As American homeowners prepare to welcome friends and family home for the holidays, the ongoing subprime mortgage crisis and resulting credit crunch have left many worried about whether they will be able to keep their home for another year and many more concerned about whether they will be able to buy a home in the coming years. In addition, given the impact that foreclosures have on communities and the economy, homeowners who have never paid a bill late are seeing their home values decline. Unwilling to do nothing as millions stand to lose everything, Senate Democrats have proposed aggressive steps to comprehensively address the nation’s housing woes.
Unfortunately, Senate Republicans have repeatedly delayed passage of critical legislation that would help American homeowners avoid foreclosure. And the President – even as he criticizes Congress for not responding to the housing crisis – has threatened to veto appropriations that would provide funding for housing counseling assistance.
The American people are tired of partisan politics, and Democrats share in their frustration. We were happy to see Senate Republicans finally agree to allow a vote on a bill to reform the Federal Housing Administration, one part of the mortgage crisis solution, which the Senate passed by an overwhelming 93 to 1 vote. With nearly two million homeowners facing foreclosure, we hope that Senate Republicans will join us in passing other critical measures to address the nation’s growing subprime mortgage and foreclosure crisis. American families deserve our commitment to working together to protect, preserve and promote the American dream of homeownership.
Abuses in the mortgage market have led to an increase in delinquencies and home foreclosures. Subprime and exotic mortgages once helped millions of Americans, most with limited or blemished credit, achieve the American dream of homeownership. These loans also helped millions more homeowners, many of whom were older Americans with good credit, but on fixed-incomes, refinance their homes. Unfortunately, while many lenders and brokers offered these mortgages fairly and responsibly, many others engaged in abusive and predatory lending practices, using aggressive tactics to deceive vulnerable borrowers into adjustable-rate mortgages (ARMs), they could never afford, trapping them in high-cost loans with costly pre-payment penalties, and then immediately selling-off the loans to investors.
Other actors contributed to the mortgage mess as well. Appraisers, under pressure from lenders, inflated home values, which resulted in “upside down” mortgages where a homeowner owes more than the house is worth and is, therefore, unable to sell. Unscrupulous mortgage servicers charged borrowers excessive fees and routinely posted payments late to mortgage holders, which resulted in additional fees and made it nearly impossible for borrowers to pay down their interest and principal. Moreover, Wall Street investors, who purchased these loans from lenders, created a perverse incentive structure in which lenders were paid more for selling risky loan products to unsophisticated borrowers.
This perfect storm has resulted in a personal and financial nightmare for millions of American homeowners, who, as interest rates on their ARMs adjust higher and higher, are pushed closer and closer to losing their home – their most important asset – to foreclosure.
America is experiencing the worst mortgage crisis in decades. Earlier this month, the Mortgage Bankers Association reported that foreclosures in the third quarter of this year were at their highest level on record and the percentage of homeowners currently behind in their payments was at its highest level in 21 years. Subprime adjustable-rate loans, representing 43 percent of new foreclosures, are the biggest part of the problem, but prime adjustable-rate loans, representing 18.7 percent of new foreclosures, are problematic as well. Given that more and more ARMs are scheduled to reset to a higher rate in the coming months, trapping an estimated two million homeowners – two million families – in foreclosure and representing $160 billion in lost equity, this upward trend is very alarming
Minority communities are among the hardest hit by high-cost lending. Through the many hearings held during the 110th Congress, and the many criminal investigations launched, on the issue of subprime mortgage lending, it has become clear that a considerable number of mortgage brokers targeted subprime and exotic loan products to minority and elderly borrowers, even those with high incomes who would have qualified for a prime mortgage with better terms. In 2005 and 2006, more than 50 percent of all mortgage loans sold to African-Americans and 40 percent of those sold to Latinos were higher-cost subprime loans. And according to the National Association of Realtors, the use of subprime loans among Asian Americans grew by 181 percent from 2004 to 2005. As a result, minority communities have been disproportionately impacted by rising foreclosure rates.
Subprime borrowers are not the only victims of this crisis. Even homeowners with strong credit, who are in safe, fixed-rate loans are suffering from the reduction in property values and home equity wealth that result from foreclosures within their neighborhood. The U.S. Conference of Mayors recently reported that the nation may lose $1.2 trillion in property values in 2008 due to the current housing crisis. A study of home prices in the Chicago Metropolitan area estimated that a single home foreclosure lowered the value of homes located within a one-eighth mile area by 1.5 percent, which equals approximately $3,000 in that market. As a result, entire communities, especially those that are already vulnerable to economic disruptions, are at risk of being severely harmed by the subprime mortgage crisis.
Moreover, the resulting credit crisis in the mortgage markets is making safe, affordable mortgages less available for aspiring homeowners or borrowers in need of a refinancing alternative. A Federal Reserve study found that approximately 40 percent of lenders have increased loan standards for even the most creditworthy borrowers. As a result, the American dream of owning a home is becoming less and less of a reality for Americans.
Senate Democrats are committed ensuring that Americans can buy a home – and keep a home. With housing agencies, homeowner advocacy groups, many in the private sector, and the American people at our side, Democrats have proposed a series of measures aimed at comprehensively addressing all aspects of the housing crisis in an effort to help as many homeowners as possible.
· The Democratic-led Senate approved the FHA Modernization Act of 2007 (S. 2338), by an overwhelming 93-1 vote on December 14. S. 2338 will strengthen and modernize the Federal Housing Administration (“FHA”) to help homeowners facing foreclosure obtain safe and affordable home loans. This legislationwill address problems in the mortgage market that have shut off funding for home loans, will make FHA loans a more viable alternative to the subprime market, and help to bring stability to local communities and the national economy.
· Democrats provided$200 million for foreclosure-avoidance and loss mitigation services in the House and Senate-passed Fiscal Year 2008 appropriations for the Department of Housing and Urban Development (H.R.3074).
· Democrats are sponsoring legislation, the Helping Families Save Their Homes in Bankruptcy Act (S.2136), to help homeowners avoid foreclosure by amending the bankruptcy code to allow the modification of home loans on primary residences;
· Democrats proposed, in the Mortgage Cancellation Relief Act of 2007 (S.1394), alleviating the foreclosure tax burden on borrowers who have lost their homes or modified their mortgage debt;
· Democrats have introduced thePromoting Refinancing Opportunities for Mortgages Impacted by the Subprime Emergency Act of 2007 (“PROMISE Act,” S. 2348), which would temporarily increase portfolio caps applicable to Freddie Mac and Fannie Mae to increase liquidity in the mortgage market; and most recently,
· Democrats sponsored legislation, the Home Ownership Equity Protection Act of 2007 (S. 2452), to enhance federal regulation of mortgage brokers and other originators in order to crack down on predatory lending and ban harmful loan products and practices.
As Congress completes the 2007 session and looks toward 2008, the American people can count on Democrats to work in a bipartisan manner to protect and help make real the dream of homeownership for this and future generations. It is our hope that Republicans will join us in this effort.