U.S. Senate, Servicers Connect On Foreclosure Crisis With “Statement Of Principles”

As borrowers and servicers continue to tackle the growing foreclosure troubles in the subprime mortgage market, several members of the U.S. government have recently stepped forward with their own intervention and prevention efforts.

"The crisis affecting the subprime market is a comprehensive one and involves many parties," said Sen. Chris Dodd, D-Conn., in a recent statement encouraging further action.

During the months following his February hearing entitled "Preserving the American Dream: Predatory Lending Practices and Home Foreclosures," Dodd, who serves as chairman of the Banking, Housing, and Urban Affairs Committee, has continued to push for regulatory measures intended to preserve homeownership, particularly among subprime borrowers.

At his Homeownership Preservation Summit in April, Dodd urged the subprime lenders, securitizers and servicers in attendance to recognize the severity and consequences of current foreclosure levels, as well as to develop collaborative solutions.

"The mere fact that this many prominent leaders sat around one table to truly tackle the problems in the subprime market was tremendously symbolic, and I truly appreciate their commitment to preserving homeownership," Dodd stated after the meeting.

One of the gathering's immediate results, a Statement of Principles issued by Dodd and his colleagues in May, drew endorsements from a range of organizations and corporations, including the Mortgage Bankers Association and numerous major servicers.

"Participants recognize that no one – not investors, servicers, lenders, homeowners, or neighborhoods – benefits when families lose their homes to foreclosure," the introduction to the Statement of Principles explains.

Along with officially agreeing to the principles outlined in the document – which emphasizes early borrower contact, loan modification and refinancing through a range of techniques, credit availability, damage control and accountability – such firms as Citi Consumer Lending Group, Litton Loan Servicing and Self-Help Credit Union lauded Dodd for his initiative on the issue.

In his company's statement of support for the Statement of Principles, Larry B. Litton Jr., president and CEO of Litton Loan Servicing, affirmed that the document is "a great tool the industry can use to help reduce the number of foreclosures facing the subprime industry, while continuing to meet our obligations to our investors."

Martin Eakes, CEO of Self-Help Credit Union, declared his official support for the statement as well, adding that "servicers should take advantage of their ability to extend the initial rate for the life of the loan and make any other adjustments so that families can stay in their homes and investors can continue to get paid."

A related recent initiative spearheaded by Dodd – along with Banking Committee associates Sens. Jack Reed, D-R.I., Charles Schumer, D-N.Y., Wayne Allard, R-Colo., and Jim Bunning, R-Ky. – focused on accelerating the steps recently taken by various government agencies to develop and apply protective underwriting guidelines to subprime mortgages.

In a May 17 letter to the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision and National Credit Union Administration, the senators urged these government offices to "move expeditiously to finalize these important new guidelines." They praised the government offices for including a requirement that lenders take into account adjustable-rate mortgage (ARM) payment shock when qualifying borrowers.

However, the senators also called into question the government groups' fear that at-risk borrowers approaching a loan reset and seeking refinancing may qualify only for a similarly dangerous new loan.

"Frankly, we view this objection as an admission that the original subprime ARM was inappropriate," the senators pointed out. "It stretches credulity to argue that the path out of one poorly underwritten loan is another unaffordable loan underwritten on the same faulty basis."

Members of the U.S. Committee on Financial Services, meanwhile, citing the committee's "jurisdiction over both federal housing policy and the financial services industry," recently requested in writing that the Government Accountability Office (GAO) conduct an investigation into the causes of the country's foreclosure surge.

"It seems clear that the type of mortgages that have been offered to borrowers in recent years is one such factor, but there is no reason to conclude that it is the only factor," Sens. Barney Frank, D-Mass., and Spencer Bachus, R-Ala., noted in their April 25 letter to GAO Controller General David M. Walker.

The senators went on to specify three essential areas of analysis for the GAO to examine. These targeted topics include "current state of the problem," which takes into account geographic and chronological trends; "causes of the problem," which identifies the roles played by various lending practices and macroeconomic factors; and "potential solutions," which evaluates appropriate measures that government agencies, servicers and other relevant parties might take.


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