Today, the Financial Crisis Inquiry Commission (FCIC) held its last in a series of four field hearings in communities around the country significantly affected by the financial crisis. This last hearing, titled "The Impact of the Financial Crisis – Sacramento", examined the role and impact of housing and mortgage crisis Sacramento.
Testifying before the FCIC were the following witnesses:
Session 1: Overview of the Sacramento Housing and Mortgage Markets and the Impact of the Financial Crisis on the Region
- Mark Fleming, Chief Economist, CoreLogic
Session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region
- Karen J. Mann, President and Chief Appraiser, Mann and Associates Real Estate Appraisers & Consultants
- Thomas C. Putnam, President, Putnam Housing Finance Consulting
- Kevin Stein, Associate Director, California Reinvestment Coalition
- Benjamin B. Wagner, United States Attorney, Eastern District of California
Session 3: The Mortgage Securitization Chain: From Sacramento to Wall Street
- Vicki Beal, Senior Vice President, Transaction Management, Clayton Holdings, LLC
- Kurt Eggert, Professor of Law, Chapman University School of Law
- D. Keith Johnson, Former President and Chief Executive Officer, Washington Mutual’s Long Beach Mortgage
Session 4: The Impact of the Financial Crisis on Sacramento Neighborhoods and Families
- Pam Canada, Chief Executive Officer, NeighborWorks Home Ownership Center – Sacramento Region
- Mona Tawatao, Regional Counsel, Legal Services of Northern California
- Bruce Wagstaff, Agency Administrator, County of Sacramento Countywide Services Agency
- Clarence Williams, President, California Capital Financial Development Corporation
- Henry W. Wirz, President and Chief Executive Officer, SAFE Credit Union
In Session 1, Mr. Fleming responded to questions regarding mortgage demographics in Sacramento, the influence of housing policy, the driving factors for the large price increases, the driving factors for the subsequent price declines, the results of negative equity from such price declines, and the general state of the economy in Sacramento due to the mortgage crisis. Mr. Fleming concluded that the declining mortgage rates and policies intended to increase homeownership in the early part of the decade allowed borrowers to leverage their incomes and afford more expensive homes. Thus, house prices responded to increased leverage by rising in response to the increased demand. However, loan products that allowed borrowers to "leverage incomes even more effectively and increased speculative behavior further added to the upward price pressures" but that "once affordability was no longer possible given interest rate increases and more restrictive loan terms, speculators began to exit the market and price growth slowed." Mr. Fleming noted that over-extended borrowers became delinquent and prices decreased. This in turn caused borrowers to carry negative equity and resulted in yet more foreclosures. As a result, Mr. Fleming concluded that "the influence of high unemployment rates and negative equity will likely be the driving forces of distress going forward in Sacramento and throughout the country."
The witnesses testifying during Session 2 focused on mortgage origination, fraud and predatory lending in the Sacramento region. Karen Mann characterized the types of loans originated between 2000 and 2004 as "EASY MONEY!" due to a perfect storm of low interest rates and low unemployment combined with poor lending guidelines and regulatory complacency. She testified that the impact of the mortgage crisis has anticipated direct costs to borrowers of over $50,000,000 with additional indirect costs to municipalities and local businesses of over $47,000,000. Similarly, Thomas Putnam of Putnam Housing Finance Consulting testified that the lack of effective market and management discipline harmed consumers and undermined the viability of mortgage lending companies. The lack of such discipline included incentives such as "overages" to loan officers to prioritize transactions at the expense of consumer interests and volume incentives to mortgage managers and underwriting personnel to close transactions even if loan performance was questionable. Kevin Stein of the California Reinvestment Coalition testified that predatory lending was a contributing factor and noted that "Sacramento County’s largest lender, Countrywide Home Loans, was sued in 2008 by the state Attorney General for engaging in a pattern and practice of defrauding California borrowers into taking out loans they could not afford and did not understand." Furthermore, United States Attorney Benjamin Wagner testified that the fraud schemes prevalent during the period from 2003 through 2008 were loan origination schemes, all of which essentially come down to one thing: "material lies to the mortgage lender" where "mortgage fraud perpetrators primarily lied about borrowers’ qualifications for obtaining a mortgage loan, about the true market price of the property securing the mortgage loan, and about what the money being borrowed was to be used for."
Session 3 focused on the "mortgage securitization chain" from Sacramento to Wall Street. Two industry executives testified. Vicki Beal, a Senior Vice President at Clayton Holdings, provided testimony on their mortgage due diligence services to investment banks, commercial banks, mortgage insurance companies, fixed income investors and loan servicers. She testified that their diligence was based on terms dictated by Clayton Holdings’ clients and the clients’ individual objectives. Beal emphasized that their assessments are performed on samples of loans being purchased for likely placement in a residential mortgage-backed security and that they were not given full details on the nature of their samples. Furthermore, Clayton Holdings does confirm the authenticity of any securitization information on file. Keith Johnson, former President of Clayton Holdings and also former President of Washington Mutual’s Long Beach Mortgage, opined that the financial crisis is not the result of a "single cause," but a combination of significant factors operating at the same time, including "low interest rates, increased housing goals, creative securitization, lack of assignee liability, compromised warehouse lending, flawed Rating Agency process, relaxed and abusive lending practices, rich incentives, shortfalls on regulation and enforcement provided the fuel to inflate home prices and excess borrowings by consumers." Finally, Kurt Eggert provided testimony on securitization regulatory reform, and emphasized that "it is important to recognize that the flaws of the previous system go far beyond the lack of both ‘skin in the game’ by originators and transparency for investors" and warned that "some in the financial industry are advocating for minimizing the changes to the system, as if adding a dash of disclosure and risk retention were all that was needed."
Session 4 concluded the day with testimony on the impact of the financial crisis in Sacramento neighborhoods and families. The witnesses testified that lower property prices and abandoned homes have caused communities to suffer from increased crime due to home abandonment, cities and counties have been negatively impacted from the lower tax base, area youth have been hit by foreclosures, small businesses have struggled to stay afloat and that communities have been generally blighted from the struggles created by the financial crisis. The witnesses emphasized that the ultimate remedies for these problems is a combination of new laws and regulatory reform to curb predatory lending, programs that include meaningful principal reduction and loan modification programs, and pre-purchase education for homebuyers.
The FCIC has now completed its field hearings in advance of its mandated December 15, 2010 report, which will contain the cumulative results of its investigation.