March 22, 2007

Opening Statement of Chairman Chris Dodd - Hearing on "Mortgage Market Turmoil: Causes and Consequences"

I want to welcome everyone to today’s hearing, which we have entitled “Mortgage Market Turmoil: Causes and Consequences.” You cannot pick up a newspaper lately without seeing another story about the implosion of the subprime mortgage market. The checks and balances that we are told exist in the marketplace, and the oversight that the regulators are supposed to exercise, have been absent until recently. Our mortgage system appears to have been on steroids in recent years – giving everyone a false sense of invincibility. Our nation’s financial regulators were supposed to be the cops on the beat, protecting hard-working Americans from unscrupulous financial actors. Yet, they were spectators for far too long. Risky exotic and subprime mortgages – all characterized by high payment shocks – spread rapidly through the marketplace. Almost anyone, it seemed, could get a loan. As one analyst put it, underwriting standards became so lax that “if you could fog a mirror, you could get a loan.” Some of these loans have legitimate uses when made to sophisticated borrowers with higher incomes. But a sort of frenzy gripped the market over the past several years as many brokers and lenders started selling these complicated mortgages to lower-income borrowers, many with less than perfect credit, who they knew, or should have known, would not be able to afford to repay these loans when the higher payments kicked in. I am going to take a few moments to lay out what I can only call a chronology of neglect: Regulators tell us that they first noticed credit standards deteriorating late in 2003. By then, Fitch Ratings had already placed one major subprime lender on “credit watch,” citing concerns over their subprime business. In fact, data collected by the Federal Reserve Board clearly indicated that lenders had started to ease their lending standards by early 2004. Despite those warning signals, in February of 2004 the leadership of the Federal Reserve Board seemed to encourage the development and use of adjustable rate mortgages that, today, are defaulting and going into foreclosure at record rates. The then-Chairman of the Fed said, in a speech to the National Credit Union Administration, said: “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” Shortly thereafter, the Fed went on a series of 17 interest rate hikes in a row, taking the fed funds rate from 1% to 5.25%. So, in sum: By the Spring of 2004, the regulators had started to document the fact that lending standards were easing. At the same time, the Fed was encouraging lenders to develop and market alternative adjustable rate products, just as it was embarking on a long series of hikes in short term rates. In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today. By May, 2005, the press was reporting that economists were warning about the risks of these new mortgages. June of that year, Chairman Greenspan was talking about “froth” in the mortgage market and testified before the Joint Economic Committee that he was troubled by the surge in exotic mortgages. Data indicated that nearly 25% of all mortgage loans made that year were interest-only. Yet, in December, 2005, the regulators proposed guidance to reign in some of the irresponsible lending. And we had to wait another seven months, until September, 2006, before that guidance was finalized. Even then, even now, the regulators’ response is incomplete. It was not until earlier this month – more than 3 years after recognizing the problem – that the regulators agreed to extend these protections to more vulnerable subprime borrowers. These are borrowers who are less likely to understand the complexities of the products being pushed on them, and who have fewer reserves on which to fall if trouble strikes. We still await final action on this guidance, which I urge the regulators to complete at the earliest possible moment. Let me explain why these new rules are so important. The subprime market has been dominated in recent years by hybrid ARMs, loans with fixed rates for 2 years that adjust upwards every 6 months thereafter. These adjustments are so steep that many borrowers cannot afford to make the payments and are forced to refinance, at great cost, sell the house, or default on the loan. No loan should force a borrower into this kind of devil’s dilemma. These loans are made on the basis of the value of the property, not the ability of the borrower to repay. This is the fundamental definition of predatory lending. Frankly, the fact that any reputable lender could make these kinds of loans so widely available to wage earners, to elderly families on fixed incomes, and to lower-income and unsophisticated borrowers, strikes me as unconscionable and deceptive. And the fact that the country’s financial regulators could allow these loans to be made for years after warning flags appeared is equally unconscionable. We have invited the top five subprime lenders to testify today to explain these practices to us. Unfortunately, New Century declined to appear, even as they face a blizzard of loans going into early default. Their absence from this hearing is regrettable. New Century played a leading role in pushing unaffordable subprime loans and they should be here to explain their actions. How many homeowners were sold loans they could not afford in the time that the regulators delayed? How many of these borrowers are still receiving these loans? The people paying the price for the regulators’ inaction are homeowners across America struggling to maintain their piece of the American Dream. Homeownership is supposed to be a ticket to the middle class. Predatory lending reverses the trip. A study done by the Center for Responsible Lending estimates that up to 2.2 million families with subprime loans will lose their homes at a cost of $164 billion in lost home equity. In the words of former Federal Reserve Board member Edward Gramlich, “We could have real carnage for low-income borrowers.” These are numbers. I hope we can stay focused on the human tragedies behind these numbers. We need to keep in mind Ms. Delores King, the elderly, retired woman who testified before us last month. Ms. King was advised by her mortgage broker to take out a new loan whose payments quickly shot up beyond her means, simply to pay off a $3,000 debt. We need to keep in mind Amy Womble, our other witness, a small businesswoman and widow with two children, who was promised a mortgage at $927 per month and ended up with a mortgage costing her $2,100. Both these women are now struggling to keep their homes. We should not let them struggle alone. We need to let them know, and the American people know, that we intend to fight for them. We will hear this morning from another victim, Ms. Jennie Haliburton, about how these practices cause so much hardship. The challenges are clear. In my view, we need to take several steps. First, we need to put a stop to abusive and unsustainable lending. The regulators must finalize the recent subprime guidance as quickly as possible. Second, the Federal Reserve should exercise its authority under the Home Ownership and Equity Protection Act (HOEPA, pronounced HOPE-A) and the FTC Act to prohibit these abusive practices and products for all mortgage market participants, regardless of what kind of charter they have. Third, I intend to work with my colleagues and all interested parties to introduce legislation to attack the problem of predatory lending. Passing such legislation will be tough – there are still plenty of market players out there who stand to lose if we provide decent protections for consumers. But we must try to push forward. Finally, we need to deal with the problem of the millions of homeowners who may face foreclosure after being hit with the payment shocks built into their mortgages. The solution to this problem may not be legislative. Instead, I intend to ask leaders from all the stakeholders – Regulators, investors, lenders, GSEs, FHA, and consumer advocates – to come together and try to work out an efficient process for providing relief to homeowners. I hope to have more to say on this in the next couple of weeks. One thing I know for sure – we cannot simply sit back and watch as up to 2.2 million families lose their homes and, with them, their financial futures. Let me be clear, the purpose of this hearing is not to point fingers but to find solutions. We need to get to the bottom of this problem, understand thoroughly what went wrong, and then work to make sure we don’t see a repeat of these problems.