Schumer Urges Passage Of Two Bills To Help Subprime Borrowers Refinance, Avoid Foreclosure

Schumer Urges Passage Of Two Bills To Help Subprime Borrowers Refinance, Avoid Foreclosure

U.S. Senator Charles E. Schumer (D-NY), chairman of the Joint Economic Committee (JEC) and chairman of the Senate's Housing Subcommittee, spoke today on the Senate floor in support of expedited passage of two pieces of landmark legislation that will assist borrowers trapped in risky, unaffordable subprime loans. Following Senate Majority Leader Harry Reid's unanimous consent requests for the two proposals, Senator Schumer spoke to encourage his colleagues to support the two bills without any further delay.

"This Administration needs to take off its ideological handcuffs when it comes to helping homeowners and protecting our economy," Schumer said. "These bills are a measured, targeted effort to prevent the spread of the subprime mortgage meltdown to more families and into the larger economy—and they should be supported by my colleagues and by the White House."

The FHA Modernization Act, which includes the loan limit increase originally proposed by Senator Schumer this past spring, allows risk-based pricing and lowers down payment requirements from 3% to 1.5%. It also includes provisions enhance consumer and fraud protection. These improvements will give FHA greater flexibility to assist subprime borrowers with critical refinancing alternatives that will allow them to prevent foreclosure.

The PROMISE Act, introduced by Schumer, would stabilize the current credit crunch and alleviate the predicted wave of foreclosures by providing the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—with a temporary, six-month increase in their portfolio caps. The bill would increase the limitations currently in place by 10%, allowing for 85% of the increase to be dedicated to assisting in the refinancing of subprime mortgages at risk of foreclosure.

Senator Schumer's remarks as delivered are reproduced below.

Statement of Senator Charles E. Schumer

November 15, 2007

I rise today to discuss the subprime lending crisis and the plan we are executing to address the foreclosure wave that threatens homeownership and our broader economy. Rampant predatory lending practices across this nation have left millions of American homeowners stuck in unaffordable and unfair subprime loans.

As a result, two million families now face the prospect of foreclosure and the loss of their homes over the next two years unless we take action. The number is going to get worse because the loans that were made in 2006 and this year, 2007, usually don't reset until 2008 and 2009. And because so many people who took these loans were taken advantage of, the interest rate will skyrocket for them and many of them will not be able to afford it.

Foreclosures entail not only direct costs to the lenders and borrowers but also high spillover costs that are felt by neighboring homeowners, communities, and local governments in the form of lower home values, lost property tax revenue, and increased maintenance costs. A recent report by the majority staff of the Joint Economic Committee (JEC) estimated that each foreclosure can cost $227,000 in direct and indirect costs. That's astounding. The homes on a street or in a neighborhood that has had foreclosures often go down in value. So even if you're perfectly safe, even if you've already paid your mortgage and have no intention of taking out another one, you are at risk because of this foreclosure crisis in terms of the value of your home. The numbers mean that if the housing market slump continues through the next two years, as many economists estimate, approximately $103 billion in housing wealth will be destroyed as these homes are foreclosed on. $103 billion in lost wealth at a time when our families can least afford it.

In addition, states and local governments will lose nearly $1 billion in property tax revenue over the next two years as a result of the destruction of housing wealth caused by subprime foreclosures. That is $1 billion less funding for schools and public safety, and that's just the direct property tax loss. We're not talking about the other losses that states and local governments will see as a result of the broader economic impact of the crisis. 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. We're also not talking about the cost to the larger economy.

When home values go down because of this crisis, consumers spend less. Consumer spending has been the engine of this economy. It accounts for about 70% of our GDP and the statistics show when home values go down, consumers spend less. So this is ricocheting from one end of the economy to the other. And again, even if you live in a home and you've paid your mortgage, you will be affected by this.

Mr. President, the frustrating thing here is we know what to do here. We can't make this crisis go away. There is no magic wand. It took years of neglect, years of ideological aversion to even commonsense regulation of the now unregulated mortgage brokers. But the frustrating thing—frustrating for this member, who's been talking about this for a long time—is that we know what to do and this Administration, when it comes to the subprime crisis, has remained like an ostrich with its head in the sand: not paying attention.

Why? Why don't they see what everyone else sees? The reason is quite simple, Mr. President. We have ideologues that run this Administration. Their view is government should never be involved. Let the homeowner pay the price. Let the economy pay the price. Because to get the government involved is bad. They can't prove that. That's their ideology. And if there was ever a time when we needed some thoughtful, careful, moderate but directed government intervention not to bail out anybody, those people are paying the price. You read it in the financial pages of the newspapers right now. But to help our nation out of this crisis at a time when other things like high oil prices are hitting makes eminent sense.

The time to act is now while we still have a chance to save these homes and strengthen our floundering housing market. Well, I'm proud to say today that my colleagues, we in the Senate, will have an opportunity to act and take action on two measures that are designed to use the tools of the Federal Government to assist in helping the two million subprime borrowers facing foreclosure with alternatives for loan workouts, refinancings and modifications. I hope my colleagues on the other side of the aisle will agree with us that these two actions are urgently necessary.

To wait even three, four months will have this crisis grow in problem for those homeowners whose mortgages go up, for those financial institutions that have the mortgages, but to a far greater extent, to our entire economy, neighborhoods affected and consumer spending. So I hope my colleagues on the other side of the aisle will join us in helping take the urgent action that is needed no now. Not next month, not in February but now.

First we'll take action to pass the FHA Modernization bill. This legislation makes several important changes to FHA, including adjustments to down payment requirements, loan limits, and underwriting standards to give the FHA more flexibility to assist subprime borrowers with safe and sustainable refinancing alternatives before their loans reset to unaffordable rates. With these changes, FHA will be able to rescue tens of thousands of American families from the financial ruin of foreclosure. The legislation will also make improvements to FHA's counseling and foreclosure prevention programs to ensure that borrowers who have already faced the specter of the loss of their home will not have to go through the ordeal again. The FHA legislation is modest. It has bipartisan support. It has the support of the Administration. What are we waiting for?

Second, we are pushing the passage of the PROMISE Act, a bill to temporarily increase the portfolio caps upon Fannie Mae and Freddie Mac by their regulator, legislation I have introduced along with Congressman Frank in the House. The bill will alleviate the predicted wave of foreclosures by giving them 10% more balance sheet capacity. But not just, "Do you what you want, we hope you can avoid some foreclosures." We say that 85% of that increase must be dedicated to assisting subprime borrowers that are stuck in risky adjustable rate mortgages.

The legislation is based on the premise that in troubled market times like these when private firms are unwilling or incapable of providing financing to help subprime borrowers it is appropriate and necessary for the government-sponsored enter prices to step in and provide liquidity this is why we have GSEs—quasi-private and quasi-public. They have a certain and special responsibility when the nation's month is at risk. They are not the same as a private company whose job is to make money for owners or stockholders but at the same time they have the expertise of the private sector and the clout of the private sector to get something done in an efficient and directed way.

We've all heard the GSEs are the only game in town for secondary market trading due to profound distrust of credit quality and rampant uncertainty about the rating agencies. We have to use the liquidity they provide to target those subprime borrowers in a need of saving their home. The frustrating thing is the administration is opposed to this legislation. They just don't like Fannie and Freddie and they say let the markets take care of this in their own way.

Mr. President, that's a lesson that was widely accepted in the 1890's and to some extent in the 1920's. But this is 2007. We know that thoughtful, well thought out government intervention in a careful way works and what is needed. We also know if we don't have it, the booms and busts of the economy and to individuals will be far greater and starting, really, with Woodrow Wilson and then with Franklin Roosevelt and with Democratic and Republican presidents alike since World War II we have learned that, at times, government intervention is called for, particularly when the private sector is unable to act. In this case, the private sector is clearly unable to act. Over the coming weeks, we also plan to pass $200 million in the transportation HUD appropriations bill for housing counseling, organizations that specialize in foreclosure prevention.

Here's another problem. A homeowner—and most of the homeowners who are in foreclosure or about to go into foreclosure, these are home owners who could qualify for prime loans but were taken advantage of by greedy mortgage brokers. Now they are stuck. But not really. They have a revenue stream. People I have met, the late subway motorman, Ms. Diaz, a clerk at a hospital for 35 years with a pension—have the income. Mr. Ruggiero, of Queens, and Mrs. Diaz, of Staten Island, they can refinance but they have no one there to help them. Banks don't do this good part anymore. There are nonprofits able, dedicated, capable, knowledgeable nonprofits who could come right in and fill in.

Now, you, Mr. President, the Senator from Ohio and the Senator from Pennsylvania and I were able to persuade Senator Murray who, in her wisdom and always willingness to help, put first $100 million and then $200 million into the appropriations bill for housing counseling organizations who can provide this help. At a cost of as little at a few hundred dollars per borrower, housing counselors can prevents foreclosure that result in economic loss of $227,000, direct and indirect on average. This is a highly cost effective investment. We urge the Administration not to veto this emergency funding when the Senate passes it. If it's vetoed and this crisis gets worse, a portion of the blame, a good portion, will be at the President's doorstep, plain and simple. So I hope the President will not veto it.

Most everyone who has looked at this legislation says it's needed. If we can do these three things: FHA reform, temporarily lifting the portfolio caps imposed on Fannie and Freddie, and providing critical funding for nonprofit housing counselors, we can evade the mortgage crisis and we can get our country focused on moving economically and on so many other problems that face us. Mr. President, I yield the floor.

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