The Leadership Conference on Civil and Human Rights

Table of Contents

• Introduction

Executive Branch

• Looking Forward to New Blood in Washington
• Interview with Bob Edgar

On the Hill

• The Americans With Disabilities Act, Act Two
• As Home Foreclosures Climb, Efforts to Help Troubled Homeowners Continue
• The Year in Judicial and Executive Nominations
• Advocating for Federal Leadership on Education
• Facing New Challenges with the 2010 Census
• Modernizing the Federal Poverty Measure
• Piecemeal Legislation, Raids Take Place of Immigration Overhaul
• Below the Surface
• Interview with Kathryn Kolbert

In the Courts

• Wrapping up the Supreme Court’s 2007-2008 Term

In the States

• Colorado: Battleground for More Than Just the Presidency.
• Interview with Lilly Ledbetter

Leadership Conference Activities

• Preventing a Digital TV Divide
• Examining the State of Fair Housing in the 21st Century
• Bringing Diverse Communities Together
• 32nd Annual Hubert H. Humphrey Civil Rights Award Dinner
• Interview with John Payton

As Home Foreclosures Climb, Efforts to Help Troubled Homeowners Continue

Rob Randhava

After years of ignoring warnings by civil rights and consumer groups about the growing crisis in the mortgage lending industry, policymakers in 2008 finally responded to the sharp nationwide increase in home foreclosures.  However, the federal government's response will help only a fraction of homeowners keep their homes as foreclosures continue.

How the Foreclosure Epidemic Emerged and Evolved

The decade-long housing boom led many mortgage lenders to abandon traditional safeguards against risky lending tactics such as low introductory "teaser" interest rates that later called for higher monthly payments; "no-doc" loans, in which borrower assets could easily be falsified; and exclusion of such homeownership expenses as property taxes and insurance.

Rapid growth in securitization (bundling and selling mortgage loans to investors) further encouraged risky practices.  Mortgage securitization was supposed to act as a way to quickly return funds to lenders, allowing them to make additional loans that would increase homeownership. It eventually did the opposite: accelerating mortgage loans without guaranteeing borrower payback.

Many lenders squeezed out even more money for themselves through predatory lending practices – paying bonuses, so-called "yield spread premiums," to mortgage brokers for steering borrowers into subprime mortgages (more expensive loans meant for risky borrowers) even when they could have qualified for less expensive ones.

The civil and human rights communities had long expressed concern about predatory lending because these practices disproportionately targeted racial and ethnic minority borrowers, robbing them of their homes and their chief wealth-building asset.  According to the Center for Responsible Lending, Black and Latino borrowers were over 30 percent more likely to get higher-cost loan than White borrowers, even after accounting for differences in borrowers' credit.

The results have been disastrous not only for minority homeowners, but for homeowners nationwide, with millions poised to lose their homes.

Despite early warnings from the civil rights community and consumer organizations, neither the Federal Reserve nor Congress did anything to avert this crisis.  This was not because they were powerless, but because of the tremendous resistance from the lending industry, which steadfastly denied – even in the midst of the growing 2007 crisis in which foreclosures shot up 79 percent according to RealtyTrac, a national database of foreclosure listings – that predatory lending was a widespread problem. 

Washington Responds to Growing Foreclosures – Sort of

Congress and federal regulators finally took action in late 2007. In November, the U.S. House of Representatives passed The Mortgage Reform and Anti-Predatory Lending Act of 2007, sponsored by Rep. Barney Frank, D. Mass.  Among other things, the bill would prohibit lenders from steering borrowers into higher-rate mortgages and require lenders to verify whether borrowers could afford monthly loan payments. 

Civil rights organizations were generally supportive of early versions of the bill, but its provisions were weakened before it reached the House floor, as its sponsors made compromises to secure enough votes for the bill to pass.  Of key concern was a provision that prevented states from enacting more borrower-friendly laws than those that were established under the bill.  Lending industry advocates had lobbied hard for the addition, claiming they would be more supportive of regulation as long as it was uniform.

Ultimately, civil rights organizations were divided over the final version of the bill, with some supporting it as a generally positive first step and others opposing it because it could prevent more beneficial legislation in the future.  In the end, the bill never proceeded beyond House passage.  Senator Christopher Dodd, D. Conn., followed up by introducing stronger anti-predatory lending legislation, but faced insurmountable resistance in the closely divided Senate.

In addition, the Federal Reserve, the nation's central banking system, finally announced that it would invoke its own powers under the Home Ownership and Equity Protection Act (HOEPA) – powers it had had since 1994 – and issued draft regulations in December 2007, which were finalized in July 2008. 

However, the Federal Reserve or Congress had not yet addressed the most immediate problem of escalating foreclosures.  Finally, in early 2008, the Senate began work on a comprehensive legislative package.

Senate Majority Leader Harry Reid, D. Nev., introduced the Foreclosure Prevention Act, which included a favorite proposal of civil rights and consumer groups: legislation that would allow borrowers to modify their mortgage terms in Chapter 13 bankruptcy proceedings, as borrowers can already do with almost any other kind of debt.  The Center for Responsible Lending estimated that as many as 600,000 borrowers could be helped by such a process.

The financial services industry, however, adamantly opposed the bankruptcy proposal, which was dropped from the bill during a filibuster in April 2008. 

Civil rights advocates did not support the eviscerated final version of the bill. LCCR President and CEO Wade Henderson said that "the bill amounts to Congress dancing around a fire when it should be putting it out," and it was met with equally critical responses from the media.

Congress finally passed the bill on July 30 after months of negotiations.  The final bill responded not only to the foreclosure crisis but to other housing-related policy issues.  To boost foreclosure prevention, the bill established a program in which lenders could obtain Federal Housing Administration guarantees of refinanced loans if they voluntarily agreed to accept some losses on the original mortgage.  The bill also:

• Provides $4 billion in Community Development Block Grants for states and cities to purchase and rehabilitate foreclosed properties;
• Creates a long-desired "Affordable Housing Trust Fund" to provide affordable rental housing;
• Imposes a new nationwide licensing and registration system for loan originators; and
• Gives the federal government sweeping powers to fund and oversee Fannie Mae and Freddie Mac, the two government-sponsored companies that help provide liquidity to the housing finance market, but were saddled with growing losses.

LCCR supported the final bill, though it and other civil rights groups criticized the lack of mandatory anti-foreclosure reforms, such as the Chapter 13 bankruptcy proposal.

The bankruptcy proposal briefly saw new life in September as the faltering economy forced the federal government to consider bailing out the nation's credit markets.  On September 21, U.S. Treasury Secretary Henry Paulson proposed a controversial plan to buy up $700 billion worth of bad debt from the financial industry.

The civil rights community pushed Congress to add the bankruptcy proposal to the final bill, arguing that struggling homeowners should be helped as well.  However, the provision was stripped out on September 28, due to intense opposition from the lending industry.

What's Next

With the foreclosure crisis expected to continue, the civil rights community will continue to urge Congress in 2009 to enact laws that give struggling homeowners more leverage in dealing with mortgage lenders and servicers.  These efforts will focus, in particular, on Chapter 13 bankruptcy relief reforms and targeted foreclosure deferment policies.  Groups will also look for assistance for families and communities that have already been devastated by widespread foreclosures.

Rob Randhava is counsel for the Leadership Conference on Civil Rights and specializes in immigration and housing/finance issues.