Senate Democrats

Democrats are Committed to Safeguarding the American Dream of Homeownership

Years of abuse by the mortgage lending industry and under-regulation by the Bush Administration have resulted in a serious housing crisis that is crippling the American economy. It is estimated that lenders file thousands of new foreclosures per day,[1] and in the next two years, as many as two million Americans may lose their homes to foreclosure[2] and more than 40 million of their neighbors may see their property values decline as houses foreclose around them.[3] As a result, towns and cities across America are experiencing business closings, increased crime, and an undermined tax base due to the abandonment of homes in their neighborhoods.

Unwilling to stand by as millions lose everything, the Democratic-led 110th Congress worked quickly to lessen the squeeze on American homeowners nearing or facing foreclosure by providing additional funds for foreclosure counseling, expanding refinancing opportunities, and reforming the tax code to ensure borrowers are not penalized when their mortgages are modified. This week, the Senate is expected to take its biggest step toward addressing the nation’s housing crisis by passing the Housing and Economic Recovery Act of 2008. This bipartisan legislation aims to reform the government-sponsored enterprises system, modernize the Federal Housing Administration, create the HOPE for Homeowners program, establish national standards for residential mortgage brokers and lenders, enhance mortgage disclosure requirements, increase foreclosure counseling, and provide tax benefits that will likely help stabilize the housing market for homeowners and homebuilders. All while maintaining fiscal responsibility.

While Senators on both sides of the aisle are working to pass this vital legislation, President Bush and some in the Republican conference are working to defeat it,[4] even though it is a bipartisan bill that contains legislation the President requested and the country so desperately needs.[5] Undeterred, Democrats are committed to passing this legislation and encourage all Senators to join us to create a veto-proof majority. As we move forward in the 110th Congress to pass this comprehensive legislation, the American people can count on Democrats to deliver on our promise to make the American dream of homeownership more affordable for this and future generations.

A “perfect storm” of abuses in the subprime mortgage market led to a housing crisis of epic proportion. 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 predatory or irresponsible lending practices, using aggressive and manipulative tactics to steer vulnerable borrowers into “exploding” 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 crisis as well. Lured by lowered mortgage lending standards, some homeowners knowingly took on more debt than they could realistically repay. 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 to mortgage holders late, 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. Perhaps 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.[6] The Center for Responsible Lending estimates that from 2003 to 2006 the percentage of subprime mortgages relative to all mortgages jumped by 20 percent,[7] with 89-93 percent of all subprime mortgages made from 2004 to 2006 containing exploding ARMs.[8] Many of these loans will reset in the next two to three years, with monthly payment increases ranging from 30 to 50 percent.[9] As these loans adjust higher and higher, homeowners will be pushed closer and closer to losing their home — their most important asset — to foreclosure.

America is experiencing the worst mortgage crisis in decades. In June, the Mortgage Bankers Association (MBA) reported that nearly one percent of all mortgage loans fell into foreclosure during the first quarter of 2008.[10] This is the highest percentage since 1979, and surpasses the previous high of .83 percent during the last quarter of 2007. Worse, the total inventory of homes in foreclosure has increased to 2.47 percent.[11] As a comparison, at the end of 2005, only one percent of the total inventory of homes were in foreclosure.[12]

The number of American homeowners who are standing on economic “thin ice” also increased during the first three months of 2008, with delinquencies growing to record-highs. In particular, the number of home loans that were 30 days behind in payments jumped to 6.35 percent – 2.9 million loans — from 5.82 in the previous quarter, with increases in moderate (60 days) to severe (90 day) delinquencies being the biggest part of the problem.[13]

While the subprime adjustable rate mortgage (ARM) market represents the biggest part of the problem, the problem is spreading to the prime ARM market. Although subprime ARMs represented only six percent of all outstanding loans in the first quarter of 2008, they represented 39 percent of all foreclosure starts, and the percentage of subprime ARMs that started the foreclosure process jumped to 6.35 from 5.29 percent in the previous quarter. [14] Moreover, while prime ARMs represented 15 percent of the market, they accounted for 23 percent of the foreclosure starts, which is more than fixed-rate subprime loans.[15] The percentage of prime ARMs that started the foreclosure process also increased, jumping to 1.55 percent from 1.06 percent during the previous quarter.[16]

It is clear that in both the short- and mid-terms, the default rates for prime borrowers is only going to grow. While the delinquency rate amongst subprime ARMs grew to 22.07 percent in the first quarter of 2008 from 20.02 percent in fourth quarter of 2007, the delinquency rate for prime ARMs increased as well, from 5.51 percent to 6.78 percent.[17] Isolate severe delinquencies, and the problem is even more evident. The number of prime ARMs 90 days behind in payments increased by 28.71 percent. In comparison, the number of subprime ARMs 90 days behind increased by “only” 18 percent.[18]

Taking all prime and all subprime loans into account over the past year, the number of prime loans falling behind in payments and falling into foreclosure has increased at a greater rate than subprime loans. [19] The Joint Economic Committee reports that, while the percentage of delinquent subprime loans has increased by 32.8 percent since first quarter of 2007, the percentage of delinquent prime loans has increased by 49.4 percent. Similarly, while the percentage of subprime foreclosures has increased by 102.5 percent since last year, the percentage of prime foreclosures has increased 134.9 percent.[20]

Given that prime loans are extended to borrowers with the strong credit, these trends are very alarming and forecast darker days for the mortgage market, American homeowners, and the U.S. economy.

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. According to the Center for Responsible Lending, in 2005 and 2006, 52.4 percent of all mortgage loans sold to African-Americans and 40.66 percent of those sold to Latinos were subprime.[21] 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 the subprime mortgage crisis and rising foreclosure rates.

Subprime borrowers are not the only victims of this crisis, neighbors, communities, and new home buyers are also feeling the crunch. Even homeowners with strong credit, who are in safe, fixed-rate loans, and who are paying their bills on time are suffering from the reduction in property values and home equity wealth associated with foreclosures in their neighborhood. 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 at least .9 (1.44 percent in lower-income neighborhoods), which equaled approximately $3,000 in that market. In other markets that decrease may be closer to $5,000.[22] It is estimated that 40.6 million homes will face devaluation due to surrounding foreclosures, representing a total drop, according to one estimate, in house values and tax base of $202 billion.[23] And just this week, Case-Shiller recorded, in its home price index for April 2008, that all 20 of the metropolitan areas measured showed year-over-year declines in home values since April 2007.[24] Moreover, it is estimated that from 2006 to 2007, the national median price of a single family home dropped anywhere from 6.1 percent to 8.9 percent, either of which represents a record decrease.[25]

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.[26]  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 55 percent of U.S. banks have increased standards for prime loans, and 85 percent of banks have increased standards for nontraditional loans.[27] As a result, the American dream of owning a home is becoming less and less of a reality for nearly every American.

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. The National Association of Realtors’s May 2008 report showed that existing home sales dropped in April — the eighth drop in nine months — and the month’s supply of homes skyrocketed to 10.7 months.[28] It seems Americans are finding it more difficult to purchase homes even as home prices have dropped. With the market saturated with unsold homes, construction jobs have taken a hit resulting in the loss of more than 34,000 construction jobs in May, which brings the total number of construction jobs lost since May 2007 to more than 300,000.[29]

What is most striking about the current crisis, especially given the earlier assertions by the Bush Administration that the nation’s housing woes would be contained to the housing industry, is that the mortgage crisis has spilled over into the broader economy. Given that real estate represents 10 percent of the nation’s economic output,[30] home equity is the greatest source of wealth for most Americans, and Wall Street is deeply invested in the subprime mortgage market, solving the nation’s housing problem is key to repairing the nation’s struggling economy.

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.

Congress overwhelmingly passed an economic stimulus package to help alleviate the squeeze on tens of millions of American homeowners. In February 2008, Congress passed and the President signed into law the Recovery Rebates and Economic Stimulus for the American People Act (P.L. 110-185), which has provided a boost to the stalled economy by providing rebate checks to tens of millions of Americans, providing tax relief for American businesses, and helping families avoid foreclosure by expanding financing opportunities. Specifically, the law: