With The Nation On The Brink Of A Foreclosure Crisis, Schumer, Brown And Casey Announce Inclusion Of $100 Million In Appropriations Bill To Deal With Subprime Fallout

WASHINGTON, DC-With the nation on the brink of a foreclosure crisis, U.S. Senators Charles E. Schumer (D-NY), Sherrod Brown (D-OH) and Bob Casey (D-PA) today announced that the full Senate Appropriations Committee has approved $100 million for HUD Housing Counseling programs in the Transportation, Housing and Urban Development, and Related Agencies FY08 Appropriations Bill.   Federal funds will be used by non-profit counseling agencies that work one-on-one with borrowers who are trapped in unaffordable subprime loans.  In May, Senators Schumer, Brown and Casey wrote a letter to the Sens. Patty Murray and Christopher Bond, the Chairman and Ranking member of the Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies to request funding for this program.

“$100 million to community groups that specialize in foreclosure prevention will go a long way to help thousands of families save their homes,” Schumer said.  “I hope that in addition to this appropriation, Congress will pass the legislation I introduced along with my colleagues, Senator Brown and Senator Casey.  The current situation in the subprime mortgage market is untenable. The more we do to help solve it, the fewer families will be faced with losing their homes because of bad loans and dubious mortgage brokers.”

“Ohio is faced with one of the highest foreclosure rates in the country, and our cities are being particularly hard hit,” Brown said. “As tens of thousands of predatory loans hit their reset dates in the coming months, these federal dollars will be essential in counseling families on how to keep their homes. This is a good step in the right direction to curb the effect of subprime loans, but there is much more work to be done.”

“I’m glad the Appropriations Committee agreed that immediate help is needed to help consumers who are victims to the subprime mortgage market,” said Casey.  “Foreclosures in the subprime market are an increasing problem that must be averted through cracking down on abusive practices, but consumers also need help navigating the process.”

Federal funds included in the bill will be used for foreclosure prevention programs within the HUD Housing Counseling program.  With these funds, non-profit agencies will be able to provide individual counseling by working one-on-one with borrowers who are in unaffordable subprime loans.  Due to the individual nature of this counseling, foreclosure prevention programs are resource intensive and very expensive, often costing $1,000-$3,000 per person.  These high costs and the rising wave of subprime foreclosures have caused existing programs to become overwhelmed by requests for assistance.  This money will help stem the tide of foreclosures that are a result of the current subprime mortgage crisis.  The counseling programs have a proven track record and represent the best way to help homeowners navigate the complicated process of contacting lenders, banks and legal services to modify their mortgage loans and ultimately save their homes from foreclosure.

HUD Housing Counseling programs make use of their relationships with lenders and loan services to help homeowners prevent foreclosure.  They are able to utilize a combination of strategies including loan restructuring, loss mitigation and financial counseling to keep a homeowner in their home.  The phenomenally effective programs have allowed 92% of families receiving delinquency counseling in HUD programs to avoid foreclosure. 

The impending avalanche of mortgage foreclosures across the nation can be directly tied to the exploding popularity of costly non-traditional mortgage products over the past decade. These non-traditional mortgage products, which include hybrid adjustable-rate mortgages with intricate interest rate terms and conditions, have been sold to middle and lower-income families in record numbers. While they offer attractive and easy lending terms, they also include excessively high interest rates that can sharply spike, leaving new homeowners struggling to meet rising mortgage payments. 

The problem is only magnified in the subprime mortgage market, where borrowers with weaker credit histories and lower incomes have flocked to mortgages that have higher interest rates than prime mortgages. Despite subprime loans being universally more expensive than prime loans, they still remain a main source of capital for millions of low-income Americans, especially minorities, who wish to fulfill the American Dream and purchase a house.

The most popular “affordable” subprime loans are adjustable rate mortgages (ARMs) that offer an initial fixed rate that is set low – often called a “teaser” rate. The rate resets after an initial fixed rate period (commonly two to three years), to a more onerous rate that leads to a significantly higher mortgage payment that low-income borrowers will have difficulty affording. These ARMs, commonly known as “2/28s” or “3/27s” represented more than 60 percent of all subprime mortgages originated in 2006.   The FDIC estimates that this year alone, one million of these loans will reset to higher rates.  Next year, 800,000 more will reset to higher rates.

Over the next two years, nationwide 1.8 million risky subprime borrowers who were “teased” into their loans may be forced to foreclose because they will be hit with steep rate increases that they can not possibly afford.  This follows in the wake of more than 1.2 million foreclosures in 2006. According to a report by the Center for American Progress – the number of homeowners who entered into some stage of foreclosure in December 2006 was up 35% from December 2005. These numbers are only expected to soar in the coming years as the interest rates reset.

Another recent study found that over the next several years, approximately 20% of subprime loans issued in 2005 and 2006 will go into default, putting an additional 2.2 million homes in danger of foreclosure.  The combined effect of these potential foreclosures would be catastrophic, not only for the families directly affected but also for their surrounding communities.

Now that the bill has been approved by the full Senate Appropriations Committee, it will be sent to the Senate floor. Following approval by the Senate, the bill will move towards Conference with the House and then to the President for signature.  

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