Subprime Lending Dominates Congressional Hearings on Foreclosure Crisis
Feature Story by Ryan Post - 2/6/2008
Congress is attempting to find solutions to a subprime lending crisis that has forced 2.2 million families from their homes and led to a downturn in the housing market.
Recently, the House Subcommittee on Commercial and Administrative Law and Senate Committee on Banking, Housing, and Urban Affairs held hearings to address what Representative Linda Sanchez, D. Calif., chairwoman of the House Subcommittee, called "an economic crisis fueled by the subprime mortgage meltdown and falling home prices."
Subprime loans are at the heart of the mortgage crisis. A subprime loan is given to someone who does not qualify for a traditional loan due to poor credit history and, consequently, the loan is advanced at a higher interest rate. However, many recipients of subprime loans have found it difficult to cope with the high rates, resulting in mortgage default and foreclosure.
Many accuse the lending industry of deliberately engaging in predatory lending by granting subprime loans to borrowers they know will not be able to pay, essentially assuring collateral seizure and foreclosure. "Subprime lending – which can and should be used in a responsible way to create new homeownership opportunities for persons with impaired credit – was instead shamelessly perverted through recklessness, greed, and unrealistic expectations," says Wade Henderson, president and CEO of the Leadership Conference on Civil Rights (LCCR).
H.R. 3609, the potential solution considered in the House Subcommittee, directly addresses the issue of subprime loans. The bill applies to pre-existing, non-traditional loans only and allows families facing foreclosure to appear before a bankruptcy judge. Under the terms of the statute, the judge has jurisdiction to restructure the terms of the loan, a proverbial second chance.
Such a bill, if passed, is predicted to foster immediate changes. "Allowing homeowners access to judicial modification would prevent about one-quarter of foreclosures likely to occur between now and the end of next year," says Dr. Mark Zandi, chief economist and co-founder of Moody's Economy.com.
Others see the bill as less meritorious. David Kittle, chairman-elect of the Mortgage Bankers Association, opposes the bill because it would: "Increase rates significantly, dry up investor interest in mortgage-backed securities and impose significant losses on the mortgage industry and bondholders."
Mr. Kittle believes that the market should be allowed to fix itself and that government regulation of the industry will be detrimental to the greater economy in the long run.
Dr. Zandi disagrees: "This legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuses by borrowers." He also notes that foreclosure proceedings are traditionally more costly and arduous than appearing before a bankruptcy judge.
While the House debates H.R. 3609, the Senate has also been working on finding potential solutions to the foreclosure crisis. One specific policy initiative discussed during the Senate hearing was the creation of the Federal Home Ownership Preservation Corporation, a government agency similar to the Home Owners Loan Corporation established under Franklin Delano Roosevelt's New Deal.
The Federal Home Ownership Preservation Corporation would, according to Mr. Henderson, "Facilitate the purchase of troubled pools of mortgage-backed securities at a substantial discount from investors, and leverage existing institutions' capacity to quickly replace the underlying mortgages with newly originated loans to homeowners at fair market values and reasonable fixed rates."
The establishment of such a corporation could produce significant results. Michael S. Barr, senior fellow at the Center for American Progress, believes that it has the potential to "Restore confidence and liquidity to America's financial markets, and provide a needed boost to the economy."
The lending industry has, according to many, failed to show they can effectively handle the mortgage crisis, leaving no other alternative but government intervention. "Individual homeowners – and our economy as a whole – cannot afford to wait for an industry that collectively created this mess, and is now being devoured by it, to take the lead in cleaning it up," says Mr. Henderson.
Sponsors of the legislation hope to bring the bills to the House and Senate floor in the upcoming weeks.
