Lawmakers propose aid for borrowers
Congressional Democrats, seeking to head off a surge in home foreclosures, called Wednesday for steering hundreds of millions of federal dollars to nonprofit groups to help borrowers refinance their loans.
Democrats said they were still working out details of the plan but said their aim was to help borrowers who have not yet entered foreclosure. The federal money would be used to help subsidize their monthly payments or help them spread out payments over a longer time, Sen. Charles E. Schumer (D-N.Y.) said.
Industry experts were cautious in assessing the proposal, saying there were too many unknowns.
“A few hundred million would certainly be a help, but I don’t think it would be enough to cover everything,” said Rick MacDonald, head of research at Action Economics in Boulder, Colo., which monitors economic indicators.
The Center for Responsible Lending, an advocacy group for borrowers, said it wanted to ensure that any rescue plan was aimed at homeowners and not banks or other mortgage companies that made the loans.
“We support the intention of the efforts to minimize foreclosures for borrowers who are in loans they should never have been in in the first place,” said Paul Leonard, director of the group’s state office in Oakland.
Mortgage aid is necessary, he said, but a package that sends most of the money to lenders would be “the wrong way to go about it.”
As many as 460,000 people in California -- and 2.4 million nationwide -- are at risk of losing their homes because they are unable to make payments or refinance high-cost sub-prime loans they took out between 1998 and 2006, according to the Center for Responsible Lending.
Default notices, the first step toward a foreclosure, soared by 145% in California in the last three months of 2006 compared with the year-earlier period, according to DataQuick Information Systems.
Sub-prime loans are typically made to borrowers with poor credit or without enough income to qualify for cheaper prime loans. Many of these borrowers are at risk of default because they took out loans with low introductory teaser rates, and struggle to pay higher amounts as their payments rise.
At a news conference Wednesday, Schumer said nearly 2 million mortgages would reset to higher rates this year and next. He said his plan was designed to stop these borrowers from losing their homes.
“As sub-prime mortgage lenders scramble to protect their bottom lines, we need to redouble efforts to protect American families and communities who are at the losing end of this mess,” said Schumer, chairman of Congress’ Joint Economic Committee. “The sub-prime mortgage meltdown has economic consequences that will ripple through our communities unless we act.”
Schumer said the bailout money could come from appropriations as well as federal housing programs, including the Federal Housing Authority.
Schumer, joined by fellow Democratic Sens. Robert Menendez of New Jersey and Sherrod Brown of Ohio, promised to introduce legislation in coming months that would toughen federal lending standards and mortgage industry oversight.
Jay Brinkmann, a financial economist with the Mortgage Bankers Assn. in Washington, said talk of a bailout program could do more harm than good if it led borrowers to skip house payments.
“For some of these borrowers, it’s do you pay the house note or the credit card bill, and if they see the possibility of some sort of federal relief, they may decide not to pay the mortgage and the foreclosures may actually go up,” Brinkman said.
The proposal is also likely to face harsh criticism from congressional Republicans and the White House.
Alabama Sen. Richard C. Shelby, senior Republican on the Senate Banking Committee, says taxpayers shouldn’t have to bail out homeowners who got in over their heads.
“Sen. Shelby believes we have a lot more work to do on this issue and that we’re still uncovering the causes and that we need to continue to work with regulators before subscribing to any particular remedy,” spokesman Jonathan Graffeo said.
White House spokesman Tony Fratto said the administration did not support the Schumer plan and was looking for ways to help sub-prime borrowers without intervening in the market.
“We have enormous sympathy for homeowners who are going through difficulties in keeping their mortgages,” Fratto said, but, “individuals need to make smart decisions in taking on debt, and there has to be some responsibility for making those decisions.”
He criticized any federal bailout as “an insurance policy for the private, financial decisions made by individuals” that would only encourage “risky behavior.”
Local and state governments have been piecing together sub-prime relief programs in the absence of federal aid. Ohio plans to issue a $100-million bond this month to bail out 1,000 sub-prime homeowners. Legislators in California, Minnesota and other states are also weighing solutions, while attorneys general in New York, Massachusetts and other states are attempting to hold lenders accountable.
Some lenders are pitching in to help troubled borrowers, but Schumer said congressional leaders would be demanding much more in coming months. Besides the bailout bill, Schumer plans to introduce legislation to improve federal regulation of mortgages, limit predatory lending and require lenders to establish a borrower’s ability to repay his or her entire mortgage.
On Wednesday, Bank of America Corp. and Citigroup Inc. announced that they had pledged $1 billion to fund fixed-rate, below-market mortgages administered by a Boston-based nonprofit group, the Neighborhood Assistance Corp. of America. The mortgages are aimed at helping an estimated 7,000 to 10,000 borrowers who were victims of what the group calls predatory lending practices.
Authorities generally define this as actions that involve deception or wrongdoing, but Neighborhood Assistance Corp. Chief Executive Bruce Marks said his group considered any loan with artificially low teaser rates to be predatory.
The loan commitment from the banks will be drawn from funds already set aside for lower-income borrowers under previous agreements.