Press Release

Frank and Bachus Ask GAO to Investigate the High Rates of Foreclosures

Washington, DC - House Financial Services Chairman Barney Frank and Ranking Republican Member Spencer Bachus today sent the following letter to the Government Accountability Office calling for an investigation into the high number of foreclosures and the subprime mortgage market.  The text of the letter follows:

April 25, 2007

The Honorable David M. Walker
Comptroller General
GAO
441 G Street, N.W., Room 7100
Washington, D.C. 20548

Dear General Walker,

As Chairman and Ranking Member of the Committee on Financial Services, with jurisdiction over both federal housing policy and the financial services industry, we are, very concerned with the significant increase in foreclosures on residential mortgages seen in recent months.  Developing workable solutions to the current problems in the subprime mortgage market is a high priority for Members of both Houses and both parties, and our Committee will be considering legislation on the subject in the coming months.

To assist the Committee in its deliberations, we are requesting that the GAO conduct a thorough study of the reasons for the recent surge in foreclosures.  It seems clear that the type of mortgages that have been offered to borrowers in recent years is one such factor, but there is no reason to conclude that that it is the only factor.  Moreover, even if the types of mortgages recently being offered are the predominant factor, the question is why they have only now begun to lead to higher foreclosure rates.

In performing its analysis, GAO should examine the current state of the problem, its causes, and potential solutions, and should seek to provide answers to the following questions, as well as any others that the GAO finds to be relevant.

Current State of Problem.  What is the scope and magnitude of the current increase in foreclosures, and has the increase been concentrated: geographically; in the subprime or prime market; in refinancing or purchase money transactions; among first-time homebuyers or speculators; in loans made by or through particular classes of lenders (e.g., federally chartered versus other lending institutions)?  How does the recent rise in foreclosures compare to the scope of foreclosures in previous housing downturns?  Are foreclosure rates higher in regions that are also experiencing higher unemployment levels?

Causes of the Problem.  What role has been played by: the rise in subprime lending and risk-based loan pricing; "alternative" or "exotic" mortgages (e.g., interest-only, high loan-to-value, no-documentation and similar loans); predatory practices (e.g., loan flipping and deceptive sales practices, among others); evaluations of borrowers' ability to repay?   What effect has the increased involvement of secondary markets (securitization, parceling and packaging of risk, and the like) had on foreclosures?  What impact have the 17 consecutive Federal Reserve interest rate increases had on borrowers with adjustable rate mortgages (ARMs)?  What role have federal and state regulators played in monitoring and averting foreclosures, and have their actions been adequate and effective?  What effect have trends in employment both nationally and regionally had on delinquency rates?  What impact has the slow down or absence of home price appreciation had on foreclosure rates, particularly in high unemployment regions?   Have life events, such as job loss, major sickness or death had an impact on current foreclosure rates?

Potential Solutions.  What constructive role in resolving the problem and averting future foreclosures can be played by: mortgage counseling, financial education, lender forbearance and loan "work-outs," among other tools?   What role can the Federal Housing Administration (FHA) and the housing Government Sponsored Enterprises (GSEs) play in refinancing failing loans and offering new mortgage products?  What impact, if any, will use of these tools have on the number of borrowers who will have access to mortgage credit? 

Given the potential effects of foreclosures on consumers and the economy, and the potential need for Congressional action on these issues, we look forward to GAO's prompt response.

BARNEY FRANK                                                                              SPENCER BACHUS