Subprime Loans in the Secondary Market
December 6, 2007

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 Transcript:

Mrs. MALONEY. Okay. My time is up. Thank you.
The CHAIRMAN. The gentleman from North Carolina.
Mr. MILLER. Thank you, Mr. Chairman. And I think I would like to pursue the questions that Ms. Maloney was asking.  Mr. Deutsch, I have always agreed that we need a vibrant secondary market, that lenders need to be able to sell loans to have the liquidity to make more loans, to make credit available for Americans to buy homes. And I think homeownership is the way most middle class American families really build wealth. And good mortgages help people build wealth; bad mortgages steal wealth from them. And I thought to do that, we needed to have some limitation on the liability in the secondary market, that they could not be responsible for everything that happened at the retail level. They couldn’t know of every conversation. And I have supported some limitation. But looking at what has happened in the market is kind of hard for me to imagine that you all have really proceeded in good faith and had no idea of what was going on at the retail level of the market. Five years ago, 8 percent of the total mortgages made were subprime; last year, 28 percent.  That is a 31⁄2 fold increase.  Mr. Shelton just left the room when I was about to ask a question I wanted him to hear. But more than half of African-American families who took out mortgages in the last year took out subprime mortgages; among white families, it was 22 percent. We know from the HMDA data or from analysis of it you cannot explain that by any criteria, any explanation, except race. You can’t explain it by credit score. You can’t explain it by income. You can’t explain it by
loan to value. You can only explain it by race.  We know from the Wall Street—well, 5 years ago, Freddie Mac said that 25 percent of subprime loans were made to people who qualified for prime loans. The Wall Street Journal said this week that it is now 55 percent of the people who take out subprime loans qualify for prime loans.  Ninety percent of the subprime loans made in the last 2 years, in 2006 and 2007, had adjustable rate mortgages with a short adjustment, 2 or 3 years, typically a 30 to 50 percent increase in monthly payment. Seventy percent of subprime loans had prepayment penalties, many of them short of the time of the—I mean, that extended beyond the adjustment period. Seventy-five percent, no escrow for taxes and insurance. Half—I have seen a range, estimate of a range, of 43 to 50 percent were made without full documentation of income. Now, the vast, vast majority of Americans can easily document their income. They can do it with payroll records. They can do it with employment verification. They can do it with bank statements. They can do it with tax returns. It is easy. People who are self-employed can verify their income. People who own businesses and make their income that way can verify their income. And yet almost half of the loans that were coming to the secondary market, and they were buying, were made without full income verification. And consumers paid more, higher interest rates, if there was not full documentation.  Now, that is what you were seeing coming towards you. Those were the loans that you were buying. And you didn’t know anything
was going on? You didn’t think something funny was happening at the retail level?
Mr. DEUTSCH. Well, I guess in answer to the question is part of the institutional investors that were purchasing these loans, that were purchasing the securities backed by these loans, obviously were trying to pay close attention to them.  But at the time, and again going back to my previous statement, is that the housing price appreciation market, especially in particular areas like California where the home prices were increasing quite dramatically—many people have noted that there were a number of speculators in the market trying to increase, trying to obtain homes, and multiple homes, in certain areas where they were able to create quite a dramatic increase in their wealth by speculating on different homes.  So obviously, the secondary market was purchasing, and institutional investors in particular were purchasing, these subprime loans. And in particular, in 2006 there was a significant deterioration in credit quality of some of the underlying borrowers.                                                                                                               Mr. MILLER. The figure I have seen of the percentage of the loans now in default, the subprime loans that went to speculators, people who did not occupy the home that they had purchased, is well less than 10 percent, the 5 to 7 range. Do you have different information?  Because my understanding is that is a pretty small percentage
of the problem.                                                                                                                          Mr. DEUTSCH. I don’t have different information. I don’t have the data on the exact number of the various investor properties. But it is also very difficult to verify by verifiable data to know who is an owner-occupied versus investor. There are a number of concerns
about how verifiable that data is.
Mr. MILLER. Well, do you think it is dramatically different from
5 to 7 percent?
Mr. DEUTSCH. I just don’t have the information. I don’t have the data associated with that.
Mr. MILLER. I am done.