Letter to Henry Paulson, U.S. Secretary of Treasury, Re: Address Key Concerns with Administration's Subprime Package

Letter

Casey, Dodd, Schumer, Brown: Urge Paulson to Address Key Concerns with Administration's Subprime Package

U.S. Senators Bob Casey (D-PA), Chris Dodd (D-CT), Charles Schumer (D-NY) and Sherrod Brown (D-OH) today wrote to Henry Paulson, U.S. Secretary of Treasury pressing him to ensure that the exact terms of the subprime agreement help as many borrowers as possible. Secretary Paulson is expected to announce the White House proposal later this week

"We applaud your willingness to alter your approach to this issue, and hope that you will show a similarly open mind towards the initiatives some of us have proposed to aid homeowners," they wrote. "We believe that this broad modification effort, if done correctly, is an important piece of addressing the subprime crisis and hope that you will consider some specific concerns we have as you work out the final details."

In particular the Senators asked Paulson to negotiate rigorous terms and outlined five specific points to Paulson:

* Eligibility for modification must not be too narrow, and people must be afforded every opportunity to ensure that they remain in their home;
* Loan modifications must be long enough to ensure the long-term affordability of mortgages, not merely delay foreclosure;
* All prepayment penalties must be waived;
* The guidelines must guarantee the fair treatment of families who will not be able to avoid foreclosure, even with modification;
* The modification program must be transparent to allow for independent monitoring.

The Senators went on to write, "all of these matters are extremely important to the economic well being of millions of families and the country as a whole. These issues are also evolving very quickly and we understand you may be entering the final stages of negotiating the loan modification plan."

Senators Casey, Dodd, Schumer and Brown have together secured a combined $200 million for foreclosure prevention counseling in the Transportation, Housing and Urban Development Appropriations conference report. The House of Representatives passed the conference report last month. The funding was first requested by the three senators last spring. The conference report will now go to the Senate for final approval.

Full text of the letter is below.

Dear Secretary Paulson,

We are writing today in regards to your effort to encourage a systemic approach to avoiding foreclosure over the next few years for the hundreds of thousands of Americans who are saddled with unaffordable subprime loans. We applaud your willingness to alter your approach to this issue, and hope that you will show a similarly open mind towards the initiatives some of us have proposed to aid homeowners.

We believe that this broad modification effort, if done correctly, is an important piece of addressing the subprime crisis and hope that you will consider some specific concerns we have as you work out the final details.

First, the extent to which this effort will help borrowers will be entirely dependent upon the criteria used to identify who will qualify for help. Your statements have made it clear that lenders or servicers will establish selection criteria in determining who will have access to relief and who will not. It would be a sad irony if this attempt to correct the damage done by poor underwriting standards that extended too much credit to too many borrowers was undone by criteria that made loan modifications and workouts available to too few borrowers now.

In your remarks you have divided households into several categories, including those who will not be able to afford to remain in their homes even with modification, and those who do not need modification to remain in their home and continue to meet their mortgage obligations. Whatever selection criteria are established will undoubtedly leave some borrowers on the margins of eligibility. We believe that lenders and servicers must afford borrowers every opportunity to ensure that they remain in their home and have access to loan modification.

Second, it is important that whatever loan modifications are provided ensure the long term affordability of the respective mortgage. A temporary solution which merely delays the point at which a borrower cannot afford their mortgage is insufficient. Both homeowners and financial markets are desperate for predictability and stability. The modifications negotiated must leave sufficient time for borrowers to build equity, solidify their financial position, and if necessary, refinance into a fixed mortgage or other appropriate alternative.

Third, we are increasingly concerned that prepayment penalties will form a significant barrier to borrower refinancing. These prepayment penalties are a particularly pernicious aspect of subprime lending which we believe is abusive and in many cases prevents homeowners from seeking more equitable loans. Many of these loans were made with little equity, and falling home prices have exacerbated the problem of low or negative loan to value ratios among subprime borrowers. In addition to offering loan write downs to borrowers, we hope that you will insist that lenders and servicers waive all prepayment penalties.

Fourth, we hope that your modification and assistance guidelines will include provisions to mitigate the costs and trauma experienced by families who will face foreclosure. As you have noted in your public remarks, some borrowers have been extended credit which they cannot afford, even at the introductory rate. Many of these borrowers have already lost their savings as well as their creditworthiness. We believe that there must be guidelines in place to minimize the costs and disruption of foreclosure whenever a lender or servicer determines that such a family cannot afford to keep their home.

Fifth, servicers and lenders must apply these modification programs in a transparent manner and provide enough timely data to allow for their efforts to be independently monitored. Opaque practices have been a hallmark of this crisis, and sunlight is a necessary component of finding a solution. As President Bush remarked in another context, "the best way to determine whether you get good results is to measure."

Finally, we note that you have asked Congress to undertake a number of steps, from providing funding for foreclosure prevention counseling to passing both temporary and permanent legislative remedies to some of the legal barriers to helping current homeowners and preventing this crisis from recurring. We welcome your assistance in achieving these goals, and believe that you could play an important role in passing this legislation.

For example, a number of us were able to include a total of $200 million for foreclosure prevention counseling in the Transportation, Housing and Urban Development Appropriations bill. Unfortunately, the President has threatened to veto a number of Congressional spending bills, making final passage of all of the bills more difficult. We believe that you could be of great assistance in convincing the President to remove these veto threats and ask that you endeavor to do so.

Additionally, some of our colleagues remain unconvinced that strong legislative action is needed. Majority Leader Reid's efforts to pass the reform of the Federal Housing Administration prior to the Thanksgiving recess were frustrated by an objection from Senate Republicans. Just as you have adjusted your position over time and begun to see the need for actions we have been advocating for some time, we hope that you will join us in impressing upon our colleagues the dire need for action.

All of these matters are extremely important to the economic well being of millions of families and the country as a whole. These issues are also evolving very quickly and we understand you may be entering the final stages of negotiating the loan modification plan.

In light of these circumstances, we would be delighted to discuss this matter as well as our thoughts in further detail. We would benefit from a better understanding of your efforts, and would like to share with you our opinions on what legislative action is necessary.

Sincerely,

Bob Casey, U.S. Senator, Chris Dodd (D-CT), U.S. Senator, Charles Schumer, U.S. Senator and Sherrod Brown, U.S. Senator

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