October 03, 2007

Statement of Senator Chris Dodd, Chairman of the Senate Banking Committee, at the Democratic Leadership Event to Discuss the Subprime Mortgage Crisis

Today, we are facing a serious meltdown in the subprime mortgage market. This crisis is the equivalent of a slow-motion, 50-state Katrina, taking people’s homes one-by-one, devastating their lives, and destroying their communities. As a result of this crisis, 2.2 million American families are in danger of losing their homes to foreclosures at a cost of over $160 billion in hard-earned home equity, equity that should have been available for people to finance their childrens’ college educations, pay healthcare expenses, or simply been held as a cushion against uncertainty. Now, that equity -- that wealth -- may be completely lost. Too often, we get lost in a sea of numbers and statistics when we talk about this problem. But behind each number, behind each statistic, is a young family, often working multiple jobs, struggling to make ends meet; or an elderly woman living alone, or a widow caring for young children, trying to save their homes. At hearings held in the Banking Committee earlier this year, we heard from Delores King and Amy Womble, both of whom sought to act responsibly, to repay debts, but were led unknowingly into high-cost, high-fee loans that forced them to the edge of foreclosure. For Ms. King and Ms. Womble, and millions of families like them, the subprime crisis is a cold and harsh reality. This crisis was created by a mortgage system that is driven by the desire to generate excess fees by churning out a high volume of mortgages, without regard to whether or not a borrower can repay that loan. Too often, it is turning out that the borrowers cannot afford these loans. Now millions of borrowers are saddled with subprime loans that have abusive terms that include payments that jump 35% or more after 2 or 3 years and prepayment penalties that trap them in these unaffordable loans. Regrettably, as with Katrina, the Administration’s response to this crisis has been marked by the same denial, delay, timidity, and incompetence as characterized its response to the hurricane. Only in the last several weeks has the Administration seemed to take notice, after the impact was felt on Wall Street. Then, all of a sudden, the Administration discovered the plight of the American homeowner. President Bush and his Administration need to get fully engaged. First, they need to press subprime servicers and lenders to modify loans into longterm, affordable mortgages. Where modifications are not possible, the Administration must work with Fannie Mae and Freddie Mac to refinance troubled borrowers on fair and affordable terms. In April of this year, I convened a Homeownership Preservation Summit where a number of the largest subprime lenders and servicers pledged to do these modifications. Unfortunately, a recent report from Moody’s tells us that just 1% of subprime ARMs have been modified. Frankly, this is wholly inadequate, and the Administration must work with us to press the lenders and servicers to live up to their obligations. To that end, we are calling on the President today to appoint a Special Advisor whose full-time job it will be to aggressively work with lenders, servicers, and the GSEs to modify or refinance troubled homebuyers so that they can keep their homes. Second, we need to ensure that the non-profit groups that are on the frontlines of this battle are adequately funded as the problems deepen. Senator Schumer and I have worked to get $200 million in additional funding for these groups. They represent a critical infrastructure for reaching out to troubled borrowers and negotiating the modifications that will be necessary. Third, we are committed to working with the President to get FHA modernization legislation to his desk shortly. A healthy and effective FHA is vital to help offer safe, fair, and affordable mortgage credit both to new homebuyers, and homeowners that need to escape predatory subprime loans. Finally, while we are focused today on how we can rescue homeowners that have been victimized by predatory practices, we are also mindful that we need to prevent these kinds of abuses in the future. This means that the federal regulators -- the cops on the beat -- must be far more aggressive in policing the markets. The Federal Reserve noted, as early as 2003, that problems were developing in the markets. Yet, not until it came under intense pressure from the Congress did the Federal Reserve agree to meet its obligation under the Homeownership and Equity Protection Act (HOEPA) to prohibit unfair or deceptive mortgage practices. The Board has it the power to put an end to many of the practices that have gotten us into this mess today. They ought to exercise that power, and they ought to do it comprehensively and quickly. In addition, a number of us have introduced or outlined anti-predatory lending legislation. Let me say, the measure of any legislation must be that it creates high lending standards for the subprime market, and it must include remedies and penalties sufficient to ensure those standards are adequately enforced. Today’s crisis is a market failure. Legislation must reengineer that market so that it works to create long term, sustainable and affordable homeownership.