|A recent government report indicates that subprime foreclosures will increase dramatically as 1.8 million hybrid adjustable-rate mortgages reset within the next two years. But mortgage bankers, who say the report is flawed, blame local economic conditions -- and not subprime lending -- for a potential increase.
"What we are facing," Sen. Bob Menendez, a New Jersey Democrat, said in the report by Democrats on Congress' Joint Economic Committee, "is a tsunami of foreclosures."
Committee Chairman Sen. Chuck Schumer, a New York Democrat, was also sounding a rhetorical alarm in a statement announcing the report, "Sheltering Neighborhoods from the Subprime Foreclosure Storm."
"The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act," Schumer said.
But John Robbins, chairman of the Mortgage Bankers Association, said while problems exist they aren't as bad as the senators portray.
"This is a serious problem that is hurting borrowers, communities, lenders and investors," Robbins said in a statement. But "we believe the report overstates the potential number of foreclosures. By relying on faulty, inflated data to draw its conclusions, the report paints a far more dire picture of the landscape than MBA's studies support."
The report, Robbins said, relies on a "flawed" Center for Responsible Lending report that "issued a projection of foreclosures based on unrealistic, worst-case assumptions."
Robbins said the MBA agrees with some of the policy recommendations made in the report, including a "uniform national standard to combat predatory lending as well as foreclosure prevention programs."
"We have already begun discussions with regulators, investors and other stakeholders on new products to help those borrowers who find themselves having trouble paying their loans," he said.
But the MBA is opposed to other policy recommendations, including a "suitability standard" investors would be required to meet before investing in certain mortgage products.
"We do ... have grave concerns about a suitability standard," Robbins said. "Mortgage lenders are not analogous to financial analysts in this way and a subjective suitability standard could threaten decades of fair lending gains."
The Senators also suggested enhancing disclosure practices for mortgage products and increasing federal support for local foreclosure prevention programs.
In an oft-repeated industry line, Robbins said that the major cause of foreclosures is local economic conditions, "not the fact the loans were made to subprime borrowers."
He points to Ohio, Michigan, Indiana, Illinois and Wisconsin, Rust Belt states that represent 14 percent of the nation's outstanding mortgages but account for 28 percent of loans in foreclosure, with subprime borrowers making up about half of the failed loans.
"This region has lost over 700,000 jobs since the middle of 2000," Robbins said. "It is clearly problems with the economy in this region that are driving the ability of borrowers to repay their mortgages or sell their homes if they get into trouble."