Federal Action on Subprime Mortgage Crisis
Feature Story by Angela Okamura - 12/18/2007
In recent weeks, the federal government has been working to provide relief to the millions of homeowners in the subprime market in danger of losing their homes.
On December 18, the Federal Reserve proposed new mortgage lending rules designed to prevent lenders from taking advantage of subprime borrowers. Under the new rules subprime lenders are required to consider borrowers' abilities to make payments and to verify that they have the income and assets they claim. It also would require better disclosure of special bonuses that mortgage brokers earn when they write loans at higher rates than a borrower is eligible to receive.
The proposal is subject to a three-month public comment period, after which the Fed will decide whether or not to adopt them.
In addition President Bush has announced a plan to help slow down the growing subprime mortgage crisis. The plan would temporarily freeze interest rate hikes for some homeowners who bought houses with subprime loans, allowing the borrowers to pay lower introductory rates for several more years.
Critics of the plan argue that it puts only a small dent in the growing number of foreclosures.
Under the plan, they claim, only a fraction of subprime borrowers would be helped, while borrowers who have already fallen behind on payments or those whose introductory rate expires before January 1, 2008 would be left out. Experts suggest that only 12 percent – about 240,000 homeowners – of subprime borrowers would benefit from the plan.
In an effort to reach more troubled borrowers than President Bush's plan, Representatives John Conyers, D. Mich., and Steve Chabot, R. Ohio, reached a compromise on a bill to give hundreds of thousands of borrowers a chance to save their homes through the use of Chapter 13 bankruptcy proceedings. Unlike the President's plan, it would allow bankruptcy judges to alter the terms of a mortgage over the entire life of the loan – something they can already do with nearly any other form of debt.
The bill was cleared by a House panel last week by a 17 to 15 vote. Supporters expect the full House to consider it in early 2008.
While the housing crisis is a huge problem, civil rights groups are particularly concerned with homeowners in the subprime market whose homes are in jeopardy. In a letter to the House Judiciary Commitee, the Leadership Conference on Civil Rights (LCCR) voiced its enthusiastic support for the Conyers/Chabot bill and argued that while the President's plan is "undoubtedly a positive step, it will only help a small percentage of borrowers who are likely to find themselves in trouble in the coming years....homeowners, and our economy as a whole, simply cannot afford to wait."
The Senate passed a different bill (93-1) on December 13 that would allow the Federal Housing Administration to back refinanced loans for tens of thousands of borrowers who are in danger of losing their homes because their mortgages are resetting to sharply higher rates from initial low "teaser" rates. Sen. Jon Kyl, R. Ariz., was the lone senator to vote no.
These new efforts to mitigate the effects of the foreclosure crisis come at a crucial point in the problem. According to a recent Center for Responsible Lending (CRL) report, the crisis is currently "spilling over" and affecting local housing prices. CRL cites that 44.5 million neighboring homes will experience devaluation because of the projected foreclosures on 1,115,000 subprime loans issued in 2005 and 2006.
Subprime loans are mortgages that are offered to borrowers with relatively troubled credit histories, and are disproportionately utilized by minority communities, predominately African-American and Latino. Because the loans are viewed as more risky, they generally carry higher interest rates and other costs.
Predatory lending practices – where borrowers are often strapped with unreasonable rates they are unable to pay, without warning or explanation from the lenders – are found more frequently in the subprime market.
