June 25, 2008
Statement
Floor Statement Supporting the American Housing Rescue and Foreclosure Prevention Act of 2008
Mr. REED. Mr. President, we are at a critical moment. According to the Mortgage Bankers, the rate of foreclosures and the percentage of loans in the process of foreclosure are at the highest recorded level since 1979.
The delinquency rate for all mortgage loans on one- to four-unit residential properties stood at 6.35 percent of all loans outstanding at the end of the first quarter of 2008. This is an increase of 151 basis points from 1 year ago--a 1.5-percent increase--which is usually significant because it translates into thousands and thousands of Americans who are facing foreclosure.
The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, more than double what it was a year prior.
In my own State of Rhode Island, 5.65 percent of all loans are past due, and 2.75 percent are in foreclosure.
That is a staggering statistic. Rhode Island has the unfortunate distinction of having the highest foreclosure rate in New England and is fourth in the Nation for subprime foreclosures.
For many Rhode Islanders--in fact, the majority--their home is their wealth, their nest egg. Unfortunately, with such a high foreclosure rate, many Rhode Islanders are seeing their wealth erode as home prices fall. Thousands more are in default because they are no longer able to refinance or sell their homes since their mortgages are now worth more than the appraised value of their homes.
This week, the latest Case-Schiller home price index was released. Home prices in 20 U.S. metropolitan areas in April fell by 15.3 percent from a year earlier, signaling that the housing recession is not over. In fact, it continues unabated.
More foreclosures will further exacerbate the overall decline in property values and have a dramatic and drastic effect on entire communities. It is clear that this vicious cycle in the mortgage and housing markets is negatively impacting the entire economy.
In addition, as a result of the credit crunch in the mortgage markets, Fannie Mae and Freddie Mac are now the largest player in the secondary housing market. Combined, they are purchasing and securitizing almost 80 percent of the mortgage market right now and almost single-handedly are keeping mortgage credit flowing throughout the country.
Fannie Mae and Freddie Mac are at a critical juncture, and we need to make sure they are well capitalized and overseen by a strong and independent regulator with more bank-like regulatory authorities.
Finally, we do not just have a credit crunch and a mortgage meltdown, we also have a continuing and persistent affordable housing crisis in this country. The irony is, we had an affordable housing crisis when prices were going up because people were being squeezed out of rental properties. Rents were going up. People were being squeezed because there was a real demand for upscale housing and not the same kind of demand in the private market for affordable housing.
As the housing market declines, people are also squeezed. People lost their homes and are moving into apartments. The activity to build and develop affordable housing has not picked up at all. So we have the situation where we also have to deal with affordable rental housing in particular.
In the wake of the foreclosure crisis, all of these factors are compounding the plight of Americans across the board. Homeowners are losing their homes, low-income Americans are struggling to find properties to rent, and homeowners have seen the value of their housing investment--which represented their plans for the future and the future of their children--all being radically rewritten as we speak because of a decline in the price of houses. We have seen for the first time a reversal in what had been a positive trend in home ownership. That is now declining.
So I think we are working hard to try to respond to all these issues. How do we inhibit, prevent, as much as we can, this drumbeat of foreclosures? How do we provide support for families who are looking for affordable housing? How do we do it in a conscientious way and also strengthen the regulatory structure that governs Fannie Mae and Freddie Mac? I think we have achieved that in this legislation, and now the time is to move forward. That is why I am encouraging all of my colleagues to support the Housing and Economic Recovery Act of 2008.
This bill includes the Federal Housing Finance Regulatory Reform Act, which will allow us to create a world-class regulator for Fannie Mae and Freddie Mac and the Federal Home Loan Banks, the housing government-sponsored enterprises. This regulator will have broad, new authorities to ensure the safe and sound operations of all these institutions. These powers will include establishing capital standards, setting prudential management standards, enforcing orders through cease-and-desist authority, civil monetary penalties and also the authority to remove officers and directors, restricting asset growth and capital distribution for those institutions which are undercapitalized. It can place a regulated entity into receivership, and it can review and approve new product offers. All of these are the powers which we have extended historically to bank regulators, and now these powers are being extended to the regulator of three of the most prominent financial institutions in the country, although their focus is on housing exclusively, or generally.
This legislation expands the number of families Freddie Mac and Fannie Mae can serve by raising the loan limits in high-cost areas to 150 percent of the conforming loan limit. It also significantly enhances the housing component of the GSEs' mission.
It includes provisions I authored that will dramatically expand Fannie Mae's and Freddie Mac's affordable housing mission by creating a new housing trust fund and capital magnet fund, financed by annual contributions from the enterprises, which will be used for the construction and rehabilitation of affordable rental housing. We expect these programs to eventually provide between $500 million to $1 billion per year for the development of housing for low-income families. These affordable housing contributions are obtained by requiring Fannie Mae and Freddie Mac to set aside less than half a cent on each dollar of unpaid principal balance of the enterprises' total new business purchases. Eventually, 75 percent of the funds collected will be used for the affordable housing trust fund and 25 percent will be allocated for the payment of Government bonds to keep the bill deficit neutral.
I was very pleased to have worked out a compromise with all my colleagues, particularly Senators Dodd and Shelby, that would allow the HOPE for Homeowners Program--the program Senator Dodd has taken the lead in crafting which will resolve or attempt to resolve some of these foreclosure difficulties--to be a mandatory program that is deficit neutral and would not require any payments from the Federal taxpayers because it would use the proceeds from the Federal housing fund in the first 2 years to pay for this foreclosure program. I think this program is a great way to accomplish many of the objectives we have. First, we do want to help people facing foreclosure, but we also do not want to necessarily engage taxpayer funds in that process. This arrangement accomplishes those two objectives.
As many of my colleagues know, I introduced a bill in November to improve the mission of the GSEs that would, in fact, allocate all the money to affordable housing. The bill before us would help this affordable housing mission, but it would also allow, as I have said, for the first 2 years, to allocate some of the resources to Senator Dodd's proposal to prevent and assist in the foreclosure process.
Once we have the foreclosure program up and running, then, after 2 years, the resources will be devoted to affordable housing, with 65 percent being used to create a permanent housing trust fund. The housing trust fund will be managed by the Secretary of Housing and Urban Development, and it would distribute these funds to States via a formula. At least 75 percent of the funds distributed to the States must be targeted to extremely low-income families.
Thirty-five percent of the affordable housing funds will be allocated to a capital magnet fund and will be used by the Secretary of the Treasury to run a competitive grant program to attract private capital for and increase investment in affordable housing. Applicants for funding will need to show they can leverage the funding by at least 10 to 1. We believe this will result in the creation of many more units of affordable housing than could be done otherwise. What we are requiring these applicants to do is to enlist private capital in a ratio of at least 10 to 1 to match the public capital and increase significantly the scope of these programs and to house many more Americans. I think this is a great way to incentivize and challenge private capital to come into the field of affordable housing and to put more Americans in decent, affordable rental housing.
The mission improvement section of the bill also strengthens Fannie Mae's and Freddie Mac's affordable housing goals. In particular, it would align their goals regarding the purchase of affordable mortgages with current Community Reinvestment Act income targeting definitions and ensure that these enterprises provide liquidity to both ownership and rental housing markets for low- and very low-income families. We want to make sure we target these resources to those Americans particularly struggling in a very difficult economy--low- and very low-income Americans.
The legislation requires the enterprises to serve a variety of underserved markets, such as rural areas, manufactured housing, and affordable housing preservation. It improves reporting requirements for affordable housing activities, including expansion of a public-use database, and strengthens the new regulator's ability to enforce compliance with these housing goals.
All of these affordable housing provisions are premised on the fact that with Fannie and Freddie's Government benefits come many important responsibilities to the public.
As I mentioned earlier, this legislation also contains a bill authorized by Senator Dodd called the HOPE for Homeowners Act. I wish to commend him for his hard work in crafting these provisions and also commend him for the judicious way he has managed this legislation.
In the last several weeks, this legislation has called for very critical judgments about procedures and timing and substance. On every one of those occasions, Senator Dodd, working closely with Senator Shelby, has made some remarkable, wise, and judicious judgments, and I commend him for that--both of them, and for their stewardship of this legislation.
Now, this legislation Senator Dodd is proposing, the HOPE for Homeowners Act, would create a new temporary, voluntary program within the Federal Housing Administration to back FHA-insured mortgages to distressed borrowers. The program is vitally important and could not come at a more important time.
Two weeks ago, the OCC--the Office of the Comptroller of the Currency--put out a report documenting the scope of the failure of the Bush administration's efforts to stem the mortgage crisis. The administration has been relying on a voluntary industry effort called HOPE Now. HOPE Now has been reporting that it has produced in excess of 1 million loan modifications through this program. They have had events to tout it in the public and the press. They always mention this number.
The credibility of the HOPE Now numbers has been under attack for a while, primarily because they are self-reported numbers and because HOPE Now includes in its numbers ``payment plans,'' which are not loan modifications but only delay troubled home borrowers. Apparently, the regulators themselves have begun to feel a little uncomfortable, and the OCC decided to do its own report with its own numbers. They reported that voluntary mortgage industry efforts have resulted in only 52,000 loan modifications out of 3 million seriously delinquent loans.
In addition to the 3 million seriously delinquent loans--loans over 60 days or in bankruptcy or foreclosure--there are also 1.5 million foreclosures in process, and new foreclosures initiated during the same period total almost 300,000. In effect, foreclosures are running six times ahead of loan-modification efforts. Looking at it another way, loan modifications are less than 2 percent of seriously delinquent loans and only about 3 percent of foreclosures.
It is clear that the administration's argument that no new action is needed has been proven wrong. The OCC data also clearly demonstrates that helping mitigate the effects of this mortgage mess cannot be left completely up to the mortgage industry and voluntary efforts. ``Fuzzy math'' and a lack of transparency are what got us into this mess. It should not be used to try to cover up the fact that there is still a major problem.
That is why Senator Dodd's HOPE for Homeowners Program is so important. It is going to enable approximately 400,000 homeowners to refinance into 30-year fixed mortgage products with FHA mortgage insurance. Many of these homeowners have no other financing option since their homes are now worth less than their mortgage. They are ``underwater.''
Any lender who participates in the HOPE Program Senator Dodd is advancing will have to write down the value of the mortgage to 90 percent of the current appraised value of the home. They will write off the loss, and then the new loan for the homeowner will have to be for 30 years at a fixed rate and with FHA mortgage insurance. In exchange for getting a new loan with built-in equity, homeowners will have to share future appreciation equally with the FHA.
The intent of the legislation is to set a floor on lender losses while at the same time putting families into 30-year fixed rate mortgages that will allow them to keep their homes. This legislation, we hope, will help stabilize the housing markets in parts of the country that need the help the most.
In addition, most of the provisions from the Foreclosure Prevention Act of 2008 that passed the Senate by a vote of 88 to 8 on April 10 are included in this legislation. This section of the bill contains the Banking Committee's legislation to modernize, streamline, and expand the reach of the FHA mortgage insurance program.
The FHA modernization section includes provisions I authored that would expand access to home ownership counseling, provide for technology and staffing improvements at FHA, and update the FHA Home Equity Conversion Mortgage--HECM--Program, allowing seniors to safely tap into the equity of their home for other necessary expenses.
The FHA loan limit is increased from 95 percent to 110 percent of area median home price, with a cap at 150 percent of the GSE limit in high-cost areas, which currently will be $625,000. This should allow families in older areas of the country to access home ownership through FHA. It also requires a downpayment of at least 3.5 percent for any FHA loan.
In addition, the Foreclosure Prevention Act section of the bill provides $3.92 billion in funding to communities hardest hit by foreclosure and delinquencies to purchase foreclosed homes at a discount and rehabilitate or redevelop the homes to stabilize neighborhoods and stem the significant losses in house values of neighboring homes. It also contains $150 million in additional funding for housing counseling.
It contains some important provisions to help our returning soldiers avoid foreclosure by lengthening the time a lender must wait before starting the foreclosure process and providing the veterans--soldiers, sailors, marines, airmen of the current conflict--with 1 year of relief from increases in mortgage interest rates. In addition, the Department of Defense is required to establish a counseling program to ensure these veterans can access assistance if facing financial difficulties. The legislation also increases the VA loan guarantee amount, so that veterans have additional home ownership opportunity.
I am also pleased that the bill contains a provision I authored in my bill, S. 2153, to amend the Truth in Lending Act to improve home loan disclosures. This provision will ensure that consumers are provided with timely and meaningful disclosures in connection with not just home purchases but also for loans that refinance a home or provide a home equity line of credit. The bill requires that mortgage disclosures be provided within 3 days of application and no later than 7 days prior to closing. This should allow borrowers to shop for another mortgage if they are not satisfied with the terms. If the terms of the loan change, the consumer must be notified 3 days before closing of the changed terms.
If consumers apply for adjustable rate or variable rate payment loans, there will now be an explicit warning on the 1-page Truth in Lending Act form that the payments will change depending on the interest rate and an estimate of how those payments will change under the terms of the contract based on the current interest rate. The bill also provides a new disclosure that informs borrowers of the maximum monthly payments possible under their loan.
The bill provides the right to waive the early disclosure requirements if the consumer has a bona fide financial emergency that requires they close the loan quickly and increases the range of statutory damages for TILA violations from the current $200 to $2,000 to a range of $400 to $4,000.
Finally, it requires lenders to include a statement that the consumer is not obligated on the mortgage loan just because they received the disclosures. This will give consumers the opportunity to truly shop around for the best mortgage terms for the first time ever. They will be able to compare the payments and costs associated with a certain loan product and decide not to sign on the dotted line if they do not like the basic terms of the loan.
I believe that giving consumers the information they need regarding the maximum payment is absolutely critical. Borrowers need to better understand the full financial impact of entering into a particular loan early in the process and before they actually consummate the loan.
There are many borrowers today who signed up for a loan with teaser rates with a monthly payment they could well afford and then were shocked 18 months later to get the adjusted rates that were staggering to them and were, for many, unaffordable. Many in good faith relied on what they thought would be the initial introductory loan. I do not think they should be in that position. I think all the details, the maximum loan amount under the current rate should be available upfront, not hidden in a pile, literally a foot high, of closing documents.
They also have to have a chance to back out of the loan, if the terms are not acceptable to them, before closing the loan at the conference room table.
I am pleased my Republican colleagues have agreed with the need to improve mortgage disclosures also.
Finally, this legislation includes some important tax provisions that should enhance and strengthen the low-income housing tax credit program and the mortgage revenue bond program. It also has a refundable first-time home buyer credit of up to $8,000 to help reduce the stock of existing unoccupied housing and a nonitemizer tax deduction for State and local property taxes from Federal income tax.
It is my hope this legislation will help more families to refinance out of bad loans, help stabilize the housing market, and improve the laws and regulations so this type of foreclosure crisis never happens again.
As a member of the Banking Committee, I wish to particularly thank Chairman Dodd and Senator Shelby for including a number of bills and initiatives that I have been working on in the Housing and Economic Recovery Act that is before us today, and I hope we are going to be able to pass this important legislation in very short order.
The American people need a lot more than the current HOPE Now program, they need help now. I encourage all my colleagues, we should move forward deliberately--today, I hope--on this important legislation and send it to our colleagues in the House.
I know Chairman Frank and his colleagues have done a remarkable job on their side to pass legislation that is very close to ours. Together, we should be able to send something to the President that he will, I hope, sign and will send a message to the American people that hope is not just a fiction of rhetoric, but it is a reality--and not just hope, but help is on the way.
I yield the floor and suggest the absence of a quorum.
###
