Seven Leading Consumer, Civil Rights Groups Launch Alliance to End the Foreclosure Crisis, Debunk 'Deeply Misleading' Lender Attacks on Bipartisan Compromise Bills

Former HUD Secretary Jack Kemp and Leadership Conference on Civil Rights President and CEO Wade Henderson Join New Push to Stem U.S. Housing Crisis

WASHINGTON, Jan. 29 /PRNewswire-USNewswire/ -- A diverse group of seven consumer and civil rights groups joined together today to create the "Alliance to End the Foreclosure Crisis," including two new members: Jack Kemp, former Housing and Urban Development (HUD) director and U.S. Congressman; and Wade Henderson, president and CEO of the Leadership Conference on Civil Rights.

Kemp said: "The bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property -- all secured loans, that is, except those secured by the debtor's home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets -- their homes -- and leaves untouched their largest liabilities -- their mortgages."

Alliance members are working to support HR 3609, the "Emergency Home Ownership and Mortgage Equity Protection Act," and S. 2136, "Helping Families Save Their Homes in Bankruptcy Act," which have been attacked by trade organizations representing the key banking and lending institutions responsible for creating the subprime mortgage crisis in the U.S.

In alphabetical order, the full list of Alliance to End the Foreclosure Crisis members is as follows: Center for Responsible Lending; Consumer Federation of America; Leadership Conference on Civil Rights; National Association of Consumer Advocates; National Association of Consumer Bankruptcy Attorneys; National Consumer Law Center (on behalf of clients); and Jack Kemp, former HUD Secretary and former U.S. Congressman.

Highlights of a joint statement issued today by the Alliance to End the Foreclosure Crisis include the following: "On January 23, 2008, the [American Bankers Association] ABA, along with other lending groups, released a letter opposing HR 3609. This bipartisan, compromise legislation would treat primary residences on par with all other types of secured debt by permitting judicial modification of existing subprime exploding ARMs as a last alternative to foreclosure. The ABA letter is deeply misleading. Contrary to its claims:

* The House bill narrowly targets loans that face foreclosure. Relief is available only when family lacks sufficient income to pay their mortgage according to a strict IRS means test, and foreclosure is imminent. Judicial discretion is limited, and favorable loan terms for lenders are guaranteed. Relief is available for existing loans only, and applies only to loan products federal regulators deem potentially dangerous; conventional fixed-rate or adjustable-rate loans are not eligible ...

* HR 3609 will not increase interest rates, negatively affect secondary markets, or lead to abuses. The compromise House bill is now limited to existing loans only. This removes any concerns that could reasonably be raised about the bill's impact on the cost or availability of future credit. While the bill has changed, the industry's talking points against it have not caught up with those changes. As explained by Mark Zandi, Chief Economist and Co-Founder of Moody's Economy.com, "this legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuses by borrowers. Given that the total cost of foreclosure to lenders is much greater than that associated with a Chapter 13 bankruptcy, there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise. Simply consider the substantial costs associated with navigating through fifty different state foreclosure processes in contrast to one well-defined bankruptcy proceeding. Indeed, the cost of mortgage credit to prime borrowers may decline. . . . There is also no evidence that secondary mortgage markets will be materially impacted after a period of adjustment, as other consumer loans which already have similar protection in Chapter 13 have well-functioning secondary markets. . . . It is very unlikely that abuses by mortgage borrowers will increase as a result of this legislation given that a workout in Chapter 13 is a very financially painful process." ...

* Current voluntary modification efforts are woefully insufficient. Examining mortgages during the first eight months of 2007, Moody's Investors Service found that lenders only modified 3.5% of subprime loans that reset to higher levels, compared with industry estimates that up to half of such borrowers facing reset will lose their homes to foreclosure. In addition, recent MBA data show that foreclosures are outstripping modifications 7 to 1; for the subprime ARMs that are the root of the current crisis, foreclosures outnumber modifications 13 to 1. Further, while the Paulson plan for voluntary modifications is welcome, only 3% of subprime ARM borrowers are likely to receive streamlined modification under its terms. Repayment plans, which require a subprime ARM borrower to pay the full often 12% interest rate while catching up on delinquent payments at the same time, are ineffective. In the absence of detailed reporting, it is not even clear that the few modifications that have occurred are sustainable. Countrywide has acknowledged that most of its modifications "involved deferring overdue interest or adding the past due amount to a loan," not reducing interest rates or principal balances on subprime ARMs.

* 600,000 foreclosures could be prevented. CRL estimates that judicial modifications allowed by HR 3609, "The Home Ownership and Mortgage Equity Protection Act," could prevent 600,000 homes from being lost to foreclosure, and prevent $72.5 billion of wealth lost by families faithfully paying their mortgages but with the misfortune of living within a block of these foreclosures. Similarly, according to Mark Zandi, allowing homeowners access to judicial modification would prevent about one-quarter of foreclosures likely to occur between now and the end of next year -- or about 570,000 homes saved.

* Experts support HR 3609. In addition to Mr. Kemp and Mr. Zandi, William Apgar, Senior Scholar at Harvard's Joint Center for Housing Studies, a former FHA Commissioner; Karl E. Case, a highly respected Professor of Economics at Wellesley College; and Robert Shiller, Professor of Economics and Finance at Yale University and a principal in creating the Standard & Poor's Case-Shiller(R) Home Price Index support the bill. New York Times, USA Today, and other editorial boards support it as well.

* Bankruptcy courts can easily handle the work. According to U.S. Bankruptcy Judge Rich Leonard, "the bankruptcy courts are equipped to deal with these cases with their current staffing. In response to what were overwhelming caseloads in the 1990s, the bankruptcy courts of this country have become the most technologically advanced in the world, able to deal with cases and claims electronically and often remotely. There would be an initial flurry of filings, each court would then work out its predictable response to these issues, and the market would respond. For example, the secured debt on motor vehicles is restructured in hundreds of my cases each year, but I rarely have a contested hearing. Debtors' counsel, the trustee, and the car company lawyers know about what my court will do with a certain set of facts and agree to it, and this happens in every jurisdiction."

* Passage of the bill will facilitate voluntary modifications, not prevent them. As Richard Levin, Vice Chair of the National Bankruptcy Conference, testified in October, the success of Chapter 12, in which loans on family farms can be modified, "has resulted in a substantial decrease in its use. As lenders and borrowers understand its operation, they are often able to get to family farm mortgage modifications on their own, without the bankruptcy court's intercession."

* The Congressional Budget Office did not claim negative results from judicial modification. The ABA falsely quotes the CBO as stating that "one of the costs of the bill 'would be higher mortgage interest rates'" and that it "would 'add to the caseload of the bankruptcy court system causing delays in resolving cases.'" In fact, the CBO actually presented both pros and the cons of the policy in balanced fashion, without making a choice between them; in both cases, the CBO actually used the word "could."