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Friday, May 11, 2007

Foreclosure crisis



Dealing with the foreclosure crisis

Senate introduces legislation



On Thursday Senator Charles Schumer (D-NY), chairman of the Senate's Housing Subcommittee introduced legislation to deal with a potential foreclosure crisis arising out of the subprime lending mess.

In the legislation Schumer and co-sponsors Sherrod Brown (D-OH) and Bob Casey (D-PA) proposed that $300 million in federal funds and, Schumer said, "hopefully even more private money," would be channeled to community non-profit groups via the Department of Housing and Urban Development to boost refinancing programs to help homeowners prevent foreclosures.

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These funds, Schumer said, placed in the hands of community groups that specialize in foreclosure prevention "will not only help hundreds of thousands of families save their homes, but it will save billions in spillover foreclosure costs. This seems like a cost-effective investment to me, and one that will help restore confidence in our shaky housing market."

Schumer said that acting to prevent what he expected to be large numbers of foreclosures over the next two years is not only important from the perspective of protecting homeowners and communities, "but it also makes good economic sense. Foreclosures can cost up to $80,000 for all stakeholders-homeowners, neighbors, cities and local governments, lenders, and loan servicers.

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The rising wave of subprime foreclosures has caused existing programs to become overwhelmed by requests for assistance, and they are struggling to give homeowners in trouble the assistance they require in order to successfully workout a suitable payment plan with the lenders."

Also on Thursday the Federal Reserve Board announced that it will hold a public hearing on June 14 to gather information on how it might use its authority to curb abusive lending practices in the home mortgage market.

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The three senators said that, to encourage the private sector including those banks and mortgage lenders that have the most to lose from foreclosures, they had just sent letters to individual financial institutions, the American Bankers Association and other groups encouraging them to partner with the federal government to create a similar home retention fund by matching federal funds at a minimum of $2 to $1.

A second part of the proposed legislation is designed to "seal the cracks in our regulatory system to prevent future widespread lending abuses." The bill seeks to regulate mortgage brokers and lenders under the Truth in Lending Act. Among the proposals is a standard for originators to assess a borrower's ability to repay a mortgage and holds lenders responsible for brokers and appraisers.

"The goal is to find ways to promote sustainable homeownership through responsible lending, informed consumer choice, and effective guidance and regulation," said Federal Reserve Board Governor Randall S. Kroszner, who will chair the hearing. "We want to encourage, not limit, mortgage lending by responsible lenders, so it is crucial that any actions the Board might take are well calibrated and do not have unintended consequences."

And finally, on Wednesday General Motors Acceptance Corporation (GMAC) posted a first-quarter loss as the company took charges at its housing finance unit. GMAC, a former wholly owned subsidiary of General Motors (which still holds a 49 percent stake) took a net loss of $305 million.


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GMAC's mortgage unit ResCap had a quarterly loss of $910 million which effectively swamped net proceeds from the company's insurance and auto financing divisions which totaled $605 million. One year earlier GMAC posted a profit of $495 million.

GMAC has sold off some of its subprime mortgages at a loss, marked down its remaining portfolio and is curtailing new loans to non-prime customers, reducing its subprime lending to 1/3 the volume of one year ago and increasing its reserves to accommodate higher delinquencies.

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