Predatory mortgage lending is what brought me here in the first place.
I wrote my first diary almost two and a half years ago. I was the lead sponsor of legislation to protect consumers from predatory mortgage lending. The bill was really a rear guard action against a bill introduced by Bob Ney. Ney’s bill would have provided some flimsy, easily evaded federal consumer protections against predatory mortgage lending, and then in the name of a "consistent national standard," prohibited any state from enforcing effective state laws, like North Carolina’s. The Ney bill was really about protecting predatory lenders from state laws, not protecting consumers from predatory lenders.
Congress had enacted the bankruptcy bill a few weeks earlier. The bankruptcy bill was every bit as obscure, technical and generally hard to explain as predatory mortgage lending issues, but somehow the bankruptcy bill had provoked populist rage that caught many Democrats who supported the bill by surprise. The populist rage appeared to have come largely out of the blogosphere. I knew that if I couldn’t stir up some populist rage over predatory mortgage lending, I was going to get rolled by Ney.
So I wrote Predatory Lending Does Not Have to Be Bankruptcy Sequel.
The diary provoked 80 comments, many remarkably well informed and thoughtful. I asked my relatively blog-savvy press secretary if I should reply to some of the comments. He said that would be crazy. A few Members wrote an occasional diary on progressive blogs, he said, but nobody mixed with the rabble in comments. But the next week I wrote another diary, More Predatory Lending Thoughts, Answers & Don Quixote, to respond to some of the comments to my first diary, including comments that any effort to pass real consumer protection legislation in a Republican Congress was quixotic. "It’s true that we’re playing defense," I said. "But having our own bill highlights what’s wrong with other proposals, and may force a compromise that will do better by consumers. Besides, I don’t mind occasionally tilting at windmills—some windmills just need tilting at."
A lot has changed in two and a half years.
In the next couple of weeks, I will again introduce legislation to protect consumers from predatory mortgage lending. The issue isn’t obscure anymore. An epidemic of defaults and foreclosures of subprime mortgages has created turmoil in financial markets and put the issue on the front pages.
Democrats aren’t in the minority in the House anymore either. I’ve been working on the bill with Mel Watt, my colleague from North Carolina and the immediate past chair of the Congressional Black Caucus, and with Barney Frank. Barney is now the chair of the Financial Services Committee, which has jurisdiction of mortgage lending issues. The bill is one of Barney’s priorities. I expect most Democrats on the Financial Services Committee to be co-sponsors.
There will certainly be opposition from some House Republicans, but not from Bob Ney. Bob’s otherwise engaged.
On the Senate side, Chris Dodd, the chair of the Banking Committee, has just announced plans to introduce a bill that sounds roughly similar to what we’ll introduce in the House, a very hopeful sign that we’ll actually get something passed.
In short, we’re not tilting at windmills now.
I’ll write in more detail about the bill when I introduce it. But that’s not why I’m here today.
I’m here today to tell you about a more urgent assignment that Barney Frank gave me early this year: figure out what can we do to help the folks already in bad loans and in danger of losing their homes to foreclosure.
About 2.2 million families with subprime mortgages are in danger of losing their homes to foreclosure in the next couple of years, often because of predatory terms--the mortgages are refinances with unconscionable costs and fees that strip homeowners of the equity in their home; homeowners are trapped in bad loans by prepayment penalties; or loan originators betrayed the trust of borrowers by "steering" the borrowers into more expensive loans.
When a family loses their home to foreclosure, they fall out of the middle class into poverty, and will be lucky ever to climb out again. When several homes in a neighborhood are foreclosed, the value of other homes collapses. African-American and Latino neighborhoods are hardest hit.
So we called consumer advocates and folks in the financial services industry to ask what our options were. I asked a bankruptcy judge at the YMCA in Raleigh if he had any suggestions, and I talked to a couple of lawyers I know who practice bankruptcy law. In general, I talked to everyone I could think to talk to. Some of the folks I talked to called friends of theirs for ideas. The bankruptcy judge I talked to talked to other bankruptcy judges.
Here’s what we’ve come up with so far:
Encourage Mortgagees to Modify the Terms of Troubled Loans.
The first suggestion was to clarify FAS 140, the accounting rule for qualified special-purpose entities ("QSPE"s), regarding the modification of securitized mortgages. I’m sorry, did you not follow that? Do you need me to explain? Come on, try to keep up.
Most residential mortgages are sold and end up as part of "mortgage-backed securities," which are much more marketable investments than mortgages. "Securitizing" mortgages is a tidy little business for Wall Street. Securitized mortgages are held in trusts as passive investments, not actively managed as assets. The trustees are limited to mechanical tasks such as collecting and distributing payments and foreclosing on mortgages in default.
The rules allowed trustees to negotiate with homeowners in default and modify mortgages rather than foreclose. But it wasn’t clear that trustees could negotiate with homeowners before their mortgages became delinquent, even when it was pretty obvious that a homeowner wasn’t going to be able to make future payments.
Both consumer advocates and the mortgage industry urged more flexibility to modify securitized mortgages, and the idea made sense. So after making discrete inquiries to make sure we’d get the answer we wanted, several Democrats on the House Financial Services Committee wrote the Securities and Exchange Commission to ask for clarification. Our friends at the SEC wrote back and helpfully agreed that trustees could modify mortgages that were troubled, but not yet in default.
It’s a start.
Let Bankruptcy Courts Modify Mortgages.
The second suggestion came from consumer advocates. They argued that homeowners in troubled mortgages should have the option of declaring bankruptcy to avoid foreclosure, and urged Congress to make it easier to modify home mortgages in bankruptcy.
Relying on bankruptcy courts to help folks save their homes from foreclosure is not new. In 1934, Congress enacted emergency legislation to allow bankruptcy courts to scale back the mortgages on family farms. Millions of family farmers had borrowed against their farms to try to ride out the depression. When farm prices didn’t improve, they had no way to pay their mortgages.
Woody Guthrie was writing about family farmers losing their homes to foreclosure in the lyrics to "Pretty Boy Floyd," which I quoted in my first diary here:
Now as through this I ramble
I see lots of funny men
Some will rob you with a six gun
And some with a fountain pen.
But as through life you travel
As through your life you roam
You won’t never see an outlaw
Drive a family from their home.
Consumer advocates’ proposed changes to the bankruptcy laws began with repealing a 1978 amendment that prohibited bankruptcy courts from modifying mortgages on a debtor’s principal residence. A bankruptcy court can modify mortgages on commercial properties and vacation properties, but not mortgages on a debtor’s home. The amendment made some sense in 1978, when virtually all home mortgages were thirty-year, fixed rate loans with relatively low loan-to-value ratios. If you couldn’t pay your mortgage in 1978, it wasn’t your mortgage that got you in trouble. The amendment makes no sense at all now, when subprime mortgages entered last year commonly had an initial "teaser" rate that was already 55 percent of the borrower’s monthly income, but would automatically increase by 30 percent after two years. If you’re in one of those mortgages, your mortgage is probably your biggest financial problem.
Consumer advocates also urged Congress to remove the requirement that a debtor complete credit counseling before declaring bankruptcy when the debtor is facing foreclosure. The credit counseling requirement was part of the 2005 bankruptcy bill. In most cases the credit requirement is simply an insult to debtors, who are much more likely to have gotten into desperate financial circumstances because of serious family illness than because they were profligate. But if you need to declare bankruptcy because your home is being auctioned at the courthouse next Tuesday at Noon, having to complete credit counseling first is a real problem.
In all, consumer advocates pointed out thirteen changes in the bankruptcy laws that Congress should make in response to the subprime mortgage crisis. A prominent House member and a prominent Senator (I’m not supposed to say who) will introduce legislation late this month to make the bankruptcy law changes urged by consumer advocates.
Changing the law to allow bankruptcy courts to modify home mortgages would also improve the bargaining position of homeowners in negotiating with mortgagees outside of bankruptcy. Mortgagees would quickly figure out what would happen in bankruptcy, and agree to the modifications that the bankruptcy court would make.
Not surprisingly, industry is less than enthusiastic about the various proposed changes to the bankruptcy laws, although it’s a little early to read the politics. Enacting all thirteen changes in the bankruptcy law may be a heavy lift. My bankruptcy judge friends generally agree with the proposed changes, but think a less ambitious bill may suffice.
So the bankruptcy thing is a work in progress.
Tweak the Tax Laws Just a Little.
There’s a problem with the tax laws that complicates things for homeowners. But when a bankruptcy court reduces a debtor’s loan balance, the tax laws do not count that as income to the debtor. When a creditor agrees to forgive part of a homeowner’s debt outside of bankruptcy, even after foreclosure, the debt forgiven is income subject to tax. So a year or so after a homeowner thought he had escaped ruin by compromising his mortgage, he may get surprised with a ruinous tax bill.
The problem got a little press attention and consumer advocates mentioned it to us, so a couple of months ago I mentioned it to Barney during votes on the floor. Barney said we should talk to Richie, and strode across the chamber with me trotting behind him. Richie turned out to be Richard Neal, the chair of the Subcommittee on Select Revenue Measures of the Ways and Means Committee. Richie’s a handy guy to know if you’ve got a problem with the tax laws. (Richard Neal is "Richie" to pretty much everybody, by the way, but the only people who call Steve Lynch "Stevie" or Mike Capuano "Mikie" are the other members of the Massachusetts delegation.)
Barney explained the problem and Richie said yeah, he’d heard about that too. Richie thought he could fix the problem by tucking a little amendment into a bill about something else. Richie said have-your-people-talk-to-my-people, and Richie, Barney and I exchanged the names of our staff members working on the issue.
So I think we’re going to get the tax problem fixed. We’ve got Richie working on it.
Help Homeowners Figure All This Stuff Out.
Creating new options to homeowners in troubled loans won’t do much good if homeowners don’t know what their options are. In the spirit of giving credit where credit is due, one good idea has come from the Senate, and from Chuck Schumer no less. The idea is to create a federal fund for nonprofit groups to provide credit counseling to homeowners in default or headed that way. Homeowners don’t really need to understand mortgage securitization, but they need to understand that they can negotiate with the mortgagee for different terms, or if we can get the bankruptcy changes through, that they can avoid foreclosure in bankruptcy.
Using federal funds to pay off mortgages is a bad idea. I’ll be pluperfect damned if I want federal funds to pay prepayment penalties. But using federal funds to advise homeowners how to modify their loans is a very good idea.
Any other ideas?
This is how legislatures work. Asking around for ideas to fix a problem, quick conversations on the floor, calculations about what would be ideal and what would be acheivable, and amendments tucked quietly into bills about something else. The difference now is who we’re trying to help. We’re hustling to help folks who are struggling at the border between being working poor and lower middle class. There are conversations in every Congress like my conversation with Barney Frank and Richie Neal, but when Tom DeLay was in charge, those conversations weren’t about how to help the working poor.
I know there will be discussion here this month about whether it even matters that the Democrats are now in the majority in Congress. To millions of families in danger of losing their homes to foreclosure, or seeing the value of their home collapse because of foreclosures in their neighborhood, it matters a lot.