DPC REPORTS

 

FACT SHEET | July 31, 2008

Democrats Pass Landmark Legislation to Safeguard the American Dream of Homeownership

Years of abuse by the mortgage lending industry and under-regulation by the Bush Administration have resulted in a serious housing crisis that is crippling the American economy and undermining the American people's sense of security. It is estimated lenders file thousands of new foreclosures per day,[1]and that over the next two years, more than twomillion Americans may lose their homes to foreclosure (see below for state by state figures)[2]andmore than 40 million of their neighbors may see theirproperty values decline as houses foreclose around them.[3]As a result, towns and cities across America are experiencing business closings, increased crime, and an undermined tax base due to the abandonment of homes in their neighborhoods. 

Unwilling to stand by as millions lose everything, the Democratic-led, 110thCongress worked quickly to lessen the squeeze on American homeowners nearing or facing foreclosure by providing additional funds for foreclosure counseling, expanding refinancing opportunities, and reforming the tax code to ensure borrowers are not penalized when their mortgages are modified. In July 2008, the Democrat-led Congress took its biggest step toward addressing the nation's housing crisis by passing the
H.R. 3221, the Housing and Economic Recovery Act of 2008. This bipartisan legislation aims to reform the government-sponsored enterprises system, modernize the Federal Housing Administration, create the HOPE for Homeowners program, establish national standards for residential mortgage brokers and lenders, enhance mortgage disclosure requirements, increase foreclosure counseling, and provide tax benefits that will likely help stabilize the housing market for homeowners and homebuilders, all while maintaining fiscal responsibility. The legislation also includes emergency, temporary authority for the Department of Treasury, designed to shore up the confidence of the financial markets in Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. 

While Democrats and some Republicans supported this legislation from the beginning, others in the Senate Republican Caucus, with the aid of President Bush, delayed its passage for months, during which time thousands of Americans lost their homes to foreclosure and the economy steeped into a deeper decline.[4]Nevertheless, under pressure from the American people, on July 26, all but 13 Republicans Senators present voted in favor of the bill, and it passed by an overwhelming margin of 72 to 13. Though sooner would have been better for the American people, later is better than never, and Democrats welcomed their support. 

As we move forward in the 110th Congress and look toward an even brighter future, the American people can count on Democrats to deliver on our promise to safeguard the American dream of homeownership and make it more affordable once again.

 

A "perfect storm" of abuses in the subprime mortgage market led to a housing crisis of epic proportion.Subprime mortgages once helped millions of Americans, most with limited or blemished credit, achieve the American dream of homeownership. These loans also helped millions more homeowners, many of whom were older Americans with good credit, but on fixed incomes, refinance their homes. Unfortunately, while many lenders and brokers offered these mortgages fairly and responsibly, many others engaged in predatory or irresponsible lending practices, using aggressive and manipulative tactics to steer vulnerable borrowers into "exploding" adjustable-rate mortgages (ARMs) they could never afford, trapping them in high-cost loans with costly pre-payment penalties, and then immediately selling-off the loans to investors. 

Other actors contributed to the mortgage crisis as well. Lured by lowered mortgage lending standards, some homeowners knowingly took on more debt than they could realistically repay. Appraisers, under pressure from lenders, inflated home values, which resulted in "upside down" mortgages where a homeowner owes more than the house is worth. Unscrupulous mortgage servicers charged borrowers excessive fees and routinely posted payments to mortgage holders late, which resulted in additional fees and made it nearly impossible for borrowers to pay down their interest and principal. Moreover, Wall Street investors, who purchased these loans from lenders, created a perverse incentive structure in which lenders were paid more for selling risky loan products to unsophisticated borrowers. Perhaps worst of all, the Bush Administration's laissez-faire regulatory approach to the marketplace resulted in regulators turning a blind-eye to the out-of-control mortgage market. 

This "perfect storm" has resulted in a personal and financial nightmare for millions of American homeowners.[5]The Center for Responsible Lending estimates that from 2003 to 2006 the percentage of subprime mortgages relative to all mortgages jumped by 20 percent,[6]with 89-93 percent of all subprime mortgages made from 2004 to 2006 containing exploding ARMs.[7]Many of these loans will reset in the next two to three years, with monthly payment increases ranging from 30 to 50 percent.[8]As these loans adjust higher and higher, homeowners will be pushed closer and closer to losing their home -- their most important asset -- to foreclosure.

 

America is experiencing the worst mortgage crisis in decades. In July, RealtyTrac'ssurvey of the country's 100 largest metropolitan areas estimated that nearly 740,000 foreclosures were filed during the second quarter of 2008, which represents an increase of 14 percent from the first quarter.[9]While most of the foreclosures are concentrated in Nevada (the highest rate), California, Florida, Ohio, Arizona, and Michigan, nearly every state is experiencing increases.[10]

In June, the Mortgage Bankers Association (MBA) reported that nearly one percent of all mortgage loans fell into foreclosure during the first quarter of 2008.[11]This is the highest percentage since 1979, and surpasses the previous high of .83 percent during the last quarter of 2007. Worse, the total inventory of homes in foreclosure has increased to 2.47 percent.[12]As a comparison, at the end of 2005, only one percent of the total inventory of homes were in foreclosure.[13]

The number of American homeowners who are standing on economic "thin ice" also increased during the first three months of 2008, with delinquencies growing to record-highs. In particular, the number of home loans that were 30 days behind in payments jumped to 6.35 percent -- 2.9 million loans -- from 5.82 in the previous quarter, with increases in moderate (60 days) to severe (90 day) delinquencies being the biggest part of the problem.[14]

 

While the subprime adjustable rate mortgage (ARM) market represents the biggest part of the problem, the problem is spreading to the prime ARM market.Although subprime ARMs represented only six percent of all outstanding loans in the first quarter of 2008, they represented 39 percent of all foreclosure starts, and the percentage of subprime ARMs that started the foreclosure process jumped to 6.35 from 5.29 percent in the previous quarter.[15]Moreover, while prime ARMs represented 15 percent of the market, they accounted for 23 percent of the foreclosure starts, which is more than fixed-rate subprime loans.[16]The percentage of prime ARMs that started the foreclosure process also increased, jumping to 1.55 percent from 1.06 percent during the previous quarter.[17]

It is clear that in both the short- and mid-terms, the default rates for prime borrowers is only going to grow. While the delinquency rate amongst subprime ARMs grew to 22.07 percent in the first quarter of 2008 from 20.02 percent in fourth quarter of 2007, the delinquency rate for prime ARMs increased as well, from 5.51 percent to 6.78 percent.[18]Isolate severe delinquencies, and the problem is even more evident. The number of prime ARMs 90 days behind in payments increased by 28.71 percent.[19]In comparison, the number of subprime ARMs 90 days behind increased by "only" 18 percent.[20]

Taking all prime and all subprime loans into account over the past year, the number of prime loans falling behind in payments and falling into foreclosure has increased at a greater rate than subprime loans.[21]The Joint Economic Committee reports that, while the percentage of delinquent subprime loans has increased by 32.8 percent since first quarter of 2007, the percentage of delinquent prime loans has increased by 49.4 percent. Similarly, while the percentage of subprime foreclosures has increased by 102.5 percent since last year, the percentage of prime foreclosures has increased 134.9 percent.[22]

Given that prime loans are extended to borrowers with the strong credit, these trends are very alarming and forecast darker days for the mortgage market, American homeowners, and the U.S. economy.

 

Minority communities are among the hardest hit by high-cost lending. Through the many hearings held during the 110th Congress and the many criminal investigations launched on the issue of subprimemortgage lending, it has become clear that a considerable number of mortgage brokers targeted subprime and exotic loan products to minority and elderly borrowers, even those with high incomes who would have qualified for a prime mortgage with better terms.[23]According to the Center for Responsible Lending, in 2005 and 2006, 52.4 percent of all mortgage loans sold to African-Americans and 40.66 percent of those sold to Latinos were subprime.[24]And according to the National Association of Realtors, the use of subprime loans among Asian Americans grew by 181 percent from 2004 to 2005. As a result, minority communities have been disproportionately impacted by the subprime mortgage crisis and rising foreclosure rates.

 

Subprimeborrowers are not the only victims of this crisis, neighbors, communities, and new home buyers are also feeling the crunch.Even homeowners with strong credit, who are in safe, fixed-rate loans, and who are paying their bills on time are suffering from the reduction in property values and home equity wealth associated with foreclosures in their neighborhood. A study of home prices in the Chicago Metropolitan area estimated that a single home foreclosure lowered the value of homes located within a one-eighth mile area by at least .9 (1.44 percent in lower-income neighborhoods), which equaled approximately $3,000 in that market. In other markets that decrease may be closer to $5,000.[25]It is estimated that 40.6 million homes will face devaluation due to surrounding foreclosures, representing a total drop, according to one estimate, in house values and tax base of $202 billion.[26]And last month, Case-Shiller recorded, in its home price index for April 2008, that all 20 of the metropolitan areas measured showed year-over-year declines in home values since April 2007.[27]In July 2008, the National Association of Realtors reported that the price of all homes dropped 6.1 percent between June 2007 and 2008; it is estimated, that between 2006 and 2007, the national median price of a single-family home dropped anywhere from 6.1 percent to 8.9 percent, either of which represents a record decrease.[28]

 

Compounding matters, foreclosures lead to increased crime rates, which further drive down home values. The same Chicago study found that for every percentage point increase in foreclosures, violent crime increases by 2.3 percent.[29]As a result, entire communities, especially those that are already vulnerable to economic disruptions, are at risk of being severely harmed by the subprime mortgage crisis.

Moreover, the resulting credit crisis in the mortgage markets is making safe, affordable mortgages less available for aspiring homeowners or borrowers in need of a refinancing alternative. A Federal Reserve study found that approximately 55 percent of U.S. banks have increased standards for prime loans, and 85 percent of banks have increased standards for nontraditional loans.[30]As a result, the American dream of owning a home is becoming less and less of a reality for nearly every American.

 

The subprime mortgage crisis has hardly been contained to the housing industry. There is no doubt that the housing industry, including the home construction industry, has been negatively impacted by the nation's housing crisis. The National Association of Realtors's July 2008 report showed that existing home sales dropped in June by 2.6 percent to the lowest level in ten years, which was more than double the drop expected, and the month's supply of homes increased to 11.1 months.[31]It seems Americans are finding it more difficult to purchase homes even as home prices have dropped. With the market saturated with unsold homes, construction jobs have taken a hit resulting in the loss of more than 34,000 construction jobs in May, which brings the total number of construction jobs lost since May 2007 to more than 300,000.[32]

What is most striking about the current crisis, especially given the earlier assertions by the Bush Administration that the nation's housing woes would be contained to the housing industry, is that the mortgage crisis has spilled over into the broader economy. Given that real estate represents 10 percent of the nation's economic output,[33]home equity is the greatest source of wealth for most Americans, and Wall Street is deeply invested in the subprime mortgage market, solving the nation's housing problem is key to repairing the nation's struggling economy.

 

The foreclosure crisis is taking an emotional toll on American families. The numbers listed above tell only one part of the nation's housing story. As noted by Senator Dodd, Chairman of the Senate Banking, Housing, and Urban Affairs, " ... for every one of these numbers[,] there is a family... These numbers don't speak about the human tragedy and the cost beyond the financial implications."[34]Across the nation, mental health specialists are reporting that financial woes, defaulting mortgages, and foreclosures are leading to "anxiety disorders, depression, [domestic violence, marital problems,] and addictive behaviors such as alcoholism and gambling. And, in a few cases, suicide."[35]The housing crisis has exacerbated already existing fears about housing costs amongst struggling and non-struggling homeowners. A 2007 survey conducted by the American Psychological Association found that nearly half of Americans identified housing costs, including rent and mortgage payments, as significant sources of stress.[36]

American children are among the hardest hit by the housing crisis. The Brookings Institution estimates that over the next two years, nearly two million children (see below for state by state figures) will be directly impacted when their families loose their homes to foreclosure. This number does not capture the children who will loose their homes to evictions due to increasing costs in the rental industry or because the owner of their rental unit defaulted on his/her mortgage. Far more than a loss of shelter, these children will have their education disrupted, their relationships strained, and their emotional stability upended, and their sense of security destroyed.[37]

 

Senate Democrats are committed to ensuring that Americans can buy a home - and keep a home.With housing agencies, homeowner advocacy groups, many in the private sector, and the American people at our side, Democrats have proposed a series of measures aimed at comprehensively addressing all aspects of the housing crisis in an effort to help as many homeowners as possible and begin repairing the American economy. 

Congress, under the leadership of Democrats, passed landmark legislation to address the nation's housing woes. On July 26, 2008, Congress adopted H.R. 3221, the Housing and Economic Recovery Act of 2008, a comprehensive legislative package that would bring relief to American homeowners and stabilize the housing markets while maintaining fiscal responsibility. The bill will enact: 

TheFederal Housing Finance Regulatory Reform Act of 2008(GSE Reform), which would create a new, effective regulator for the government-sponsored enterprises (GSEs) so that these vital institutions can safely and soundly carry out their important mission of providing our nation's families with affordable housing; the legislation would also raise loan limits to expand affordable housing in high cost areas; in addition, this legislation would create the Housing Trust Fund, of which 75 percent of the monies must be used to benefit extremely low-income families, and a Capital Magnet Fund, which will leverage $10 for every dollar contributed by the Fannie Mae and Freddie Mac; 

Treasury Emergency Authority, which was requested by Secretary of the Treasury Paulson and designed to shore up the confidence of the financial markets in Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (referred to as "GSEs") in response to the erosion of investor confidence in GSEs in July 2008. This temporary authority would allow Treasury to purchase debt securities issued by the GSEs and to purchase common stock of the enterprises with the agreement of the companies in order to protect the taxpayer, provide stability to the financial markets, and prevent disruptions in the availability of mortgages; 

The HOPE for Homeowners Act, which would establish a voluntary, new initiative at the Federal Housing Administration (FHA) to help 400,000 American homeowners refinance their loan at an affordable rate in an effort to avoid foreclosure and stay in their homes; 

The S.A.F.E. Mortgage Licensing Act, which would create a federal registry and establish minimum national standards for all residential mortgage brokers and lenders; 

TheForeclosure Prevention Act, which would provide assistance for communities devastated by foreclosures, foreclosure counseling for families in need, programs to help returning soldiers avoid foreclosure, and mortgage disclosure enhancements; the bill also includes the FHA Modernization Act;

The Housing Assistance Tax Act of 2008, which would provide tax benefits for homeowners, homebuyers, and homebuilders aimed at helping the housing market recover; and 

Revenue provisionsto pay for the legislation, consistent with responsible fiscal policy. 

Both the Foreclosure Prevention Act and theFHA Modernization Act had already passed the Senate during the 110th Congress by overwhelming margins.The Federal Housing Finance Regulatory Reform Act of 2008, passed the Senate Banking, Housing, and Urban Affairs Committee on a 19 to 2 vote on May 20. The combined Housing and Economic Recovery Act of 2008is supported by a wide range of groups, including affordable housing advocates and economists, and by a bipartisan group of Senators and Representatives. Even President Bush, who had originally threatened to veto this needed legislation, rescinded his threat and issued a Statement of Administration Policy in support[38]of it after worsening turbulence in the housing market made it clear that the Administration needed to follow Congress's lead in finding a solution to this crisis for the American people and economy. 

 

Congress overwhelmingly passed an economic stimulus package to help alleviate the squeeze on tens of millions of American homeowners. In February 2008, Congress passed and the President signed into law the Recovery Rebates and Economic Stimulus for the American People Act (P.L. 110-185), which has provided a boost to the stalled economy by providing rebate checks to tens of millions of Americans, providing tax relief for American businesses, and helping families avoid foreclosure by expanding financing opportunities. Specifically, the law: 

Temporarily increases conforming loan limits for single-family homes from Fannie Mae and Freddie Mac to 125 percent of the area median home price (with a maximum of $729,750) in an effort to increase credit availability in the mortgage market; and 

Temporarily increases the Federal Housing Administration loan limitto 125 percent of the area median home price (with a maximum of $729,750), which would expand affordable mortgage loan opportunities.

 

The Democratic-led 110th Congress has also:

Passed the Mortgage Debt Forgiveness Relief Act of 2007.This new law (P.L. 110-142) offers tax relief to Americans facing foreclosure by providing a three-year exception for debt forgiveness on home loans and extends a provision that allows homeowners to deduct mortgage insurance payments from their taxable income; and 

Provided $180 million for foreclosure-avoidance and loss mitigation servicesinthe Consolidated Appropriations Act, 2008 funding for the Department of Housing and Urban Development (P.L. 110-161). 

While there are no "quick-fixes," as we move forward in the 110th Congress and look toward the future, the American people can count on Democrats to work in a bipartisan manner and with the public- and private- sector players needed to strengthen the economy and make the American dream of homeownership more affordable for this and future generations. 


ENDNOTES

[1]David Herszenhorn, The New York Times, "Approval is Near for Bill to Help U.S. Homeowners," here, (June 25, 2008); Peter Viles, Los Angeles Times, here, (May 20, 2008) (It is estimated that there are more than 8,000 foreclosure filings per day, which includes notices of default.).

[2]Center for Responsible Lending, "The Subprime Spillover Effect," here(updated January 18 2008); The Brookings Institution, Center on Children & Families, "The Impact of the Mortgage Crisis on Children and Their Education," here(April 2008).

[3]Center for Responsible Lending, "The Subprime Spillover Effect," here (updated January 18 2008); PEW Charitable Trust, "Defaulting on the Dream," here(updated April 2008).

[4]Executive Office of The President, Statement of Administration Policy for the Housing and Economic Recovery Act of 2008, here(updated June 19, 2008). During the week of June 23, with passage of this critical legislation in sight, Senator Ensign used procedural rules to block further consideration in favor of adding energy tax provisions to the bill that, while important, are unrelated to the housing crisis and would prevent passage of the bill in the House. This action further underscores "how even bipartisan bills have fallen victim to gridlock in the closely divided Senate and how much a single senator can stand in the way." Congressional Quarterly, "Energy Dispute Blocks Housing Bill," here(June 25, 2008); Senate Banking Committee, "Dodd, Shelby Response to Administration's Veto Threat," here(updated June 19, 2008).

[5]Goldfarb, Zachary and Alec Klien, The Washington Post, "The Bubble: How homeowners set off widespread problems and woke up the Fed," here(updated June 16, 2008).

[6]Center for Responsible Lending, "A Snapshot of the Subprime Market," here(updated November 27, 2007).

[7]Center for Responsible Lending, "A Snapshot of the Subprime Market," here(updated November 27, 2007).

[8]Center for Responsible Lending, "A Snapshot of the Subprime Market," here(updated November 27, 2007).

[9]RealtyTrac, "Foreclosure Activity Up 14 Percent in Second Quarter,"here(July 25, 2008).

[10]RealtyTrac, "Foreclosure Activity Up 14 Percent in Second Quarter," here(July 25, 2008).

[11]Jeannine Aversa, Yahoo Finance, "Foreclosures hit record high and more coming," here (updated June 5, 2008).

[12]Joint Economic Committee of U.S. Congress, "Schumer on Record Home Foreclosures Report," here(updated June 5, 2008).

[13]Harvard University's Joint Center for Housing Studies, "The State of Nation's Housing Factsheet," here(updated June 23, 2008).

[14]Jeannine Aversa, Yahoo Finance, "Foreclosures hit record high and more coming," here (updated June 5, 2008); Mortgage Bankers Association, "Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey," here(updated June 5, 2008).

[15]Mortgage Bankers Association, "Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey," here(updated June 5, 2008).

[16]Fixed-rate subprime loans also represented six percent of the market, but represented 11 percent of foreclosures starts in the first three months of 2008. Mortgage Bankers Association, "Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey," here(updated June 5, 2008).

[17]Jeannine Aversa, Yahoo Finance, "Foreclosures hit record high and more coming," here (updated June 5, 2008).

[18]Jeannine Aversa, Yahoo Finance, "Foreclosures hit record high and more coming," here (updated June 5, 2008).

[19]Paul Jackson, HousingWire, "Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers," here(updated June 5, 2008).

[20]Paul Jackson, HousingWire, "Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers," here(updated June 5, 2008).

[21]Mortgage Bankers Association, "Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey," here(updated June 5, 2008); Paul Jackson, "Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers," here(updated June 5, 2008).

[22]Joint Economic Committee of U.S. Congress, "Schumer on Record Home Foreclosures Report," here(updated June 5, 2008).

[23]United for a Fair Economy, "Foreclosed: State of the Dream 2008," here (January 15, 2008); USA Today, "Minorities hit hard by rising costs of subprime loans" here(April 25, 2007).

[24]Center for Responsible Lending, "A Snapshot of the Subprime Market," here(updated November 27, 2007).

[25]Center for Responsible Lending, "The Subprime Spillover Effect," here(updated January 18 2008) (citing the Immergluck and Smith study.).

[26]Center for Responsible Lending, "The Subprime Spillover Effect," here(updated January 18 2008).

[27]Michael Grynbaum, The New York Times, "Consumers Wary Over Economy, Reports Indicate," here(June 25, 2008).

[28]National Association of Realtors, "Existing-Home Sales Down in June," here(July 24, 2008); Harvard University's Joint Center for Housing Studies, "The State of Nation's Housing Factsheet," here(updated June 23, 2008).

[29]J.W. Elphinstone, Associated Press Business, "Neighborhoods suffer as crime follows forclosure," here(November 14, 2007).

[30]Bloomberg News, "Fed: Banks Tightening Standards for loans," here(updated February 5, 2008).

[31]National Association of Realtors, "Existing-Home Sales Down in June," here(July 24, 2008); Martin Crutsinger, Associated Press, "Existing home sales fall 2.6 percent in June, more than double the expected amount," here(July 24, 2008).

[32]Bureau of Labor Statistics, Employment Situation Survey: May, here.

[33]Kimberly Amadeo, About.com: US Economy, "What Are the Components of GDP," here(updated June 23, 2008).

[34]Floor Statement of Senator Christopher Dodd, Congressional Record, S7224(July 24, 2008).

[35]Stephanie Armour, USA Today, "Foreclosures take an emotional toll on many homeowners," here(May 16, 2008); Associated Press, "Woman kills herself before foreclosure," here (July 24, 2008).

 

[36]Stephanie Armour, USA Today, "Foreclosures take an emotional toll on many homeowners," here(May 16, 2008); American Psychological Association, "Stress in Tough Economic Times," here (last visited July 26, 2008).

[37]The Brookings Institution, Center on Children & Families, "The Impact of the Mortgage Crisis on Children and Their Education," here(April 2008).

[38]Statement of Administration Policy, H.R. 3221, the Housing and Economic Recovery Act of 2008, here, (July 23, 2008).

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