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Monday, June 14, 2004
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises
Committee on Financial Services
Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:04 a.m., in the Keystone Room at East Stroudsburg University in East Stroudsburg, Pennsylvania, Hon. Richard Baker [Chairman of the Subcommittee] presiding.
    Present: Representative Kanjorski.
    Chairman BAKER. Good morning and welcome. I would like to call the meeting of the Capital Markets Subcommittee of Financial Institutions of the House of Representatives to order, and welcome all of our panelists and guests here this morning.
    The Committee is engaged in a continuing overview of market function in the financial services arena with specific interest in the area of home ownership. Over the past several years, securitization by the secondary market has made it easier for all consumers, particularly those borrowers with less than perfect credit ratings, to obtain mortgage financing. Translation: this means that when you go into your local lending institution and fill out the papers, and they approve you for a loan, that loan may then be subsequently sold off to someone else, so that the originating lender does not hold that debt in their own portfolio. This enables credit to be extended to more people in a more efficient manner, and has resulted in an expansion of home ownership to the segment of the population for whom it might otherwise not have been available.
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    Mortgage securitization involves the transpiration of mortgage loans into securities that are issued and subsequently traded in the capital markets. As the availability of mortgage financing has increased, so do concerns about less than scrupulous individuals who might take advantage of unsophisticated consumers. Known commonly as predatory lending, the practice of targeting individuals, often minorities or the elderly, with high interest mortgages, with little to no consideration of their ability to repay, is a matter of increasing concern from all those involved with oversight of the regulatory market.
    Predatory lending may also encompass the placement of individuals in overvalued homes, using deceptive sales practices or inflated appraisals. Because such lending deliberately stretches borrowers beyond the amount they can pay, placing them into an overvalued home, it results in higher than acceptable levels of foreclosures. Many States are now enacting predatory lending statutes to halt abusive practices in the lending industry. The consequences of these state actions is now quite unclear, and if liabilities for the origination of the loan now extend into the secondary market, there is a potential for a chilling effect. For example, in the—recently in the case of the State of Georgia where participants in the secondary market simply refused to acquire loans, this works obviously to the direct adverse interest of consumers. So this is one area in which the Committee will continue to make examination.
    The second and more local and pertinent issue for the Hearing this morning to many of you who have attended is the tactic used in the Poconos which relied upon inflated appraisals that established unjustifiable and unrealistically high real estate values. The typical function of the appraiser is to independently verify to the buyer and to the lender the true value of a particular piece of real estate. Investigations providing information to the Committee have revealed that some appraisers ignored normal codes of conduct set by the industry because the rules were not strictly enforced.
    One common problem is that real estate mortgage creditors, lenders, and realtors often attempt to influence appraisers to make the value on properties being appraised. Appraisers in the Poconos allegedly colluded with interested parties to over-estimate the value of many homes, in some cases by tens of thousands of dollars. The problem came to light when homeowners would later attempt to sell the mortgage on the open market and their property would appraise at a price significantly lower than the purchase price. Many cash-poor homeowners were unable to recoup their investment, resulting in unacceptably high levels of bankruptcy. In 1990, there were 120 foreclosures in Monroe County, by 2002, 925.
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    The Hearing will focus on the issues related to the purchase of mortgage-backed securities in the secondary market, and the role that purchasers of those securities can play in curbing abusive lending practices.
    We have a delicate task with which to resolve. On the one hand, we do not want liability issues to constrain those engaged in the secondary market from buying mortgages in the first place. But, at the same time, we cannot turn a blind eye to practices which result in predatory lending being the common practice for abused homeowners.
    To that extent, Mr. Kanjorski and I have worked over many years toward resolution of these problems. And, at this request, the Committee is here today to hear firsthand the observations of professionals from the field who may have recommendations as to potential reforms and the direction the Committee might consider on returning its work to Washington, D.C.
    With that, I yield such time as the gentleman may consume for his opening statement. Mr. Kanjorski?
    Mr. KANJORSKI. Thank you, Mr. Chairman. First of all, Mr. Chairman, welcome to East Stroudsburg University. You may not be aware of it, but it is the future alma mater of A.J. Soprano. I had the occasion to remind Dr. Dillman of that, and he assured me that all standards will be used in the determination of qualifications for that particular student.
    Chairman BAKER. Just be very careful with that determination.
    Mr. KANJORSKI. Secondly, Mr. Chairman, I know you are a good old Louisiana boy and you like NASCAR. We just completed the Pocono 500 yesterday, and we had hoped that you would be the one who said, ''Gentlemen, start your engines.'' Unfortunately, I know because of other conditions, you were unable to make that event. We intend, however, to hold another race in your honor as soon as you can accommodate us.
    Chairman BAKER. I think the Chairman of Delta Airlines was unable to say start their engines, and so as a consequence, I was a little detained yesterday, but I appreciate the courtesies extended by your and your fine office. Thank you, sir.
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    Mr. KANJORSKI. Thank you. Welcome, anyway, to the Pocono mountains of northeastern Pennsylvania, Mr. Chairman. We have recognized, over a number of years, and I have discussed this with you a number of times, a unique problem here in the Poconos. At least we think it is unique in the Poconos, but we recognize a commonality with certain problems that exist throughout the country, particularly in sub-prime lending, or as often referred to on the negative side, predatory lending.
    What we hope to do today is to hear what the particular problems are here in the Poconos and then relate them to legislative activity that we are undertaking and the bill that we are preparing. We want to see if we can establish a national standard and what protections should be put into play to encourage state enforcement and regulation of a higher order than has yet attended here in Pennsylvania. I wanted to particularly pay thanks to the new Secretary of Banking in Pennsylvania, who has commissioned a study, of which we will get a report first on, that which attends to investigate and establish the data necessary for a more comprehensive understanding of what the problem particularly is here in the Poconos, and that I think probably will lend itself to be applicable to other areas of the country.
    Our problem is an interesting one here. It also speaks well of the private press, because the ''Pocono Record'', which is the major newspaper of Monroe County, has been particularly attentive to bringing out the problem of mortgages, foreclosures, and other things that have happened here, so that it has gained a public recognition, which is most important, and ultimately the attention of the United States Congress that we reflect here today.
    Too often, faulty appraisals, questionable lending practices, and fraudulent transactions in some cases have led to broken dreams. What we have to do today is see why an astonishing 27 percent of Monroe County's foreclosure to sales rate—it was so high compared to 1 percent nationwide. Certainly, this cries for some attention. On the other hand, I would like the Chair, the Committee, and the people of Monroe County to know that your problem and your strife has not gone on without a very positive response on the national level. We have witnesses today from Fannie Mae and Freddie Mac, the Appraisal Institute, the real estate industry, the home building industry, all individuals that have participated with several other groups in a task force that I convened in Washington almost 3 years ago, that have been most helpful, and in some instances, have literally persuaded some of the institutions that held the mortgages of problem here in Monroe County to refinance and restructure some of those. Unfortunately, it has not been as uniform because there are many problems that are attentive to the particular problem of Monroe County, and secondly, it has been so wide and diverse that not everybody has received probably the same attention.
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    But corralling those entities on the federal level that are most involved with the real estate transactions, building and financing, have been most attentive to this problem, and I want to pay particular thanks to Freddie Mac and Fannie Mae, who, I think, are quite largely represented here today and have witnesses before us.
    What we ultimately can do for Monroe County is yet a question. What we can do in terms of sub-prime lending in the country is open to question. But clearly, we have the jurisdiction to act.
    Mr. Chairman, as you have cited the State of Georgia problem, sometimes in the solution of a problem, you can create a greater problem and a great disadvantage to people who would normally exercise their influence in the sub-prime market. Wanting to hold with the objective of home ownership for more Americans in a fair and safe and efficient manner is clearly the objective of this Committee and the Federal Government and the State Government of Pennsylvania, and it is just a question of how we can arrive at that objective.
    Too often, issues like this are—lend themselves to demagoguery. What I have to say is that at least I am aware of the fact that one of the presenters—the first presenter today, Mr. Goldstein from the Reinvestment Fund, has been commissioned by the Pennsylvania Department of Banking to particularly investigate the problems here of—in the Pocono Mountains of this particular problem. I want to personally thank Secretary Schenck for allowing him, even prior to the release of his final report, to give us some of the substantive facts, information and data in his report, and give us the basis, or predicate, if you will, for this hearing. So I want to extend the thanks to Mr. Goldstein and to the Secretary.
    What we do in the future, of course, to a large extent, not only depends on the facts gained in this hearing, but all the information that we have been gathering over the last several years. And I am optimistic that something can happen that we will all be proud of. As we proceed in today and the weeks ahead, it is moreover important that we find solutions to obstacles faced by honest, hardworking people who want to achieve the American Dream of owning a home. Hopefully today's hearing will also further our bipartisan efforts in Washington to develop legislation to increase homebuyer and homeowner protections. As you know, Mr. Chairman, the Financial Services Committee in recent months has been a—has begun to examine abuses in mortgage lending and the need to update federal laws to protect home ownership against such practices.
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    Again, Mr. Chairman, I welcome you to Pennsylvania, to northeastern Pennsylvania, particularly to Monroe County. We know that this will be a fruitful hearing today, and anything that we can do to accommodate your visit here, we certainly offer those assistances. Thank you very much, Mr. Chairman.
    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 48 in the appendix.]
    Chairman BAKER. Thank the gentleman for his gracious statement. And for those here in attendance, let me assure you that the Capital Market Subcommittee membership generally will have access to all statements and information provided here at the hearing today. The Subcommittee is a very large one. The Subcommittee has 47 members. There being only 435 members of the Congress, more than 10 percent of the Congress serves on the Subcommittee. Almost 20 percent of the Congress serves on Financial Institutions—Full Committee Financial Services, and to those who are expressing concerns about actions that occurred here in the community, the Committee will take a very thorough and studied view of the issues presented. But our rule is as to national policy, not as to criminal inquiries. Those responsibilities will be left to those at the State and local level who may find the facts worthy of further resolution.
    We want to get today a complete and full understanding of what has happened here, and pledged Mr. Kanjorski our continued cooperation. We have worked, I believe, very well together over our years on the Committee, and where possible, we will reach agreement and take all appropriate action. For those witnesses here today, our general and customary practice is for each witness to be recognized. Your full statement will be incorporated into the record. We request that you attempt to keep your remarks to 5 minutes to allow us to engage in discussions with you. But by prior agreement with Mr. Kanjorski, our first witness here today is going to make an overall report and presentation completed by the Reinvestment Fund.
    It is my pleasure to welcome Mr. Ira Goldstein, Director of Public Policy and Program Assessment, the Reinvestment Fund, and, by agreement, we will give you such time as you may consume, sir, to make your presentation, which I understand may be 15 minutes or so. Welcome.
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    Mr. GOLDSTEIN. Thank you very much, Mr. Baker, Mr. Kanjorski, for the opportunity to come here and present this material to you.
    Chairman BAKER. Maybe take that mic at the end of the table there. Walk it around.
    Mr. GOLDSTEIN. Thank you. Good morning. Is this on?
    Chairman BAKER. Yes.
    Mr. GOLDSTEIN. The Reinvestment Fund was contracted with by the Department of Banking in January of 2004 to help the Department of Banking devise a set of facts upon which the Department of Banking could design a set of action-steps to address the issues that have been taking place in Monroe County, Pennsylvania, for the last, at least, 4, 5 years.
    The data sources that we have used to be able to help the Department of Banking in this way is to take a very careful and detailed look at all the filings from the Prothonotary of Monroe County, the Prothonotary being the Clerk of Courts of Monroe County; some very specific property sale and mortgage and data, so for each of those properties that went into foreclosure, to look at the sale and mortgage history on those properties; to look at the records that are gathered through the State's Homeowner's Emergency Mortgage Assistance Program, or HEMAP Program, which is a program, I think, that is probably unique to the Commonwealth of Pennsylvania, has been around since the '70s, and was designed initially to help people who are facing foreclosure and might, under the proper circumstance, be able to hold that off with assistance from the State; and, of course, a full complement of census population and housing information.
    The study status is that it will be released some time in July of 2004. We are not entirely certain about the final release date, but it certainly will be within July. And when it is released, it will not only be a study of the facts, but it will be a full complement of action-steps that Secretary Schenck will be proposing to address the issue in Monroe County.
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    Our findings: first off, Monroe County is, in fact, a very fast-growing county. In fact, it is the second fastest growing county in the Commonwealth of Pennsylvania, Pennsylvania being actually a relatively slow-growth state. Monroe County grew, between 1990 and 2000, by about 45 percent, and then since 2000, has grown by about another—over 10, 12 percent, so it has been growing very rapidly in a State that has barely increased 5 or 6 percent over that time-period.
    The housing units as well, and this is the crux of where we get to the issue—the housing units stock, as well, has grown by almost 25 percent between 1990 and 2000, and by another 5 percent since 2000, up through 2002. Foreclosures across the Commonwealth have grown up almost unabatedly from the latter part of the 1970s on up through the latter part of 2002, 2003. And in fact, if you look at it, with very few exceptions, this number has tracked up. And compared to other States, Pennsylvania is one of the higher States in the overall foreclosure rate. As well, it is one of the highest States in terms of foreclosures as reported by the Mortgage Bankers Association in its percentage of loans that are in foreclosure that initially were sub-prime loans.
    In Monroe County, over the period 1995 through 2003, the number of foreclosures rose from about 300, 400 a year up through over 900 a year. Cumulatively, since 1995, more than 6,100 households were subject to foreclosure, and more than 2,700 of those were subject to foreclosure since the year 2000. This data comes from the State's HEMAP, or Homeowner's Emergency Mortgage Assistance Program, and they suggest that over the last 4 years, but for that program, about another 320 or so homes would have also been subject to foreclosure. This program kicks in and provides assistance before the actual filing of the foreclosure action.
    Now, Mr. Kanjorski himself raised this question to us when we met a few months back. Given that the population and housing unit change in Monroe County has been so dramatic over the last year—the last few years, the question is, is what has happened to foreclosure merely a reflection of the fact that there are so many new people and so many foreclosure—so many more housing units in that time-period. And we struggled with trying to get an answer to that question. But in fact, what we were able to do was to essentially create the equivalence of a crime rate for foreclosures and say what is the number of foreclosures per housing unit. And in fact, we were able to do this in a, I think, a pretty comprehensive way because of the ability to obtain updated housing unit information from the Census.
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    The top line, that green line, represents Monroe County, and over the period 2000 through 2002, you can see it is both the highest line, which means it had the highest number of foreclosures per 100 owner-occupied housing units, and actually rose at a quicker rate than any of the other counties that we have—that I detailed here. And, in fact, we have detailed counties of Allegheny, Lancaster, Lehigh, Washington, Philadelphia, Chester, and Monroe County. Those are places that to date we have been able to get comprehensive foreclosure information for, and we see that the rate of foreclosure filing, in terms of the per owner-occupied housing units, and the steepness of the increase is greater in Monroe County than in the other places that we have been able to detail.
    Where are all the people coming from to Monroe County? We have been able to trace through the Census information that vast numbers of people have come from New York, as the reports to us through interviews and the like have suggested. In fact, the largest county feeding population into Monroe County is Kings County, New York. Between 1995 and the year 2000, well over 2,000 from Kings County, New York, ended up in Monroe County. Another very similar number from Queens County, from the Bronx, then Northampton in Pennsylvania, and then you see Suffolk, Essex, Morris, Bergen, and Middlesex Counties as some of the leading places that are a feeding population into the Pocono-Monroe County area.
    How do those people look who are migrating into Monroe County? First of all, we find that about 20 percent of the new migrants are from New York, and about 16 percent are from New Jersey, between 1995 and 2000. We find that in relation to the existing Monroe County population, that is the population that existed prior to 1995, the people who migrated tend to be more likely married, tend to be more likely with children, they tend also to have higher incomes. They tend to be residing in newer construction housing, so they are moving more likely into new than existing housing stock. And they tend to be substantially more likely to be African-American and Hispanic.
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    One of the anecdotes in the stories that were reported in the ''Pocono Record'' and in what we learned through our interviews with people is that many people not only came to Monroe County for residence, but continued to work back in their counties of origin back in New York and New Jersey. And we found, in fact, that that—the data does tend to support that, and in fact, some substantial number continue—or substantial percent continue to commute back to Morris County, New Jersey; New York; Warren, New Jersey; Essex; King; Bergen. So people are making that pretty significant commute back and forth, and in some significant number.
    In terms of what has happened demographically, as I have said, the people who are commuting or who have migrated to Monroe County are more likely to be African-American and Hispanic, and that does reflect in the fact that the African-American population and the Hispanic population have risen fairly dramatically in Monroe County since 1990. In fact, what you are seeing is triple-digit increases in the size of the African-American and Hispanic population, and other, which is Asian, primarily. Those increases are coupled with relatively small percentage increases in the size of the white population. But much of that population change has been fueled by minority populations.
    In terms of the age, Pennsylvania is one of the oldest States in the nation. Depending upon how you estimate the age of Pennsylvanians, either the third or the fourth oldest state in the country. But what you find in Monroe County is that there has been substantial growth both in the numbers and the percentages of school-aged populations and populations of parents who would have school-aged populations, so that would be people in that 25- to 44-year age range.
    And as I mentioned, both the migrants are ending up more likely in newer housing, and Monroe County, in general, in relation to Pennsylvania, is much more likely to have a newer housing stock.
    Values have been fairly robust in this community, although, quite frankly, it is sometimes difficult to get a sense as to true value when what we see is that some large proportion of the sales transactions seem to be, or potentially, are tainted. Nevertheless, what you are seeing is increases in Monroe County that are roughly equivalent in size and magnitude to that of the Commonwealth. The two lower lines represent the size of mortgages in Monroe County, and the upper line represents the average of the Pocono Mountain Association of Realtors for existing home sale prices. You will notice, by the way, that those things tend to stay in relation of about an 80 percent or so of value to sale—mortgage.
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    In terms of income, as I mentioned, Monroe County, many of the population, many of the people who have migrated to Monroe County have come with higher incomes, and in fact, Monroe County tends to be slightly higher income than the Commonwealth of Pennsylvania overall.
    Okay. Now, as I mentioned, we got each of those well over 3,000 foreclosure filings from the Prothonotary of Monroe County. That is the Clerk of Courts where all foreclosure actions must be filed by law. We took each of those foreclosure filings and went through a pretty tedious and meticulous geo-coding process where we were able to take that filing and stick it right down on the geographic parser that is represented by the housing unit that is subject to that foreclosure filing. Each one of those foreclosure filings is represented by a black dot on that map.
    And what you will notice is that there are several areas of concentration. I am going to go up over here a little. Up here is a subdivision called Country Place, not too far from where we are, in the Stroudsburg, East Stroudsburg vicinity, and the Pocono Mountain Lake area. There is also—for you to be able to examine in more detail, there is a printed version of this map in slightly different coloration. But this gave us great pause because ordinarily you might expect these things to be more randomly distributed throughout a place, and in fact, we were finding the kind of clustering that, quite frankly, in the epidemiology field, you would say would be consistent with there being something poison in the ground. And what we were able to do was to be able to identify the characteristics of each of those transactions. Much of that will be released when the Secretary releases the report in about 3 weeks, a month, something to that nature.
    But I also wanted to be able to take these and show you by township some of the more hardly hit spots. This is Coolbaugh Township, which is in the upper portion of the county, and as you can see, as you walk through some of these subdivisions, it is literally look left, look right, and you are likely to see a housing foreclosure. This shows you the detail of it.
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    Next, Middle Smithfield in the Winona Lakes, and I know it is difficult to see, but just again, so you can understand about the way these maps are working, these lightly-shaded gray areas actually represent physical parcel lines, which means there is a house sitting right on that parcel. You are seeing here 4 or 5 or 6 dots right next to each other. So we present these for you to get some sense as to both the scale and the scope and the concentration of what has happened up here at Monroe County.
    This is where we are now—not to distant from where we are now, Stroudsburg and East Stroudsburg in Stroud Township, and then Tunkhannock Township.
    One of the things we did want to take a look at was the extent to which—given that we saw that so many of the people who migrated into Monroe County from New York and New Jersey were of minority group status, we wanted to see whether or not the concentration of the foreclosures tended to relate to those concentrations. And in fact, what you find is that in areas—in Census block-groups, which actually tend to be fairly small, in those block-groups, we are seeing the largest number of foreclosures. You are also seeing the highest concentrations of African-American and Hispanic homeowners. So, in fact, these data would suggest to us that there is some concentration among minority group members.
    Finally, in the plans going forward, this study will be released on or before July 31 by the Department of Banking. When the Department of Banking releases this study, it will release a set of action-steps based on the facts that we have uncovered, some of which we have presented here, others of which will be presented with the final study. And the purpose of those action-steps will be to both address the current problem, and look at the kind of changes that could be implemented to make sure that these kinds of things do not happen again.
    During the fall of 2004, the Reinvestment Fund will be also releasing for the Department of Banking a study that was commissioned on foreclosures across the Commonwealth of Pennsylvania. We will be holding focus groups across the Commonwealth over the next couple months, and then we will be looking at facts not specifically to Monroe County, but as much as we can to develop the same kind of fact basis for Secretary Schenck to be able to make the kinds of policy recommendations, legislative recommendations, programmatic recommendations, that he feels will be appropriate to address that growing foreclosure problem in the Commonwealth.
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    And, with that, I thank you.
    [The prepared statement of Ira Goldstein can be found on page 68 in the appendix.]
    Chairman BAKER. Mr. Goldstein, I understand that by agreement we are not going to engage in any questions at this time of you, and your schedule limits require your departure. I just want to express my appreciation to you and the State government for allowing you to be here to make that presentation to us. It was most helpful and insightful. The only request I might make is that at such point as you come to conclusions about any federal adjurative steps, it might be advisable if you could communicate through Mr. Kanjorski to the Committee any such recommendations the Committee might consider. Mr. Kanjorski?
    Mr. KANJORSKI. Mr. Chairman, thank you. Mr. Goldstein, I want to thank you again, and the Secretary of Banking of Pennsylvania, Secretary Schenck, for allowing you to give us the pre-disclosure of some of the information and facts in your upcoming report. It will be most helpful, and we look forward to working in conjunction with your organization and the Secretary of Banking of Pennsylvania to see if we cannot come to some resolve of some of the contentious problems here in Monroe County. Thank you.
    Chairman BAKER. And you are free to go as you require, sir. We will turn on to our record of order now, with our next witness being Mr. Robert Hay, broker and owner, BobHay.com Realtors. Welcome, sir.
    Mr. HAY. Thank you.
    Chairman BAKER. And you will have to pull that close to you. That is not real sensitive.
    Mr. HAY. Okay. Good morning Chairman Baker and Congressman Kanjorski. Thank you for the opportunity to present testimony on the very important subject of home buying and achieving the Great American Dream of homeownership. Let me first recognize your efforts, Congressman Kanjorski, for your leadership in safeguarding the economic viability of the real estate industry by co-sponsoring the Community Choice in Real Estate Act, HR 111.
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    Through your leadership, this legislation has garnered 252 co-sponsors, and will keep large banking conglomerates from engaging in real estate brokerage and management activities. It is time for Congress to act on—to finalize this legislation.
    By the way of background, I am a lifelong resident of Monroe County, and have been a licensed real estate practitioner for the last 28 years. I have also been a member of the Pennsylvania Association of Realtors, a statewide trade association representing nearly 29,000 real estate licensees since 1976. Aside from my activity on the State level of the Association, I participate on the local and national levels as well, serving on various committees and task forces, as invited.
    Even though I am currently broker-owner of a small independent firm, I still work with buyers and sellers on a daily basis. Let me give you a perspective on the home buying process, how we work with buyers, and the various disclosures we must use.
    On the first substantial meeting, all real estate licensees must review a Consumer Notice. The Consumer Notice educates the consumers of real estate about the business relationships that might be available to them and, in effect, puts the consumer on notice to exercise discretion in revealing information to a licensee before a relationship is formed. The consumer is asked to sign the form, and licensees must retain a copy in our file, pursuant to the Real Estate Licensing and Registration Act.
    Should a buyer make an inquiry by phone, the licensee can provide a verbal summary, with language dictated by law, prior to asking any qualifying questions and answering questions about a specific property.
    The second step to the process is establishing a business relationship with the buyer. Pennsylvania law specifically authorizes the types of business relationship that a real estate licensee can have with a consumer: seller agency, buyer agency, dual agency, designated agency, and transaction licensee. This disclosure protects the consumer because they know who the agent is representing in the transaction. A Business Relationship Agreement is attached for your reference as marked in Exhibit C.
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    After establishing a business relationship with a buyer, we utilize a multiple listing service to show buyers homes that meet with their criteria currently available on the market, on matter who the properties are listed with. As a realtor and a participant of the MLS, we have a unilateral agreement to cooperate with each other. This is very beneficial to both buyers and sellers.
    Once a buyer finds a property they may wish to purchase, we enter into an agreement of sale, which spells out the price and other terms to the offer. The agreement is typically subject to a mortgage contingency and various inspections. We often ask for name of lenders, home inspectors, attorneys, insurance companies, et cetera. We normally give a few select—a few selections to the buyer. Should we have any financial interest in any of the recommendations we make, we must disclose that fact.
    Without walking you step-by-step, that summarizes the buying process. The real estate market continues to be very strong across Pennsylvania, and especially here in this region. Last year, more homes were bought and sold nationally than any previous year in history. That is more than 6 million existing homes, and just over 1 million new homes. There is a great demand for homes with a very limited supply. There is legislation pending in Congress that would increase the supply of affordable housing. That legislation is Renewing the Dream Tax Credit Bill, H.R. 829, which would provide tax credits to developers and investors of affordable housing. Housing built or rehabilitated for those individuals and family at or below 80% of the area median income.
    I thank you for your co-sponsorship of this important legislation, and hope that Congress will act to make this proposal a reality for millions of Americans who seek to own their own home. The supply and the demand has increased home prices for the last several years. With home prices increasing, it helps the homeowner that has a minimum equity in their property. There are some, however, that just cannot sell high enough to pay off their debt. This is not limited to the people that just built a home. It applies to many that have refinanced their homes and pulled equity out.
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    Recently, there have been many discussions of predatory lending, which has no clear definition. This practice needs to be addressed legislatively, but the remedy must be balanced. It must protect the consumer, but not hinder some of the sub-prime lending programs that have helped so many buyers who deserve a second chance.
    Buying a home is one of the most important purchases an individual will ever make. Before embarking on this course, whether building a new home or buying an existing one, buyers should come to the table prepared. This can easily be done by picking up a home guide magazine or browsing the Internet to gain knowledge of market values.
    Buyers must also take into account consideration of cost of commuting, not only financially, but mentally and socially. People move to the Pocono Mountains area primarily for our schools, our environment, the cost of housing, and taxes. Even though there have been some that have experienced broken dreams, thousands have realized the American Dream of home ownership and have enjoyed a good home-buying experience. These individuals benefit by living in one of the most beautiful places in our great country.
    Thank you, again, for this opportunity to testify, and I would be happy to answer any questions that you might have.
    [The prepared statement of Robert Hay can be found on page 96 in the appendix.]
    Chairman BAKER. Thank you, sir. Our next witness is Ms. Maureen McGrath here as an interested homeowner. Welcome.
    Ms. MCGRATH. Thank you. Good morning, Mr. Chairman——
    Chairman BAKER. And you will need to pull that microphone close to you.
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    Ms. MCGRATH. Oh, thank you. Good morning, Mr. Chairman. My name is Maureen McGrath. I appear here today on behalf of the National Advocacy Against Mortgage Servicing Fraud, and I wish to thank you for holding this important hearing to examine the problem of predatory mortgage lending and real estate fraud in the Poconos, and for allowing me to testify. I would also like to extend a special thank you to Congressman Kanjorski for the extraordinary time and effort he spends on this and other issues on behalf of his constituents——
    Chairman BAKER. Just one second. Ma'am, you will have to pull that mic a little closer. Folks cannot hear in the back.
    Ms. MCGRATH. Is that better?
    Chairman BAKER. That is better. Thank you.
    Ms. MCGRATH. I would also like to extend a special thank you to Congressman Kanjorski for the extraordinary time and effort he spends on this and other issues on behalf of his constituents in the Poconos.
    I speak with deep personal conviction that predatory lending and mortgage servicing fraud devastates communities and destroys individuals' lives, and I testify here with great certainty that approaches to the problem are at hand, are workable, and fair. I would like to provide the stories of 3 victims of mortgage servicing fraud that the National Advocacy Against Mortgage Servicing Fraud has assisted.
    Mr. M is a 40-year old who lives in Monroe County. He is gainfully employed and has consistently paid his mortgage in a timely manner. He has owned his home for 8 years. In November of 2001, Mr. M was notified by his mortgage servicer that they were placing his loan in default, the reason, that he was 4 months in arrears. Mr. M disputed the servicer's claim and immediately wrote qualified RESPA Letters of Dispute. Despite 3 such letters, the mortgage servicer never responded to Mr. M's RESPA inquiry, and his loan was foreclosed on. After commencing litigation, a redacted copy of the loan history was finally supplied to Mr. M. A line-by-line audit of the information indicates that at the time of foreclosure, over $8,000 in principal and interest payments were missing, charges for a property in Cleveland, Ohio, were charged to Mr. M's account, and usurious fees were assessed. The litigation of this case continues.
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    Ms. X is 48-year old African-American woman. She has owned a home in Monroe County, Pennsylvania, since January 2000. Over a period of 3 years, the value of her home has dropped over $40,000 based on the BPO's conducted by her mortgage servicer. There is no explanation for the decrease in value, and this is currently under investigation.
    Ms. Y is a 50-year old immigrant. She has owned a home in Monroe County, Pennsylvania, since November 1999. Her mortgage servicer assessed her with forced-placed insurance fees in the amount of $1,998 per year, despite the fact that Ms. Y had hazard insurance in place on her home. Lenders require homeowners to carry homeowners insurance with the lender named as a loss payee. Mortgage loan documents allow the lender to force-place insurance when the homeowner fails to maintain the insurance, and to add the premium to the loan balance. Some predatory mortgage services force-place insurance naming the servicer as loss payee, even when the homeowner has insurance and has provided proof of such insurance to the servicer. Even when the homeowner has, in fact, failed to provide the insurance, the premiums for the force-placed insurance are often exorbitant. Often the insurance carrier is a company affiliated with the lender or servicer. Furthermore, the cost of forced-place insurance is frequently padded because it covers the lender for risks or losses in excess of what the lender may require under the terms of the mortgage loan. The taking of the forced-placed fees placed Ms. Y's mortgage in default, and she was forced into bankruptcy to save her home. This case is ongoing.
    Everyone is aware of such terms as home equity theft and predatory mortgage lending, however very few people are aware of mortgage servicing fraud, even when they themselves are victims. I hope that this Committee, after hearing my testimony, will no longer look at predatory mortgage lending as a process that begins with the mortgage broker and ends with the mortgagee, but will look further and realize that predatory lending breeds further abuse in the form of mortgage servicing fraud.
    Predatory lending, in and of itself, does not explain the rapid deterioration of property values in the Poconos while property values throughout the majority of the nation are rising. Predatory mortgage lending, by its innate nature, also brings about mortgage servicing abuse, because the consumer is already tagged with the nomenclature, and the mortgage services perpetrate this title consistently. That title is deadbeat. I firmly believe that mortgage servicing fraud is at the crux of the matter.
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    As you are aware, mortgage notes are bundled together and sold on the secondary market and passed as certificates, these certificates may take the form of REMIC or REIT. This bundling enables the loan originators to receive compensation for the loan, replenishing their cash flow and enabling the creation of further credit for borrowers.
    However, something has gone wrong in the Poconos. More and more homes are being foreclosed on, and there are hardly any properties that increase in value. The cause of devaluation and the effect it may have on future trusts must be addressed.
    The path for devaluation of a home is actually quite simple. Once a default is fabricated, the predatory mortgage servicer files a script until the 90-day delinquent point when the servicer will institute foreclosure proceedings. Once this process has commenced, the servicer will order a BPO, or Brokers Price Opinion. This tool is actually meant to be used by legitimate buyers and sellers of real estate who wish to know the best, worst, and median price of a home they are contemplating selling or purchasing. The mortgage servicer will use the BPO in lieu of an appraisal performed by a licensed appraiser. The mortgage servicer will also order a quick sale price for the property. This will often drop the price of a home by $30,000, $40,000 or even $50,000. In the case of one mortgage servicer, if the BPO does not come in low enough, the internal review will lower the price of the home down to what they believe it should be. As seen in the Poconos, this practice of having undervalued or quick sale BPO's performed has a devastating effect of devaluing an entire community. Once 1, 2 or 3 homes are placed in lawful foreclosure, and due to the fact that many loans in the Poconos are sub-prime or non-conforming, there is a high propensity for this behavior on the part of the servicers.
    Any legitimate appraisal for a refinancing request by any of the homes in the proximity of the wrongfully foreclosed home will need to be adjusted to reflect the value of the home due to the low sale price of the comparable wrongfully foreclosed home. Once you have several homes with high loan devalue ratios because of the downward trend of the values of the homes, and ablinge effect begins affecting home after home, consumer after consumer, until, finally, you have the phenomenon of people simply walking away from their homes because they cannot afford the current mortgages, they have been placed in a fraudulent status of default, or they cannot refinance because the downward trend of the values of their homes.
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    The implications and effects of mortgage servicing fraud are far-reaching and need to be considered when looking at real estate fraud or predatory lending, as well as the effect on the secondary mortgage market, the REMICs and the REITs. If enough loans in the trust are placed in default, it effects the distribution certificate holders, and it will eventually become more and more difficult to sell the securitization of these loans to these secondary market, and that will effect the ability of lending institutions to offer credit to borrowers. The tax consequences of wrongful foreclosures must also be addressed, as it affects the tax status of the REMICs and the REITs.
    I would like to propose that when addressing predatory lending and drafting any future legislation, that consideration should be given to requiring that a certified appraisal performed by a licensed appraiser accompany any foreclosure. This will curtail the practice of using quick sale BPO's and falsely devaluing the value of a home, which in term will serve to protect not only the certificate holders of the trust, but also the neighboring property owners, by maintaining the values of the homes in the neighborhood, and guaranteeing that the fair market value of a home is preserved.
    Concerning the mortgage servicing aspect of the industry, it should be kept in mind that the great majority of loans today are serviced by firms that do not own the notes. The servicer is paid by and is beholden to the owner of the mortgage. Borrowers have no say who serves their loan, and if they get poor service, about all they can do is write a complaint—letter of complaint to HUD or the FTC. It is hardly surprising, therefore, that servicing does not generally meet the needs of the borrowers. However, it does not have to be that way.
    Servicing systems can be designed to meet the needs of borrowers as well as the trusts. The borrower would be the client alongside the lender, and have the right to change services. Dispension—the implication of Morris would make this process quite simple. This would involve competition between services to keep their cash flow bases, and would help prevent the fraud that is currently being perpetrated.
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    To avoid undue disruption and encourage rational decisions, the opt out should become effective only after approximately 6 months of servicing, and should apply only once. To win the favor of opt out, servicers would be obligated to compete. Since servicers are paid by lenders rather than borrowers, they will compete with service, which is exactly what is needed. Firms with efficient and courteous support people, easy to read statement, et cetera, will draw opt outs from firms that have served them badly. The market would, at long last, begin to work for the borrower.
    This concludes my testimony. And, once again, thank you for your time and kind consideration. I will be happy to answer any questions.
    [The prepared statement of Maureen McGrath can be found on page 124 in the appendix.]
    Chairman BAKER. Thank you, Ms. McGrath. Our next witness is Mr. Richard J. Peterson, Executive Director, Pocono Builders Association. Welcome, sir.
    Mr. PETERSON. Thank you, Mr. Chairman, Congressman——
    Chairman BAKER. Now, you will need to pull that mic to your left over there. The gray one. There you go.
    Mr. PETERSON. Thank you, Mr. Chairman, and Congressman Kanjorski. Thank you.
    Chairman BAKER. If you would, please, the gentleman's testimony is important. We do need to hear him. I understand the emotions are high on this and everyone will have their day, so, please, let the gentleman proceed. Pull the mic closer, please, so they can hear you. Thank you, sir.
    Mr. PETERSON. Thank you. Thank you for inviting me to testify on behalf of the Pocono Builders Association, its members, and the building industry. The Pocono Builders Association is a member of the National Association of Home Builders and its federation. We represent more than 250 businesses here in Monroe County. The local building industry represents various trades and suppliers, and employs over 7,000 employees within Monroe County. Our industry generates more than 250 million annually to the Monroe County economy, and contributes to the State's third largest industry a $25 billion a year industry, and is a contributing factor for the Commonwealth's home ownership as high as 71 percent. Last year, there were over 1,630 new permits issued for new homes within Monroe County, and within the last 5 years, there have been over 7,500 new home permits.
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    The Pocono area, especially Monroe County, is an area witnessing a migration of families from New York and New Jersey, as we just saw. They are escaping high taxes, expensive housing, and what they feel is a poor quality of life, and looking for something better here in the Poconos. They have moved here seeking the American Dream, especially since the 9/11. The once 50 percent vacation/second home market has now evolved to a 75 percent primary home market.
    It has been stated that the Poconos are unique with its high growth and high foreclosure rates, yet national studies show that this region is not unique, nor does it even show up on the map when compared to national statistics. According to the U.S. Census, which I have set—put a copy of that in your files—there are only 2 States whose population increases were less than the Commonwealth of Pennsylvania, and that was West Virginia and North Dakota. The Commonwealth saw only 3.4 percent of an increase.
    As for foreclosures, a report released last week by Foreclosures.com pointed out that foreclosures are an issue throughout the country, and 7 States actually rank much higher than Pennsylvania when it came to new foreclosures. They are Georgia, Indiana, Michigan, North Carolina, Ohio, Tennessee, and Texas. And again, that documentation is in your folders. In addition, just last week, Allegheny County, located in the Pittsburgh region, has a 500 percent increase in foreclosures over the last 8 years, largely due to property reassessments and property taxes.
    We are here today because of allegations regarding real estate fraud, especially in the area of appraisals and predatory lending. It is unfortunate that these allegations have occurred in the Poconos. However, I must stress that as I speak today, I only know of 170 cases, and not to minimize this, because I am not, and these are serious allegations, but this represents 2.2 percent of the 7,500 new homes that were built within the last 5 years.
    We believe that allegations being made, while serious—and they are—are ones that involve an isolated number of members of the local real estate lending and development industry. The issues seem to revolve around appraisals and financing. Our association, representing professional contractors, has always had a consumer focus, in that we believe that all consumers are entitled to safe and affordable housing. Consequently, our association had put in place many years ago a very stringent code of ethics and a consumer protection process aimed at addressing any consumer concerns with quality workmanship and codes. We have worked hard in the past few years to educate the consumer on how to hire a professional and reputable contractor. And, again, the documentation of that is in your folders.
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    In light of the Attorney General's announcement of the filing of a civil law suit in April of 2002, our Ethics Committee reviewed our current consumer education program and extended it with a billboard featuring a toll-free number for consumers who felt they had been the targets of contractor fraud. We also published in the news media information regarding our existing contractor quality commitment program and the process to file a complaint. Within weeks, we received several complaints in which only a few related to value, and that is the appraisal issue, and again, we referred those to the Attorney General's office. Most complaints that came were not dealing with questions of appraisals and predatory lending, but workmanship issues and contractual disputes. Within the last 2 years, we have had——
    Chairman BAKER. Please, we need to be able to hear what he is saying.
    Mr. PETERSON. I am talking about our association as we receive complaints. We are not talking about the Attorney General's office or any other body that has received complaints. I am talking about the association.
    Now, within the last 2 years we heard 47 cases and distributed over 10,000 brochures to consumers on how to hire a reputable contractor, which outlines specific steps to protect consumers, again, in your folder.
    So committed is our association to the need for consumers to be educated on new home purchases, that we did reach out to one of the homeowner associations involved in the predatory and appraisal alleged fraud to offer them these materials that you have in your folder, and to help them—partner with them on consumer education. We remain firm in our resolve that the ultimate weapon against contractor fraud at all levels, and indeed this includes appraisal and predatory lending practices, is an informed and educated public.
    The present situation in the Poconos, however, does not focus on the issues of workmanship or codes but appraisals and lending. It is our understanding that the Pennsylvania Attorney General office is investigating these allegations and to be—should be handled through the proper authorities and therefore, allow the legal system to do its job. As a trade association, we are regulated by federal anti-trust laws that prohibit us as an organization to single out any one member or non-member within our community and tarnish that individual's reputation, and can only take appropriate action when one is found guilty, and must treat each member and non-member as if they were innocent until proven guilty.
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    We will continue to educate and inform the consumer, and as we tell the consumer, if it is too good to be true, it probably is. We will continue our role of a trade association to represent, educate, and hold accountable our members. We will continue to work with government officials and the business community to assure the interests of the housing consumer and the industry, and to see that they are protected due to the major economic impact that our industry does have on the Poconos.
    We believe that Congress needs to look at the issues of sub-prime loans and look at federal lending practices as it relates to first-time homebuyers programs and programs for those with bad credit. Education on the process of buying a home is important, and understanding between the new housing market, the resale market is also important. And, also, I agree that there needs to be some federal assistance in programs in finding affordable housing and producing affordable housing within areas like ours.
    Thank you very much for your time, and I am also available——
    [The prepared statement of Richard J. Peterson can be found on page 170 in the appendix.]
    Chairman BAKER. Thank you Mr. Peterson. Our next witness is Mr. Almus Wilson, founder and CEO, Pocono Homeowners Defense Association.
    Mr. WILSON. Thank you, Chairman Baker——
    Chairman BAKER. If you can tilt that mic up just a little bit, it will help us in hearing you. Just tilt it up. There you go. That is great.
    Mr. WILSON. Okay. Thank you. Chairman Baker, Ranking Member Kanjorski, I appreciate you inviting me here today to testify. Thank you for the opportunity——
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    Chairman BAKER. Make sure that mic is turned on. I am not sure—it is on. You just have to pull it very close.
    Mr. WILSON. Let me adjust it a little bit. Thank you for the opportunity to come before you to share the concerns of serious issues facing families that have become victims of predatory lending.
    The Poconos have much to offer new families starting off, established families seeking a better lifestyle, and even seniors looking for a great place to retire. Known for outstanding greenery, good schools, beautiful lakes, it is a place attractive to many looking for a new beginning away from urban areas. This was a solution to many families' dreams.
    My family, along with over 6,000 other families from many nationalities and ethnic backgrounds, saw those dreams turn sour. I come before you not just to represent the Wilson family, a family who eagerly moved to a new home, only to later realize we had been defrauded, but thousands of others who have also been run back to various large cities or they are on the verge of losing their homes as well.
    Our story: it was a glorious day, I would say, in September of 1999, that we made what I called our journey to a new and wonderful life in the Poconos. This is what we saved diligently for. We were finally realizing our dream of home ownership, something I know our government encourages and supports of various loan programs, assistance and support. It was while reading the ''Pocono Record'' in April of 2001 that I first heard about housing fraud in the Poconos. The story was about a person losing his job and having to sell his home. Nothing unusual about that, I thought initially. Reading more of the story revealed the person in question was living in a home that was not worth what the builders told him it was worth. The builder had inflated the price—the purchase prices, used cheap building materials, and even had the home assessed higher than it was worth. I thought to myself at the time, this could not pertain to my family since we were well treated and told not to worry about anything. No lawyers were needed. Everything was handled here. Being a former law enforcement officer, I believe—I became suspicious obviously. Many more articles continued to be published in reference to predatory lending in the Poconos.
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    My suspicions turned out to be right when I did reach about—research on my family's home. Oddly enough, I did not do research until I participated in a few marches and demonstrations in support of alleged homeowner victims in Monroe County. I found out that our dream home was not worth what the builder charged us. We also realized that the appraisal was questionable. Lastly, we knew we had to do something, not just for us, but for many people and others who had no voice.
    Therefore, in June of 2001, a forum was held at East Stroudsburg University, made up of local politicians and disgruntled homeowners. Beginning in 2002, a District Attorney taskforce was formed along with the State Attorney General, the FBI, and Justice Department. Later, the FBI was called off the case weeks after the District Attorney released findings. We also noticed that other States had predatory lending problems, and we began to wonder why is there no enforcement of laws and regulations. Also, we asked why no one questioned the reasons for nearly 1,000 foreclosures per year in Monroe County.
    Many people were being drawn to the area because of the dreams they had and promises they received via TV, radio and newspaper ads. The ''Pocono Record'' had published many investigative articles with unbiased angles. The ''New York Times'' also released an overwhelming 3-day investigative series, as well as NBC station Telemundo from New York City featuring Monroe County housing fraud.
    Finally, I get to the creation of PHDA. Because of the widespread fraud and predatory lending practices occurring so often, people were going all over for assistance. Unfortunately, no one knew where to turn and who to turn to. I, along with other victims of fraud, planned a march to protest in Washington, D.C., at the FBI and Justice Department. As upsetting as it was to hear some of the stories and to see the actual paperwork, it became more intriguing as to what was happening to the homeowners.
    I saw people who put down $60,000 deposits, get final paperwork showing they only put down 24,000. I saw workmanship that would make a true builder roll over in his grave. I saw people have homes built for a price, only to have the same home much later for much less. The area DA was no help. The Attorney General made us feel like we were the ones committing the crimes. And, lastly, many folks have just given up on the dreams that they had walked away from, their investment, and the crimes committed against them. Something had to be done, and done soon. I felt we all needed voices.
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    Excuse me. It is a lot of stress. Along with my wife of 25 years, Marilyn Wilson, Maria Yagual, Chairman Cooper, PHDA was created in my kitchen. With little funding and no support from local officials, we have been able to assist many homeowners. Often we eat at the others' homes to save money and share babysitting responsibilities, to give each other a break. This has been a full-time job with the reward being a family being able to save their home and keeping a roof over their heads. It has been a hard yet rewarding adventure.
    PHDA continues to assist homeowners from throughout the Poconos. PHDA's goal was to uncover alleged predatory lending by insisting that local, state, and federal agencies start an investigation of the allegations. We want to make sure those who commit the fraud are held accountable, and that there are serious repercussions behind the misuses of their professional positions through deception. If a homeowner can be held accountable for falsifying documents, so should the real estate professionals that are offering the services needed to provide the American Dream.
    People deserve financial rewards and justice criminal indictments in order to get back to their lives. We must remember even though the President has a Homeowners Initiative Program, how many people actually go into foreclosure? In Monroe County, from 1995 until now, there were more than 6,000 foreclosures, and our foreclosure to sales rate of more than 25 percent greatly exceeds the national average of about 1 percent.
    From identifying faulty building practices to fraudulent home assessments, we have been a leader in making things right for families in need. Despite personal attacks and a certain amount of fear for me, my family, and others associated with PHDA, the battle continues daily. Phones in my home and office rings off the hook 7 days a week. So, whether it is a large PHDA sponsored forum at ESU, protest marches, family assistance, mold or heat, et cetera, we remain committed to help.
    I am here to share what has been a huge battle for many years, one that has claimed families while stripping them of their dreams and their dignity. We need assistance. As the founder of PHDA, and with a great support team that has great insight into what has transpired in this region, we need to be more involved with what is happening and need funding that will be made available. We have done much already, but it is only the tip of the iceberg when looking at what needs to be done.
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    My suggestions for Congress and the PHDA members is to suggest that we need to federalize and make stronger legislation on the real estate and mortgage industry, which would include stiff penalties for illegal activity. This will hold any and all accountable for any real estate transactions. However, not to totally preempt States from being able to pass State legislations whereby they would enforce and police their real estate industry. It is vital that they have some forms of power or jurisdiction to do that, as they can adapt to the system.
    To protect—to petition the U.S. Justice Department to investigate the entire real estate housing situation surrounding Monroe County, which has a big question mark pertaining to this particular area-investigation here regarding the housing fraud situation.
    Three: to provide a larger budget for consumer education and housing organizations. I think it is vital that you need more money for these types of program and things like that.
    Lastly, the predecessors of the last three administrations in the State, we're requesting that the Congressmen here petition the U.S. Justice Department to investigate the Monroe County District Attorneys Office, the State Attorneys General Office, and the Pennsylvania State Banking Department. We are not talking about Secretary Schenck, we are talking about his predecessors. The last administrations need to be looked at. These are serious allegations. This is something that we deal with on a daily basis from citizens who are calling us and complaining. The last complaints we have received, is that they are receiving calls from the State Attorney General's office acting as a collection agency for the bank.
    Thank you, Congressman Kanjorski, Chairman Baker. I appreciate this opportunity. I apologize, but these issues are very sensitive, and they have been long-range for us at PHDA. Thank you very much.
    [The prepared statement of Almus Wilson can be found on page 212 in the appendix.]
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    Chairman BAKER. Thank you, Mr. Wilson. Our next witness is Mr. Donald J. Bisenius, Senior Vice-President, Credit Policy and Portfolio Management from Freddie Mac. Welcome, sir.
    Mr. BISENIUS. Thank you. Thank you, Chairman Baker and Ranking Member Kanjorski. It is a pleasure to be here this morning. My name is Donald J. Bisenius. I am the Senior Vice-President of Credit Policy and Portfolio Management at Freddie Mac. I am responsible for establishing and implementing a comprehensive credit risk management framework for Freddie Mac.
    I welcome the opportunity to be here today to discuss the steps Freddie Mac has taken in responding to the serious loan origination improprieties and fraudulent activities associated with certain loans made on properties located in the Pocono Mountains of Pennsylvania. Freddie Mac opposes any actions that denies homebuyers fair treatment in the purchase of decent, safe and affordable housing.
    I commend the Subcommittee for its leadership in promoting responsible lending practices. Chairman Baker has a long history of diligence and vigilance in critical financial services matters.
    I would like to recognize Congressman Kanjorski for his tireless dedication to working with affected and concerned parties in developing solutions that will help to reduce the likelihood of the situation of the Poconos reoccurring anywhere in the country. I should go further to note that the Congressman's lengthy record of service to affordable housing and economic development in general. I am honored to appear in his District at this important field hearing.
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    Congressman Baker and Congressman Kanjorski's many years of seniority on the Committee give them a unique vantage point for seasoned, effective public policy advocacy.
    Freddie Mac's mission is to ensure the stable supply of low-cost mortgages for America's families, whenever and wherever they need them. For more than 30 years, Freddie Mac has helped meet the home financing needs of low- and middle-income families across the country. As the company whose mission is to expand affordable home ownership, Freddie Mac is dedicated to promoting responsible credit underwriting and appraisal practices for all America's families who seek to achieve the dream of home ownership.
    Today I will focus on 3 areas: Freddie Mac's credit risk management practices, the steps we took after discovering the fraudulent activities in the Poconos, and our commitment to promoting responsible lending practices.
    The prevention, detection and resolution of mortgage improprieties are an integral part of Freddie Mac's business operations. Freddie Mac has in place a comprehensive risk management program designed to help us evaluate the quality of mortgage lenders and servicers with whom we do business, and the characteristics of the loans we have purchased.
    Freddie Mac has institutional eligibility requirements that help to ensure that the companies that sell loans to us, or service mortgage loans for us, have the organizational structure, financial resources, quality controls, and personnel expertise to originate and service mortgages that are acceptable to Freddie Mac. We require all mortgage loan sellers and services to originate and service every mortgage loan they sell to us or service for us in conformance with contract requirements and all applicable laws.
    As part of our broad detection efforts, we routinely sample performing and non-performing mortgage loans to check for conformance with contract requirements. We refer all suspicious patterns or trends to our internal fraud investigation area for further review.
    Freddie Mac has long been a leader in the fight against mortgage fraud. In 1989, we created the first fraud investigation unit in the secondary mortgage market because we are dedicated to helping reduce the likelihood of mortgage fraud. We have established a toll-free fraud hotline for reporting suspected fraudulent activity, and we have created and maintained an exclusionary list of individuals and companies that we have excluded from participating in transactions involving Freddie Mac loans.
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    Our fraud investigation area has substantially affected the mortgage fraud landscape. Our efforts have led to hundreds of individuals and companies being barred from selling loans to Freddie Mac, to indictments and convictions by federal and state prosecutors, and to the recovery of millions of dollars.
    Freddie Mac is firmly committed to helping participants in the mortgage finance industry establish comprehensive quality control practices that safeguard against fraud. We have developed a publication, ''Discover Gold Through Quality'' that provides all of our mortgage sellers and servicers with the information about best practices for quality control.
    So let me now turn to the steps that Freddie Mac has taken, and continues to follow, and enhance, after discovering the fraudulent activities in the Poconos. At the onset, I would note that when the allegations of significant loan origination improprieties arose in the Poconos, it was Congressman Kanjorski who was instrumental in helping all parties work towards solutions that will help the Pocono borrowers keep their homes.
    Freddie Mac issued an industry letter alerting the primary market of the serious allegations of fraud in connection with loans originating in the Poconos. After discovering the fraudulent activities, we held accountable primary market participants who were involved, and we worked closely with Congressman Kanjorski and the primary market, to facilitate a process whereby the primary market was able to provide many Pocono borrowers with the appropriate assistance and corrective measures that enabled them to keep their homes.
    Freddie Mac temporarily suspended foreclosure activities on many of the affected loans, so that the borrowers and the primary market lenders would have sufficient time and opportunity to work through the problems associated with these loans. Freddie Mac also established a special toll-free Poconos hotline for responding to borrowers' questions and concerns.
    Throughout the period of investigation and discovery of the fraudulent activities, Freddie Mac worked closely with criminal and civil authorities. Since our experience with the Poconos, we have enhanced our focus on operational risk, as demonstrated by our expansion of on-site evaluations of mortgage lenders and servicers. The fraudulent activities that occurred in the Poconos have served to reinforce our commitment to promoting responsible lending practices.
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    We have instituted the secondary mortgage market's most comprehensive set of measures designed to promote responsible lending practices. Our publications and educational programs help potential borrowers to better understand the mortgage lending process, an effective way in protecting borrowers from predatory practices.
    Freddie Mac is among the first secondary mortgage market institutions to have adopted anti-predatory lending policies, and we have developed a range of mortgage products aimed at making credit less costly and more sustainable.
    In closing, I want to reiterate that Freddie Mac has always opposed any action that denies home buyers fair treatment in the purchase of decent, safe and affordable housing. Working with Congressman Kanjorski, we have helped to fight mortgage fraud in the Poconos. We have in place a comprehensive risk management program that includes rigorous quality control, and helps us to identify loans with suspicious or fraudulent characteristics.
    Our fraud investigation unit has had substantial positive effect on reducing the likelihood of mortgage fraud, and we have instituted the secondary mortgage market's most comprehensive set of measures designed to protect consumers.
    Thank you for the opportunity to appear here today. I look forward to working with you, Congressman Kanjorski, and the members of the Committee, as you consider legislation to help reduce the likelihood of mortgage fraud and predatory lending practices.
    [The prepared statement of Donald J. Bisenius can be found on page 50 in the appendix.]
    Chairman BAKER. Thank you, sir. Our next witness is Mr. Zach Oppenheimer, Senior Vice-President, Single-Family Mortgage Business of Fannie Mae. Welcome.
    Mr. OPPENHEIMER. Thank you, Chairman Baker, Ranking Member Kanjorski, and members of the Subcommittee who are not here. My name is Zach Oppenheimer, and I am Fannie Mae's Senior Vice-President for Single-Family Mortgage Business based here in Pennsylvania. And since 2001, I have led Fannie Mae's efforts to address the problems being discussed here today.
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    I want to thank you for inviting me to testify about our efforts, and commend you, Congressman Kanjorski, for your leadership right here in and around Monroe County. Your concern and attention have been critical to helping families stay in their homes and right themselves financially.
    As this Subcommittee is keenly aware, Fannie Mae's mission is to expand homeownership, with a special focus on helping under-served Americans overcome the unique barriers they face. Our role among financial institutions, and one of the things that sets us apart, is that we provide private mortgage capital to all communities, at all times, under all economic conditions. But Fannie Mae does not originate loans. We buy loans from lenders in a very competitive secondary mortgage market, and we rely on lenders who sell us loans to comply with all laws and requirements to properly underwrite loans, and to asses the value of the property securing those loans.
    Because our mission is expanding homeownership, we are committed to being a leader in promoting responsible lender practices. We support the adoption of a strong federal anti-predatory lending law, and look forward to working with you on that issue.
    Fannie Mae has been purchasing mortgage loans in the Pocono area for many years, and we continue to do so. While we have observed swings in home values as economic conditions have fluctuated, changing home values by themselves do not necessarily indicate a problem. But in early 2001, newspaper articles alleging inflated appraisals began appearing, and Congressman Kanjorski alerted us that the valuation problems in this area required closer attention. We also began to hear similar concerns from lenders and others.
    At that time, Fannie Mae owned or guaranteed close to 8,300 mortgage loans in Monroe County and the surrounding area. We immediately formed an internal team to identify the nature and cause of the alleged problems, begin to take action to appropriately remedy the situation, and to assist affected homeowners with their mortgage loans. Fannie Mae fully recognizes that foreclosures can be devastating to homeowners and their families, to the community, and to mortgage investors.
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    In order to help homeowners whose loans we own, we committed to working with borrowers, through our lender partners, to make every reasonable attempt to keep families in their homes. We directed our servicers not to foreclose on any property in the area until they had reviewed the original appraisal and loan documents for irregularities, and we granted a moratorium on foreclosures for up to 60 days. For homeowners who could—who wanted to refinance their Fannie Mae-owned loans but could not, because of valuation issues, we even designed and offered a special refinancing program for them. We encouraged lenders originating new loans to implement controls to improve the appraisal process to reduce the possibility that homeowners would pay too much for homes that they were purchasing in this area.
    We joined the Home Ownership in the Poconos Enterprise, or HOPE, which was formed by Congressman Kanjorski to bring together national and local housing industry leaders, elected officials, and community groups, to find solutions to problems in the Pocono housing market, and to prevent similar situations from recurring. Joe Terrana, the Deputy—the Director of our local partnership office, is actively engaged in addressing community housing issues right here in the Pocono region.
    Since the end of 2000, we have managed to reduce our foreclosure rate in this area by more than half, and the trend continues lower. Since 2001, our loan workout ratio, which measures the percentage of defaulted loans that we were able to cure without foreclosure, has averaged more than 60 percent, far exceeding the State rate in Pennsylvania of 45 percent. But not withstanding these challenges, Fannie Mae has remained committed to providing mortgage loan liquidity here in Monroe County, and has increased our investments in this region from the 8,300 loans that I mentioned, to more than 10,000 loans today.
    As we move forward, we remain committed to serving this community. We have developed new procedures to detect this kind of problem sooner. We can now identify the refinance transactions with potential excessive property value estimates by using automated underwriting technology, and we also now refer unacceptable appraisal reports identified through this process to the Pennsylvania State Board of Certified Real Estate Appraisers for their investigation.
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    We believe that better appraisal practices, along with a better understanding of the home buying process on the part of homebuyers, could have enabled some consumers to avoid the problems that they experienced. Fannie Mae is a strong advocate of homebuyer education, and we require it under our own programs. In order to support homebuyer education, we have worked with the Alliance for Building Communities, the Pocono-based Pennsylvania Homeowners Defense Association, and others. We have also joined in the Keystone Housing Initiative by backing a $32 billion mortgage commitment here in Pennsylvania, which will provide additional opportunities to learn about responsible borrowing and home buying.
    In conclusion, Fannie Mae remains committed to providing mortgage loan liquidity in all communities throughout the United States, in strong markets, in weak markets, and throughout challenging times. Fannie Mae remains committed to this community, and we will continue to work with all parties to improve and strengthen the housing market in this area. Thank you.
    [The prepared statement of Zach Oppenheimer can be found on page 164 in the appendix.]
    Chairman BAKER. Thank you, Mr. Oppenheimer. Our next witness is Mr. Gary P. Taylor, President of the Appraisal Institute. Welcome, sir.
    Mr. TAYLOR. Thank you, Mr. Chairman Baker, Congressman Kanjorski. Let us review the record. Poconos real estate was thrown into turmoil by an influx of lower-income New Yorkers flooding in to seek——
    Chairman BAKER. Ladies and gentlemen, if you will, please, help us. We are here to get the facts, and we obviously are hearing—we are hearing from both sides. We are hearing from both sides, and we cannot proceed without allowing the gentleman to present his statement. I understand there is disagreement, but please help us. We want to get to the bottom of the facts, and we cannot do that without letting us proceed, please.
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    Mr. KANJORSKI. If I could have your attention, Mr. Baker has courteously traveled about 1,200 miles to be in Monroe County. We now have the advantage here of some of the most expert witnesses in the country, both locally, regionally, and nationally. We cannot complete this hearing unless we have an understanding of what each witness is going to say. Therefor, if you will do me a favor as your Representative in Congress, let the Congress hear the witnesses statements without interruption. Thank you.
    Chairman BAKER. Let us start. Mr. Taylor, if you would, proceed with your statement.
    Mr. TAYLOR. What is——
    Chairman BAKER. I assure you, all statements are going to be examined and questioned at the appropriate time. In our business, we have to let each side make their own case, and—I know, but they have not been saying it to us. Let us proceed, please. Please, Mr. Taylor.
    Mr. TAYLOR. Flooding in to seek a better life. Powerful interests—powerful interests misled the existing residents as to the value and extent of their property, cynically cheating them out of their homes. Pennsylvania authorities ignored the victims' complaints for years. I am referring, of course, to the infamous Walking Purchase of 1737, a swindle pulled off by Colonial Secretary James Logan, expanding the boundaries of settlement, which should have ended up roughly here in Stroudsburg, all the way up to Lackawack. Logan worked his scam by misleading the principles, departing from norms in land deals, and controlling the process. This beautiful land has been plagued by crooked deals ever since. The spirit of James Logan apparently still haunts the Poconos. How can we get rid of it?
    One obvious place to start is by eliminating corrupt and inflated appraisals, which figure in the outrageous transactions we are discussing today. My written testimony lists 15 specific measures to correct weaknesses in our appraisal licensing system. Most of these would have to work their way through Congress, but one could work now: if the bank regulators on the Federal Appraisal Subcommittee would use the authority they already have.
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    Last year, bank regulators reminded lenders that borrowers and loan production staff should not influence the selection of appraisers, yet this mandate is still routinely ignored. Some mortgage brokers even require a predetermined value to be met if an appraiser wants future work from them. The regulators have authority to stop this abuse of appraiser independence, and they should use it now.
    Similar problems during the savings and loan scandals of the 1980's prompted FIRREA, which sought to foster accurate appraisals as key elements in federally financed real estate transactions. The appraisal industry responded by creating uniform standards and promoting greater professional development. 15 years later, we see FIRREA has failed to meet its goal, and no where more than here in the Poconos.
    Appraisal profits exist around the country, but they are acute here, where 1/5 of all the mortgaged homes face foreclosure. Compare the 29 percent foreclosure rate in Monroe County to the national average of under 1 percent. Pennsylvania's appraisal regulators have been especially slow to deal with complaints. The political and judicial establishments have been so close to some developers that it was necessary to bring in judges from elsewhere to ensure fair, legal proceedings.
    In 2002, Freddie Mac made Chase Manhattan Bank buy back the loans it had sold to them, an extraordinary occurrence. Much Pocono development targeted inexperienced homebuyers, especially from New York City, completely unfamiliar with the area. Corrupt developers, financiers, and appraisers, in some cases, are one and the same.
    Now, 6 overlapping investigations seek to unravel the mess, which every resident of Monroe County and the region pays for one way or the other. As an appraiser proud to represent my profession, I am appalled that misleading appraisals have helped to ruin so many lives here.
    An appraiser must be independent to render an objective evaluation, and must be free to resist pressure to inflate values. Despite FIRREA, such pressure persists. Three-quarters of appraisers polled nationwide told independent surveyors that they have been pressed to deliver higher values. Contrary to the intent of FIRREA to increase professionalism, qualified appraisers are being marginalized. Language in the law is being misinterpreted to cater to minimally qualified appraisers at the expense of those with the most experience and professional development, the equivalent of hiring high school dropouts rather than college graduates.
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    So-called bargain bundling of real estate services renders appraisal just a formality in a mixed bag of services controlled by lenders, courting the disastrous results we have seen here in Monroe County. Regulators have been under-funded, understaffed, misdirected as to priorities, and sometimes just plain lazy. Some state regulators impose fines for trivial mistakes while leaving massive deliberate frauds unchecked. They chase their tails while swindled homebuyers end up on the street. Complaints languish for months and even years without resolution, while the Federal Appraisal Subcommittee does little to encourage timely action.
    Our professional organizations recommend specific changes to the law that would promote appraiser independence, and allow FIRREA to work as intended to protect government financial interests, and with them, consumers. We recommend giving regulators enough access to do their jobs, giving public access to regulatory proceedings, and advancing the professionalism of appraiser. Most important of all, we want accountability down the line, from a credible federal enforcement entity, through responsible State regulatory agencies, to the entire mortgage lending industry.
    The realty scandals of the Poconos reflect problems across the nation. Let us stop this mortgage merry-go-round whizzing in circles without going anywhere. We can work with Congress towards a system of accountability and clearly defined responsibility guaranteeing the integrity of honest appraisals is the first step toward purging Pennsylvania of the spirit of Logan and the modern Logans that still prey upon it today.
    Thank you, Congressmen.
    [The prepared statement of Gary P. Taylor can be found on page 199 in the appendix.]
    Chairman BAKER. Mr. Kanjorski, you have a motion?
    Mr. KANJORSKI. Yes, Mr. Chairman. Before we question our distinguished witnesses, I would ask unanimous consent that we insert into the record 2 documents from individuals who contacted me before the hearing and requested to submit material. Mr. Carl Silverstein, a father of 8 children, has encountered certain problems in his mortgage, and he raises some serious concerns about his initial appraisal for his home in the Poconos. Additionally, Mr. Joseph Fisher, who presently serves as an appraiser in the Poconos, has developed a proposal to combat problematic appraisals by redefining the description of neighborhoods. Consequently, I ask unanimous consent that both of these statements be entered into the record.
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    Chairman BAKER. Without objection, both statements shall be incorporated into the official Committee record.
    [The following information can be found on page 235 in the appendix.]
    Chairman BAKER. I shall begin my questions. Mr. Goldstein, I am not sure that I should ask any questions of you, given the fact the report is not been released, but I just want an observation to be confirmed for me. Your data would seem to indicate that over the last decade, generally, Pennsylvania real estate values have been on the increase. Is that a fair assessment of the real estate market?
    Mr. GOLDSTEIN. Pennsylvania? Yes.
    Chairman BAKER. Yes? Speaking for the GSE's, I just pick Mr. Oppenheimer to make a general statement. In your credit review process of portfolios, you do not in the course of normal business conduct, examine the underlying appraisals of values of every loan which is acquired as a part of the secondary market acquisition, is that correct?
    Mr. OPPENHEIMER. That is correct. That is correct, sir.
    Chairman BAKER. So——
    Mr. OPPENHEIMER. We have standards for prudent investment quality underwriting that would relate to every appraisal for every loan that we purchase. We randomly sample loans to make sure that all of the lenders selling loans to Fannie Mae abide by our requirements and our standards. When we find a problem like we did in the Pocono Mountains, we quickly take action to identify the nature and cause of the problem, and remedy the problem with solutions.
    Chairman BAKER. But as to a normal day-to-day business practice, you rely on the conduct of the originator, the appraisal, the closing attorney, the home builder, the real estate agent, and their professionalism, to provide to you a product which you can acquire in good faith. That is correct. Mr. Taylor—ladies and gentlemen, please, help us out. We are trying to go somewhere here with this line of questions, and you can tell us how good we are doing later, but let us work a little bit. Mr. Taylor, you indicated from your perspective as the national director of an appraisal organization that the pattern of practice of appraisals in the region, in the county, was, of your opinion, deeply concerning and likely fraudulent conduct. Is that a correct summary of your testimony?
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    Mr. TAYLOR. Yes, it is, Mr. Baker.
    Chairman BAKER. And did you summarize your findings and recommendations in correspondence to the Federal Appraisal Committee as of this date?
    Mr. TAYLOR. I believe we have, yes.
    Chairman BAKER. Okay. Could I get—please request a copy of that for the Committee's consideration? We would like to see what your findings were and specific recommendations. Mr. Peterson, in your statement, you seemed to indicate that the best weapon against abusive practices is for an educated consumer. In the event of a closing, is it not a standard of fiduciary conduct for the closing attorney, the real estate agent, the home builder to some extent, and specifically the appraiser, to exercise independent authority and judgment in providing that the representations made are accurate and in the fair and balanced interest of the consumer as well as the seller?
    Mr. PETERSON. Yes, I would believe it is.
    Chairman BAKER. If you would, please, get a microphone so we can—you seemed also to indicate—and for the record, the gentleman answered that question as that is correct. Secondly, you had seemed to represent that the actions in the Poconos, you believe, to be aberrant, not common practice, and that, to a large extent, the significant majority of home closings were customarily in line with professional standards of performance, is that correct?
    Mr. PETERSON. I would believe so. Again, I am speaking on behalf of the builders. We do not represent appraisers or real estate agents in that.
    Chairman BAKER. That is certainly understandable.
    Mr. PETERSON. We are strictly the builders for new construction.
    Chairman BAKER. I used to be a home builder myself——
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    Mr. PETERSON. Right.
    Chairman BAKER.—but when I built a house—I am no longer in the business. I have been out of the business for a long time. I have no monetary——
    Mr. PETERSON. Right.
    Chairman BAKER. But when I built a house and put it on the market, I had a pretty good idea about what the value of that house would likely sell for——
    Mr. PETERSON. Right.
    Chairman BAKER.—without the need of an appraiser. Would that be true——
    Mr. PETERSON. Right.
    Chairman BAKER.—of——
    Mr. PETERSON. Yes.
    Chairman BAKER. Would it also be likely—Mr. Hay, excuse me—that when you take a listing from a builder and put it on the market without the need of an appraiser to tell you the value, based on your practice of experience in the market, you would have some idea as to what the market value of that market value of that property might be?
    Mr. HAY. That is true. However, in our market area, there are very few new home constructions, other than maybe a spec home, that actually are listed by a realtor. That is not to say that a realtor does not work with builders and refer clients to them, but typically they are not put into the Multiple Listing Service as—and put on the open market because there is very little speculation building done.
    Chairman BAKER. So what you are saying in this case is that many of the homes were built pursuant to a buyer contract of presale?
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    Mr. HAY. That is true. There are—between the builder and the contract that the builder has with the buyer. They are not listed with a realtor, and then they do not go through a realtor.
    Chairman BAKER. There seems to be a conclusion reached by Mr. Taylor that there were abusive and inappropriate, perhaps fraudulent, appraisal methodologies in many closings of Pocono homes. Do you dispute that finding or conclusion, or do you think it has merit?
    Mr. HAY. I think it has merit. I do not dispute it at all. I—in our association of realtors, our local association of realtors, Pocono Mountains, works primarily with realtors that are working with existing homes and, in many cases, we do list and sell the homes once they have gone into foreclosure.
    Chairman BAKER. Well, Mr. Goldstein indicated his studies produced data that there was a progression in home values over the last decade, and generally Pennsylvania housing values. Notwithstanding the fact there may be a subdivision or a trouble property that would have some debilitating reason for a depreciation in value, from an outsider looking in, if I understand that there have been an aberrantly high number of foreclosures, that the value of the transaction at the time of closing appears to be elevated from a falsified or incorrect appraisal in which a home builder willingly participated along with a realtor in the closing, who both have substantive professional knowledge as to the value of that property on the open market, with a lender, who then knows they are going to sell it off to a government-sponsored enterprise who has no liability nor the ability to examine each credit condition at closing, how is it possible for that practice to become a widespread methodology of market conduct? There are so many moving parts where one—any one part could say, wait a minute, something is not right here. What is it that you—ladies—please, please. I am trying to help you, if you will just help me. Thank you.
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    Mr. HAY. Okay. If we could back up a moment, Mr. Chairman. Is the—again, the realtors are normally not involved with new home construction, or not involved with the contract at all in any way, shape or form, with a builder. I am not saying——
    Chairman BAKER. I do not know Pennsylvania law. Is it okay for a homebuilder to market his own property without a real estate license?
    Mr. HAY. That is correct.
    Chairman BAKER. Okay.
    Mr. HAY. And that is the way that I would say would be 99.5% of the time.
    Chairman BAKER. That is not the case in my state.
    Mr. HAY. Okay.
    Chairman BAKER. I just——
    Mr. HAY. Yeah, realtors are not involved. We do work with—more on the existing home level, not on the new home construction level. And typically in many cases, the buyer has already spoken to a lender prior to engaging a real estate agent, as you probably have seen those advertisements even on national TV, national companies. So it is not untypical for us to have to work with a lender out of California or Georgia or Florida. That is typical.
    Chairman BAKER. And——
    Mr. HAY. People do go to their——
    Chairman BAKER.—as a matter of practice——
    Mr. HAY.—licensed——
    Chairman BAKER.—within an agency of your size, you do not usually finance purchases yourself?
    Mr. HAY. Not at all.
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    Chairman BAKER. Okay.
    Mr. HAY. Not at all. And typically the realtors in the area do not finance. That is not to say that they do not have companies that they refer business to——
    Chairman BAKER. Sure.
    Mr. HAY.—but they do—again, if there is any financial interest there, they have to be—that has to be disclosed through the rules and regulations and the Licensing Act of the Pennsylvania Real Estate Commission.
    Chairman BAKER. Thank you. Mr. Bisenius, when a person is found to have been the victim of fraudulent conduct and a home closing occurs which is subsequently followed by a bankruptcy proceeding, you indicated that—or it was Mr. Oppenheimer—I am sorry—indicated that in pursuit of wrongdoers, there was successful recovery of significant amounts of money. Has any of that money made its way back to consumers, or has that been for the GSE's best interest? If you want to get back to me on that later——
    Mr. BISENIUS. Let me do that.
    Chairman BAKER. Secondly, with regard to curative work, in the instance where an individual has been the victim of fraud, there is a final judgment against a perpetrator that it was fraud, the individual has gone into bankruptcy, is there any curative work done on that individual's credit record when those facts are determined? Please, let me ask the questions.
    Mr. BISENIUS. Not that I am aware of.
    Chairman BAKER. Okay. Thank you. Mr. Kanjorski, I have been overly abusive of time, but please, take as much time as you like and I will come back with another round.
    Mr. KANJORSKI. Mr. Chairman, I want you to use all the time in the world, because it is important that you get the information. As I discern the testimony of the entire panel, there is no one single cause of a problem here in the Pocono Mountains. It is a multiplicity of causes, and to start off, and I think if you—it comes from a meeting you and I had here at the university maybe a year ago, and when we had maybe 400 of the people involved. To a large extent, am I to understand that there has been a dearth of professional support, either through the representation of an attorney or real estate agent that has been contracted for by the buyer? Most of the individuals that have been quote allegedly defrauded, they did not have the benefit of a real estate agent or an attorney, is that relatively correct? Are there—well, I cannot ask of you, but I can ask of the Fannie Mae/Freddie Mac people, what is the custom across the country? Are there any requirements of state law that, particularly first-home—first-time homebuyers have the advantages of professional services, and a predicate—I will put a predicate in that. I think we are all aware that part of the problem is sometimes a lack of sophistication of knowing what to look for, and an overly anxious desire to acquire the property because it is the escape from maybe the urban area to a pristine area like the Pocono Mountains, so that, as a result, there is that desire to acquire the property, and then a financial illiteracy, if you will, in terms of not themselves knowing necessarily how to price a property because they are from out of town, not having the benefit of a strong or independent appraisal as we would hope be the correcting mechanism, and then further not having the professional representation of the realtor or the attorney? How do we fill that? What do we do? Someone mentioned education. What do——
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    Mr. OPPENHEIMER. Congressman, the direct answer to your question is that it varies by location when you asked about whether there is legal representation to homeowners. In other jurisdictions around the country, it truly does vary. One thing that you touched on that I think is critically important though is homebuyer education. To the best of our knowledge, many of the homebuyers here in Monroe County were first-time homebuyers. Many of these people did not have any experience previously with the process of buying a home, and many of them did not know enough to look for comparable properties in the area, to know what comparable market value would be for the homes that they were purchasing, nor, Congressman Kanjorski, were many of them familiar with homebuyer inspections and other things that many people take for granted if they have already been through the home buying process many times, which is why Fannie Mae requires for many of our community lending programs and first-time homebuyer programs, homebuyer education. In fact, many Fannie Mae customers use materials that are published by the Fannie Mae Foundation, in a variety of languages, that help consumers understand the process of buying a home and financing a home. Because what many of us take for granted having purchased homes in the past, is not common knowledge for first-time homebuyers, and I believe that homebuyer education is not just critically important, but will help prevent the recurrence of these problems in other areas throughout the country with more education on the part of first-time homebuyers.
    Mr. KANJORSKI. Do the—any of the States actually require some professional representation if you are a first-time homebuyer, or——
    Mr. OPPENHEIMER. Not that I am aware of.
    Mr. KANJORSKI. In other words, it is caveat emptor?
    Mr. OPPENHEIMER. Yes, sir.
    Mr. KANJORSKI. And if you can get a purchaser from out of the area, unfamiliar—and I was particularly struck when we had this meeting with Mr. Wilson's group too—that so many of these buyers came from the State of New York where they were accustomed to a Housing Commission in the State of New York. It is much more protective of a homebuyer.
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    Mr. OPPENHEIMER. I believe attorneys also represent buyers in the State of New York. Attorneys are required at settlement.
    Mr. KANJORSKI. Attorneys are required?
    Mr. OPPENHEIMER. I believe so.
    Mr. KANJORSKI. In the State of New York? So it would not be abusive, at least at a State level, to require representation by counsel, but maybe even on a national level, look at that question. I—you know, we always, and I know Richard is the same I am, we do not want to impose federal jurisdiction in the actions of the various States in the exercise of their property rights because they are quite different. But on the other hand, if we found that this was a uniform question, particularly in first-time homeownership, would it be wise for us to set some standard out there that says that we have to have representation? Because I found it critical in our discussions and the group meetings that I have had with these buyers, that so often the problem that they stepped into was really easily curable or solvable at the very beginning if they had either a realtor or an attorney that was representing them and not the seller, or not the mortgage company, who would have asked the questions, would have alerted them. It would have been over. Now, maybe we should look at, in these marginal areas where we are now attempting to get higher homeownership, and particularly encouraging relocation ownership, where the people are unfamiliar with the area and the customs of the area, and they do not have a contact within the area to refer to, maybe we should look at the potential of the requirement of professional representation. Is that—I do not want to make work for lawyers or for realtors, but maybe having a lawyer in at the closing is going to protect the transaction and the individual with the foreknowledge.
    Mr. OPPENHEIMER. I would answer your question, Congressman, by saying that it is a requirement for many of our first-time homebuyer programs that homebuyer education classes be taken. And the truth of the matter is what some first-time homebuyers do not know can hurt them, as evidenced by what has happened here in Monroe County.
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    Mr. KANJORSKI. Well I was struck though with Mr. Taylor's testimony. At this time, Mr. Taylor, you see how you can have a response from people when you put the first clause out there? And then you won the audience because obviously your testimony was going to be that you have worked, and your institute has worked, very diligently over the last 3 years to set up high standards of appraisals because we saw that as a major weakness in Monroe County, this idea of the—that the appraiser were not really coming within the parameters of what a fair market price was for whatever reason. Again if you had a part of the problem here, it probably does go to over-exaggerated appraisals, at the very least. Would that have been ascertained by a real estate agent or an attorney if they had participated in the whole closure of the proposition, that they may have looked at it? I know when I practiced law, I could pretty much tell you the value of a home anywhere in the perimeters of the county that I represented. I could just look at it and say, wow, is that over-inflated. And I would imagine that the bar here would have the same familiarity, or certainly the real estate. Why is it that it is that common to have—I mean, that shocks me. I have to say for the audience I have a daughter that moved from Pennsylvania, went to school in California, and then moved to New Mexico. She told me she was going to buy her first-time home and was ready to close on a transaction, where I said, who is your attorney? And then she proceeded to tell me she did not have one because she was smart enough not to have an attorney, or was so encouraged by the seller, and her daddy did an ugly dance and said you will not have any support from me unless you get an attorney, got one, and saved yourself from a horrible transaction. But even lawyers' children and well-educated people make this error of the largest financial transaction of their lives. They think they can avoid the expenditure either for proper legal counsel or real estate expertise. As a result, regardless of what Mr. Taylor's organization does in terms of appraising, unless somebody is to test the appraisal and be alert, they cannot alert the secondary market, they cannot alert the mortgage company, they cannot talk to the builder. It is just a process that builds up and goes along and gets one. And then if there is a failure, it is a horrible failure, as happened here. From the whole panel, a question, anybody jump in. What should the federal government do, and what limits should we put on what we do so that we do not impose upon the States and preempt the States too much?
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    Mr. TAYLOR. Congressman, if I might start off. One of the questions you asked is would someone be better served having a realtor or an attorney at the closing. I would say to you that they would be best served having an independent appraisal performed, that they would hire the appraiser, not just rely on the appraisal that was being done for the transaction. I would then say, yes, having a realtor there would probably be helpful, and if the attorneys were doing the closings on a consistent basis, I agree with you. I think they would get an idea as to what the values were in the area from closing so many properties consistently. I do find it was unusual. My wife was from Pennsylvania, and when we were married and buying our first home, she said to me what do you mean we are spending money on an attorney for a closing. And I live in New York, and I said, well, it is required. Are you telling me it is not required in Pennsylvania? She goes we never had one in any of our closings. But she did mention she had an appraiser who did an appraisal for her and actually saved her money on the closing because the price that she was going to pay was too high and they renegotiated the deal.
    Mr. OPPENHEIMER. Congressman, this is the front page of the ''Philadelphia Inquirer'' real estate section yesterday. The title is First-Time Homebuyers Beware. There are so many risks and issues that need to be addressed for first-time homebuyers, that we at Fannie Mae strongly favor a federal anti-predatory lending law that would be applied in every state in the country to protect consumers from the practices that are predatory in nature in the marketplace today. Fannie Mae is but one investor, but since 2000, we have put guidelines and restrictions in place for loans that we purchase or securities that restrict prepayment penalties and balloon payments, that prohibit steering borrowers from lower cost loans to higher cost loans, that prohibit excessive charges and fees, and that prohibit single premium credit life insurance payments. Those practices are still very common in the marketplace today, and there are probably others that I am not mentioning, but we would strongly favor and support a strong federal anti-predatory lending law.
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    Mr. KANJORSKI. Well, as you may know, we are working on that legislation right now. But one of the things that disturbs me about it is that, you know, we can identify a particular problem and outlaw it, but the reality is there is a profit in the marketplace for either fraud or near-fraud conveyance of real estate, and invariably someone is going to find a way around whatever we—you know, whatever thou shall not that we pass, they will find a willing way to circumvent that, so I—well, what—of course, we have to look at that on a national scale and are doing so. I do not think there is any—certainly any decision on my part or the co-sponsors that I have that are interested in the issue, and is certainly going to filter through my friends on the Committee, Mr. Baker included. And I hope that out of the consensus—what did you say, 10 percent of the Congress sits on our Subcommittee alone, Mr. Chairman we ought to be able to come up with something that is a standard. But we look forward to working with you on this, and I certainly recommend that you do get together with some of the staff on the Committee and my own staff that are working on this proposition. And part of the bill that we are working on includes a counseling—buyer education. I just do not know how far to go, and I do not want to create something that is required that gets placed into a manufactured appearance. It is so often—I am familiar with some of the prior Congresses on lending obligations, and even myself, you know, I am handling—when I do a transaction personally, I am handed a series of documents to sign which I never read. And it was all because of the magnificence of the Congress that we thought that by creating these documents we would be protecting people. The reality is you can over-create requirements and documents that ultimately people then do not sign.
    Any way, we have to find some real solution to the problem, not just to cover our tail or cover the lender's tail or the appraiser's tail or the seller's, so we have to find a way that makes it practical for people that are, particularly first homebuyers, that they get the attention of a professional to assist them along the line, and that they know what questions to ask, and particular an appraisal, when in doubt, to get it. Right now, I have to say, Mr. Taylor, just my observances in Pennsylvania, and I suspect it is nationwide. Because of the lack of the number of accredited appraisers that exist, there is a tremendous delay out there in funding, and—or in getting appraisals and completing the mortgage process. Sometimes the delay in Pennsylvania is 2, 3 or 4 months, just to get a clearance of getting an appraisal. That very often frustrates the buyer and the mortgager. It slows down the transaction materially.
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    Mr. TAYLOR. Congressman, if I could respond to that. I think there are time periods when the appraisal process gets slowed down when there is an explosion in the marketplace, as we saw over the last 2 years of interest rates. But I think as far as the number of appraisers out there, there are currently 80,000 licensed and certified appraisers in the United States right now. The problem that we see is that of that 80,000, only approximately 30,000 of those appraisers belong to professional associations. When Title XI was passed in 1989, it contained a so-called anti-discrimination clause within that bill. And that bill basically instructed lenders, or told them that they could hire on a federally-related transaction, any appraiser that was licensed, licensing being a minimum requirement. They then went on to indicate that you could not hold as a requirement that someone belong to a professional association or have attained credentialing by that association as an additional requirement. So what it did really was to prove to appraisers who were working diligently to move forward din their careers and their professionalism, that perhaps they did not need to spend the time, and there was a fleeing from the associations because to be licensed, not to have to belong to an association, not to have to pay dues, not to have to be subject to ethical standards and reviews and potentially punishment and removal from the association, was much easier to agree to just be licensed. Licensing in the States right now requires 90 hours of education, no degrees. The professional association which I am a member of requires 120 hours of education to begin with, and in order to get a designation for residential appraising requires 200 hours, plus substantial number of hours of experience. We really think that the law from the federal end needs to be looked at, to say that the anti-discrimination clause of appraisers has really had a negative impact, and is not accomplishing what it was set out to accomplish. And that was to raise the bar to increase professionalism and to continue to protect the consumer and the federal institutions.
    Mr. KANJORSKI. So it would be your recommendation we go back and reexamine what we did in FIRREA, to see whether or not we in fact constricted the use of appraisal as a protective device.
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    Mr. TAYLOR. Correct, Congressman, and I think that has been looked at. The Senate looked at that recently in testimony also. It has been 15 years now and the question is did FIRREA accomplish what it set out to accomplish. And it really has created a tangled mess for real estate appraisers such that if one is to try and practice from one State to the other, they must conform to the individual State requirements, and there is no consistency. The federal authority the Appraisal Subcommittee has the right to issue temporary licenses, or to say that an appraiser in New York for instance could do an appraisal in New Jersey without having to be licensed there under a temporary basis. That has not happened. Some States have their own requirements. Some States have rejected designated appraisers in our organization that have gone well beyond minimum credentialing, because they say you do not meet the State requirement, which is hard to imagine. But it has created 54 jurisdictions with 54 sets of rules and regulations, and in some ways has restricted the interstate commerce of appraisers, and has hurt the industry from, again, as I said earlier, encouraging people not to go the extra 10 yards and go and join a professional association and subject yourself to potential disciplinary actions. The States, I think, have also failed, as we have seen here in Pennsylvania, to enforce the laws that have been set out by the States. It often takes years for cases to come to light, and in the interim these bad actors, as we call them, are still continuing to prepare appraisals, still have their licenses. New York, as I indicated in my testimony, had someone who committed a felony, and after spending a year in jail, was re-given his license because he was supposedly rehabilitated.
    Mr. KANJORSKI. Very good. Could I just prevail on one more point, Mr. Chairman? One of the situations that is unique somewhat to the Poconos is an extraordinary difference between the new property price and the used property market. And I have been looking at it, not only that it is effective here in the Poconos, but there are policies and engagements across the country in real estate that possibly account for that happening, and also whether we should look into it. One is that we are dealing here with contained or controlled communities to a large extent. In other words, a seller can be selling a lot across the street from a home that is almost identical to the new house to be constructed, and the home is sitting across the street, but the buyer of the new parcel would not be aware of the for sale of that piece of property because there is a denial of putting for sale signs and for advertising, and even if you could put a for sale sign, the neighborhood may be a closed neighborhood so the public cannot get in. And I think, to some extent, that may exacerbate this tremendous difference between the new property price and used property, which sometimes is as much as 50 percent in 3-, 4-, 5-year-old property. Is there anything we should do about it, or—and should we in some way construct with peoples' right to privately construct and give away their rights when they become homeowners, or—I mean how far should we walk down holding the hands of the real estate buyer?
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    Mr. HAY. If I could address that, Congressman. Typically when the developers initially started a community, they did prohibit—in their deed restrictions did prohibit for sale signs, and that follows obviously the chain of title, and they are still in there. The primary reason, of course, that the original developer, which are long gone in 99% of our communities here. The primary reason that they wanted the prohibition of the for sale sign is because they did not want the competition of the resale market, so that if they were selling more homes in the area, they did not want that there. That was the primary reason. However there are many of the associations that have allowed that prohibition to stay there and remain today, and in the market that we have today, because it has been so strong, it is not a real big issue, but the concern is, is if that—I guess I could relate back to the early '90s and mid-'90s when we had literally a 7-year supply of homes on the market in any one community, and if there was a for sale sign on every one of those homes, it almost looks like there is something blighted and something wrong with the community when in fact there was not. So that is why there are a lot of the communities do not allow the for sale signs there.
    Mr. KANJORSKI. How does that affect the used-market price if people who would be coming into the community do not know what houses are for sale? How do they not get into building a new home when in fact they could acquire a used home——
    Mr. HAY. Yeah.
    Mr. KANJORSKI.—with significant savings?
    Mr. HAY. I think, you know, a lot of it still goes back to the education process because the buyers do not know that the homes are for sale in these communities, and they are just shown the—today, with the Internet availability, they can find homes that are in those communities and for sale. But if there is this homework that has to be done that way and education that has to be given. If I could just jump back on the predatory lending comment. I feel that there is a need for a federal predatory lending legislation, and the reason for that are there is many people that go out on the internet and they get a mortgage company off the internet because of the rate, or everything that sounds good. And so we are not just bound to instate lenders. There are people that are lending that the do come off the internet. I had one that was a lender mortgage company out of New York State. Within the last 2 months, the mortgage broker called me and said we need to do an addendum to the agreement of sale increasing the sale price of the home by $30,000, and that we need to find an appraisal—appraiser that will appraise it for that amount of money. And it was just so that buyers could show that there was—or that they could—and going back to the phantom paperwork, that they could show that there was equity into that home when in fact there really was not. So these people can be found out of state, so that is why I think that something federally needs to be done. On the appraisal side, one of the concerns that I have is some of the lenders utilizing credit ratings and only using an assessed value of the area, not really having an appraisal done at all. That really concerns me because they do not have anybody going out and physically looking at that property to tell what that property is worth. And secondly, some of the lenders, because of the credit rating—someone having a good credit rating, at most, will ask for a drive-by appraisal, and again that is not fair to either the buyer or, in some cases, the seller. So I think those are some of the things that we need to look at, but I appreciate your work on predatory lending law, but I think we do need to do something federally on that.
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    Mr. KANJORSKI. Okay. I am going to pass it back to you.
    Chairman BAKER. Thank you, Mr. Kanjorski. By way of show of hands—do not stand up, please—how many people are here in the audience today who have either directly or indirectly been affected by what they believe was misrepresentation in home price, just to get some idea. Okay. If you will put your hands down. How many of that number were first-time—let me reverse it. How many of that number were not—you already had owned real estate prior occasions, just—so it was predominantly first-time homebuyers, but there were some experienced homebuyers who also were adversely affected. By way of explanation from my own experience in my home state, we have a requirement that a realtor meet certain licensing requirements, but that you cannot represent but one party in a transaction, either the buyer or the seller. If you are to put yourself in the position of representing both, then you must have both sign a document agreeing to that arrangement, and then you cannot advise either party. I cannot tell the seller what the buyer what—will really pay. I cannot advise the buyer what the seller will really take, because that is a violation of law. If you violate your fiduciary duty, you go to jail. We have a similar requirement for appraisers, and we have to have an independent appraisal done by a third party who has no interest in the transaction other than the appraisal fee. The attorney is under a similar obligation, and the mortgage company has an obligation. So that in all—and we did not just jump ahead of the curve here. We came out of the S&L crisis in the late '80s, so we had people going to jail in every direction. And so as a result of that, we put into effect at the State level a remedy, which in my view of the world, might greatly enhance, along with the appraisal recommendations of Mr. Taylor, where we might need to go. But as to the issue of predatory lending, we first have to design a definition of what is it that is not already currently a violation of law. It appears from what has been described here today, there is sufficient grounds for actions against individuals where you—where the addition of a predatory law would not necessarily make any big difference. However should we pass one, I am understanding that members of the secondary market would want to have an exclusion from liability should there be an abusive practice identified to your portfolio, that you rely on the originator to do the screening. Because otherwise you are going to be at the Georgia model. Then you are going to find yourself not participating in the market at all. Is that correct, Mr. Bisenius?
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    Mr. BISENIUS. Well, not exactly. The issue only comes down to one whether it is strict—liability or more limited liability. We believe we should be held accountable to a standard where we have to do reasonable due diligence against the people we are doing business with and the practices they are engaging in. And as long as we take reasonable efforts to watch against that, then we think we should be protected from the liability. If we had no quality control, we had no lender approval, we did no due diligence, then we should be subject to the same liabilities in the market——
    Chairman BAKER. But that does not go to where you are doing a—you get down to a credit examination of every loan. You—what you are doing is taking the current business practice and saying that standard shall be applicable going forward, although for mortgage originators at the State level, they will have a higher standard of liability than they do today.
    Mr. BISENIUS. That is correct.
    Chairman BAKER. Okay. Thank you.
    Chairman BAKER. Mr. Peterson, I want to go back to your earlier comments about the homebuilders obligation. Is there any—what is the standard—is there a professional code of conduct, for example, that the Homebuilders Organization has in effect that requires you to utilize any method of what I would call a fiduciary standard—homebuilders may have another description of it. What is your stated professional organization's obligation to your home purchaser?
    Mr. PETERSON. Well, number one, as an association, locally we do have some guidelines that our builders and our contractors must sign, saying that they are going to do specific things, that they are going to follow code and stuff. Unfortunately, most of these deal with construction and quality and workmanship. They do not deal with appraisals. They do not deal with financial issues. Now that is something that we can be looking at, but it is hard for us as builders to determine that if we are not licensed appraisers and we are not attorneys, and we ourselves do not know that.
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    Chairman BAKER. But you know what cost you have going into the home to construct it. You know what normal rates of return——
    Mr. PETERSON. right.
    Chairman BAKER.—would be on that product.
    Mr. PETERSON. Yes.
    Chairman BAKER. And if you have something that represents a 200 percent rate of return, maybe a flag goes off there. Is there anything that—there is no bounds from which you as a professional organization—let me make it easy. How about, if you can, get us a copy of your current homebuilding code of conduct and we can examine it and take a look at it.
    Mr. PETERSON. And you do have that. That is in your——
    Chairman BAKER. Great.
    Mr. PETERSON.—package. I—you did receive that today. Again, there is not anything dealing with the appraisal end of it. Maybe that is something that we do need to——
    Chairman BAKER. Has there been——
    Mr. PETERSON.—look at.
    Chairman BAKER.—any curative action, corrective action, penalty assessments, anyone taken out of the organization as a result of identified irregularities of conduct?
    Mr. PETERSON. For workmanship and code violations, yes, there have. For appraisals?
    Chairman BAKER. Yeah, no. Appraisals is not your business.
    Mr. PETERSON. Right. It is not our business. But for workmanship and contractual problems, things like that, we have, but for the financial end, no.
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    Chairman BAKER. And please, I need to hear what he is telling me so we can get it on the record. I thank you for your interest. Secondly, if you were to go personally to a closing on a home that you felt was worth $200,000 and the appraiser came back with a $250,000 appraisal. The mortgage lender says that is not my job, it is the appraiser's responsibility. We are going to loan 80 percent of the value. Does everybody just go along their merry way, or what do you feel is the homebuilder's responsibility at that point——
    Mr. PETERSON. Right.
    Chairman BAKER.—in fairness of value?
    Mr. PETERSON. Well, again, from the national level of our federation to our State association and ours, we recommend that the consumer does have a real estate attorney. We do recommend—unfortunately it is not law here in Pennsylvania, and I think maybe that is something that needs to be done here. We also recommend that they do their homework. We actually go out and say to a consumer—and I get many phone calls every day from consumers——
    Chairman BAKER. I bet, yeah.
    Mr. PETERSON.—saying, you know, do—can you give us a list of builders and stuff like that. And I simply say, look, when you are shopping, shop with more than just one builder. Do not get just nailed with one developer and start looking at just their products. Shop among at least 4 or 5 different builders and developers——
    Chairman BAKER. Well, let me——
    Mr. PETERSON.—and compare——
    Chairman BAKER.—ask the question about marketing responsibility. Would your organization, either for whom you appear here today or in your opinion in a State-wide basis, oppose a requirement that would require a licensed realtor whether the homebuilder was a licensed realtor himself?
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    Mr. PETERSON. Yes.
    Chairman BAKER. And from your view, I understand that is another layer of cost, another layer of bureaucracy, so forth——
    Mr. PETERSON. Right.
    Chairman BAKER.—but there is a code of conduct which goes with being established as a State licensed realtor that if you misrepresent values or your actions mislead either buyers or sellers, then there is accountability.
    Mr. PETERSON. Yes.
    Chairman BAKER. Would you find that a reform that would be unacceptable to homebuilders?
    Mr. PETERSON. No. Personally and locally here, I believe that we would support something like that. Our concern is, though, is that as you bring more red tape into that process, it will delay the process for the homeowner to be able to buy their home and close. So there needs to be a balance there of where the safeguards are there, but also you do not tie up the process with a lot of red tape.
    Chairman BAKER. My experience is generally the realtors waiting on the homebuilder to get the paint color right, so I do not know that you have a big problem with the realtor hanging around waiting on that. I would—unless Mr. Hay has a different view. You would not object to that process, would you, sir?
    Mr. HAY. No. I would not, no.
    Chairman BAKER. Mr. Kanjorski?
    Mr. KANJORSKI. Does anyone on the panel, and we almost have all been dealing with the Pocono mountain problem for 3 or 4 years, does anyone have any insight or identifiable things that have not thus are been mentioned that we should be considering?
    Ms. MCGRATH. Yes.
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    Mr. KANJORSKI. Well, let me get Ms. McGrath, and then come to you, Mr. Wilson.
    Mr. WILSON. Okay.
    Ms. MCGRATH. Thank you. What I would like to address is something that—I am originally from New York City. I was 38 years in the legal industry there. And when I came here to Pennsylvania, I purchased in an upscale community. It was supposed to be a private community with a private golf course with a private country club. After the sale of my community to a new developer, he rewrote everything. We are now a public golf course. Our private country club is now a public restaurant. We have people in and out. It is no longer a private community. However, we are still paying the taxes as if this was all of our private stuff and has never been handed over to the developer. This happens here not only in my community, but it has happened in other communities. Country Club of the Poconos, when those people purchased, they were promised a utopia. It was never developed into the utopia that it was. There are no laws to enforce this, because here in Pennsylvania, the highest command of government you have is your developer. They are higher than the Constitution of the United States of America. They write their own laws. They serve the laws. You go to your township officials, you go to your Senator, you go to your commissioners, and you are told you have to go to your developer. So that needs to be addressed.
    Mr. KANJORSKI. Mr. Wilson?
    Mr. WILSON. I want to reflect back on the recommendations in reference to federal regulation. I think the only thing that is going to stop housing fraud, predatory lending, is going to be stiff criminal and civil penalties. Someone has to go to jail. Until you put somebody in jail, you are not going to stop it. You can pat them on the hand. You can pat them on the head. But up until somebody is going to realize that if you inflate an appraisal, and based on some of the facts I have seen. For instance, I am going to submit evidence an application whereby a homeowner was given a loan for $188,000 from a bank. The application was not signed. It was not even filled out. The bank writes back and tells the homeowner that this is what was submitted to us by your broker. Now if that is not blatant crimes and criminal, and inflating something intentionally by $20,000 and $30,000, and causing young families, old people, to be homeless, what is a crime? I mean where is justice in America? My position is this. Based on what I have done for the last 3 years, so many families and so many problems, there has to be laws put in place that will hold each and every builder, appraisal, title company, bank, totally accountable for their actions. Should the homeowner participate or collaborate, he should be held accountable, even if it is me. But the type of fraud that I have seen, there is no question in my mind, being trained in college in criminology and law enforcement, there is no doubt that the type of documents that I reviewed—as the FBI said to me 2 years ago when I called their office. I am not going to call the agent's name. He said, Mr. Wilson, the facts and the evidence that you guys are looking for are in the documentation that you have in your closing documents. You do not need to look any further.
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    Now when I started to review those documents, I began to uncover things, not as an expert, but as a homeowner—a new homeowner, because there was a lot of people who purchase homes that were not first-time homeowners. There are a lot of people who owned 2 and 3 homes, got robbed. Right there from New Jersey. So now when you are dealing with criminality, and when you are dealing with criminals who have perfected crime and how to manipulate the public, you are dealing with something that the average homeowner is not going to be able to deal with, whether he is educated or not. You need the education, no doubt. You need the counseling. But the reality of it is until there are laws put in place on the federal or state level, that it is going to actually make these people aware that if you commit this crime, the chances are you are going to put between 5 to 10 or 20 years for committed, it is not going to stop. We can talk about predatory lending all we want.
    Mr. KANJORSKI. Let me just ask—let me just take the national experts here. You have now heard everything here about Monroe County in Pennsylvania. Do you see a pattern in other areas of the United States that are similar to this one?
    Mr. TAYLOR. Congressman, if I could answer.
    Mr. KANJORSKI. Yes.
    Mr. TAYLOR. When we are discussing predatory lending and legal-federal legislation in that area, as recently as 2003—in the fall of 2003, Tom Watson and 5 others from the Federal Institutions Lending Institutions reissued a statement that was issued in 1994 requiring that there be a separation between those processing and handling mortgage lending and appraisers. So that document had been issued back in 1994. They felt it necessary to reissue it in 2003. And recent discussions at an ABA conference I attended 2 weeks ago indicated that a high percentage are not following that mandate because there is no enforcement and no penalty. And I think unless there are enforcements and penalties issued for trying to coerce appraisers into reaching values, who are not separating the powers between those ordering appraisals and those receiving them and using them for loans, we will continue to have abuses in the system, just as we have seen here in Monroe. and we have seen it in other parts of the country as well, where appraisers are being coerced by mortgage brokers, by institutions looking to file and get mortgages who are involved in the transactions. I mean what happened here was probably the extreme case of fraud with the connections between the appraiser and the builder and the mortgage broker in this. But I think we need to have strong penalties for those engaging, and we need to have a system of reporting because right now the best an appraiser can do is as—I guess it was Nancy Reagan said, just say no. And they have done that time and time again, but they are threatened with being blacklisted. They are threatened with non-payment. They are threatened with basically being strangled out of business in the local area. So again I think it is important for the government to consider that, and again go back to consider the enforcement of the rules. The rules are there. They are not being enforced, and they need to be enforced and have teeth in them before they become meaningful.
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    Mr. BISENIUS. What I have heard today is something we see a pattern of around the country. While in the Poconos, the magnitude of the fraud and improprieties that occurred in the lending practice goes beyond what we see in many areas, we have seen similar types of scams, similar types of things going on in other parts of the country. It appears that as long as there is, as you said, profit to be made, someone will try and find a way to scam. There are laws which, if enforced, could protect us. As I mentioned, we have a fraud investigation unit. We regularly make referrals to the appropriate criminal authorities in order to pursue these folks. And many times we are successful at having them prosecuted and having them put in jail, but not as frequently as it occurs. We also do maintain an exclusionary list. We do not let certain mortgage participants who have committed fraud in the past be part of transactions with us. So we have attempted, through both the exclusionary list and our fraud investigation unit, to punish those responsible for perpetrating fraud. It is critical from our perspective that we continue to educate consumers and educate lenders. There are many lenders that do not fully understand all the rules and regulations, even though they are part of the industry. I think there are many lenders that do not understand the need for the independence in the appraisal process, and therefore feel like they are doing the right thing. I think further educating lenders as we have attempted to do through some of publications like ''Discover Gold Through Quality'', educating consumers through such things as ''Don't Borrow Trouble'', a publication we put out to educate consumers, as well as ''Credit Smart'', ''Credit Smart Espanol'', which are designed to help consumers understand what their rights and responsibilities are in the transaction, go a long ways. So educate the consumers, educate the originators, and hold those responsible accountable for their actions is the way we see success.
    Chairman BAKER. Thank you. I would like to thank each of our witnesses here today. Your insights have been most helpful to us in understanding the scope and depth of the problem that has occurred here, and addresses policy concerns on the national level. Let me assure everyone that all statements will be carefully reviewed by Committee staff. This will not be the concluding hearing on this matter. We will return to Washington, but I assure Mr. Kanjorski we will continue to work diligently on the identified problems of concern. To those who feel they have not been treated professionally in the conduct of their home purchase, it is my hope that state officials will pursue wrong doers with available tools with some sense of urgency. It is clear to me that there is more than sufficient facts to warrant actions being taken against the responsible individuals. With that closing comment, unless Mr. Kanjorski has further statement——
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    Mr. KANJORSKI. Just to say, Mr. Chairman, that I thank you for taking the time out of your schedule to come here to Monroe County. I hope that the citizens of Monroe County at all levels, the homeowners, the industry, the Chamber of Commerce, the realtors, the legal bar, and the financing institutions, recognize that we have serious problems here in Monroe County, but they are not so large and overpowering that we do not have a good par. Monroe County is a very good success story for growth. What we want to do is perfect it to a much higher success story, and your attention to this issue will certainly help us accomplish that. On the other hand, we do not want to negatively affect the economy or the success of Monroe County in the future. Thank you for coming, Mr. Chairman.
    Chairman BAKER. Thank you, Mr. Kanjorski. With that statement, our meeting stands adjourned.
    [Whereupon, at 12:30 p.m., the Subcommittee was adjourned.]