Civil Rights Coalition Weighs in on Bailout Bill

Washington, DC – Today, as U.S. Treasury Secretary Paulson and the Bush administration continue to withhold aid to families trapped in the foreclosure crisis, civil rights advocates called for swift action to ebb an increasing surge of foreclosures.

Testifying before the Senate Committee on Banking, Housing, and Urban Affairs,

Nancy Zirkin, executive vice president of the Leadership Conference on Civil Rights (LCCR), stressed the need for mortgage workouts in Chapter 13 bankruptcy court for homeowners in danger of foreclosure, an option that is currently available for any other debt, including vacation homes and yachts.  Zirkin also expressed support for an FDIC plan that would provide new incentives for lenders to work with troubled homeowners to make their mortgages more affordable, a plan that the White House and Paulson continue to reject. 

Zirkin made the following statement before the committee:

“Let me begin by saying why the foreclosure crisis is so important to LCCR.  Homeownership has always been one of the most important goals of the civil rights movement.  It’s the way most Americans build wealth and improve their lives, and it’s essential to stable communities.  For decades, LCCR has worked to break down the barriers to fair housing, as well as the barriers – from redlining to predatory lending – to the credit that most people need to own housing. 

For these reasons, we argued for years that the modern mortgage system was terribly flawed, that countless irresponsible – and discriminatory – loans were being made, and that without better regulations, things wouldn’t end well.  Now, after years of denial, I think it is quite obvious that the mortgage crisis is definitely not “contained.”  But to date – and despite the best efforts of you, Mr. Chairman, and many of your colleagues – the collective response, based on voluntary industry efforts, hasn’t done much to turn the tide.

At the same time, there are helpful ideas out there, and I want to talk about them.

While there are encouraging signs of progress such as the FDIC proposal, LCCR remains convinced that the best way to quickly reduce foreclosures is to let desperate homeowners modify their loans in Chapter 13.  It would give borrowers leverage to negotiate with servicers, and give them a last resort when negotiations don’t work.

It doesn’t use public funds, and more importantly, it quickly would help other homeowners and our economy by keeping the value of surrounding homes from being eroded, stopping a vicious cycle that can lead to even more foreclosures.

We recognize that bankruptcy relief has faced intense opposition from the industry – which is ironic, given the number of lenders that have obtained bankruptcy relief themselves.  Opponents say that allowing bankruptcy would make investors hesitant, limiting “access to credit” for underserved populations.  On the surface, concerns about “access to credit” sound compelling, given our nation’s history of redlining.  But if the prospect of bankruptcy relief curtails “access” to the kinds of reckless and predatory “credit” that we’ve seen in recent years, rest assured: we won’t complain.

Instead of saddling borrowers with higher costs or refusing to provide credit altogether, perhaps lenders could simply be careful.  As one blogger who worked in the industry noted, the possibility of bankruptcy relief for mortgages once served quite well as “a brake on lender stupidity.”  Given the widespread abandonment of responsible lending practices in recent years, that brake might have been enormously helpful.

We are glad that since your last hearing, several banks and the GSEs have planned to drastically increase their loan modification programs, following what the FDIC is doing with IndyMac.  We are all for voluntary efforts.  Every home that is saved is a step in the right direction.  But to date, industry efforts simply have not provided enough affordable, lasting solutions for borrowers. This obviously has a lot to do with securitization and second mortgages.  Until those obstacles can be overcome, industry efforts cannot be a substitute for helping homeowners directly.  The stakes are simply too high, because the credit drought will not be mitigated until foreclosures are controlled.

LCCR is disappointed that bankruptcy relief was blocked this year.  But we are encouraged by some of the recent discussions with FDIC about a new mortgage guarantee program.  As we understand it, the plan would give new incentives for loan servicers to reduce payments to a thirty-one percent debt-to-income ratio, in return for government guarantees.

If the plan can be implemented quickly – and, just as importantly, if it’s quickly used by servicers – we believe it would be a great improvement over existing efforts, including the Hope for Homeowners Act, moratoriums, or even the existing IndyMac Plan with the FDIC.  It also aims directly at cause of the economic crisis – foreclosures – so it is a wise investment, especially with the latest controversies over how Wall Street has been using tax dollars.

For these reasons, and while we have a few reservations, we strongly believes that the FDIC plan is very much worth a try – and that it should be adopted as quickly as possible this fall. 

Before I conclude, I would be remiss – especially because we commemorated the 40th anniversary of the Fair Housing Act this year – if I didn’t note that any measure to implement the financial rescue law must be done in a way that is fully consistent with all applicable civil rights laws, something I discuss in greater detail in my written statement.

Mr. Chairman, thank you again for the opportunity to speak today.  I look forward to answering any questions you may have.”