, we would have to ask ourselves if they had control of the U.S. House of Representatives, the U.S. Senate. They had control of the executive branch of the government, even had control of the Supreme Court, and they had all of this at the same time. If the CRA posed the hazard that they contend it poses, and they said that they made statements at the time that the CRA was not functioning as it should, then why didn't they do something when they had control of the House, the Senate, the executive branch of government as well as the Supreme Court?

It would have been easy to generate legislation that could have gone from one House to the other. It would have been very easy to get the President, who apparently would have been in

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agreement, to sign it. But the truth is that the CRA was functioning well and has functioned well.

In times of crisis, it is very unfortunate that the least among us will sometimes be blamed for what others have done. This is not the time to blame the CRA or the persons that the CRA might benefit for what has happened. Why? Because if we do this, we will allow ourselves to be distracted from the real causes--these exotic products.

And not all exotic products are bad, but many of them are harmful and hurtful. These exotic products like these 3/27s and 2/28s that we talk about, exotic products that allowed people to get into homes, but it didn't enure to their becoming homeowners.

We developed a society wherein people became homebuyers such that they could simply get into a home with no assurance that they could pay for the loan that they were purchasing.

So we cannot allow ourselves to be distracted with this CRA stalking horse, if you will. We must focus on the real causes so that we can come up with real solutions.

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Mr. AL GREEN of Texas. Let me say, before I make my comment, Mr. Ellison, I want to give you a note of appreciation for some legislation that you have recently introduced to help us cope with some of the problems that we are contending with as a result of this crisis, some of your work in the area with tenants and helping tenants who are being evicted, rent paid but still being evicted because a person who purchased property is in default. You are to be highly commended for the efforts that you are making to help out these tenants.

But I wanted to make this comment with reference to the evidence that is out there. The empirical evidence all supports the notion that the CRA is not at fault. It is unfortunate, as has been indicated, that there are many who would contend that the CRA is at fault; that the CRA ought to somehow now be eliminated because it is at fault.

I think that what we should be doing, in addition to pointing this out, we should also point out that the banks that have been good stewards, that have been making good, decent loans using sound banking policies in areas where persons traditionally could not acquire loans, these banks ought to be commended. We should not allow the distractions from the other side to prevent us from giving kudos when they are deserved.

So to all of the banks, those who have been making these loans and doing so with a good degree of safety and soundness, we want to compliment you.

But we also have to remember as we do this that, in addition to making some of these loans, we had other things that were happening that were not in the best interest of good banking, and these are the things that the legislation that we passed today out of the House, or that we put before the House today, is going to address this predatory lending that took place. It was the predatory lending that was a part of the problem, people having to get the loans that they did not want. Because no one wants a 9 percent loan if you qualified for 7 percent or 5 percent. You want the loan that you are qualified for. Steering people into the higher loans, higher interest rates, so as to make more money for the originator. These are the kinds of things that we have to deplore. These are the kinds of things that happened chiefly with originators that were not regulated by the CRA.

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Mr. AL GREEN of Texas. It is important to point out, also, that this credit default swap market was not regulated; that AIG had about $440 billion plus of credit default swaps.

It is also important to point out that the AIGs of the world, in an effort to cover themselves, would go to bond rating agencies and they were paying those agencies to rate these bonds. And, in so doing, they were getting products that were not totally reliable because of the

way the payment system was working.

Mr. ELLSWORTH. So you mean to say, Congressman, that rating agencies would say that this is a AAA product, when in fact there were a lot of problems with the product. Is that right?

Mr. AL GREEN of Texas. That is exactly right.

It also promoted, as a result of this, this new industry that AIG became sort of the father of, in a sense, or at least the biggest benefactor of this credit default swap industry, such that they could capitalize on what became a form of gambling, if you want to know the truth. It really was a means by which one person was willing to bet that a default wouldn't take place on something that a third party was ultimately going to have to pay for at some point in time. It really was a lot of confusion that was created.

I would like to say this and digress for just a moment, because I think it is important. Our chairperson, the Honorable Barney Frank, has been wrongfully accused in this process. And I want to stand and say before the world that this is absolutely untrue that he is in any way associated with the ills that we find ourselves having to cope with.

I say this because at the time when all of this was taking place, the persons across the aisle who had the opportunity to do something about it, they had the House, they had the Senate, they had the Supreme Court, they had the executive branch of government, yet they didn't do anything about it. But now that the Honorable Barney Frank happens to have some influence because he is the chairperson of Financial Services, but all of this took place before he became chairperson and, as a result, he is trying to clean up something that took place on someone else's watch.

He is dutiful and mindful of his watch, and I think we ought to let the world know that he has been a fine chairperson who has tried to clean up the problems that have been created.

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