Senator Amy Klobuchar

Working for the People of Minnesota

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Joel Gross
Press Secretary
(202) 224-3244

News Releases

Klobuchar: Government must act now to contain the economic spillover effect of the subprime lending disaster

New JEC Report: Subprime Crisis to Cost Billions in Family Wealth, Property Values, and Tax Revenues Unless Action is Taken to Prevent Foreclosures

October 25, 2007

Washington, D.C. – U.S. Senator Amy Klobuchar today joined members of the Joint Economic Committee (JEC) in highlighting the dangers in a report released by the Committee analyzing the disastrous financial impact of the subprime foreclosure boom. The JEC report, entitled “The Subprime Lending Crisis: The Economic Impact on Wealth, Property Values and Tax Revenues, and How We Got Here,” reveals that families, neighborhood property values, and state and local governments will lose billions of dollars as  two million subprime mortgage homes are foreclosed.

The subprime fallout report argues in favor of foreclosure prevention, which can save the economy billions in housing wealth and ease falling housing prices.  The JEC report is the first of its kind to project economic costs on a state-by-state basis from the third quarter of 2007 through 2009.  Minnesota has been hit particularly hard with foreclosures in the subprime market.  Nearly 8.6% of subprime mortgages in in Minnesota are in foreclosure – the 4th highest in rate in the country.

“In the world of subprime lending, the chickens have come home to roost,” said Klobuchar.  “If we are to contain the economic spillover effect of the subprime lending disaster, we must act now.”

The JEC report found that the subprime catastrophe is likely to accelerate the downward spiral of house prices.  Based on state-level data, the report estimates that by 2009:
• 2 million foreclosures will occur by the time the riskiest subprime adjustable rate mortgages (ARMs) reset over the course of this year and next.
• Approximately $71 billion in housing wealth will be directly destroyed because each foreclosure reduces the value of a home.
• More than $32 billion dollars in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties.
• States will lose more than $917 million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures.
• On top of the losses due to foreclosures, which this report examines, a 10 percent decline in housing prices would lead to a $2.3 trillion economic loss.

Klobuchar is a cosponsor of S. 1299, the “Borrower’s Protection Act,” that was introduced by Sen. Chuck Schumer (D-NY).  The legislation makes it more difficult for non-bank lenders and irresponsible brokers to sell mortgages that are in essence built to fail the homeowner and end in foreclosure.

Klobuchar also spoke about how widespread the problem is affecting both urban and rural areas.

“Across Minnesota, the number of homes in foreclosure is skyrocketing,” said Klobuchar. “And the foreclosure crisis is by no means isolated to the Minnesota Twin Cities metro area – it is a problem being experienced across the state.  It is estimated that foreclosures in Greater Minnesota will increase by 93 percent in just one year.”

The full report can be found at www.jec.senate.gov

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