Protecting Homeowners And Fighting Predatory Mortgages
Homeownership is the foundation of the American Dream. For most families, the equity they build up in their home is a source of security and the primary source of their wealth. But for millions of families, the dream of homeownership is slipping away. Home foreclosure filings rose to 1.2 million in 2006 a 42 percent jump due to rising mortgage bills and a slowing housing market. In Iowa, 3,445 families experienced foreclosure last year, up 64 percent from 2005. Nationally, as many as 2.4 million subprime borrowers have either lost their homes or could lose them in the next few years. Problems in the housing market could weigh down the economy. [RealtyTrac, 2007; Center for Responsible Lending, 2007; WSJ, 3/28/2007 and 3/29/2007]
A Rising Tide of Risky and Predatory Mortgages
Today, John Edwards called for strong national legislation to regulate mortgage abuses and prohibit predatory homelending, based on North Carolina's successful law. He proposed immediate steps to help homeowners escape predatory and other unaffordable mortgages, including letting families shed excessive home debt through bankruptcy and creating a Home Rescue Fund to help struggling homeowners renegotiate or refinance their mortgages. Finally, he called for federal regulators, lenders, and investors to take responsibility and work together to help homeowners avoid foreclosure.
Increasing Use of Risky Mortgages: In recent years, the housing market has increasingly relied on riskier mortgages. Subprime mortgages carry higher interest rates and upfront fees than traditional mortgages, often costing families thousands of dollars more. While they are a valuable alternative for families with poor credit, as many as half of subprime borrowers are qualified for cheaper conventional loans. Other "exotic" mortgages with "teaser" rates, no downpayments, or interest-only payments are often made without regard to the ability to repay. Together, subprime and exotic mortgages are now 40 percent of new home loans. [Center for American Progress, 2007; Providence Journal, 3/25/2007]
Minorities and Rural Communities Are Targeted for Predatory Lending: Predatory mortgages carry abusive terms that deceive and exploit borrowers, such as excessive and hidden fees, large prepayment penalties, mandatory arbitration clauses, unnecessary insurance products, and broker "kickbacks" for steering borrowers into more expensive loans. Predatory terms are more common among subprime loans. Black and Hispanic borrowers are three times more likely to receive subprime loans than white borrowers with similar credit scores. Rural subprime borrowers were more likely to take out a mortgage with a prepayment penalty in 2002. [CRL, 2007; National Community Reinvestment Coalition, 2007; Carsey Institute, 2006]
Protecting Homeownership and Fighting Predatory Mortgages
The Result Is Millions of Foreclosures: Many recent mortgages carry low introductory rates that are expected to jump as much as 30 percent in the coming months. Falling home prices have made it harder to refinance. As a result, Lehman Brothers predicts that 30 percent of subprime loans made in 2005 will eventually default. The Center for Responsible Lending recently concluded that because most subprime loans are refinanced loans, not new home loans, and yet many end in foreclosure subprime lending has actually reduced homeownership. [Boston Globe, 3/17/2007; CAP, 2007; Lehman Brothers, 12/22/2006; CRL, 2007]
* Enact a Strong National Law against Predatory Mortgages: As president, Edwards will pass a strong national law to prohibit the worst abuses in the mortgage market: loan flipping, mandatory arbitration clauses, balloon loans, steep prepayment penalties, and other excessive fees. It would regulate all lenders, including non-bank finance companies, and strengthen underwriting standards to ensure that borrowers receive affordable loans suited to their means. Because abusive practices among some brokers are part of the problem, Edwards will ban broker kickbacks (yield-spread premiums) and work with states to establish uniform broker licensing standards and a national database for disciplinary infractions.
* Rewrite Certain Abusive Mortgages in Bankruptcy to Let Families Keep Their Homes: Many victims of predatory lending owe more on their mortgages than their homes are worth. These "underwater" mortgages are created by excessive interest charges or falling home values. Even if they declare bankruptcy, they must pay off their inflated mortgages in full or else lose their homes. As president, Edwards will let homeowners shed excessive mortgage debt in bankruptcy. They will be able to keep their homes by paying off their full market values and get new loans terms set by the courts. For example, a family owing $120,000 on a home worth $100,000 could cut its mortgage to $100,000, with the remaining $20,000 treated like other unsecured debt in bankruptcy. The relief would be available only once and at the discretion of the bankruptcy judge.
* Rescue Homeowners at Risk of Foreclosure: Many foreclosures can be avoided by timely help, such as renegotiating loan terms, finding a new lender, or catching up with past payments. Preventing foreclosures can also prevent vicious cycles that can bring down whole neighborhoods. Edwards proposed a national Home Rescue Fund to help prevent foreclosure. The Fund would work through local non-profits, government agencies, and community financial institutions. If necessary, the Federal Housing Administration, Fannie Mae, and Freddie Mac could work with community lenders to create affordable refinancing alternatives for these families.
* Hold Lenders and Investors Accountable: Edwards commends the FDIC for summoning lenders and Wall Street investors to a meeting discussing their role in the crisis. However, these conversations will only succeed if lenders and Wall Street give regulators specific commitments to mitigate foreclosures, such as waiving prepayment penalties, restructuring loan terms, and forgiving of back payments. [Engel and McCoy, 2007; National Consumer Law Center, 2007]
Today, John Edwards announced his agenda to fight abusive and predatory mortgages. He will prevent future mortgage abuses with a strong national law and help current struggling families by rewriting bankruptcy laws and creating a national rescue fund for families at risk of foreclosure.