August 07, 2007

Statement of Chairman Dodd in Reaction to Continued Subprime Mortgage Market Turmoil

“As Chairman of the Senate Banking, Housing and Urban Affairs Committee I have taken a number of steps to reduce foreclosures and protect the American Dream of homeownership. These include: · Documenting through multiple hearings the failure of the Federal Reserve and other federal regulators to protect homeowners from the kinds of predatory lending which has been responsible for the record number of foreclosures which we are witnessing. · Successfully persuading the Fed to meet its obligations under a nearly 14-year old law – the Homeownership and Equity Protection Act (HOEPA) – to protect borrowers from unfair, deceptive, and misleading actions by mortgage industry participants against homebuyers. · Urging the Fed and other federal regulators to apply common-sense lending standards and protections for homebuyers and -owners, including those in the subprime market. These standards include: basing loans on the borrower's ability to pay the loan, not on speculation about a home's future value; requiring brokers, lenders, and servicers to escrow for taxes and insurance and disclose those expenses to borrowers along with principle and interest; and restricting the use of low- and no-documentation loans. · Developing a set of principles which leading companies in the mortgage industry have agreed to abide by. These principles obligate lenders, servicers and securitizers to take affirmative steps to restructure mortgage loans in order to prevent foreclosures. In addition, I believe that additional steps are warranted to protect, preserve and promote the American dream of homeownership. These reforms include: · Modernizing FHA. FHA loans have long been a source of quality mortgage credit for working families. FHA needs to be modernized to ensure that more Americans can have the benefits of an FHA loan. These benefits include: a ban on prepayment penalties; 30-year fixed-rate mortgages so borrowers know they have to pay a set amount each month, rather than rates that can climb and force borrowers to pay more over time until they can't pay anymore; and loans that are based on a borrower's ability to pay the full cost of the loan, including associated taxes and insurance. · Cracking down on unscrupulous brokers and broker practices. In particular, brokers are often paid more when they steer a borrower toward loans with a higher interest rate than the borrower could otherwise get. This perverse incentive to overcharge homebuyers should be prohibited. In addition, many brokers portray themselves to borrowers as acting on behalf of the borrower, when in fact they might not be doing so. Brokers should have to act either as agents of the borrower, thereby owing them a fiduciary duty, or as agents of the lenders, who would be responsible for the brokers' sales practices. · Elimination of prepayment penalties for all subprime mortgages. These penalties, which are nearly non-existent in the prime market, often punish or prevent borrowers from refinancing their loans just when their monthly payments become increasingly burdensome. By trapping borrowers into paying exploding mortgage payments, prepayment penalties significantly increase the risk of default and foreclosure. For that reason, these penalties should be prohibited for all subprime mortgages. · Expanding the ability of Fannie Mae and Freddie Mac to extend affordable mortgage credit. Fannie Mae and Freddie Mac were established by Congress in part to make mortgage credit more readily available to middle and lower income Americans. This mission is particularly important at times like the present when there are contractions in the flow of mortgage credit. For that reason, it may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie's mortgage portfolio. Any such increase would have to be used only to purchase loans made consistent with the highest standards of consumer protection. The GSE’s should not be used to bring liquidity to loans with abusive terms. · Increasing affordable housing. As part of the efforts to reform the GSE’s, an affordable housing fund should be established to expand the supply of affordable housing for owners and renters. At least a portion of these funds should be made available to prevent foreclosures.”