Democrat Charles Schumer introduces proposals to tame the ‘Wild West’ of sub-prime lending.
WASHINGTON — In a bid to stop a wave of foreclosures, Sen. Charles E. Schumer (D-N.Y.) on Thursday urged Congress to approve $300 million for counseling and outreach efforts to help beleaguered borrowers hold onto their homes through refinancing deals and other financial strategies that would require cooperation from private lenders.
Schumer also proposed legislation to hold mortgage brokers and independent, non-bank lenders such as Ameriquest Mortgage Co. legally responsible for making loans that borrowers can understand and can afford.
The separate proposals represent the first legislative attempts to address the problem of rising foreclosures, a situation that has worsened nationwide during the last year. In many cases, borrowers were enticed by artificially low entry costs. The loans, often marketed by brokers and independent lenders, eventually soared in cost.
"The sub-prime mortgage market has been the Wild West of the mortgage industry for far too long," Schumer said Thursday, referring to high-cost loans aimed at people with weak credit. Such loans have been failing at a rapid rate, sending jitters throughout the mortgage industry and adding instability to Wall Street. "Our proposal brings the sheriff back in town," he said.
Under the plan, nonprofit community organizations that specialize in housing concerns would use the federal money to locate troubled borrowers and lead them toward potential relief, such as more-affordable loans achieved through refinancing or cheaper new loans — if lenders are willing to provide them.
Schumer estimated that the $300 million might help 300,000 individuals stave off foreclosure. Joined by Sens. Sherrod Brown (D-Ohio) and Robert P. Casey Jr. (D-Pa.), he urged private lenders to match each of the tax dollars with $2, to help create a foreclosure-prevention fund that ultimately could save 900,000 homes.
Beleaguered borrowers are often afraid to contact lenders or respond to their inquiries, experts say. Some 2 million borrowers may face the risk of foreclosure over the next two years, by some estimates, as their loan payments soar once the preliminary, teaser rates expire.
In California, there were 11,033 foreclosures during the first three months of 2007, an 800% increase from the previous year.
"Congress must act to provide necessary protections for consumers," Brown told reporters. "This legislation is a necessary first step."
Representatives of community organizations that might dispense the money also support the proposals.
The prospects for Schumer’s bill were not clear. His approach is in contrast to that of Sen. Christopher J. Dodd (D-Conn.), chairman of the banking committee, who has steered clear of using taxpayer dollars and instead has focused on prodding regulators and private lenders to make sure that loans are fair and affordable.
The notion of a taxpayer bailout would be highly controversial and many politicians are wary of having government come to the rescue of borrowers who took out voluntary loans. Community activists, however, contend that many borrowers had been deceived about the costs they would be incurring.
"To be clear, no one is getting bailed out," said John Taylor, president of the National Community Reinvestment Coalition, in a statement. "Borrowers will repay their loans, but at interest rates and with fees that are fair and reasonable."
Besides proposing money to help borrowers avoid foreclosure, Schumer on Thursday urged Congress to adopt a stricter regulatory approach aimed at brokers and independent lenders who play a much larger role in housing than they used to.
His bill would stipulate that all lenders must adhere to standards of fairness and integrity in providing home loans. Federal regulators have traditionally focused on national banks, often leaving a vacuum in oversight of non-bank lenders.