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Schumer To Paulson, Bernanke: Focus Solely On Liquidity Will Not Solve Problem; Asks Regulators To Change Focus To Mortgage Market—Only Way To Solve Crisis Of Confidence

Non-Bank Lenders Who Sell Off Mortgages Have Left Distressed Homeowners With No Workout Options; Regulators, Private Industry Must Step into Breach to Defray Crisis

Schumer: New Thinking Needed—Housing Non-Profits Must Serve Intermediary Role Once Played by Neighborhood Banks; Otherwise, Crisis in Markets Will Worsen

Washington, DCToday, Senator Charles E. Schumer cautioned Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke that the regulators’ efforts to bring liquidity to tightened credit markets have so far overlooked the harrowing situation in the underlying mortgage market that stoked the credit crunch in the first place. In separate letters to both federal financial market regulators and more than 40 major market players in the subprime mortgage industry, Schumer—the chairman of the Joint Economic Committee (JEC) and the Senate Banking Subcommittee on Housing—said that banks must follow the lead of the U.S. Senate, where the appropriations committee approved $100 million for non-profit housing groups to help facilitate refinancings. The full Senate is expected to pass the appropriations bill this fall.


“Preserving liquidity in financial markets is important, but it does not solve the fundamental problem of the weak and worsening conditions in the mortgage market, particularly the subprime mortgage market.  Unfortunately, the regulators have not adequately addressed the seriousness of our mortgage market troubles thus far,” Schumer wrote to the regulators. “Yet until we deal with the widespread uncertainty about the depth and seriousness of the problems in the mortgage market, we will not ease the crisis of confidence in the broader credit markets, no matter what actions are taken to address the credit crunch.” 


Schumer noted that the prevalence of securitization in the mortgage industry has slice-and-diced individual home loans. With few of today’s lenders holding on to the mortgages they underwrite, borrowers facing resets on their adjustable-rate loans frequently have no intermediary to negotiate with on the terms of a potential workout. Schumer has supported the empowering of non-profit agencies, sanctioned by the Department of Housing and Urban Development, to play this role of facilitator. These groups are on the front lines providing foreclosure prevention assistance to borrowers, but are increasingly stressed for resources as demand for their services grows. Earlier this spring, Senator Schumer fought to ensure that $100 million in foreclosure prevention assistance was included as part of the HUD spending bill. 


Today, he called upon banks, lenders and loan servicers to follow the Senate’s example and direct resources to the non-profits on the frontlines of the mortgage crisis. This step—together with a temporary lifting of the cap on Fannie Mae’s and Freddie Mac’s portfolio, allowing them greater flexibility for refinancings—would provide a comprehensive solution to stave off the looming foreclosure spike, Schumer said.


“This crisis does not call for a bailout of borrowers, but it does demand a new way of refinancing a borrower that could have been accomplished simply by the borrower going to their neighborhood bank twenty years ago,” Schumer wrote to Paulson and Bernanke.


Since 2005, the number of subprime loans has more than doubled.  In both 2005 and 2006, approximately 3 million subprime loans were made, as compared to 6.7 million in 2006, resulting in $1.2 trillion in outstanding debt by the end of last year.  It is estimated that at least one in five subprime loans will end in a lost home.


Market experts estimate that up to 40% of current subprime borrowers could now qualify for prime, fixed rate loans, making the crisis one that could be curtailed by strong efforts to assist borrowers.  Not only will such efforts save thousands of families from losing their homes, it will also prevent further damage to the already weak housing market and the economy overall.


Over the next two years, nearly 2 million homeowners with adjustable-rate mortgages will experience payment shocks as their loans reset in a weakening housing market, a harbinger of more foreclosures to come.  Acting to prevent these foreclosures is not only important from the perspective of protecting entire communities, but it also makes good economic sense.   Foreclosures can cost up to $80,000 for all stakeholders—homeowners, neighbors, cities and local governments, lenders, and loan servicers.  Meanwhile, estimates suggest that foreclosure prevention counseling can cost as little as $1,000 per household.  To be successful, these programs require one-on-one counseling with the homeowner and negotiations with a variety of stakeholders – making them very resource-intensive.  The rising wave of subprime foreclosures has caused existing programs to become overwhelmed by requests for assistance, stressing the non-profits’ ability to give troubled homeowners the assistance they need to workout a suitable payment plan with the lenders.


Copies of both of Senator Schumer’s letters appear below.


# # #






Ben S. Bernanke


The Federal Reserve Board

20th Street and Constitution Avenue, NW

Washington, DC 20551

Henry M. Paulson, Jr.

Secretary of the Treasury

U.S. Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220


John C. Dugan

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219


James B. Lockhart III


Office of Federal Housing Enterprise Oversight

1700 G Street, NW

Washington, DC 20552


John M. Reich


Office of Thrift Supervision

1700 G. Street, NW

Washington, DC 20552


Christopher Cox


Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549


Sheila C. Bair


Federal Deposit Insurance Corporation

550 17th Street, NW

Washington, DC  20429

Alphonso Jackson


U.S. Department of Housing and Urban Development

451 7th Street SW

Washington, DC 20410



August 22, 2007


Dear Sirs and Madam:


The Federal Reserve Bank has taken good steps to restore liquidity to the financial system, but there is still much more that needs to be done to address the risks that we face to our broader economy caused by the ongoing turmoil in the mortgage market.  Preserving liquidity is important, but it does not solve the fundamental problem of the weak and worsening conditions in the mortgage market, particularly the subprime mortgage market.  Unfortunately, federal regulators have not adequately addressed the seriousness of our mortgage market troubles. Until we deal with the depth and seriousness of the problems in the mortgage market, we will not ease the crisis of confidence in the broader credit markets, no matter what actions are taken to address the credit crunch.  It is essential that the Federal agencies overseeing the financial markets use their influence over the major market players to encourage them to engage in a major effort to modify or refinance the loans that have a high probability of defaulting so that the upcoming wave of foreclosures that is anticipated can be abated and market confidence can be restored.


UBS estimates that the interest rates on $339 billion in subprime loans underlying mortgage backed securities will reset between the third quarter of 2007 and the end of 2008.  The total volume of subprimes that will reset is even larger.  It is widely acknowledged that the loans which are about to reset are already performing poorly, with higher than expected default and foreclosure rates.  Therefore the reset process is very likely to contribute to higher foreclosure rates, rates which are already alarming. Just yesterday, we learned that national foreclosure filings are 93 percent higher than they were this time last year.


If increased foreclosures are allowed to proceed unchecked, the ultimate harm will extend well beyond the families who will lose their homes.  Regional housing markets in several states are experiencing high ownership vacancy rates and have large inventories of new homes for sale.  In these markets, increased foreclosures will put additional downward pressure on housing prices, and this additional pressure could contribute to spiraling price declines and additional foreclosures.  The effects on households, neighborhoods, and the broader economy are likely to be severe.  In addition, the continued uncertainty about the credit-worthiness of mortgage products, caused in large part by the widespread loss of faith in the integrity and accuracy of credit rating agencies, will continue to spook the financial markets.


Over the past several decades, innovations in the mortgage markets have made it much more difficult for too many homeowners to refinance their loans when they need to.  Furthermore, the prevalence of unscrupulous lending fueled by the increased appetite for subprime mortgage securitizations has resulted in a growing number of homeowners facing payment shocks as rates reset that could cause them to lose their homes. In order for them to keep their homes, their loans must be modified.  Twenty years ago, most of these borrowers could go to the bank that held their mortgage and seek assistance.  Today, with their loans sliced and diced into many pieces held by a variety of unaffiliated market participants, there is no one on the scene to help beleaguered homeowners do loan workouts.


However, there is a way out of this mess.  According to the Center for Responsible Lending and other sources, up to 40 percent of current subprime borrowers could now qualify for safe, prime, fixed-rate loans.  Fannie Mae has estimated that 80 percent of resetting subprime loans could qualify for a fixed rate prime loan. Our ability and willingness to assist these borrowers is going to be essential to our efforts to prevent the further damage to the housing market, credit markets and overall economy that would otherwise result if their loans are not modified or refinanced.  Only a concerted effort by market participants, the administration, Congress, the GSEs and nonprofit foreclosure prevention specialists on the ground can reach all of these borrowers, refinance them into safe loans, and head off this looming crisis.


The reality of today’s mortgage market calls for new and creative thinking by the regulators.  There are many nonprofit groups that are experienced and willing to assist these borrowers, but they are both resource-constrained and need the cooperation of the banks, lenders and loan servicers.  In addition, there are still financial institutions, mainly regional banks, that do not sell off their mortgages and thus can readily assist their borrowers by refinancing them into safe, fixed-rate loans.  Commitments have also been made by Fannie Mae and Freddie Mac to help refinance homeowners stuck in high interest adjustable mortgages. While the federal government and regulators have largely been reluctant to use these tools to help struggling homeowners in the past, this new type of crisis demands a new type of response.  This crisis does not call for a bailout of borrowers, but it does demand a new way of refinancing borrowers who can no longer simply go to their neighborhood banks, as they could have twenty years ago.


Therefore, I am urging you to take the following steps to address the problems we face in the mortgage market:


First, I respectfully ask that additional federal resources be targeted to HUD-certified nonprofit groups currently helping struggling subprime borrowers navigate the complicated nexus of lenders and servicers who control the rights to loan modifications. I cannot stress enough the successes that many nonprofit organizations across the country have had in negotiating for workouts and loan modifications between struggling borrowers and private sector lenders and loan servicers.  Senators Sherrod Brown, Bob Casey and I have been working to ensure that the $100 million in foreclosure prevention funding that we have secured in the Senate Committee’s 2008 appropriations bill is approved this Fall.  As you can appreciate, $100 million will not go far enough to ensure that the nonprofits helping borrowers will get the resources they need to help their increasing case loads. I urge you to ask the administration to come up with quick additional financing.


Second, as mentioned, GSEs like Fannie Mae and Freddie Mac have already made commitments to provide substantial resources for subprime refinancings.  I have publicly stated that I will introduce legislation when Congress reconvenes in September to increase the portfolio caps on the GSEs to increase their flexibility to participate in loan modifications with borrowers and lending institutions.  I encourage the regulators to act before Congressional action is necessary, and raise these caps to help facilitate more loan modifications.


Finally, I urge you to use your leverage over financial institutions—whether banks, lenders, servicers, or brokerages—to encourage them to match the federal government’s efforts to provide funding to nonprofit groups working to prevent foreclosures, and to work with the nonprofits to help borrowers who need of loan modifications.  Using your influence over the market players in this regard is an acceptable course of action that is urgently needed in today’s world.  In the past, the regulators have shown no reluctance to “jawbone” financial institutions to issue more credit.  In today’s world, the analogous action is asking these same institutions to help accomplish refinancing.


I have sent the attached letter to the largest private sector players in the subprime lending industry requesting that they do everything in their power to modify loans or provide refinancing alternatives for loans held by struggling subprime borrowers and help facilitate others to do so, including supplementing the Senate’s efforts to provide foreclosure prevention funding to nonprofit specialists on the ground.  I respectfully ask that you make available any additional federal resources and also join me in strongly urging the major market players to take an active role and help struggling borrowers before they lose their homes. 






Senator Charles E. Schumer




Enclosure: Letter to Banks and Lenders



*   *   *



Dear Sirs and Madams:


I have sent the attached letter to the financial market regulators today to urge them to use their resources, authority and influence to bring about major efforts to modify or refinance the subprime loans that have a high probability of defaulting so that the upcoming wave of foreclosures that is anticipated can be abated and market confidence can be restored.  The letter asks them to enlist your cooperation, which I hope will be forthcoming.


In addition, so that we can base our legislative responses on fact, I respectfully ask that you respond to the following questions:


  1. What efforts have you made to date to modify subprime loans or help struggling subprime borrowers?
  2. How many subprime loans have you succeeded in modifying or refinancing over the last twelve months?  What percentage does that represent of the total loans you service?  What percentage of these modifications extended the initial monthly payment for a period of 60 months or more?  What percentage of these modifications extended the initial monthly payment for a period of 36 months or more?
  3. How much money have you directed (and over what time period) to HUD-certified nonprofit or community organizations working locally in your markets to prevent foreclosures and help borrowers with loan modifications? What specific activities have you funded with these resources?
  4. What percentage of your customer service calls relating to troubled subprime loans have you been able to assist with one-on-one assistance?
  5. What language do you provide to your front-line modification staff to ensure that borrowers without legal representation get the same modification as a borrower represented by an attorney or counselor?
  6. What steps do you plan to take going forward to limit the number of home foreclosures on loans that you have originated or serviced?
  7. What major obstacles remain to refinancing troubled loans that would benefit from policy actions taken by the federal government or legislation in Congress?


It is in all of our interests to take steps to avoid the high financial and social costs of foreclosures.  We must use all the tools at our disposal to prevent an impending crisis that will threaten our housing market and our broader economy.  I look forward to your prompt response.





Senator Charles E. Schumer



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