Testimony
Source: Leadership Conference on Civil Rights
Recipient: Senate Subcommittee on Housing, Transportation, and Community Development
Date: 06/26/07
Chairman Schumer, Ranking Member Crapo, and members of the Subcommittee: I am Wade Henderson, president and CEO of the Leadership Conference on Civil Rights (LCCR). Thank you for the opportunity to testify in today's hearing on protecting homeowners and on eliminating abusive and predatory mortgage lending.
LCCR is the nation's oldest and most diverse coalition of civil rights organizations. Founded in 1950 by Arnold Aronson, A. Philip Randolph, and Roy Wilkins, the Leadership Conference seeks to further the goal of equality under law through legislative advocacy and public education. LCCR consists of approximately 200 national organizations representing persons of color, women, children, organized labor, persons with disabilities, the elderly, gays and lesbians, and major religious groups. I am privileged to represent the civil and human rights community in submitting testimony for the record to the Committee.
Today, I would like to discuss what has caused the subprime mortgage market to break down, what it means for the communities LCCR represents, and what needs to be done. While a wide range of private stakeholders in the housing, lending, finance, and nonprofit sectors are already working hard to address the problems that have been emerging – problems that include a drastic rise in subprime foreclosures – I believe that the problems in the subprime market today are systemic ones that, ultimately, will require a strong Congressional response.
The Problems
While I am honored to speak before you today, I must say how much I wish that we had held this hearing years ago. For years, civil rights and consumer protection groups have been arguing that the modern subprime mortgage lending system is fundamentally flawed, that countless numbers of irresponsible and abusive loans were being made, and that the consequences for both borrowers and our economy at large would be drastic. It has long been clear to our groups that America has a separate and unequal lending system and that African-American, Latino and other minority consumers disproportionately secure credit from an unscrupulous and unregulated lending market.
I would also like to say at the outset, in order to make sure that my words are not misinterpreted, that I agree with many here today that responsible subprime lending does indeed serve a valuable role. Responsible subprime lending creates opportunities for many people who might otherwise never own a home or obtain credit and we all have an interest in preserving it.
The basic problem that we face today, however, is that the "responsible" part of "responsible subprime lending" has essentially gone out the window. Over the past few years, we witnessed an explosion in the use of risky mortgage products and a rapid decline in the use of sensible lending practices.
Some of the root causes of today's foreclosure crisis lie in the abuse of normally-sound subprime lending practices. In a gross perversion of a practice normally used to lend money to self-employed borrowers who lack W-2 documentation, for example, many Americans were carelessly given home loans without being required to show any proof that they had enough income to pay them back. Many others, perhaps under the mistaken notion that home values would continue to spiral upward indefinitely, were only required to show they had enough income to pay low "teaser" rates for the first two or three years of hybrid ARM loans – and were led to believe that they could easily refinance or sell their home once their monthly payments increased. Still others fell victim to loan originators who encouraged appraisers to artificially inflate the home's market value causing untold thousands of consumers to take out refinance mortgages that were much more than what the home was worth. In order to make mortgages look cheaper and more enticing than they actually are, many lenders did not factor other critical expenses such as property taxes and hazard insurance into the cost of home loans. Practices such as these drastically increase the likelihood that financially unsophisticated borrowers will be given home loans that they cannot afford to repay.
This recklessness has been aided and abetted by the rapid growth in the secondary mortgage market. While securitization, the repackaging and selling of mortgages to investors, plays an important role by making more funds available to lenders so they can provide additional mortgage loans, it can easily become counterproductive if it reduces the incentives for lenders to carefully ensure that the mortgages they originate can actually be repaid.
At the same time, other aspects of the subprime mortgage lending system have reflected not just carelessness and a lack of accountability, but outright greed. Many mortgage brokers, for example, are given bonuses, or "yield spread premiums," for steering unwitting borrowers into higher-rate subprime mortgages than their incomes or credit scores would otherwise dictate. Many subprime mortgages also include heavy penalties for early repayment, penalties that require borrowers to sacrifice thousands of dollars of equity in their homes if they wish to refinance at a lower rate. Such practices are of particular concern to LCCR because, according to extensive research by the Center for Responsible Lending, they disproportionately target many of the racial and ethnic minority communities that our member organizations represent.
In any normal market situation, such unsound and even predatory lending practices are inherently bound to backfire on borrowers, lenders, and investors alike. However, when such tactics are used on a widespread basis in a housing market where supply greatly exceeds demand, and where prices have simultaneously been driven up to unsustainable levels through widespread speculation as well as through appraisal practices that range from overly-optimistic to downright fraudulent, you have a recipe for a widespread meltdown. Unfortunately, it appears that this is the situation in which we find ourselves today.
What has further exacerbated this situation is that the current problem we are facing is due, in part, to the ineffectiveness of federal regulatory agencies in ensuring that their member institutions fully meet their obligations under the Fair Housing Act and Community Reinvestment Act. The truth is that if federally regulated institutions were meeting their fair lending and CRA requirements and making affordable, sustainable, prime loans to deserving borrowers, we would not have seen such an explosive growth in abusive subprime lending. The hard truth is that African-American, Latino, and female householders disproportionately receive unsustainable high cost subprime loans. Federally regulated lenders, who routinely have denial rates for African-American and Latino loan applicants that are at least double the rate for Caucasian loan applicants, are not lending as they should to African-American, Latino, and female borrowers. This gap in fair lending has opened the door for the unregulated lending market to come in and take advantage of these borrowers.
This failure is particularly disheartening when one considers that borrowers are unwittingly receiving higher cost loans when they actually qualify for lower cost loans with less onerous terms. Various sources report that a significant percentage of subprime borrowers could have qualified for a prime loan. Freddie Mac was the first agency, to our knowledge, to report this finding. The GSE reported in 1996, based on an analysis of loans it had reviewed, that 35 percent of subprime mortgages could have qualified for a conforming, prime loan. More recently, Freddie Mac has conservatively estimated that 15 percent of subprime borrowers could qualify for traditional loans. Fannie Mae has reported estimates that up to 50 percent of subprime borrowers could qualify for prime loans.
Moreover, Congress has allowed the Office of Comptroller of the Currency to exempt its member institutions, their affiliates, and third party contractors from state anti-predatory lending laws. This is problematic because OCC members own and operate – and have owned and operated – subprime affiliates and utilize third party contractors, such as mortgage brokers, to originate loans. This has meant that for a broad section of the mortgage market, the only entity regulating loan originations is the bank itself.
