Crisis Rooted in Economic Insecurity
In the past two weeks, we have been reminded of the seriousness of the mortgage foreclosure crisis. Major mortgage lenders such as Fannie Mae, Freddie Mac and Wells Fargo all have been forced to write off billions of dollars in losses as a result of their investments in subprime mortgages. The impact of the mortgage foreclosure crisis extends far beyond Wall Street. Housing foreclosures are changing the landscapes of our neighborhoods and causing a credit crunch, hence making loans to all consumers more expensive. In Hennepin County, Minn. (an area I represent), less than six years ago there were about 1,000 home foreclosures, but in 2006 there were more than 3,000. As Congress begins to address the mortgage foreclosure crisis, we need a comprehensive strategy that in the short term curbs the abuses in the subprime lending industry and in the long term addresses the root cause of the foreclosure crisis, which I believe is rooted in the economic insecurity of America’s working families.
Despite record profits on Wall Street, America’s working families over the past decade have seen their wages stagnate because the cost for major ticket items like housing, health care, energy and education have all gone through the roof. To make ends meet, working families have been forced to rely more on credit for basic household necessities. According to a recent study by Demos, from 1989 to 2001 credit card debt in the U.S. nearly tripled, from $238 billion to $692 billion. Add into this equation the lack of affordable housing in almost every region in the country, and an ideal environment was created for predatory mortgage lenders to take advantage of vulnerable working families.
The subprime market, which just a decade ago represented only a small portion of the mortgage lending business, has grown dramatically. According to the Center for Responsible Lending, the subprime lending industry is now a $665 billion business, representing 20 percent of home loans.
Congress has taken action this year to address some of these concerns. This fall, under the leadership of Financial Services Chairman Barney Frank (D-Mass.), the House passed a number of major legislative initiatives to deal with the lack of affordable housing and the subprime lending mess.
The National Affordable Housing Trust Fund Act (H.R. 2895) passed the House in September and creates an affordable housing trust fund that will provide states and local governments $800 million to $1 billion each year to create, preserve and rehabilitate affordable housing stock.
The Mortgage Reform and Anti-Predatory Lending Act (H.R. 3915), passed before the Thanksgiving break, puts a stop to many of the most egregious predatory practices in the subprime mortgage market and strengthens protections for consumers by requiring additional licensing standards. The legislation also allows the states to continue their tradition of strong consumer protections, all without disrupting the national mortgage market.
I was proud to support and be a co-sponsor of H.R. 3915. Earlier this year, I introduced H.R. 3081, based on a comprehensive predatory lending law that passed in Minnesota in 2006. I am pleased that some of the provisions also were included in this final bill. Both H.R. 2895 and H.R. 3915 passed the House with strong bipartisan support, and now it is the Senate’s turn to ratify this legislation.
In the addition to Congressional action, the lending industry also can play a significant role in the short term to stem the tide of mortgage foreclosures. Specifically, the industry can help borrowers in risky subprime loans renegotiate the terms of their mortgages likely to enter into default. These loan modifications can serve as a major short-term tool to alleviate the foreclosure crisis. To date, however, only 2 percent of these loans have been modified.
The lending industry has been resistant to modifying these loans because some lenders believe this exposes them to litigation. But recently one of the associations representing the industry, the American Securitization Forum, stated in my local paper that “two of every three [loan] contracts” can be modified. Additionally, the Securities and Exchange Commission this summer clearly stated that loan modification of securitized loans could be legally accomplished if it appeared these loans were likely to default.
The industry is running out of excuses. I believe industry must do more to encourage lenders to engage in loan modifications because this is one clear short-term solution that can help families get out of bad mortgages and keep their homes. Let me be clear: I am not talking about a bailout of irresponsible borrowers or lenders. What I am talking about are honest negotiations between the parties that would help keep families in the homes and put good loans on the books for lenders.
As we move into 2008, our attention must turn from prohibiting the predatory practices described above to improving the economic environment for America’s working families and addressing the basic race bias within the housing industry.
Accusations of racial discrimination in lending have been prevalent in much of the discussion of predatory lending. The National Community Reinvestment Coalition recently released a comprehensive study that shows that across this country, middle-to- upper-income African-Americans are twice as likely to receive high-cost loans as whites with the same income. Middle-to-upper- income Hispanics are 30 percent to 40 percent more likely to receive high-cost loans than whites with the same income. While these high-cost loans may not initially have predatory characteristics, when race is used as a determining factor they become exactly that. Discriminatory practices in the lending industry should be a leading topic in oversight hearings in the coming year. I look forward to working with the other members of the Financial Services Committee to address these concerns.
The effects of the foreclosure crisis on our communities have been devastating. It has ruined neighborhoods, destroyed the property values of innocent neighbors and placed an additional burden on our already overwhelmed city governments. Prohibiting predatory practices and smoothing the way for loan modifications are good immediate fixes. However, the underlying causes of the mortgage crises also must be addressed. The focus for Congress in 2008 should be to address the underlying crisis of economic insecurity for America’s working families that has contributed to this mortgage foreclosure mess.
Rep. Keith Ellison (D-Minn.) is a member of the Financial Services Committee.