U.S. Congressman David Scott : 13th District Of Georgia

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Home Foreclosure Crisis

As a member of the Financial Services Committee, I have introduced H.R. 3133, the Financial Literacy for Homeowners Act, which would provide for grants to states and non-profit agencies to educate consumers on the advisability of a particular mortgage loan. Also included in the bill is a provision which would create a national toll-free number where consumers can report cases of abuse. Through this number we will be better able to maintain a database of lenders who operate under dishonest terms and have knowledgeable staff on hand to guide homeowners and potential homebuyers towards those organizations who can properly address their particular concerns. Providing consumers with education and informative programs about lending laws, counseling and referral services which address current and prospective homebuyers’ concerns is of utmost importance at a time when subprime loans have lead to record foreclosures throughout the country.

HELPING PEOPLE ALREADY AT-RISK FOR FORECLOSURE

Stop Avoidable Foreclosures

The Financial Services Committee has made progress toward helping people at risk of foreclosure remain in their homes. As you know, we cannot constitutionally legislate people out of contracts they have already signed. Accordingly, we have worked to ensure that institutions work with people to find “good credit” so they can keep their homes. For example, a number of my fellow committee Democrats sent a letter to the Federal Banking regulators asking that they clarify that depository institutions can “forbear foreclosure” (i.e., use their discretion not to foreclose) in appropriate circumstances.

In addition, Democratic members sent a letter to the Securities and Exchange Commission asking that they clarify that loan servicers can modify loans for consumers where there is a “reasonable likelihood of default” rather then waiting until the loan is already in default, maximizing the possibility that people can remain in their homes. The SEC agreed. In both instances, Democrats took the lead and found that many institutions wanted to help consumers stay in the homes but felt limited by legal ambiguities. The Committee pushed regulators for the clarity needed and in doing so stripped away a perceived impediment to best practices. Following the Committee’s lead, federal and state banking regulators have also begun encouraging institutions to help consumers at risk by modifying their loans. Institutions should now be working diligently with their customers to avoid unnecessary foreclosures.

More Liquidity and Outreach

We have also pushed large financial institutions to create new solutions for people facing foreclosure. In response to our efforts, Fannie Mae has begun working with state housing finance agencies to help consumers at risk of foreclosure, Freddie Mac pledged substantial amounts to purchase fixed-rate and hybrid mortgages that will provide lenders with better choices to offer subprime borrowers, and the Financial Services Roundtable has teamed up with NeighborWorks and the Homeownership Preservation Foundation on a nationwide campaign to educate consumers and avoid foreclosures. They have set up a helpline for at-risk consumers to call at (888) 995-HOPE. Unfortunately, even with this progress, we remain concerned that too many consumers may not be able to keep their homes.

Expand FHA to Provide Good Loans for People in Trouble

To give homeowners more refinance options, the House passed H.R. 1852, the “Expanding American Homeownership Act of 2007,” to update FHA to serve more subprime borrowers at affordable rates and terms, recapture borrowers that may have received risky loan products in recent years, and offer refinancing opportunities to borrowers currently struggling.

In particular, the bill would lower down payments, increase loan limits, and direct FHA to provide loans to higher risk (but qualified) borrowers (without authorizing unnecessary fee hikes on those borrowers).

Increase Role and Stronger Regulation of Housing GSEs

In addition, we have passed comprehensive legislation to improve the regulation of Fannie Mae and Freddie Mac and the Federal Home Loan Bank system. These government-sponsored enterprises provide liquidity to the mortgage markets by purchasing loans already made (freeing up money for new mortgages and refinances). Under the House bill these entities could purchase more loans in higher cost areas (lowering interest rates for new homes and refinances in those areas). We have also sought increased liquidity by asking federal regulators to reconsider artificial restrictions on the number of loans that the GSEs can own.

Promote Affordable Housing to Lower Need for Risky Loan Products

To ensure that families losing their homes to foreclosure have affordable housing and ensure that families are not inappropriately pushed into buying homes because of a lack of rental housing, the Committee also passed H.R. 2895, The National Affordable Housing Trust Fund Act of 2007. This legislation would establish a national affordable housing trust fund – for the creation and preservation of affordable housing.

Members of the Committee are also encouraging lenders, servicers and banks to work with rent-paying tenants who are caught up in their landlord’s foreclosure. Currently many rent-paying tenants are automatically evicted as part of the foreclosure process even though they are not a fault for the foreclosure. Allowing these tenants to remain in occupancy could provide a needed stream of income for the bank. Moreover, communities are much better served by occupied residences than the vacant homes tenants are forced to leave behind. The Committee is also asking whether anything can be done to help convert foreclosed properties into rentals so that they improve rental options and do not weigh down other houses in the community as does vacant property.

PROTECTIONS FOR NEW LOANS

Promote Better Protections for Risky Loan Products

To ensure that we do not face this problem again, we have also been very active in trying to stop these bad loans from being made in the first place. In response to FSC letters and hearings, federal banking regulators and a number of state banking regulators have issued guidance that has substantially reduced the flow of risky mortgages, including so-called “2-28” and “3-27” mortgages that have an initial fixed “teaser” rate followed by a longer-term variable rate that brings payment shock (and potentially foreclosure) to consumers. To limit the incentives to make these loans, this guidance is also being extended to loans purchased by Fannie Mae and Freddie Mac.

Supporting Senate Banking Committee Chairman Chris Dodd’s leadership, we have also encouraged the Federal Reserve Board to issue new regulations under the Home Ownership and Equity Protection Act to combat abusive mortgage lending practices. Thanks to Democratic leadership in the House and Senate, the Federal Reserve is finally beginning to use some of its long-standing consumer protection authority, and Chairman Bernanke has committed to issue regulations this year.

Although the Committee continues to make real progress, Committee Democrats have concluded that the current regulatory framework (and the progress we have outlined) works well for federally-regulated depository institutions, but is much less effective for others. Accordingly, Democrats on the Financial Services Committee have been formulating comprehensive legislation to rein in the practices that have caused these problems and ensure that the same rules apply to the same mortgages, regardless of who is selling them.

We have pushed for years for substantive regulations and legislation in this area and were long thwarted by the former Republican leadership. We introduced comprehensive subprime and predatory lending legislation long before this crisis, and last year, meaningful discussions occurred with then Subcommittee Chairman Spencer Bachus that could have produced a bipartisan bill had the then House Republican leadership not ordered an end to our effort.