Don’t Forget Homeowners

Subprime Mortgage Crisis Boasts Difficult Choices

Congress weighs the cost of rising mortgage foreclosures and possible remedies. Resulting policymaking must be highly sophisticated.

Key congressional panels on the House and Senate sides of Capitol Hill this week will wade directly into the growing home mortgage crisis in America, examining state and federal oversight of the once frothy subprime mortgage market as well as the consequences of the boom in subprime mortgage originations in the first half of this decade—before the nationwide downturn in the housing market.

Members of the two panels holding hearings this week—the House Oversight Subcommittee on Domestic Policy and the full Senate Banking Committee—already know the questions to ask. How did outright fraud seep so deeply into the subprime mortgage origination marketplace? Why did state and federal regulators fail to police this marketplace, where so many unsophisticated borrowers are exposed to such abuse? Where were the credit rating agencies and investment banks (with their allegedly sophisticated risk-measurement models) to foresee the outcome of these abusive lending practices before they got out of hand? What can now be done to ensure this doesn’t happen again?

The most immediate question, however, must be: What can be done to help the families at risk of losing their homes as a result of this crisis? The Center for Responsible Lending predicts that one in five subprime mortgage loans that originated over the past two years will end in foreclosure due to predatory lending highlighted by the lack of solid underwriting documentation by lenders, allowing many prospective homeowners to borrow well beyond their ability to service their debts, as well as costly up-front fees and pre-payment clauses that make it difficult for borrowers to refinance their mortgages.

That’s 2.2 million families. Others should not follow in their wake.

Yet, Congress has a delicate balancing act ahead of it as it considers legislation. Policymaking on this front must take into account the importance of the subprime marketplace (absent fraud and abuse) in helping first-time borrowers realize the dream of homeownership and subsequent wealth creation. New laws must also balance the importance of a liquid secondary marketplace in subprime mortgages, which helps lenders cope with the risk of lending to subprime borrowers, with the need to ensure the secondary market does not allow lenders and brokers to pass on too much risk or create over-stimulated demand for subprime mortgages, as has been the case over the past couple of years.

There are a number of good starting points of discussion now on the table. Detailing which regulatory agency is responsible for oversight of the increasingly complex mortgage marketplace is critical. So, too, is a serious policy discussion over a potentially modified role for a more nimble and sophisticated Federal Housing Administration to help bring more balance to the subprime marketplace. The chairmen of the House Financial Services Committee and Senate Banking Committee, Rep. Barney Frank (D-MA) and Senator Christopher Dodd (D-CT), say they are weighing some of these options. Both chairmen also see a potential role for the FHA in helping current homeowners saddled with impossible subprime mortgage terms cope with fighting off foreclosure.

These discussions are very good starting points, yet it is equally important to look to the states and local communities to begin the individual workouts necessary to save the homes of up to 2.2 million families in the coming years. After all, real estate markets by their very nature are local, most especially in a downturn. What better place is there to look for solutions that work today in order to then take those solutions on the road to other communities in need of speedy, workable ideas?

While all states have homeownership and foreclosure prevention counseling, only a handful of states sponsor mortgage assistance programs that help qualifying families in danger of falling too far behind on their mortgage payments due to a sudden loss of income, illness, or death in the family. To read a detailed review of these state programs, please see the Center’s recently published report: Boom to Bust: Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures.

As our report details, increased federal assistance could expand these programs and enhance those foreclosure prevention programs that do not provide loans. Among the steps policymakers should consider are:

  • Federal grants to expand and enhance current mortgage assistance and foreclosure prevention programs and low-interest mortgage assistance to eligible borrowers.
  • Federal funds to target key cities and states facing the highest risk of mass foreclosure.
  • Provisions to ensure federal agencies assess the effectiveness of each program every three years.
  • Strengthen programs that aid families while their mortgage contracts are renegotiated or the property is sold on the market so that the homeowners’ credit ratings are salvaged, allowing for the possibility of future homeownership.

Coping with the crisis in this fashion would put federal money to work directly in the worst-hit communities. What’s more, when you consider the great financial burden placed on lenders, borrowers, and communities when homes foreclose, these are exceedingly cost-effective solutions. While foreclosures are sometimes unavoidable, it is in the best interests of our communities and overall economy to support those who have embraced homeownership and work to prevent foreclo­sure.

Homeownership is a critical step in the creation of stable and secure communities. Yet, homeownership is also a step that is especially difficult to take for those without access to tradi­tional home lending products. When assets and wealth are better distributed and families are more financially secure, this, in turn, enhances opportunities for everyone and contributes to the country’s overall economic security.

For more information on the Center’s research and analysis of the subprime mortgage crisis and the U.S. housing market, please see the Economy page on our website, where you’ll find the following reports:

Boom to Bust: Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures

Subprime Market: Isolated or Tipping Point?

Guiding Lights: Regulators Eye Subprime Mortgages

The End of the Great American Housing Boom

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