Press Conference with Senators Schumer and Klobuchar on Subprime Mortgages

Interview

Press Conference with Sen. Charles Schumer (D-NY), Sen. Amy Klobuchar (D-MN) and Allen Fishbein, Director of Housing and Credit Policy, Consumer Federation of America on Subprime Mortgages

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SEN. SCHUMER (D-NY): Okay, good morning, everybody, and I'm happy to be joined here by Senator Klobuchar. Senator Brown is in ag markup, and Representative Maloney is voting. So neither of them can be here.

And I also want to thank my staff at the JEC -- our staff -- that did an incredibly good job to put this report together, as you will see.

Now today's report -- this is the cover, which many of you -- I guess you've all gotten the report, it says "Foreclosed" -- shows that -- shows that state by state the economic cost from the subprime debacle are shockingly high. From New York to California we are headed for billions in lost wealth, property values and tax revenues.

The subprime crisis is sort of shaking the economy from one end of the country to the other, and from the top to the bottom.

The current tidal wave of subprime foreclosures will soon turn into a tsunami of losses and debt for families and communities. The Bush administration needs to take off its ideological handcuffs and act quickly to save financially-strapped families from drowning in this flood of subprime foreclosures.

The key findings of the report are: first, from the beginning of this year to the end of 2009, if housing prices keep declining as they are expected to, we'll have 2 million foreclosures on our hands among subprime borrowers alone. The administration has forecast 500,000; that is much too low. And our report shows 2 million, wherever it shows it.

Over the next year-and-a-half approximately $71 billion in housing wealth will be directly destroyed, 32 billion (dollars) in neighbors' property value goes down, because when a house if foreclosed the neighboring property values decline. States will lose $917 million in property tax revenues alone. And then of course there are sales and other taxes which would add to that and push it over 1 billion (dollars).

And we're not talking about the financial burden that cities and towns all over the nation will face to maintain vacant properties and prevent crime near abandoned homes.

On top of the subprime foreclosure losses we outline in this report, the continuing housing slump risks being a massive blow to the economy. Economists like Robert Schiller, who recently spoke before our committee, estimate that a 10 percent decline in housing prices could lead to an overall loss of $2.3 trillion at a time when the country can least afford it -- if you move over this way, Amy.

Now we're going to that poster. That shows the loss. For the first time we've put together the loss on a state by state basis. In my state of New York alone total economic costs from foreclosures could be up to $9.5 billion. States like California, Florida, Ohio and Michigan are also going to be hurt badly. And I'll let my colleague from the Midwest go over the figures for her area in a few minutes.

I've been through a number of neighborhoods in New York, recently, Queens, Long Island and Staten Island, and I've met some of the folks who are on the verge of losing their homes. Each story is a sad story, and the people I've met, the majority of them, didn't have to lose their homes. In other words, their FICO scores and income was good enough that they could have gotten a much different loan than the one they've gotten. That's the saddest part of all, of this.

Now maybe if these foreclosures were occurring in an otherwise robust housing market, we wouldn't be so worried. But it's a vicious cycle. More foreclosures; housing market gets worse. The housing market gets worse; more foreclosures. And the cycle goes on and on. And it's not going to stop on its own for awhile unless somebody does something.

The National Association of Realtors last month predicted that home sales this year will be 11 percent lower than last year, and the Federal Reserve has estimated that, so far, declines in residential investment have already reduced annual GDP growth by three-quarters of a percent over the past year-and-a-half. That's likely to get worse; that is really a lot, to reduce GDP growth by close to 1 percent, which is likely to happen next year, is a heck of a drag on the economy.

With housing prices on the decline, and a lack of overall economic growth, subprime borrowers can't refinance their homes to pay off loans before they reset to higher and often unaffordable rates.

Two significant problems are prolonging the decline. One is fear in the credit markets by banks and investors. The second is confidence of homeowners goes down.

For instance, when my wife and I hear that a house in our neighborhood has just sold for a good price, we feel good, even though we're not selling our home in Brooklyn -- it's a co-op actually -- we feel like we're on solid economic footing. When you hear the opposite, you feel worse. And so while you can't measure it, the decline in consumer spending is very, very noticeable as well as a consequence of the subprime crisis.

So what do we do? Well, the number one best action we can take to calm this foreclosure storm is to prevent foreclosures from happening in the first place. We need action on two fronts. I've talked about this. We need the lenders and loan services to develop a standardized approach to doing loan modifications so they can help the volume of borrowers whose loans are due to reset.

These players have gotten to -- a late start in fixing the bad loans they've made to vulnerable borrowers. And the regulators, the administration and Congress, must continue putting pressure on them to do everything in their power to keep families in homes.

And we need more direct emergency resources to the nonprofits helping these borrowers negotiate with their lenders to get these loan modifications and refinances.

Senator Brown, Casey and I fought to get $100 million in the appropriations bill; that's not nearly enough to help the 2 million households that will need it. We need to do a lot more.

And second, to help facilitate the rescue of these borrowers, we should immediately give Fannie and Freddie increased flexibility to provide safe subprime refinances. I've introduced legislation with Barney Frank that would give the GSEs a six-month portfolio cap increase, 85 percent of which must be dedicated to refinancing subprime ARMs.

We also strongly support legislation currently pending that aims to stop sucker-punching struggling homeowners who are forced to pay income tax on forgiven debt stemming from restructured loans.

Our report -- and I hope you will read it because it really, as I said, it's just a great job, and I hope people will pay a lot of attention to it -- our report outlines in detail how we got to this point. For too long now unregulated mortgage companies have offered perverse incentives to opportunistic brokers, not bound by law, or in many cases, by conscience. These brokers have taken advantage of the most vulnerable segments of our economy.

The report makes some important policy recommendations that many of us here today have been fighting for for a long time. In addition to foreclosure prevention, we need stronger federal laws that offer predatory lending protections to homeowners, and restore commonsense underwriting practices that ensure borrowers' ability to pay.

The administration and Republicans in Congress need to get out of their ideological handcuffs.

They need to help us throw Americans a life raft as this subprime tsunami is about to hit not just them but the economy as a whole.

And now I'd like to call on somebody -- you know it's said we have a great freshman class. We do. And one of the brightest stars in that class is somebody who has an amazing ability to understand issues and explain them to the voters in ways that are crystal clear, in ways that motivate them to be involved.

She's really made a major mark already in this United States Senate. She has the affection and respect, both, I'd say, of every one of our colleagues in the caucus, Amy Klobuchar of Minnesota.

SEN. AMY KLOBUCHAR (D-MN): Thank you.

Well, thank you very much, Senator Schumer, for that nice introduction. And I'll try to put this in words that people at home will get, and this is maybe because I've been spending too much time at the farm markup.

But I would say that today's report underscores that in the world of subprime lending, the chickens have come home to roost. We are seeing all over our state people losing their homes, losing their dreams. And I spent the last two years doing a series of living room forums in our state where we would just call people together, often in suburban locations, and we'd talk about what was going on in their life.

And what they would say is, well, I've got a job, but I realize that my kids can't afford a house. And I was able to afford a house when I started out, and my kid can't. And they're going to have a baby, and they can't get a house, and I feel guilty, I don't know what to do. Should I take another job?

Or, I can't afford health care. And it basically was something that I think you saw reflected in the ballot boxes. And that was something of a middle class revolution -- you know, people saying, we are doing everything we can to get by in this country, and the forces are against us.

And I think that's what we're seeing with this subprime lending and what's been happening. In a perfect world subprime lending products enable borrowers with limited capital and less than a perfect credit history to purchase a home and establish credit. But we have witnessed a proliferation of abuse in this market, as our report shows. Too many borrowers have been offered loans that lenders know they cannot afford, and cannot sustain, ultimately leading to foreclosure and financial devastation, not only for families in jeopardy of losing their home, but also for the neighborhood and the communities in which they live.

I have talked to bankers who've looked at some of these cases. And they said that they couldn't design a loan in a better way to try to get someone to foreclose or not be able to make payments, the way the interest rate is low, and then it suddenly balloons up. These people prey -- these predatory lenders preyed on innocent people who were just trying to fulfill their dreams.

This is an issue that I witnessed first hand as a country prosecutor in Minnesota. We worked closely with the U.S. Attorney's office on many of these cases. Across Minnesota the number of homes in foreclosure is skyrocketing. In my home county of Hennepin, just this year, we've seen an 81 percent increase in the number of share sales as a result of foreclosure, while in neighboring Ramsey County the number of foreclosures jumped 125 percent over the same period.

And the foreclosure crisis is by no means isolated to the Twin Cities metro area. It is a problem being experienced across our state. It is estimated that foreclosures in greater Minnesota will increase by 93 percent in just one year.

And you have to understand, the economy of Minnesota is strong. We're eighth in the country for corporate headquarters. We have a very low unemployment rate. But here are people that were just trying to get a house for their families. They had jobs. They were doing what they could. And this is what's happening to them. So if it's happening in our state, which has, as I said, low unemployment rate, strong economy, diversified economy, you can imagine what it's doing to some people in other states across this country.

As today's report shows, unless action is taken now, these foreclosure rates are only going to increase. The results of this spike in foreclosures will be devastating for our state.

As Senator Schumer pointed out, it's not necessarily just the individual who gets the mortgage. It's the homeowners down the street, once there's a big foreclosure sign. It's the people in the community.

As the number of foreclosures increase, property values are likely to drop, resulting in decreased tax revenues and increased municipal maintenance costs. Slumping housing values are also likely to result in decreased consumer spending and jeopardize the overall economy.

Unfortunately, today's report underscores that this situation is expected to worsen rather than improve, and the effects of the subprime crisis are likely to extend beyond the housing market to the broader economy.

For too long, the Bush administration has ignored this problem and pretended that it's just going to go away. They have insisted that it will not impact the economy as a whole. However it's clear now that this problem is not just going to correct itself. It's not just limited to some very poor areas, or people that were fooled by one bad -- one bad lender or a few lenders out there engaged in fraud. It is across this country in every area, in every town.

If we are to contain the economic spillover effect of the subprime lending disaster, the federal government must act now. Minnesota has taken action to combat abusive lending practices by passing the strongest anti-predatory lending law in the country. It's time for Congress to enact equally tough legislation to protect America's homebuyers.

I commend Senator Schumer for taking the lead on this issue, so critical to our nation's economy. And I look forward to working with Congress and our committee to take action on behalf of America's homebuyers.

Thank you very much.

SEN. SCHUMER: Thank you, Amy.

And just before I call on Allen Fishbein, I just would refer all of you to this chart. This is the first time that there was ever a state-by-state breakdown, and it shows the devastation. My state of New York, $9-and-one-half billion of decline in value. Now even for a big state like New York $9-and-a-half billion is a lot. And in my state in particular, because housing values are so high, and because the homes are packed so densely, about 4 billion (dollars) of the 9- and-a-half billion (dollars) comes from neighborhood decline. You could be paying your mortgage, be totally up to snuff, and you're going to lose money on the value of your home because the likelihood is in your neighborhood there is a home that's being foreclosed on and that brings down property values.

And it's different in different states. Some states have a very high neighborhood value compared to the other, like New York; others don't. But again, this shows the effects on every state, and it's affecting every one of us.

Now the Consumer Federation of America has done an incredibly job on this in so many areas, and a leader in that organization for, how long, many many years, is Allen Fishbein. And I'd like to call him up to say a few words.

Allen.

MR. FISHBEIN: Thank you, Senator Schumer and Senator Klobuchar.

I'm Allen Fishbein, and I'm director of housing and credit policy with the Consumer Federation of America. CFA is a national association of some 300 pro-consumer organizations representing a combined total of 50 million citizens that was organized to promote the consumer interests. And I just have a brief statement about the report being issued today.

The report issued today by Senator Schumer's Joint Economic Committee provides compelling evidence as to why the worsening subprime foreclosure crisis is a problem for all Americans. Hundreds of thousands of families are threatened with home loss due to faulty mortgages that should never have been made.

However, as the JEC report illustrates, the effects of the crisis extend well beyond vulnerable home loan borrowers. Massive foreclosures harm neighborhood property values, reduce local tax revenues, and strain municipal resources. It could even lead to a broader economic downturn.

Federal action can help stave off these broader effects, and there are three things specifically we think that Congress could do to slow the bleeding. First, to fix the bankruptcy code to protect an estimated 600,000 families from foreclosure; two, to increase foreclosure avoidance counseling; three, reform the consumer protection laws to reduce the likelihood of these problems again. And CFA commends the leadership of Senator Schumer and others in Congress who are putting forth very constructive legislative proposals to address each of these three items. And we hope the Congress will act on them swiftly.

Thank you.

SEN. SCHUMER: Thanks, Allen.

And just again I'd refer you to this chart. The ones in the red have over 2 -- $2.2 billion in decline, of economic loss. And you can see they're spread throughout the country and they run from the new booming states like Arizona, a rather small state to have such a large loss, to the old Midwest, places like Ohio, Michigan, parts of Pennsylvania, New York. Again, to the East Coast, the property values are very high in New Jersey, downstate New York and -- (inaudible).

Ready for your questions. Yes.

Q (Inaudible.)

SEN. SCHUMER: Well, we hope to move on all of these. I know we're working closely with the committee staff. And we're hoping that a lot of this legislation can move late this year or early next year.

Q (Inaudible.)

SEN. SCHUMER: Well, I'm hopeful that we can have markups. We just finished the TRIA bill which was very important to large parts of the country including New York. And I think the next topic we're going to be looking at is the subprime crisis.

Q Senator, you said -- (inaudible).

SEN. SCHUMER: Let me give you an example.

Q (Inaudible.)

SEN. SCHUMER: Good. Good, let me give you an example of someone who has just passed away actually, that I met him and knew him, but there are many like this: Frank Ruggiero (sp) was a homeowner in Ozone Park. He was a retired subway motorman. My guess is he was a Daily News reader, being a retired subway motorman -- he's from the Daily News.

Anyway, Frank had a good pension and had Social Security. He would have qualified for a prime loan. He had his house in Ozone Park, in Nativity Parish. He had paid about 15 years on his loan, but he needed $50,000 cash rather quickly because he had diabetes -- that's what he died from. His health care plan didn't cover it. You can see all these issues sort of converge. Lack of health care forced a lot of people into the subprime market.

Frank saw an ad, get some easy money, refinance your home. Calls up the person on the phone, and the person says, yes, if you refinance a new 30-year mortgage you can get 50,000 (dollars) in cash.

Great, says Frank, how much more will I pay? Said, starting in January you'll $100 more, 1,400 (dollars) to 1,500 (dollars). Frank says, that sounds easy. I'll do it. Doesn't read the whole document; who does. I didn't read my whole mortgage document; it's the only one I've ever signed. We've had the same co-op for 25 years.

But in any case -- excuse me -- here's what happened to Frank, three things, okay. First, sure enough, the following January his mortgage went up $100 from 1,400 (dollars) to 1,500 (dollars). The following year it went up to 3,800 (dollars). He couldn't afford it.

Second, of the 50,000 (dollars) he was supposed to get -- listen to this -- he got $5,700. The mortgage broker got a fee of $22,000 because he put all the bells and whistles -- bad bells and whistles -- on Frank's mortgage. In other words, he got a commission for a higher interest rate than Frank would have had to pay. He got a commission because it was a non-recourse loan. He got a commission for all these kinds of things. He got 22,000 (dollars).

The mortgage company -- not a bank -- that lent Frank the money got 11,000 (dollars). And then between the lawyer and the appraiser, the rest was eaten up, so Frank only got 5,700 (dollars).

Here's the most amazing fact: Frank could have walked into a bank and gotten a prime loan. He was a prime borrower. Half the people who are now in foreclosure could have gotten prime loans but they were taken advantage of by these really slimy mortgage brokers. Not all mortgage brokers are slimy, but there are too many who are.

And that's what happened. And so he didn't get the money he needed. He lost his home. And he's now passed away from the diabetes.

That case can be repeated. I was with Ms. Diaz (sp) in Staten Island. Same type of thing. She worked as a worker in a hospital. She had good enough income to get a much better loan. But they were taken advantage of. These are not people who deal with banks all the time.

Other questions? Okay, thank you all and have a nice day.

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