January 31, 2008

DODD: THE EPICENTER OF THIS ECONOMIC CRISIS IS THE HOUSING CRISIS

Banking Chairman Holds First Hearing of the Year

“Strengthening Our Economy: Foreclosure Prevention and Neighborhood Preservation” WASHINGTON, DC – As the nation experiences a dramatic economic slowdown and Congress considers economic stimulus packages to present to the President, Senator Chris Dodd (D-CT), Chairman of the Banking, Housing, and Urban Affairs Committee, held his first hearing of the year on the root cause of the current problems in the economy: the tumult in the mortgage markets and the rising number of home foreclosures. Dodd focused the hearing on both short- and longer-term solutions to address the housing crisis, based on the premise that the mortgage meltdown is largely responsible for the current economic downturn. Dodd heard from two panels of witnesses representing the Administration, consumer advocacy groups, and both progressive and conservative think tanks. Ideas discussed included: • Home Ownership Preservation Corporation: Based on a similar entity temporarily established during the Depression, this entity would capture the discount at which delinquent and near-delinquent loans are trading in the marketplace through a transparent, market-based process. Lender and homeowner losses would be mitigated and homeowners would have a chance to re-finance into long-term affordable mortgages – all at little or no cost to taxpayers over the long run. • Reform the Federal Housing Administration (FHA): Senator Dodd remains committed to enacting comprehensive FHA reform, which can give homeowners a chance to trade in “foreclosure loans” for stable, affordable 30-year fixed rate mortgages. This bill passed this Committee on a 20 to 1 vote, and it passed the Senate by a vote of 93 to 1. • Preserving our Neighborhoods and Communities: To help local communities cope with the rising number of foreclosed and abandoned homes that litter their communities, Dodd supports an increase of $10 billion in funding for the Community Development Block Grant (CDBG) program so that states and localities may acquire, renovate, and resell these properties. “The catalyst of our economic problems is the housing crisis,” said Dodd. “And the face of this housing crisis is the historic increase in foreclosures. Therefore, any serious effort to address our economic woes must include an effort to take on the causes of the foreclosure crisis. This morning’s hearing is the beginning of that process. Furthermore, a foreclosure does not affect just one home or family – it has consequences for the entire neighborhood. We must find ways to equip local governments with the tools they need to keep their communities clean and safe.” At several hearings last year, Dodd brought attention to the issues of predatory lending, the rising number of defaults on subprime loans, and the steadily increasing number of home foreclosures. Warning of the potentially major economic consequences of turmoil in this market, Dodd brought together key stakeholders who later agreed on a set of principles to promote more responsible lending practices. Dodd introduced a comprehensive predatory lending bill in the fall, which will be the subject of further hearings this year. Dodd also announced that he will hold a hearing next Thursday on Government-Sponsored Enterprises (GSEs). -30- The epicenter of this economic crisis is the housing crisis. Housing starts are at their lowest levels in a quarter-century. The housing sector has declined for 8 straight quarters, shaving 1.2% out of our GDP in the last quarter alone. Home prices declined last year nation-wide by 6 percent, and are expected to decline again this year. To my knowledge, that would be the first time since the Great Depression that national home prices have dropped two years in a row. The virtual collapse of the housing market was triggered by what Treasury Secretary Paulson himself has called “bad lending practices.” These are practices that no sensible banker should have engaged in. Reckless, careless, and sometimes unscrupulous actors in the mortgage lending industry allowed loans to be made that they knew hard-working, law-abiding borrowers would not be able to re-pay. And they did this in full view of our financial regulators, who acted much too late and far too timidly. Even now, the Federal Reserve is not taking the strong steps needed to protect consumers. As a result, foreclosures are at record levels, the value of people’s homes are declining, and the tax base for state and local governments is shrinking. The catalyst of our economic problems is the housing crisis. And the face of this housing crisis is the historic increase in foreclosures. Therefore, in my view, any serious effort to address our economic woes must include an effort to take on the causes and symptoms of the foreclosure crisis. This morning’s hearing is the beginning of that process. A number of important steps have already been taken. After what I regret to say was months of denial and delay, the industry and the Administration finally put together the Hope Now alliance, which has developed a set of standards by which loans can be more readily refinanced or modified. It is my hope that these standards will be applied quickly and in a broad, systematic way, as FDIC Chairman Sheila Bair has been advocating. Unfortunately, the results to date have been disappointing. Moody’s reports that only 3.5% of subprime ARMs were modified in the first 8 months of 2007. While industry data paint a more optimistic picture, the Washington Post pointed out that even the industry’s data show that “delinquent borrowers were almost twice as likely to lose their homes as they were to reach an agreement with their lender.” (“Foreclosures, Lenders’ Preferred Fix,” January 18, 2008). For that reason, I believe we need to give serious consideration to other ideas. One such approach that we will hear about today is the creation of an entity I am calling the Home Ownership Preservation Corporation. In its general outline, such an entity would capture the discount for which delinquent and near-delinquent loans are trading in the marketplace through a transparent, market-based process, and transfer the discounts to the homeowners through new, lower-balance loans so that more families can keep their homes. Rather than a case-by-case approach, such an entity would purchase and restructure these loans in bulk to help many borrowers as quickly as possible. In my view, this entity should make use of existing institutions, such as FHA and the GSEs, to expedite the process and maximize efficiency. Every day that goes by without action means more families are losing their homes. Obviously, many details need to be fleshed out – that is one of the purposes of this hearing. But the fact that this idea has been embraced by highly respected leaders of both the conservative American Enterprise Institute and the progressive Center for American Progress tells me it is well worth pursuing. While we continue to seek out ways to prevent foreclosure, we need to take other measures as well. These include enacting comprehensive FHA reform, which can give homeowners a chance to trade in “foreclosure loans” for stable, affordable 30-year fixed rate mortgages. This bill passed this Committee on a 20 to 1 vote, and it passed the Senate by a vote of 93 to 1. We should also help local communities cope with the rising number of foreclosed and abandoned homes that litter their communities. To that end, I believe we need to increase funding for the Community Development Block Grant (CDBG) program by $10 billion so that states and localities may acquire, renovate, and resell foreclosed and abandoned homes. These properties lead to a cycle of disinvestment, crime, falling property values and property tax collections, thereby leading to service cuts and further disinvestment. An increase in CDBG can help stop this vicious cycle of decline. In the long-term, we also need to end the predatory lending practices that led to this problem. I introduced a bill late in the fall that will crack down on these practices and help restore consumer and investor confidence in the market. That will be a subject for future hearings. Today, and in the coming weeks, we need to work together to help American families keep their homes, and their dreams alive. With that, I will turn to Senator Shelby for any opening statement he wishes to make. -30-