|
AHGA Home
| |
|
Testimony of the
American Homeowners Grassroots Alliance
Submitted to the
House Financial Services Committee
Hearing on
Possible Responses to Rising Mortgage Foreclosures
April 17, 2007
|
The American Homeowners Grassroots Alliance (AHGA)
commends the House Financial Services Committee for holding this hearing
on Possible Responses to Rising Mortgage Foreclosures. AHGA is an
independent consumer advocacy organization which focuses on policy
issues that have a significant economic impact on homeowners and home
ownership.
AHGA strongly supports a stable and healthy mortgage marketplace that
will enable the expansion of U.S. home ownership. The current mortgage
environment is causing untold grief for many innocent homeowners,
undermining the equity of the nation’s 75 million homeowners, and
threatening the ability of potential future homeowners to take part in
the American dream.
The nation faces a mortgage policy crisis and a mortgage policy
challenge. The first is the immediate crisis faced by a very large
number of homeowners who were sold unsuitable mortgages with features
likely to lead to foreclose between now and the end of 2008. It is a
crisis with the potential to spread beyond the subprime mortgage market
and which could impact the overall economy. The window of opportunity
for Congress to act to mitigate the problem is the next few months for
those homeowners.
The mortgage policy challenge is determining how best to prevent a
future recurrence of the current mortgage crisis, which was caused
primarily by mortgage lenders’ temporary abandonment of sound
underwriting practices. From a policy standpoint we are currently much
further along toward addressing this challenge than the crisis faced by
homeowners who will lose their homes unless Congress acts in the
immediate future. Both recent changes in the marketplace and a number of
desirable long term regulatory reforms that have already been made or
are in process have already reduced the rate of unsuitable mortgage
loans now being made to homeowners. There are still gaps that need to be
plugged and additional actions that Congress should consider to provide
further assurance that the circumstances that have lead to the current
crisis do not recur in the future, but progress to date in this area has
been admirable.
Many of the worthy reforms that have been made or are in process will
not address the immediate personal crisis faced by a large number of
homeowners who were sold unsuitable mortgage loans and will likely face
foreclosure as their mortgage rates adjust in 2007 or 2008. Although
they are needed, some of those recent regulatory reforms will actually
make it harder for many homeowners currently at risk of foreclosure to
refinance their homes.
A recent study by First American CoreLogic Inc predicted that in the
next six years, 13 percent of the 8.37 million adjustable-rate mortgages
(or 1.1 million mortgages) originated between 2004 and 2006 will
default, destroying $112 billion in home equity. The study, “Mortgage
Payment Reset: The Issue and the Impact," also projects that for each 1
percent increase in home values, 70,000 homes can be saved from
foreclosure, and conversely, that for each 1 percent decline in home
values another 70,000 homes will face foreclosure. In a more disturbing
report issued on March 20, "Dissecting the Mortgage Distress," BAS
analysts noted an excess supply of 800,000 existing homes currently on
the market, and predicted that another 300,000 new foreclosures will
soon be added to inventories. This will likely depress home values by
another 5% in 2007, according to the Bank of America subsidiary.
Homeowners at risk of foreclosure as a result of unsuitable mortgage
loans need immediate Congressional action to assure them affordable
refinancing alternatives over the balance of 2007 and 2008 for the
estimated 1.8 million of mortgagees whose loans will adjust during that
period. A part of the solution is legislation that will reduce the cost
of home ownership in order to make these homes more affordable to future
home buyers and maintain home values. We cannot stress strongly enough
that time is of the essence. Any legislation that takes the rest of this
first session of Congress and most of the next session to enact will be
too late to do any good.
Both Congress and mortgage lenders have already begun to take some steps
that will help address the subprime mortgage crisis:
●
The GSE reform bill will provide relief for homeowners as a result of
funds to be set aside from GSE profits to help the economically
disadvantaged achieve home ownership. This bill does not limit GSE
lending, and the ability of GSEs to provide affordable mortgage
financing for the largest possible segment of American homeowners is
important to maintaining low interest rates and minimizing foreclosures.
● The Expanding
Homeownership Act of 2007 will enable the Federal Home Administration to
provide zero down and lower down payment FHA loans for homebuyers who
could not otherwise make the down payment required under current FHA
rules. It directs FHA to underwrite to borrowers with higher credit risk
than FHA currently serves that are still creditworthy to take out a
mortgage loan, but are otherwise now being driven into the subprime loan
market, with much higher mortgage rates. It also authorizes zero down
and lower down payment FHA loans for homebuyers who could not otherwise
make the down payment required under current FHA rules, reduces FHA
closing cost premiums, increases loan limits in high cost areas of the
country, and permanently eliminates the current statutory volume cap on
FHA reverse mortgage loans.
● More mortgage
lenders are adopting loss mitigation techniques that are helping
homeowners at risk of foreclosure. This growing practice is in the best
interest of both lenders and homeowners. Many mortgage foreclosure
investment experts advise against paying more than 65% of the fair
market value for a home at a foreclosure auction. If the lender can find
a way that preserves their securitization at a higher level than that it
makes economic sense for the lender to find ways to do so. Techniques
include loan restructuring, such as foregoing fees associated with
changing into more sensible mortgage products, and allowing the “short
sale” of homes. In a short sale the lender agrees to accept less than
the balance owed on the mortgage when the proceeds of a home sale are
insufficient to cover the mortgage balance. From a mortgage lender’s
perspective the proceeds of a short sale are often greater than the
proceeds of a foreclosure sale. There are many other worthy loss
mitigation techniques, and mortgage lenders should be encouraged to
expand the practice.
In addition to enacting this legislation as quickly as possible and
encouraging more lenders to practice mortgage loss mitigation, more
needs to be done in the immediate future as well:
● More and better
mortgage loan standards and disclosures have been required of many, but
not all, categories of mortgage lenders by some of the regulatory
initiatives already in place. With the strong support of leaders of this
committee, federal banking regulators last October issued interagency
guidance on nontraditional mortgage products and in March proposed
interagency guidance regarding subprime loans with hybrid ARM features.
The Office of Federal Housing Enterprise Oversight also applied the
guidance on nontraditional mortgage to Fannie Mae and Freddie Mac. The
Conference of State Banking Supervisors has acted to develop parallel
guidance for state regulators. It has been adopted by 30 states, with
more in process. Among other requirements are discrete minimum
underwriting standards, such as requiring lenders to use the fully
indexed mortgage interest rate in qualifying prospective ARM borrowers.
The advantage of such a discrete standard is that its impact can be
quantified with respect to the ability of people to qualify and on their
foreclosure rate. All mortgage lenders should be required to use these
new and reasonable mortgage loan standards and provide timely, clear,
plain English disclosures that include, among other information, the
dollar amount of payments of a fully adjusted mortgage.
● A federal fund
should be created to help victims of unsuitable subprime mortgages who
are going through the foreclosure process. The fund would be used to
help homeowners buy back their homes at foreclosure auction prices,
which are often substantially less than their current market value,
according to foreclosure experts. This fund would serve as a backup in
cases where a homeowner facing foreclosure was unable to work out a
solution with the mortgage lender and the lender had begun the
foreclosure process. One way such a program might work is that
homeowners who are threatened with foreclosure but still have sufficient
income to support payments on a smaller fixed rate mortgage would be
prequalified by a government approved lender for a fixed rate mortgage
up to a certain amount, based on the homeowner’s current income and
assets. The homeowner could then bid up to that amount on their own home
at a foreclosure auction. Government backing would be essential, as
homeowners facing foreclosure have flawed credit and would otherwise
have a very difficult time qualifying for any mortgage from any lender.
This program would help homeowners who had been put in the wrong kind of
mortgage keep their home and would also lessen to some degree the
downward pressure that foreclosure auctions put on home values. The risk
to the government would be minimal because the purchase price would be
the auction price which is a market liquidation amount that would be
unlikely to drop much further. In cases where the effort was successful
it would offer a modest benefit to mortgage lenders (an incrementally
higher bid on the foreclosed property). It is important that this
program be structured so as not to undermine the incentives for mortgage
lenders to restructure loans. For example, if the fund was made
available to any subprime homeowners who were simply behind in their
mortgage payments, the incentive for lenders to undertake mortgage loss
mitigation efforts would disappear. The cost of the program would be
huge, and the fund would then be bailing out lenders who made unsound
underwriting decisions. It would send the message that there is no need
to restore sound underwriting procedures in the future, because
taxpayers will bail you out if you don’t. For that reason the program
should apply to cases where the lender has already made a business
decision not to apply loss mitigation procedures and is in the
foreclosure process.
● Congress should
establish minimum national professional/educational standards for sales
professionals who counsel homeowners on mortgage financing. There are
currently no state or federal professional/educational standards for
mortgage salespersons and few standards for mortgage brokers. The person
who sold you a mortgage last year may have sold aluminum siding the year
before and may be selling used cars today. He or she has little stake in
the mortgage lending profession, having invested neither time nor money
in it. He or she may have little knowledge of sound lending practices
and has little ability to provide suitable guidance on mortgage
alternatives to consumers. Real estate agents and brokers are also in
many cases de facto mortgage counselors to home buyers. In many cases
they are the ones who convinced a prospective buyer to make an offer to
buy a home that was beyond their means. Even though real estate agents
currently owe a fiduciary duty to their clients and have at least
minimal professional/educational standards, they too should be required
to achieve higher levels of knowledge of mortgage financing. Legislation
providing the framework for the eventual establishment of specific
minimum national professional/educational standards for mortgage and
real estate brokers and their agents should be one of the immediate
steps. The legislation should provide for input from the mortgage
lending, real estate brokerage, and consumer advocacy communities, and
the appropriate federal agencies in developing those standards
● Many homeowners
facing unaffordable payment adjustments on their subprime loans have
enough equity to be able to pay off the mortgage with the proceeds of
the home’s sale, but there would not be enough left over to cover the
traditional 5-6% real estate sales commission. The median price of a
U.S. home is over $200,000, and the traditional 5-6% commission can be
more than $12,000. In some states real estate brokers are allowed to
list homes in the multiple listing services that distribute the listings
extensively on the Internet for a few hundred dollars. However, in many
states traditional full service real estate brokers have successfully
lobbied to prohibit this limited service business model. These current
artificially high real estate transaction costs are a barrier to the
sale of many homes that could be sold by subprime mortgagees under
duress, if those transaction costs could be reduced. Congress should
override any existing state laws that force home sellers to pay for real
estate services they neither want nor need.
● To help
increase the pool of home buyers, Congress should also override a number
of state laws that prevent home buyers from receiving real estate
commission rebates. In some cases those rebates can amount to as much as
2% of the selling price. Many prospective buyers who are just short of a
down payment could become homeowners if these laws were repealed. The
repeal would help not only the home buyers but many times more home
sellers (including many in trouble with subprime loans), since an entry
level home purchase often makes possible three purchase/sales higher up
the food chain.
● Congress should
also permanently extend the private mortgage insurance tax deduction for
home buyers with $100,000 in income. This deduction, passed late last
year, expires at the end of 2007.
● Mortgage
interest rates have now increased for the fourth straight week. The
Federal Reserve Board and other government entities should be encouraged
to take any steps that will keep mortgage rates low.
● A number of
other constructive and innovative proposals have been suggested to help
keep mortgage interest rates down, reduce the cost of home ownership
and/or help maintain home values. We urge the committee to consider any
that make sense and which can be enacted in the narrow window of
opportunity for legislative action.
There are also some steps that Congress should not consider as part of
the fast track crisis avoidance effort:
●
Suitability standards, while well intentioned, cannot
realistically be applied sensibly by someone who has had little or no
training in mortgage finance. Homeowners should not be subjected to a
regime in which such an unqualified person gets to decide whether or not
they will get a mortgage. Even if legislation to raise
professional/educational standards of lenders’ sales staff substantially
is passed immediately, it will be some years before the professional
ability of mortgage sales representatives rises to the level appropriate
to provide sound consumer counseling. In addition the concept of a
suitability standard is both elusive and subjective. Suitability
standards are bound to lead to the denial of mortgage financing to some
who could afford the mortgages. Their inherent subjective nature will
also encourage lawsuits. With a number of new, pending, and proposed
regulations that include specific and objective requirements for better
disclosures and sound underwriting practices, subjective suitability
standards may not be needed. In any event suitability standards are not
a short term solution, and considerable thought and study should be
undertaken before they are adopted as part of a long-term solution.
|
|