Support the Foreclosure Prevention Act of 2008
Recipient: U.S. Senate
Troubled Mortgage Lenders Can Get Bankruptcy Relief – Why Can’t Troubled Homeowners?
February 26, 2008
On behalf of the Leadership Conference on Civil Rights, the nation’s oldest, largest, and most diverse civil and human rights coalition, we urge you to support S. 2636, the “Foreclosure Prevention Act of 2008.” In particular, we strongly urge you to support Title IV, the “Helping People Save Their Homes in Bankruptcy Act,” and ensure that it remains in the bill. As modified by a substitute amendment, Title IV is a well-targeted, thoughtful approach that could save hundreds of thousands of homes from foreclosure.
Foreclosure rates are rapidly increasing, thanks to years of reckless and predatory lending practices – including “exploding ARM” loans; poorly underwritten “interest-only,” “payoption,” and “stated income” mortgages; and steering of creditworthy borrowers into expensive subprime loans. Despite industry-led efforts to avert foreclosures, such as “Project Lifeline” and the “Hope Now Alliance,” countless families remain destined to lose their homes.1
Title IV would give hundreds of thousands of struggling homeowners a second chance through the Chapter 13 bankruptcy process. Bankruptcy courts would be able to: 1) reduce the principal on mortgages to reflect the current value of the home; 2) reset interest rates to affordable-but-fair levels; and 3) eliminate many abusive fees. Taking a pragmatic approach, it would only affect existing subprime and nontraditional loans, would sunset after seven years, and would only apply if foreclosure is imminent. It also leaves the 2005 bankruptcy reforms intact.
For several reasons, Title IV represents one of the best responses available to the foreclosure crisis. One key advantage is its cost. Because the public would not have to pay to save homes, it would not amount to a “bailout” or raise moral hazard issues. Indeed, bankruptcy relief would come at a heavy enough private cost to families who file – monetary and otherwise – to encourage wiser financial decisions in the future.
In addition, Title IV would benefit other homeowners and our economy at large. Every home that gets saved from foreclosure helps protect the value of surrounding homes, making other borrowers less likely to get “upside down” on their own loans. It would also reduce the blight, public safety hazards, and drains on government resources that inevitably result from widespread foreclosures. In short, it would help control the “bleeding,” hopefully for long enough to allow the economy to recover on its own.
Opponents of Title IV claim that it would make credit more expensive. We certainly take such concerns seriously. With respect to Title IV, however, that concern simply has not been substantiated. More importantly, because it only applies to existing loans, and only when moreexpensive foreclosures are imminent, it is difficult – at best – to see how it would lead to higher interest rates on loans in the future.
While we commend industry-led efforts to reduce foreclosures, the fact remains that these efforts have done little, so far, to mitigate the ongoing crisis. Homeowners, and our economy as a whole, simply cannot afford to allow an industry that collectively created this epidemic – and is now being consumed by it – to dictate the terms of the cleanup.
We strongly urge you to pass S. 2636 with Title IV intact. Thank you very much for your consideration. If you have any questions, please feel free to contact Rob Randhava, LCCR Counsel, at 202-466-6058.
Wade Henderson, President & CEO
Nancy Zirkin, Executive Vice President
1. See, e.g., Ruth Simon and Tom McGinty, “Earlier Subprime Rescue Falters: December Plan Has Done
Little to Help Borrowers In Dire Circumstances,” Wall Street Journal, Feb. 13, 2008, A3.