A basic mortgage that would be offered to everyone unless they choose to opt-out and a basic mortgage disclosure form that would be provided to all borrowers were among the proposals presented to U.S. senators at a hearing on foreclosure prevention Thursday.
Other proposals discussed before the Senate Committee on Banking, Housing and Urban Affairs, chaired by Sen. Chris Dodd (D-Conn.), involved the acquisition and refinance of loans by the government sponsored enterprises, bankruptcy court judicially supervised loan modifications, a five-year freeze of adjustable-rate starter rates, eliminating tax liabilities on cuts in outstanding principals and acquisition of REOs by government agencies and non-profit organizations.
Some speakers went back to federal programs initiated in the 1970s and even the 1930s, drawing on these past efforts to deal with housing finance crises to suggest similar undertakings today, according to transcripts of prepared statements released by the Mortgage Bankers Association.
A one-page disclosure form that would "insure clear and straightforward disclosure to borrowers of what mortgage loans really mean to them and to their household income" -- described as similar to a proposal introduced by Sen. Charles E. "Chuck" Schumer (D-N.Y.) -- was suggested by Alex J. Pollock, a resident fellow at the American Enterprise Institute who was president and CEO of the Federal Home Loan Bank of Chicago for 12 years.
But, to deal with the lack of understanding of nontraditional loan products by many borrowers, Michael S. Barr, a senior fellow at the Center for American Progress and a professor of law at the University of Michigan Law School, proposed an "opt-out home mortgage plan." Under this plan, all borrowers would be offered "a standard set of mortgages, with sound underwriting and straightforward terms," he explained. However, they could, if they choose, opt-out and thus take advantage of "beneficial financial innovation."
Barr also proposed a program under which the three GSEs would purchase, at a discount, loan pools and then refinance the loans "at terms that would reduce the likelihood of default, foreclosure and liquidation."
When borrowers file for bankruptcy, Barr proposed allowing "judicially supervised modifications of home mortgages ... under certain narrow circumstances."
The need for mortgage relief in bankruptcy proceedings was also pushed by Wade Henderson, president and CEO of the Leadership Conference on Civil Rights, who said his organization "strongly believes that Chapter 13 reform is one of the most important policy options available to Congress in the effort to reduce the number of foreclosures."
He said they support "a proposal like S. 2136," Helping Families Save Their Homes in Bankruptcy, co-sponsored by Senators Dodd and Richard Durbin (D-Ill.), which would enable bankruptcy courts to reset interest rates, eliminate prepayment penalties and reduce principals owed to reflect the actual value of homes.
That bill is opposed by the Mortgage Bankers Association and others in the industry. Currently, loan modifications of any kind on primary residences, but not on second homes, are barred under bankruptcy law.
Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, called for modifying loans to keep them at "the starter rate for a long-term, sustainable period of five years or more."
She noted that "brief extensions of the starter rate or temporary repayment plans will not provide stability to the borrower, investors, or the market. Brief extensions," she said, "simply increase the resource stress on servicers and decrease the ability of the market to determine market prices for mortgage assets."
Modifying loans before reset, she said, will "avoid negative credit consequences for borrowers, permit borrowers to keep their homes while making payments they can afford, preserve neighborhoods and provide investors with a return that exceeds any return they would receive from foreclosures."
Congress, said Doris W. Koo, president and CEO of Enterprise Community Partners Inc., should make REO property disposition to government agencies and qualified nonprofit organizations an eligible activity toward banks' CRA responsibilities.
Koo, whose organization helps partner financial institutions with community organizations and local governments for the creation of affordable homes, also called for creation of a Neighborhood Stabilization Fund, financed with a $10 billion Community Development Block Grant, that would acquire, repair and resell or temporarily lease foreclosed, vacant homes. And she promoted Senate Bill 2517, co-sponsored by Senators Gordon Smith (R-Ore.), Norm Coleman (R-Minn.) and John Kerry (D-Mass.), that would temporarily allow state housing finance agencies to use tax-exempt bond funds to refinance mortgages.
In calling for more federal government action, she noted how the federal government had taken over foreclosed apartment buildings and single-family homes in the wake of the S&L crisis of the late 1970s and early 1980s.
Pollock cited another case of successful federal government intervention in the wake of defaults and foreclosures caused by "interest-only loans, balloon payments, frequent second mortgages, the assumption of rising house prices and the firm belief in the availability of the next 'refi'" that occurred in the 1920s. This was the creation of the Home Owners' Loan Corporation under the Home Owners' Loan Act of 1933 to acquire defaulted residential mortgages from lenders and investors that were then successfully refinanced.
U.S. Treasury Department Undersecretary for Domestic Finance Robert K. Steel, while stating that the number of homeowners facing hardship will remain higher over the next two years than during other recent housing downturns, presented one bright spot, saying that "material progress is being made" with the HOPE NOW alliance, which is connecting with more at-risk borrowers than just a few months earlier, with its hotline now receiving 4,000 phone calls a day and obtaining a 16 percent response rate to 483,000 letters to delinquent homeowners who previously avoided contact with servicers.
Pollock, Koo, Bair and Henderson all cited the need for help from outside the industry to limit the cost of foreclosures to homeowners, servicers and investors.
The federal government, said Koo, can play "a pivotal role" in coming up with creative and targeted solutions that will help overcome "these serious and immediate challenges."
"With a foreclosure crisis unlike anything we have seen in decades," concluded Henderson, "homeowners -- and our economy as a whole -- simply cannot afford to wait for an industry that created the mess, and is now being devoured by it, to take the lead in cleaning it up."
Dodd described the hearing as the beginning of the committee's process of tackling the causes of the foreclosure crisis and dealing with its consequences.
As part of that process, he said the committee will be holding a hearing on the GSEs on Feb. 7. Also, additional hearings will be held on the predatory lending bill he introduced last fall.