Earlier today, Senator Hillary Clinton discussed her plan to help break down hurdles people in New Hampshire and across the country have been facing in their attempts to own their own homes and protect them from unfair lending practices.
In her plan, which she spoke about at the National Community Reinvestment Coalition today in Washington, DC, Clinton proposed e xpanding access to independent face-to-face counseling, encouraging refinancing when the loan floats or payment shock hits, requiring a "plain talk, no fine print disclosure," promoting foreclosure timeout and strengthening the Federal Housing Administration's mortgage insurance program. Below is the text from the press release Senator Clinton’s Senate office put out today as well as an article that ran in the Union Leader yesterday and an article that is running on Bloomberg News today.
According to the Union Leader article, “A November report, based on information from Manchester-based Real Data Corp., found that total mortgage foreclosures doubled in the first nine months of 2006 compared to 2005. And a recent study from the Center for Responsible Lending projected that 5.4 percent of the subprime loans written in the state between 1998 and 2001 would at some point default during the loan's lifetime. But for loans written in 2006, the study said, that projection jumped to 14.9 percent. Projections were similar in the Manchester-Nashua area, as well as in Rockingham and Strafford counties.”
SENATOR CLINTON ANNOUNCES INITIATIVE TO ADDRESS GROWING CRISIS FACING SUBPRIME MORTGAGE HOLDERS
Washington , DC – In an address to the National Community Reinvestment Coalition, Senator Hillary Clinton today announced an initiative to address the growing crisis facing those holding subprime mortgages. Underscoring the need to make the rules clear and level the playing field for homebuyers, Senator Clinton outlined a plan to break down barriers to owning a home and build up protections against unfair and unscrupulous lending practices. Senator Clinton's plan will provide more borrowing options for lower income, minority and first-time homebuyers before they sign on the dotted line; more information and safeguards against abuses when signing a mortgage; and smart reforms to reduce foreclosures.
In her remarks, Senator Clinton emphasized the urgent need to act. "The subprime problems are now creating massive issues on Wall Street. It is a serious problem affecting our housing market and millions of hard working families buying a home, many of them for the first time. We need to expand the role of the Federal Housing Administration to issue more mortgages at better rates to these homeowners. And we need to give consumers more counseling and information, prevent families from being trapped in high interest loans with pre-payment penalties, and in some cases allow more breathing room from foreclosure. This market is clearly broken, and if we don't fix it, it could threaten our entire housing market," said Senator Clinton.
The market for subprime loans has expanded rapidly, growing from $20 billion in 1993 to over $600 billion today. Subprime now represents 23 percent of all new mortgage loans and 13 percent of all mortgages outstanding. The subprime mortgage market serves mostly people with poor or limited credit histories, and the rates and fees on subprime mortgages are higher than those on traditional mortgages. According to Department of Housing and Urban Development (HUD), subprime borrowers are disproportionately African-American and Latino.
With the real estate market cooling, subprime borrowers are facing significant challenges. The situation is made worse by the fact that the two-year, fixed-rate "teaser" period on over $300 billion in adjustable rate mortgages (ARMs) will expire this year, saddling most borrowers with higher monthly payments. The Center for Responsible Lending estimates that nearly 20 percent of subprime loans made in 2005 and 2006 will end in foreclosure. Late payments and defaults are rising rapidly. In the fourth quarter of 2006, 13.3 percent of all sub-prime loans and 14.4 percent of subprime ARMs were delinquent. The subprime market now accounts for more than 60 percent of foreclosures.
Senator Hillary Clinton today announced a new initiative to address the growing crisis in the subprime mortgage lending market:
Expand Access to Independent Face-to-Face Counseling. Senator Clinton underscored the need to ensure that financial counseling is available to borrowers before they take out mortgages. In particular, Senator Clinton emphasized the need to expand access to programs and initiatives that assist at-risk borrowers. These initiatives, such as the National Community Reinvestment Coalition's "Consumer Rescue Fund" can provide borrowers unbiased advice on lenders, loan types, refinancing options, etc. Studies have shown that pre-purchase, face-to-face counseling lowers delinquency and default rates. Many borrowers fail to appreciate the significant financial responsibilities that come with a mortgage; they fail to manage their finances appropriately to meet those responsibilities; or they simply do not understand the loan terms. Large numbers of unsuspecting people are also "steered" to sub-prime mortgages even when they qualify for lower-cost ones.
Encourage Refinancing When the Loan Floats or Payment Shock Hits. Senator Clinton proposed limiting the length of time for which prepayment penalties apply, and prohibiting prepayment penalties on mortgages with rates above a specified level. She emphasized that 70 percent of sub-prime mortgages have prepayment penalties, but less than 5 percent of prime mortgages do. Loans with prepayment penalties have 52 percent greater default risk according to findings by the Center for Responsible Lending and the National Low Income Housing Coalition. Some adjustable rate mortgages (ARMs) have prepayment penalties that extend beyond the fixed-rate period, making it difficult for borrowers to avoid incurring the higher floating rate payments.
Require "Plain Talk, No Fine Print Disclosure." Senator Clinton underscored that the protections offered by the Truth in Lending Act and existing federal regulations should be strengthened. Mortgage lenders should clearly and explicitly explain the risks and costs of mortgages. In particular, there should be "plain talk" disclosure of payment escalations on ARMs; prepayment penalties; balloon payments; the price premiums on reduced documentation loans; and the cost of taxes and insurance which are not included in the mortgage payments.
Promote Foreclosure Timeout . Senator Clinton discussed creating incentives for lenders to identify troubled mortgages and sit down with borrowers and try to figure out a way to restructure the loans before foreclosing. One option would be to give borrowers some period of forbearance in which they could get their financial house in order before resuming their mortgage payments. When a homeowner is having trouble making mortgage payments, some financial institutions sit down with borrowers to try to restructure the loans and figure out ways for borrowers to make their payments. In too many cases, however, homeowners don't reach out to their lenders and simply default after missing their payments, ultimately losing their homes.
Strengthen the Federal Housing Administration's Mortgage Insurance Program. Senator Clinton called for passage of legislation she has proposed, the 21 st Century Housing Act, which strengthens the FHA, makes FHA loans available to more Americans, and expands access to a responsible and stable alternative to the subprime market. Senator Clinton's bill also would raise existing FHA mortgage limits in high-cost areas like New York and California, making FHA an option for borrowers in those places. In addition, her bill would allow the FHA to reinvest a portion of its revenue in hiring more employees, upgrading its IT systems, and taking other steps to improve its operating infrastructure. These initiatives would position the FHA to work more efficiently with lenders, develop new mortgage products, and serve a larger number of borrowers.
Homebuyers who do not qualify for conventional mortgages are the most common users of FHA-backed mortgages. This population of first-time buyers, many of whom are low- or moderate-income, and minority, is essentially the same that turns to the subprime market. FHA insurance makes it possible for private lenders to provide mortgages to lower income families without attaching the rates and fees that sub-prime lenders do. FHA's market share, however, has been dropping in recent years. In the 1990s FHA loans were about 12 percent of the market; today, they are closer to three percent. Strengthening the FHA would provide more homebuyers an alternative to the subprime market.