New Efforts Ensure Borrowers Can Repay Loans, Holds Mortgage Brokers and Originators Accountable, Should Lessen This Crisis and Avoid Future Ones
Sen. Schumer said, "$300 million in federal funds, and hopefully even more private money, to community groups that specialize in foreclosure prevention will not only help hundreds of thousands of families save their homes, but it will save billions in spillover foreclosure costs. This seems like a cost-effective investment to me, and one that will help restore confidence in our shaky housing market. And to ensure that we don't get into this mess again, we need to seal the cracks in our regulatory system to prevent future widespread lending abuses."
After a Joint Economic Committee report released last month "Sheltering Neighborhoods from the Subprime Foreclosure Storm," which found that a rise in subprime delinquencies in the early months of 2007 indicate more foreclosure trouble to come, the Senators began working on a legislative solution that includes two distinct components. First is a proposal for $300 million in new federal funds to be directed to community non-profit groups via the Department of Housing and Urban Development to boost refinancing programs to help homeowners prevent foreclosures. As part of the foreclosure prevention effort, Schumer, Brown, and Casey are calling on lenders and banks in a letter to consider matching federal government funds two to one giving community groups the ability to help anywhere between 300,000 to 900,000 homeowners keep their homes, depending on the level of assistance they need. The second piece of the plan includes a bill that significantly upgrades the standards for all loan originators and mortgage brokers AND a standard to insure borrowers can repay their loans.
"Too many Pennsylvanians face foreclosure due to inappropriate loans," said Sen. Casey. "It is time we provide assistance to these people at the time they need it most and extend common sense and well established regulation to brokers. I look forward to working with Senator Schumer on this bill."
"Ohio is faced with one of the highest foreclosure rates in the country, and our cities are being particularly hard hit. Instead of living out the American Dream, thousands of Ohioans are facing a nightmare on Elm Street and Euclid Avenue and East Market Street. Congress must act to provide greater protections for consumers and this legislation is a necessary first step. No longer should the dreams of Ohioans and homeowners across the country fall victim to the fine print. No longer should Congress turn a blind eye to despicable practices that victimize our neighbors and our communities," Senator Brown said.
$300 Million in Federal Foreclosure Prevention Funds:
Over the next two years, nearly 2 million homeowners with adjustable-rate mortgages will experience payment shocks as their loans reset in a weakening housing market, a harbinger of more foreclosures to come. Acting to prevent these foreclosures is not only important from the perspective of protecting entire communities, but it also makes good economic sense. Foreclosures can cost up to $80,000 for all stakeholders—homeowners, neighbors, cities and local governments, lenders, and loan servicers. Meanwhile, estimates suggest that foreclosure prevention counseling can cost as little as $1,000 per household. To be successful, these programs require one-on-one counseling with the homeowner and negotiations with a variety of stakeholders - making them very resource-intensive. The rising wave of subprime foreclosures has caused existing programs to become overwhelmed by requests for assistance, and they are struggling to give homeowners in trouble the assistance they require in order to successfully workout a suitable payment plan with the lenders.
To enable these organizations to successfully accommodate increasing caseloads, the Senators are proposing that Congress appropriate $300 million to provide to assist HUD-certified nonprofit organizations, with proven track records, in foreclosure prevention and intervention. Additional funding will allow non-profits to increase training and capacity to focus on default and foreclosure prevention counseling, to outreach to homeowners for early intervention, to improve the communications between homeowners and servicers/lenders, and to negotiate modified loan agreements or refinances. The fund will be administered by the Department of Housing and Urban Development (HUD).
Private Matching Foreclosure Prevention Funds:
To have the greatest impact, private sector banks and mortgage lenders that stand to lose the most from foreclosures must partner with the federal government. If the private sector created a similar home retention fund by matching the aforementioned appropriation at a minimum of $2 to $1, hundreds of thousands of homeowners could avoid foreclosure. To that end Senators Schumer, Brown, and Casey sent letters today to financial institutions' Washington representatives including the American Bankers Association, Securities Industry and Financial Markets Association, Financial Services Roundtable, and Mortgage Bankers Association.
Legislation to Hold Mortgage Brokers and Originators Accountable:
The bill seeks to regulate mortgage brokers and originators under the Truth in Lending Act (TILA) by establishing on behalf of consumers a fiduciary duty and other standards of care. In addition, the bill outlines standards for brokers and originators to assess a borrower's ability to repay a mortgage and holds lenders accountable for brokers and appraisers. The enforcement mechanism applied to this new section is those that currently apply under TILA.
The Borrower's Protection Act of 2007:
1) Establishes a fiduciary duty for mortgage brokers and other non-bank mortgage originators;
2) Creates a faith and fair dealing standard for all originators
3) Requires originators to underwrite loans at the fully indexed rate;
4) Requires originators to create escrow accounts to pay taxes and hazard insurance on subprime loans;
5) Prohibits steering (i.e. brokers may not direct or counsel a consumer to rates, charges and principal amount or prepayment terms that are not appropriate or suitable for the them); and
6) Holds lenders responsible for policing their associated appraisers and brokers.
7) Prohibits originators from influencing appraisal process
Strong Support from Community Groups Helping Homeowners:
Some of the community groups most involved in the efforts to prevent foreclosures around the country joined the Senators today to support their plan to avert foreclosures and prevent future foreclosures:
National NeighborWorks Association, Center for Responsible Lending, Consumer Federation of America (CFA), National Community Reinvestment Coalition (NCRC), Association of Community Organizations for Reform Now (ACORN)
David C. Brown, Executive Director of National NeighborWorks® Association:
"National NeighborWorks® Association members nationwide have seen firsthand the deleterious impact on communities due to the recent rise in foreclosures and strongly support Senator Schumer's efforts to increase homeownership counseling resources and to create the legislation necessary to meet this growing challenge."
Maude Hurd, ACORN's President:
"ACORN members applaud Senator Schumer for throwing a lifeline to the homeowners who are swept up in the flood of foreclosures. We call on other stakeholders, including Members of Congress, the Administration, and the mortgage industry to support Senator Schumer's proposal and safeguard the American Dream for millions of homeowners."
Allen Fishbein, Director of Housing and Credit Policy, Consumer Federation of America:
"In recent years, many mortgage originators abandoned prudent lending standards based on the ability of borrowers' to repay a loan. This has already unleashed a torrent of home foreclosures and threatens to turn the dream of homeownership into a nightmare for many more consumers. The Consumer Federation of America applauds Senator Schumer for offering common sense reforms to prevent future lending abuses from occurring by requiring mortgage originators to offer more responsible loans."
John Taylor, CEO and President of NCRC:
"The National Community Reinvestment Coalition applauds Sen. Schumer's leadership in addressing a growing national crisis that will affect 2 million families or more. Sen. Schumer's bill takes the right approach, because it proposes a critical role for both the public and private sectors in addressing the mortgage tsunami in the marketplace. His proposal will assist the NCRC's Consumer Rescue Fund Foreclosure Prevention Initiative in keeping thousands of borrowers in their homes, or affording them with a fresh start. We know from our work that families across America are struggling and we applaud Sen. Schumer for being a leader on this issue."
