Legislation, Education Keys to Zapping Crisis
When I walk the streets of my district in Colorado, the mortgage crisis is evident everywhere. For-sale signs sprinkle the lawns of neighborhoods, and people talk to me about their fears of future foreclosure and their inability to get any line of credit. Unfortunately, the problem is not only in Colorado but also across the country. The mortgage crisis does not just impact individuals but
can spread through neighborhoods like a virus.
The current economic downturn can be attributed to the mortgage crisis, and many economic experts highlight the need for swift reform because the foreclosure epidemic is not even halfway over. Over the past year, Congress has held hearings, introduced legislation and worked in a bipartisan manner to aid borrowers who face delinquencies, defaults and foreclosures. Included in our efforts are short-term solutions to keep people in their homes, as well as long-term solutions to prevent this type of problem from happening in the future.
In the early 1990s, a subprime mortgage system was developed to enable borrowers with blemished credit and a higher risk of default the opportunity to get a line of credit for a loan to purchase a home. However, a few years ago the housing market began to slow down, and individuals with nontraditional mortgages, such as interest-only or adjustable-rate mortgages, faced and will continue to face monthly payments that will reset.
Additionally, if borrowers planned on using the appreciation of the price of their home to combat the new monthly payments, the recent slowdown in the market could hurt their efforts and fuel the number of foreclosures. Last year, there were more than 2 million foreclosures nationwide, and the sales of new homes plunged by more than 26 percent from 2006, the biggest year-to-year drop in history. Almost 2 million mortgages are predicted to reset through the fall of 2008.
Clearly, the increase in packaging mortgage loans together, also known as securitizing, spreads the responsibility for mortgage payments and the risk of default to third-party investors. When similar loans are pooled together and quickly sold, a steady stream of funds into the mortgage market is maintained, keeping interest rates low. However, this process introduced parties into the system that operated without federal supervision, and their practices have been considered by many to be shady.
Securitization moved the risk away from parties originating loans directly with borrowers. If the risk of default is with a third party, mortgage originators can encourage borrowers to take on more debt than they actually can afford. Congress is considering a number of different solutions to control this issue, including some liability for the issuers of the mortgage-backed securities.
Unfortunately, millions of Americans will face foreclosure throughout 2008, and Congress will continue assisting borrowers with the goal of keeping them in their homes. Funding was appropriated last year to set up a support network to help borrowers refinance their loans. A housing counseling program was established to get borrowers and lenders to work together on different, more suitable payment plans. I applaud the administration, under the guidance of the Treasury Department, in conjunction with industry in creating the HOPE NOW Alliance. If a number of conditions are met, the alliance buys time for the homeowners to get more affordable fixed-rate loans. But, unfortunately, it does not help those currently in foreclosure.
Many agencies on both the federal and state levels suggest that regulated lenders go through their portfolios and determine which loans are already delinquent or most likely will default in the future. Once identified, the lenders should start the process of working out better deals with those specific borrowers. People need to know their options to withstand the increased payments. It is in the best interest of the entire economy, the industry, communities across the country and for the millions of homeowners facing an uncertain future to get this type of education. These are necessary but short-term quick fixes that will not prevent this type of crisis in the future.
Discussion also centers on a moratorium on foreclosures and freezing interest rates. I believe this is an ill-advised idea. A moratorium would help some homeowners, but it would only delay the inevitable. And it would hurt others who are seeking a new mortgage because their interest rates could increase dramatically.
The economic stimulus package passed by the House will aid many people in need. The increased loan limit for government- sponsored enterprises will allow Fannie Mae and Freddie Mac the opportunity to actively assist in providing relief from the mortgage crisis. The increases would raise the limit in high-cost areas to $729,750 through the end of 2008. Hopefully, mortgage rates will decrease and more people will qualify for loans. There are concerns about allowing GSEs into the jumbo loans market, but their stability is needed to loosen the credit crunch.
The House recently passed the Mortgage Reform and Anti-Predatory Lending Act (H.R. 3915). It is not a perfect bill, but it is a good start. We, as Members of Congress and in cooperation with industry, must ensure that we do all we can to help families keep their homes and prevent further decline of the housing market.
Rep. Ed Perlmutter (D-Colo.) is a member of the Financial Services Committee.