March 05, 2008


WASHINGTON, DC – Senator Chris Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, tonight spoke on the Senate floor about the economy and problems in the housing market, citing lax oversight by the Federal Reserve and the Administration as part of the cause for the serious economic situation we face today. Dodd also highlighted his ongoing efforts in the Banking Committee to stimulate the economy and help homeowners, including his commitment to enact FHA reform, to strengthen and reform the actions of federal financial regulators, to reform Government Sponsored Enterprises, to develop an initiative to help homeowners facing foreclosure, and to target resources to communities that are most at risk from the foreclosure crisis. Senator Dodd’s full remarks, as prepared, are below: Mr. PRESIDENT: I rise today to discuss the challenges that our nation’s economy continues to face. The current economic situation is more than merely a “slowdown” or a “downturn. ” It’s more, even, than a mere recession or near-recession. We are facing a very serious situation, and we are doing so in a much weaker position than we were just 7 years ago, the last time that our nation stood on the brink of a recession. That is not a partisan or ideological statement. When Federal Reserve Chairman Ben Bernanke was before the Banking Committee last week, I asked him whether he thought that we are in a worse position today to respond to the problems that we face than we were in when we last faced a recession in 2001. He agreed that we are indeed in a worse position today than we were seven years ago. He specifically said that the standard monetary and fiscal policy tools that we have to confront economic downturns are more constrained today. He also said that the American consumer is facing the brunt of this economic downturn. The incoming economic data show how serious the problem is. The nation’s economy slowed to a near standstill in the fourth quarter, with overall GDP growing by less than one percent and private-sector GDP growing by only one-tenth of one percent. The country had a net loss of jobs in January, the first time that we have lost jobs in over 4 years. Incoming data on retail sales have been very weak and most projections, by private economists and by the Federal Reserve, for economic growth this year have been revised down sharply. Credit card delinquencies are on the rise – as consumers find themselves increasingly unable to tap the equity in their homes to help pay down credit card and other bills. Lastly, inflation increased by 4.1 percent last year – the largest increase in 17 years, driven mainly by the rising costs of energy, food, and health care. Oil is at and over $100 a barrel. The U.S. dollar is at its lowest point in modern history, since we began freely floating our currency in 1973. This economic decline has been reflected in falling stock prices, a falling currency and increased volatility in the securities markets. Our economy is clearly in trouble. As I’ve said previously, the catalyst of the current economic crisis is the housing crisis. Overall, 2007 was the first year since data has been kept that the United States had an annual decline in nationwide housing prices. A recent Moody’s report forecasts that home values will drop in 2008 by 10% to 15% and others are predicting similar declines in 2009, as well. This would be the first time since the Great Depression that national home prices have dropped in consecutive years. If the catalyst of the current economic crisis is the housing crisis, then the catalyst of the housing crisis is the foreclosure crisis. Last week it was reported that foreclosures in January were up 57% compared to a year ago and continue to hit record levels. When all is said and done, over 2 million Americans will lose their homes. There are already 1.4 million homes in foreclosure nationally, including over 14,000 in my home state of Connecticut, according to RealtyTrac, who publishes these figures, as a result of what Secretary Paulson himself has called “bad lending practices”. These are lending practices that no sensible banker would ever engage in. Reckless, careless, and sometimes unscrupulous actors in the mortgage lending industry essentially allowed loans to be made that they knew hard-working, law-abiding borrowers would not be able to re-pay. And they engaged in practices that the Federal Reserve, under its prior leadership, and the Bush Administration did absolutely nothing to effectively stop. The crisis affects more than the families who lose their homes. Property values for each home located within one-eighth of a mile of a foreclosed home will drop by an average of $5,000. This will affect 44 to 50 million homes. Just yesterday, I chaired a hearing in the Banking Committee with representatives of the federal bank, thrift, and credit union regulators. The evidence strongly suggests that they were asleep at the switch as this crisis built and when the alarm went off, they merely hit the snooze button. The Federal Reserve, in particular, candidly acknowledged that they failed to properly assess and address excessive risks that were being taken. The regulators abandoned proven standards of applying good judgment and strong supervisory oversight. Instead, they relied on models and estimates that were being used to justify that there was no housing bubble. These models and estimates were wrong. What is so troubling is that questions were raised about them years ago, before the bubble burst, by regulators and people like the late Ned Gramlich, when he sat as a Governor of the Federal Reserve. But the warning flares shot into the sky by him and others went largely ignored. Now that the bubble has burst, the regulators are telling us that they are “studying” what went wrong. While studying the problem has its place, I must say that conducting studies while there is a major crisis in the economy and financial markets is a bit like a firefighter responding to a fire by picking up a book and reading a study on how to put out fires. We need action today, not complacency by the front-line bank regulators. That is why Senator Shelby and I will continue to press the regulators for what actions they are taking to address the serious problems that we are facing. Congress too, must act. I know that there have been some disagreements about what steps we need to take to confront the challenges that we face today. One point that I hope that we can all agree on is that doing nothing is not an option. We need to come together and work out these differences and provide solutions that will work. To that end, I am continuing to work with my colleague and Ranking Member on the Banking Committee, Senator Shelby on several key issues. We are working together with our counterparts in the House on a final version of the FHA legislation that passed the Senate by a vote of 93-1 in December. Modernizing the Federal Housing Administration is a critical step to responding to the housing crisis. Another important step is comprehensive GSE reform. I am holding another hearing on that issue tomorrow at the Banking Committee, so that we can hear views from all sides on this important issue before drafting what I hope will be bi-partisan legislation. As Chairman Bernanke said several days ago in the Banking Committee, our country is in a worse economic situation today to face a recession than we were seven years ago. Traditional monetary and fiscal tools might not be adequate to face the unprecedented challenges that our economy is facing today, with national home prices falling for the first time since the Great Depression. So we must turn to new ideas and new proposals to address the problems that we are facing; we must create tools designed to address the housing crisis specifically. Unfortunately, the Administration has so far been reluctant to hear new ideas and take action on proposals to address these problems. At every turn of this housing crisis, the Administration has been one step behind: one step behind the 2.2 million homeowners facing foreclosure last year; one step behind the financial markets which started to tighten up credit for student loans and other consumer needs last summer; one step behind those of us in the Congress who have been calling for solutions to the foreclosure crisis for more than a year; one step behind regulators at the FDIC who urged broad-based modifications for homeowners since last spring. Now, the Administration is one step behind the Federal Reserve which is calling for more action before this housing crisis gets worse. It took some time for the Federal Reserve to acknowledge the severity of the housing problem, but they have come around. Days after I convened the first hearing of the 110th Congress on foreclosures, Federal Reserve Board Governor Susan Bies said she didn’t “think there will be a large impact on the prime mortgage industry.” Last March, Treasury Secretary Paulson reinforced that benign and incorrect view, saying that the economic fallout from the housing market would be “painful to some lenders, but…largely contained.” By the time I held the second hearing on subprime abuses last March 22nd, the Federal Reserve finally acknowledged that the Fed had acted too slowly to address mortgage lending abuses. The Fed pledged then to do more to protect homeowners. Yet the Administration continued to deny the severity of the problem. Throughout last spring and summer the Treasury Secretary commented that “we are at or near the bottom” of the housing correction and that there was no risk to the economy overall. When the Treasury Secretary sends such rose-colored messages to the public it’s no surprise that the Administration and industry was slow to assist homeowners with broad-based loan modifications. I organized the first Homeownership Preservation Summit in April last year, bringing together the nation’s leading mortgage loan servicing companies, regulators, and community organizations to discuss tangible solutions to reduce foreclosures. But the private sector acting alone yielded minimal results. Moody’s found that just 1% of loans had been modified in the spring and summer of last year. Instead of taking action throughout those months to help homeowners, the Administration continued its happy talk about the housing market and the economy. Secretary Paulson stated in July that troubles in the housing market were “largely” over and “contained.” It wasn’t until November that the Administration convened its own homeownership preservation summit. Unfortunately, during those 7 months that passed, tens of thousands of new homeowners became delinquent on their mortgages. Instead of working with Congress to develop solutions for homeowners over the summer, Secretary Paulson said on August 1st that “he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained.’” Echoing Secretary Paulson’s benign assessment of the housing market just days later, President Bush said “[I]t looks like we're headed for a soft landing.” Later that month, I met with Secretary Paulson and Federal Reserve Chairman Bernanke urging them to use “all the tools” at their disposal to address the mortgage market turmoil. I wrote a letter to the Treasury Department and the Department of Housing and Urban Development (HUD) to move expeditiously to make any administrative changes to the Federal Housing Administration (FHA) single-family insurance program to help borrowers escape abusive mortgages by refinancing into more affordable FHA loans. Throughout the fall, FDIC Chair Sheila Bair and I advocated for systemic loan modifications to help homeowners facing foreclosure. Instead of using his authority and influence to promote such solutions, the Treasury Secretary said “The idea of across-the-board modifications is not something that this group [of large subprime servicers] is looking to do…and it’s not something we in this administration are advocating.” Weeks later, however, the Treasury Secretary changed his view, saying he saw an “immediate need to see more loan modifications and refinancing and other flexibility” and a standardization of loss-mitigation metrics to evaluate servicers’ performance goals. If we’ve learned one lesson from this housing crisis, it is that delayed action will cost families, neighborhoods, our economy, and the taxpayer more money than timely action. Instead of turning a tin ear, we must listen to the growing chorus of homeowners, lenders, servicers, housing counselors, economic experts, and regulators who are all calling for bold action to prevent this housing crisis from becoming worse than it is today. I believe that bold action must include expanded financing options for homeowners through FHA, the GSEs, and a new fund at FHA that I propose to use to preserve homeownership. We must also do more to slow the tide of foreclosures overcoming many of our cities, and we need to give our local officials tools and resources to cope with the increases in foreclosed properties. In so doing, we will help break the downward cycle that is pushing our economy toward a recession, if we are not already in the middle of one. By acting, we can bring some certainty where, today, only uncertainty exists. We can help restore the confidence of consumer and investors that is indispensable to economic progress for our nation. There are some steps we have taken in the housing sphere already – working closely with Senator Shelby, Ranking Member of the Banking, Housing, and Urban Affairs Committee, and the Administration, we were able to pass FHA reform legislation. We have been working with the House to resolve our differences on that legislation. I am committed to working with Senator Shelby and the Administration to pass a GSE regulatory reform bill so that Fannie Mae, Freddie Mac, and the Federal Home Loan Banks can expand their efforts to help people keep their homes. The Committee has held extensive oversight hearings on the problems that plague the housing markets, including a hearing on January 31 to look at the foreclosure issue. We held a hearing on the state of the economy and financial markets with Treasury Secretary Paulson, Chairman Bernanke, and SEC Chairman Cox. We held a hearing with Chairman Bernanke last week to receive the semi-annual monetary policy report. We held a hearing yesterday on the state of the banking industry with all of the federal bank regulators. We are holding our second hearing on GSE reform tomorrow. And there will be more hearings to come. I also believe S.2636 will help address the problems we are facing in the housing and mortgage markets in a number of ways by providing counseling services, dealing with bankruptcy reform, improving disclosures, increasing availability of mortgage revenue bonds, appropriating emergency funds for local communities struggling with empty properties. I commend Majority Leader Reid for his leadership. At the end of the day, this legislation, by itself, will not stop foreclosures, or restore our communities to economic health. In my view, we need to do more to bring liquidity to the mortgage markets, to help establish a value for the subprime securities that are clogging up the system, and a way of clearing them out of the markets so that capital can, once again, flow freely. I continue to work on the details of a Home Ownership Preservation Entity that makes use of existing platforms, including FHA and the housing GSEs, that can help achieve this. The Home Ownership Preservation Entity will facilitate the re-financing of distressed mortgages. This idea was originally proposed by the American Enterprise Institute and the Center for American Progress—two organizations that come from very different philosophical perspectives but who both agree that more action is needed to stem the housing crisis. In its general outline, the Home Ownership Preservation Entity would capture the discount for which delinquent and near-delinquent loans are trading in the market place through a transparent, market-based process, and transfer the discounts to the homeowners so that more families can keep their homes. I would hope that such an entity could purchase and restructure these loans in bulk, so we can help as many people as possible, but a case-by-case process would be possible, as well. It would require lenders and investors to recognize losses so there would be no bailout. 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, but I am currently drafting legislation for such an idea and plan to introduce a bill in the coming weeks. The legislation closely mirrors the approach recommended by Federal Reserve Chairman Ben Bernanke in his speech before community bankers yesterday. Mr. President, I encourage all of my colleagues to work with me on these various proposals to preserve the dream of homeownership for Americans and to restore growth and confidence in our economy. Each step will make a difference but we must match the will of the body to address the magnitude of the problem before us.