Recently the Center for Responsible Lending (CRL) released an analysis showing that during the third quarter of 2007, mortgage lenders initiated foreclosures seven times more frequently than they modified mortgages, and 13 times more frequently than they modified problematic adjustable-rate subprime loans. In addition, CRL estimated that under the Treasury Department's voluntary plan, only 3% of homeowners (118,200) with adjustable-rate subprime mortgages are likely to receive a streamlined loan modification from their lender.
In a defensive rebuttal, the Mortgage Bankers Association (MBA) disputes these findings. After considering their objections, we at the Center unequivocally stand by our original analysis. Here are our specific responses to MBA's arguments:
- The MBA contends CRL's analysis doesn't take into account loans that pay off early, when in fact it clearly does.[1] Further, CRL rejects the MBA's rosy assumption that half of subprime loans scheduled to reset shortly will be refinanced. This is especially improbable given the steep drop in housing values following the housing bubble's burst and the total drying up of subprime liquidity based on the industry's excesses.
- The MBA insists that repayment plans should be counted as effective foreclosure prevention, but these are only temporary fixes As the MBA itself recognizes, repayment plans help people who need to recover from short-term financial shocks caused by job loss, divorce, illness, etc., but who can afford their loan's regular interest rate.[2] These will not help homeowners holding subprime mortgages with monthly payments that will increase 30% to 40%, since the problem is the unaffordable loans themselves.
- The MBA contends that court-supervised foreclosure prevention will raise the cost of credit, when in fact proposed legislation in the U.S. House only applies to loans that have already been made. Further, by adopting a policy that would stop hundreds of thousands of foreclosures that would have caused even larger losses, loan costs should go down, not up. The MBA is well-aware of these facts, but continues its scare tactics nonetheless.
CRL recognizes that bankruptcy is highly undesirable for homeowners but, for most families, losing their home is much worse. Saving a home through Chapter 13 bankruptcy should be the final option to avoid foreclosure when voluntary modifications are not forthcoming. This would also eliminate a major reason that many Chapter 13 plans currently fail—that is, borrowers are trapped in unaffordable mortgages that bankruptcy judges are powerless to restructure as they can for every other form of debt.
Foreclosure instantly wipes out a working family's most important source of wealth-building and often leads to a downward financial spiral for them and their communities. Keeping homeowners in their homes helps stabilize communities, preserve neighborhood property values, and spare cities and states the tax losses that would result from en masse foreclosures.
Permitting court-supervised loan modifications on primary residences that otherwise would go into foreclosure will likely help five times as many families as the Treasury's plan—roughly 600,000 families who would otherwise lose their homes.
CRL is not inflating the subprime problem, which needs no exaggeration. After denying for months that a foreclosure crisis even exists, the MBA now claims lenders are making "vast efforts" to prevent foreclosure. Yet it offers no evidence that their efforts are resulting in a meaningful number of sustainable mortgage modifications, which will be essential to minimize the massive economic damage inflicted by reckless lending practices.
[1] See Line 9 ("Loan does not terminate prior to reset") in the chart attached to CRL's analysis. This step excludes 22% of outstanding subprime ARMs and is based on information compiled by Bank of America Securities. CRL analysis is available at updated-analysis-of-paulson-plan.html.
[2] http://www.mortgagebankers.org/NewsandMedia/PressCenter/59454.htm, page 7.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; or Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org.