JEC Hearing on Subprime Crisis & the FHA Bill

The bicameral Joint Economic Committee has just concluded a hearing, “Evolution of an Economic Crisis?: The Subprime Lending Disaster and the Threat to the Broader Economy.” Witnesses included Peter R. Orszag, Director of the Congressional Budget Office; Dr. Robert J. Shiller, Stanley B. Resor Professor of Economics at Yale University; Martin Eakes, Chief Executive Officer of the Center for Responsible Lending; and Alex J. Pollock, Resident Fellow at the American Enterprise Institute.

Rep. Carolyn Maloney (NY-14) gives opening remarks:

Rep. Maloney: “Yesterday Realty Track released the latest bad news, that foreclosures reported in August increased 36% since July and 115% since this time last year. Expectations are that the next eighteen months will be even worse as many subprime loans reset to higher rates… In Congress we are focusing on helping families stay in their homes and preventing another crisis like this in the future. Just yesterday the House of Representatives passed legislation to enable the FHA to serve more subprime borrowers at affordable rates and terms, attract borrowers who have turned to predatory loans in recent years, and offer refinancing to homeowner’s struggling to meet their mortgage payments.”

Peter R. Orszag, Director of the Congressional Budget Office, gives testimony:

Orszag: “In the traditional form of mortgage financing the originator of the loan also holds the loan in its portfolio and therefore has a very strong incentive to learn about the borrower’s ability to repay. By contrast, in the securitized form of mortgage financing the originator sells the mortgage to a third party and earns a fee for origination with little immediate reward were discovering relevant information about the borrower. As a result the originator may not have adequate incentives to exercise care in discretion in its underwriting unless the ultimate purchaser or the entity providing the securitization carefully structures such incentives…”

Dr. Robert J. Shiller, Stanley B. Resor Professor of Economics at Yale University, gives testimony:

Schiller: “I wanted to reiterate the fundamental importance of the unwinding of the housing boom. Senator Schumer, you quoted some alarming statistics and I heard numbers in the hundreds of billions. But if we look at the prospective loss in value of homes in this country, it’s actually in the trillions… If you correct this for inflation we’re talking about a 13% to 20% decline in real value that’s already in the market for a year from now, and that with $23 trillion in real estate value, that’s trillions of dollars of losses. That’s the fundamental thing that will drive it, it will upset balance sheets, it will upset lots of our financial institutions.”

As mentioned by Rep. Maloney, yesterday the House passed the Expanding Homeownership Act of 2007 to revitalize the Federal Housing Administration (FHA), which was established to provide a reliable source of affordable mortgage loans for first-time homebuyers. The bill will enable the FHA to serve more subprime borrowers at affordable rates and terms, to attract borrowers that have turned to predatory loans in recent years, and to offer refinancing to homeowners struggling to meet their mortgage payments in the midst of the current turbulent mortgage markets.

Strengthens protections for higher risk FHA borrowers:

More than doubles federal funding for housing counseling, to help subprime homebuyers who fall behind on their mortgage payments, and requires counseling for higher risk FHA borrowers prior to purchasing their home.

Requires disclosures regarding the costs associated with lower down payment loans, so that borrowers can make a more informed decision about the type of loan they should take out.

Extends FHA-backed loans for homeowners struggling with mortgage payments:

Directs HUD to offer refinancing loans to help borrowers currently in default or at imminent risk of being in default — expanding on the Bush Administration proposal to serve 80,000 families.

Permits the FHA to offer zero and lower down payment loans in refinancing home loans.

Increases affordable housing, building on the progress Congress is already making:

Affordable Housing Fund. Authorizes up to $300 million a year for affordable housing from the bill's excess profits, resulting from expanding FHA loans.

More affordable rental housing. The bill boosts FHA multifamily loan limits in high cost areas, to ensure that loans can cover the cost of construction, and bars the Bush Administration's pending proposal to raise fees on FHA multifamily loans.

Enhances FHA's reverse mortgage program for seniors to get cash out of their house:

Eliminates a volume cap on reverse mortgages and raises loan limits for seniors so that seniors that own their home can mortgage their home to pay for high health care bills and other expenses.

Reduces by 33% the maximum fee loan originators can charge senior citizens for reverse mortgage loans.

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