The ongoing subprime mortgage crisis and resulting credit crunch have left many Americans 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 addition, given the impact that foreclosures have on communities, homeowners are seeing their home values decline. Unwilling to do nothing as millions stand to lose everything, the Democratic-led Senate has passed aggressive measures to comprehensively address the nation’s housing woes, including tax reform to ensure borrowers are not penalized when their mortgages are modified; providing additional funding for foreclosure counseling; expanding the opportunities for affordable home loans; and increasing credit availability in the mortgage market.
Unfortunately, many Senate Republicans have repeatedly blocked or delayed passage of these and other critical pieces of legislation that would help Americans buy a home and keep a home. And the President – even as he criticizes Congress for not acting more quickly – has not put any pressure on his fellow Republicans to do the right thing and work with Democrats to swiftly address the housing crisis .
The American people are tired of partisan politics and Democrats share in their frustration. With nearly two million homeowners facing foreclosure and the American economy suffering the consequences, we hope that Senate Republicans will join us in passing other critical measures to address the nation’s growing subprime mortgage and foreclosure crisis. To begin, we encourage them to support S.2636, the Foreclosure Prevention Act of 2008,which wouldassist homeowners at risk of foreclosure, help communities and businesses impacted by foreclosures, and improve home lending practices to help homeowners avoid foreclosures in the future. American families deserve our commitment to working together to protect, preserve, and promote the American dream of homeownership.
America’s housing crisis threatens homeowners, communities and the broader economy.
Years of under-regulation of the mortgage lending industry during the Bush Administration have caught-up with the American people and led to a housing crisis of epic proportions that now threatens the entire American economy.
Abuses in the mortgage market have led to an increase in delinquencies and home foreclosures. Subprime 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. 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. Worst of all, the Bush Administration’s laissez-faire regulatory approach to the marketplace resulted in regulators turning a blind-eye to the out-of-control mortgage market.
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. In December 2007, the Mortgage Bankers Association reported that foreclosures in the third quarter 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. And the Census Bureau reports that the homeowner vacancy rate is at its highest level on record. 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, neighbors, communities, and new home buyers are feeling the crunch. 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.
Compounding matters, foreclosures lead to increased crime rates, which further drive down home values. The same Chicago study found that for every percentage point increase in foreclosures, violent crime increases by 2.3 percent. 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 many Americans.
The subprime mortgage crisis has hardly been contained to the housing industry. There is no doubt that the housing industry, including the home construction industry, has been negatively impacted by the nation’s housing crisis. A recent report from the National Association of Realtors showed that the inventory of unsold homes is rising rapidly from 4.5 in 2005 to 10.0 in August 2007; and, last month, the Department of Commerce (Commerce) reported that new single-family homes sales fell 4.7 percent in December 2007, a nearly 26 percent drop over the year, as Americans are finding it more difficult to purchase homes even as home prices have dropped. Nonetheless, despite earlier assertions by the Bush Administration and Wall Street analysts that the nation’s housing woes would be contained to the housing industry, a variety of other industries are also being affected, including the retail and transportation industries.
In 2007, stocks plunged for major Department stores, across price scale, as Americans were less willing to spend because their home values were falling. This reduction in consumer spending has also led to a reduction in the need for trucking firms to deliver products. It is no wonder then that, according to a Commerce Department report, the nation is experiencing its weakest rate of economic growth in years. Most economic experts agree that the housing crisis is at the epicenter of the problem.
Senate Democrats are committed to 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 and begin repairing the American economy.
In February, the Senate overwhelmingly passed an economic stimulus package to help alleviate the squeeze on American homeowners. As amended by the Senate, H.R.5140, the Recovery Rebates and Economic Stimulus for the American People Act, will jumpstart the slowing economy by providing rebate checks to eligible single, married, and elderly Americans, providing tax relief for American businesses, and helping families avoid foreclosure by expanding financing opportunities. Specifically, the bill would:
· Temporarily increase conforming loan limits for single-family homes from Fannie Mae and Freddie Mac to 125 percent of the area median home price (with a maximum of $729,750) in an effort to increase credit availability in the mortgage market; and
· Temporarily increase the Fair Housing Administration loan limit to 125 percent of the area median home price (with a maximum of $729,750), which would expand affordable mortgage loan opportunities.
Furthermore, in the 110th Congress, the Democratic-led Senate:
· Passed, and the President signed into law, the Mortgage Debt Forgiveness Relief Act of 2007, P.L. 110-142. This new law offers tax relief to Americans facing foreclosure by providing a three-year exception for debt forgiveness on home loans and extends a provision that allows homeowners to deduct mortgage insurance payments from their taxable income;
· Provided $180 million for foreclosure-avoidance and loss mitigation services in the Consolidated Appropriations Act, 2008 funding for the Department of Housing and Urban Development (P.L. 110-161); and
· Approved the FHA Modernization Act of 2007 (S. 2338), by an overwhelming 93-1 vote on December 14. The bill would 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.
Senate Democrats have also sponsored:
· the Foreclosure Prevention Act of 2008 (S.2636), which would help struggling families keep their homes by increasing pre-foreclosure counseling funds, expanding refinancing opportunities, and amending the bankruptcy code to allow the modification of home loans on primary residences. The bill would help communities impacted by foreclosures by allowing localities with high foreclosure rates to access Community Development Block Grants (CDBG) funds to purchase foreclosed properties for rehabilitation, rent, or re-sale. The bill would also extend relief to struggling businesses by making it easier for them to utilize losses incurred in 2006, 2007, and 2008 to offset prior years’ income to recoup previously paid income taxes. And the bill would help families avoid foreclosure in the future by amending the Truth-in-Lending Act to improve loan disclosures during the original loan and refinancing process.
· the Promoting 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
· the Homeownership Preservation and Protection Act of 2007 (S. 2452), which would enhance federal regulation of mortgage brokers and other originators in order to crack down on predatory lending and ban harmful loan products and practices.
Throughout 2008, the American people can count on Democrats to work in a bipartisan manner to protect the dream of homeownership for this and future generations. It is our hope that Republicans will join us in this effort.