Testimony before the U.S. House of Representatives House Committee on Financial Services
By John Hope Bryant
Founder, Chairman and Chief Executive Officer
Operation HOPE, Inc.
Thank you Committee Chairman Barney Frank, as well as the Members of the House Finance Committee, including Congresswoman Judy Biggert from Illinois, Congresswoman Maxine Waters and Brad Sherman from California, Congressman Mel Watts of North Carolina, Congressman Al Green of Texas, as well as the other members of the Committee, for calling today’s hearing. In particular I want to commend Committee Chairman Barney Frank and Congresswoman Biggert, who is also co-chair of the House Financial Literacy Caucus, for your leadership and vision here.
meThis hearing, focused on reviewing legislative proposals for reforming mortgage practices, in the light of the sub-prime crisis in America, is a critically important day for our country. In this regard, I support the spirit of HR3915, as well as HR1752, HR3017 and HR3019, which together help to create a responsible floor, for the poor.
Mr. Chairman, for those who would say that they did not see this crisis in the sub-prime mortgage market coming, I would have to respectfully disagree. Robert Gnaizda, Esq., general counsel for the Greenlining Institute, and I called a meeting with banking leaders at the Federal Reserve on this very topic in early 2005, and we subsequently wrote an Op-Ed article, which appeared in the American Banker on May 13th, 2005, entitled ARMs Race Could Set Off a Wave of Foreclosures. I have taken the liberty of enclosing a copy of the Op-Ed with my testimony. Needless to say, our cautions at the time were dismissed by many who should have known more.
Let me start by saying that this is personal to me.
My father lost our family home in South Central Los Angeles because he did not understand the documents he was signing, and unfortunately, because he asked the wrong question.
Growing up, I remember the pride I had, every week on Friday nights, watching my father make a payroll for his cement contracting business, from the front door of our home. That was powerful for a son to see.
But after a while, the workers I knew so well would leave our home. And then a mortgage broker, someone I didn’t know at all, would soon show up at the front door; finally convincing my otherwise brilliant father that he could somehow “have more,” while simultaneously, somehow, “paying less.”
The result: my dad was left almost completely defenseless in making the most significant financial and wealth building decision of his adult life, and our family’s life too.
A decision that in the end negatively impacted my dad, as well as his marriage to my beautiful mother -- - and they loved each other dearly. But in the end, it was a marriage which ended, over money.
The number one cause for divorce today, is money. Ultimately, decisions made on that day in South Central L.A. had a negative ripple effect, years later, on my brother, my sister, my mother and me.
You see, my dad ultimately asked this person, this mortgage broker who was disconnected from any sense of responsibility, the wrong question, asking “what’s the payment?” when in reality he should have been asking, “what’s the interest rate?”
No one should ever ask what the payment is when there is an interest rate attached.
We lost our home not because my father wasn’t brilliant, because he was, and is, at 83 years young, but because my dad was badly represented, asked the wrong question, and then signed documents he didn’t understand.
I suggest that the Committee significantly overhaul oversight of mortgage brokers and the mortgage banking industry.
I suggest that the Committee significantly restrict, if not outright ban negative amortization loans; where with every payment you make, the broker you become.
My mother’s story, oddly enough, ended in a completely different way.
You see, my mom, who worked a regular 40-hour job, was financially literate.
My mother worked more than 35 years at McDonald Douglas Aircraft, now Boeing Aircraft, in Long Beach, California, and realized early on that “it was not necessarily about making more money, but making better decisions with the money you make.”
My mother bought and sold 5 homes over time, and today she is retired and financially independent, living in Houston, Texas. In contrast, my dad is today financially dependent, living in a new 4-unit apartment building, built for him, by my wife and I; on the very street I grew up on in South Los Angeles.
Not all children, or even most children, are financially able to build and pay for a home for their father. Nor should they have to.
Parents should be in a position, if and when they can, to accumulate and later if they like, to pass down assets to their children, not the other way around.
Some 20 years later, this is the “negative legacy” impact of the sub- prime mortgage crisis many Americans, and not just low-wealth Americans, are experiencing today.
This is why I am so passionate about financial literacy, and economic empowerment today.
As the founder, chairman and chief executive officer of Operation HOPE, inclusive of the only national delivery platform in urban, inner-city communities in the country for financial literacy education for youth, Banking on Our Future;
as well as the only national network of inner-city banking and empowerment centers located in urban, inner-city low-wealth communities, from California to Anacostia in Washington, D.C. to our latest HOPE Center in Harlem, New York, opened October 3rd, 2007;
and the nation’s emergency economic disaster response program, a partnership with DHS/FEMA and DHS/Citizen Corps; we are respectfully asking you to take increased and immediate action around the growing sub-prime mortgage crisis in America.
With more than 250,000 low-wealth youth educated in financial literacy, the creation of more than 1,000 low wealth home owners and small business owners, and 85,000 individuals touched directly by our work in the aftermath of Hurricane Katrina, and thousands more served every year through our various on-the-ground and call-center offices, we have a fairly good sense of how individuals and communities are managing, or not managing, changes in our larger economy.
Within the context of this crisis, I can say without reservation that the answer here would be, not very well.
Just one example of this is our recently established Mortgage HOPE Crisis Hotline, a partnership between HOPE and City Council President Eric Garcetti of the City of Los Angeles, designed to help individuals in Southern California impacted by the sub-prime crisis.
When we launched phase I of the call center a couple of months ago we received 3,000 calls within the first 24 hours, and 4,000 calls within the first 2 days. To place this into context, we received an average of 3,000 calls during our busiest months during our nationwide outreach initiative for Katrina victims.
The 3,000 and 4,000 calls referenced here are for the Los Angeles area alone, again covered only a 48 hour period, and at the time also mostly limited to the Spanish speaking community of Los Angeles (note: initial media pick up was Spanish speaking media only).
We will soon roll-out phase II of our call center partnership with the City, and HOPE will soon partner with the State of California Banking and Finance Committee, around a similar State of California hearing on sub-prime and financial literacy, scheduled for November 1st, 2007, in South Los Angeles.
This said, respectfully, none of this, nor any other localized effort, will prove nearly enough to address this national problem.
Accordingly, I am also proposing today, as I have likewise done this week in a letter to all federal financial regulatory agencies, that the federal government establish, possibly through the Federal Home Loan Bank System or other suitable agency, a $10 billion loan guarantee fund, structured in many ways like an SBA loan guarantee is.
Ideally, such a fund would be structured as follows:
Note A: This approach has the added benefit of adding a temporary economic stimulus into an otherwise stalling mortgage market and associated overall economy, as billion of dollars of effectively “new” money, and responsible mortgage loans, would be made over the next 18 months.
Note A1: This model harkens back to the very birth of Social Security in this country, immediately following the Great Depression, when the president was looking for a way to create “new jobs” and to jumpstart the economy, in an environment where there simply were no new jobs to be had. The political answer; modeled in part after what was happening in parts of Europe, the president and nation encourage those 65 or older to “retire” from active employment, thus creating, so to speak, thousands of “new jobs” for the countless young men age 18-25 that were skilled yet desperately out of work.
This also later gave birth to what is now known as the retirement industry. This same directional approach can be applied to both solving the sub-prime mortgage crisis, and simultaneously jump-starting or re-starting the mortgage related economic engine for the nation.
Note B: This approach could serve as a unique and new opportunity for the credit union industry, as credit unions (1) were not substantially involved in the original problem, (2) several have the size and economic strength to make an impact if they decided to act, and (3) because of their unique tax structure, can afford to make these loans at an even lower price-point, making this a win/win for all involved; new profitable business for credit unions, and a reasonable, rational and affordable exit plan for sub-prime borrowers in need.
Note C: On a separate future note, and as I have said recently on National Public Radio, will say today, and will respectfully repeat, as often as I can in town halls across America, there is nothing wrong, and everything right, with responsible sub-prime lending.
In fact, responsible sub-prime lending has done more to lift the poor out of poverty and into homeownership, asset accumulation, and in becoming a stakeholder in America, than anything else over the last 50 years.
We want responsible sub-prime lending to the poor and working class in America to continue, post crisis.
We do not want the source of funds t o dry up, because of the reckless and unethical business practices of a few companies, and a number of predators. The problem here is irresponsible sub-prime lending, predatory lending, and over-arching all of this, massive levels of financial illiteracy, even amongst America’s middle class.
Individuals who simply asked the wrong question; “what’s the payment” versus “what’s the interest rate.”
In this regard, in addition to my support of the aforementioned bills, I would also respectfully encourage this Committee to look at the possibility of creating a new and progressive, responsible sub-prime mortgage lending model and standard for the 21st century.
A model and standard that considers practical financial literacy consultation, a fixed rate, and a new 40-year term (thus addressing the principle issue driving low teaser adjustable rate loans today, the overall affordability of regular mortgage payments), as key components to the approach.
If asked, my summary recommendations of an enhanced future model sub-prime mortgage market might include:
Much greater oversight of mortgage brokers and the mortgage banking industry.
Keep, but significantly enhance, low-documentation loans, as entrepreneurs, the self-employed, and small businesses that in many ways drive our economy, and new job creation, disproportionately utilize these financial products.
Deny the use of negative amortization loans.
Limit allowable (adjustable) interest rate risk for the poor.
Innovate a new 40-year, fixed-rate mortgage.
Introduce a massive focus in this nation on financial literacy.
Create accountability (and a return of integrity) in the vertically integrated mortgage process; beginning with independent mortgage brokers, and continuing straight through from application to funding, and including (on a negotiated and limited liability basis) Wall Street mortgage securitizations.
Carry a standing fixed interest rate of 3%, allowing private lenders to add 2%-3% maximum, as a reasonable fee for administration, overhead and margin. Note: there is a precedent here, inasmuch as the Federal Home Loan Bank of San Francisco extended just such a guarantee offer to banks willing to lend back into South Central Los Angeles following the Rodney King riots of 1992.
Allow anyone who had paid their loan on time and within terms of their agreement, prior to their rate reset, to be refinanced under this new program; the theory being that these individuals were already properly underwritten at the original term and rate, as they were performing prior to reset of their adjustable rate.
All new loans would be made at a 5-6% fixed rate, over a 30 year, and in some unique hardship cases, possibly a 40-year term. Note: respectfully, while I am all for free enterprise and capitalism, and our “silver rights” movement even calls for making capitalism and the free enterprise system relevant to the poor, and ultimately to make capitalism and the free enterprise system work for the poor, I do not believe that we should subject the poor to unreasonable interest rate risk.
Mr. Chairman, some have suggested that any legislation from Congress would effectively stifle, and even disrupt the flow of mortgage lending and access to the capital markets.
Respectfully Mr. Chairman, let me first say that there is already a disruption of the flow of mortgage lending and access to the capital markets today.
What is needed to break the virtual freeze that is now occurring in a good portion of the capital markets around mortgages is a return of confidence. Markets simply do not respond well when there is a lack of clarity around acceptable (best) practices, and when there is a fundamental lack of transparency. All of these negative aspects of the mortgage market are at work today, and good, balanced federal legislation that helps to set the floor (acceptable standards), instead of a ceiling (which might unreasonably restrict free enterprise), helps, not hurts.
Approached correctly, as I believe you are doing here today, good, rational and balanced legislation, giving all consideration to the market, might in fact help unlock capital flows, and lubricate the financial markets, as relates to sub-prime and other forms of mortgages.
Finally, I would respectfully recommend that Congress call for a massive nationwide campaign, involving both the public and private sectors, focused on financial literacy education. In this regard, I believe that President Bush, with active encouragement from myself and Operation HOPE as well as other financial literacy leaders such as the Jump$tart Coalition, will soon take positive action around financial literacy education in America. When this happens, it will be a positive step in the right direction, but much more still needs to be done, and this forward looking Congress is in the unique position to do it.
What is more bi-partisan, or even non-partisan, than public policy focused on educating our nation on the critical need for financial literacy in our nation?
This sub-prime mortgage crisis in America is ground zero for making the case around financial illiteracy, and thereafter for making the case for action around financial literacy empowerment, for youth and adults alike.
Thank you once again for holding this hearing, as well as your consideration of my proposal for a mortgage loan guarantee fund, as well a massive campaign around financial literacy education, for adults and children alike.