#150 Summer 2007 — Subprime Slide

Meeting the Foreclosure Crisis

Every day, news reports document rising foreclosures and their growing impact on our economy. As the congressional representative from Ohio’s north coast – a region with one of the highest […]

Every day, news reports document rising foreclosures and their growing impact on our economy. As the congressional representative from Ohio’s north coast – a region with one of the highest foreclosure rates in the nation – I am keenly aware of the detrimental effect this phenomenon is having on our families and our communities at large.

Every week when I return home, the overwhelming presence of “for sale” signs plastered throughout the district is a visible reminder of how many people cannot afford their mortgage payments. The statistics mirror this observation. In the fourth quarter of 2006, Ohio experienced a higher rate of foreclosure than any other state in the nation. Indeed, our rate is three times the national average. A recent report from the Coalition on Homelessness and Housing in Ohio estimates that $14 billion in adjustable-rate mortgage (ARM) loans will reset over the next two years, affecting up to 200,000 homeowners. These numbers play into the more than 2.2 million foreclosures that are predicted to result nationwide from subprime mortgages that originated from the third quarter of 1998 through 2005, according to the Center for Responsible Lending. The cumulative impact of irresponsible mortgage lending and the securitization of mortgages has threatened the safety and soundness of our financial system. Homes are the most important assets people have. America can do far better.

The COHHIO report has documented the extent of the problem in Ohio. COHHIO’s data show that in 2006, 12 of the 13 largest Ohio counties experienced a 25-percent increase in foreclosures over 2005, with an estimated 80,000 foreclosure filings. That year, all but 10 of Ohio’s 88 counties saw an increase in the number of foreclosure filings. Two counties I represent, Lucas County and Lorain County, experienced a 210-percent and 445-percent growth, respectively, in the past 10 years.

Even more troubling, COHHIO notes that the volume of foreclosures is expected to increase at a rapid pace in 2007 and 2008 because of the subprime ARM loans in Ohio scheduled to reset at significantly higher rates. In 2005, subprime loans accounted for about 13 percent of the mortgages issued nationally, compared to nearly 28 percent of the mortgages issued in Ohio. Currently, subprime loans represent 18 percent of all outstanding Ohio mortgages held by the secondary market and other loan servicers, yet they account for a staggering 70 percent of all foreclosures.

In many cases, subprime loans are not underwritten to anticipate the inevitable rate escalation. This is a blatant abuse, as some Ohio subprime lenders allow initial mortgage payments of up to 60 percent of a family’s pretax income – which ultimately grow to be as much as 85 percent of a borrower’s pretax income once the favorable rates expire. When you factor in prepayment penalties, stated income loans, and our region’s depreciating real estate values, the nightmare intensifies.

Immediate and Long-term Recommendations

Together, local organizations and policymakers can make great strides in combating this crisis. We need to take immediate actions to expand federal resources to assist both the State of Ohio and other organizations attempting to meet this crisis through loan workouts, extended terms for payment plans, or selling homes to avoid foreclosure. The goal should be to avoid further deterioration in mortgagees’ credit leading to bankruptcy, thus aggravating growing vacancies in the real-estate market.

In my region, many nonprofits have been addressing the problem locally. Toledo’s Neighborhood Housing Services has established pools of rescue funds to bail out homeowners who have fallen behind. These funds are able to help borrowers recovering from short-term problems, such as a brief period of unemployment.

The majority of troubled borrowers are trapped in mortgages that are beyond their means for the long haul. The Ohio Housing Finance Agency (OHFA) is stepping in to serve this category of borrowers. A partner in Governor Ted Strickland’s Foreclosure Prevention Taskforce, OHFA has developed a refinancing program backed by the sale of taxable bonds. This program, which began in April 2007, is expected to grow to $500 million this year – potentially helping several thousand homeowners refinance their loans. OHFA’s Opportunity Loan Refinance Program offers favorable financing to borrowers who feel their current loan does not fit their financial circumstances.

Nonprofit housing groups are also responding to the needs of Ohio homeowners through housing counseling. However, housing-assistance counselors often cannot track the loan to its ultimate holder, so workouts between lenders and borrowers are not always possible. Representatives from organizations affiliated with NeighborWorks America, a national organization that provides supports for community-based revitalization efforts, report additional difficulties when trying to help borrowers connect with their lenders. Sometimes it takes loan servicers so long to work out the terms of their loans that borrowers’ situations worsen because of the fees and penalties that are racked up over the course of the negotiation process. Still other lenders are only willing to make minor concessions, such as granting short extensions for borrowers to catch up. For most borrowers, such extensions are not nearly enough to make good on their loan commitment, and they only delay the likelihood that borrowers will default on their loans.

In employing long-term solutions, we must restore the three Cs of lending – character, collateral, and collectability. These principles of due diligence have been violated by a mortgage-backed security system that fails to provide accountability in underwriting, proper management of loan assets, and checks and balances for both the mortgager and mortgagee.

As I suggested to the House Financial Services Committee when I testified in April, expeditious action by Congress can help hundreds of thousands of homeowners prevent defaults and foreclosures. To meet national financial crises of this magnitude, there is a need to bring all parties to the table. With potential losers on both sides of the mortgage market table, homeowners and the lending community should realize it is in their best interests to work out solutions. I urged the committee to invite the President’s Working Group on Financial Markets – which includes the heads of the Treasury Department, the Security and Exchange Commission, the Federal Reserve, and the Commodity Futures Trading Commission – to testify. This group is uniquely positioned to engage in the intervention necessary to stem foreclosures.

The committee should also develop legislation to establish a mechanism through the U.S. Department of Housing and Urban Development (HUD) and perhaps the Federal Reserve to help families restructure their loans. This is the most significant solution to curb defaults on mortgages facing foreclosure. According to COHHIO, as many as 20 subprime lenders have gone into bankruptcy or sold off their liabilities to mortgage portfolios.

Subprime lenders, mortgage holders, loan servicers, and investors need to make significant concessions in restructuring mortgages – such as forgiving a portion of the loan, writing off late fees, setting reasonable and fixed interest rates, or extending pay-out periods. While there is likely to be resistance, the alternative will probably be worse. According to COHHIO, the mortgage industry will be incentivized to make deals because it is better than bringing thousands of vacant homes into their inventories.

Programs like that of OHFA’s Opportunity Loan Refinance Program need to be picked up and extended by other lenders. Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Federal Home Loan Bank should offer refinancing products to reach eligible pools of borrowers. Congress should consider increased funding to enhance these programs.

Housing-counseling services at nonprofits are often overextended because of the high demand for help from homeowners facing foreclosure. Programs like the HUD-approved 888-995-HOPE counseling hotline are doing excellent work linking homeowners to counseling help, and additional support is needed to increase their reach. Foreclosure and credit counselors continue to encounter unresponsive mortgage companies that have no mechanism for dealing with problem mortgages and no organized procedures or programs to offer mortgage workouts. In addition to these efforts, we need a full-service mortgage-foreclosure hotline at HUD. This needs to be an aggressive, all-inclusive, well-staffed, and well-advertised service.

As mortgage companies and subprime lenders file for bankruptcy, firm assets important to refinancing mortgages at risk are being sold off to other companies through the bankruptcy courts. A moratorium should be placed on this practice to allow workouts to occur where possible.

And finally, as the secondary mortgage market has enabled the reckless explosion of the subprime mortgage-lending industry, it should play a role in repairing the damage. Without the capital backing of these financiers, the abuses would not have grown out of control. Federal regulation and enforcement of the subprime-mortgage industry needs to be aggressively pursued and enforced and must be extended to apply to the entire subprime industry. Maximum interest rates must be capped at reasonable levels, and prepayment fees should be eliminated. More stringent underwriting criteria must be adhered to – including appropriate consideration of a borrower’s ability to repay the loan over the entire life of the loan, rather than simply the early years of suppressed teaser rates. Companies that engage in predatory lending must be aggressively penalized – particularly those who seek out borrowers who are actually eligible for prime loans. Together, these actions can reverse the trend of foreclosures and restore stability and security within the housing industry.


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