WASHINGTON — Sen. Charles Schumer and two other Senate Banking Committee members called for a government "bailout" worth "hundreds of millions" of dollars Wednesday to help delinquent subprime borrowers stave off foreclosure.
The lawmakers argued that inaction would ultimately cost taxpayers significantly more. As evidence, Sen. Schumer, Sen. Robert Menendez, D-N.J., and Sen. Sherrod Brown, D-Ohio, unveiled a 33-page report on subprime foreclosures. It said borrowers, lenders, and local governments would pay about $80,000 per foreclosure but that aid to refinance a delinquent loan would cost $3,300.
"We can't afford to let these borrowers who are staring down the barrel of foreclosure lose their homes, and our local communities cannot afford the high-cost stakes of foreclosure," said Sen. Schumer at a press conference. "Our report shows that acting to prevent foreclosure makes good economic sense … so the logic is, let's do something about it."
The lawmakers declined to offer many details on how the proposed bailout would work. Instead, they said it was part of a multipronged strategy, including pushing for anti-predatory lending legislation and for a bill that would create federal standards for mortgage brokers.
Still, the announcement was the highest-profile call to date for a government bailout. It was not immediately clear whether Sen. Schumer has much support. The New York Democrat told the press conference he was working with Senate Banking Committee Chairman Chris Dodd on legislation, but Sen. Dodd said in an interview he was "not totally" in agreement with Sen. Schumer.
Sen. Dodd said he preferred regulators to address troubles in the subprime market.
"The regulators have a greater responsibility," he said. "I think the mortgage brokers do as well. But the regulators need to be doing the job under the authority we've given them. They haven't been doing that in my view."
Sen. Richard Shelby, the lead Republican on the Senate Banking Committee, said in a separate interview that he is waiting to hear more from regulators before deciding whether legislation is needed.
"I don't think we can legislate and protect everybody, but we should work with our regulators and make sure people are not exploited," he said.
At the press conference, Sen. Schumer said that he and fellow lawmakers are still deciding how to structure a foreclosure prevention program. But he said he envisions using community groups to help reach troubled borrowers and that the government-sponsored enterprises, banks and other lenders could also play a role.
"There are lots of nonprofits in these communities that can help people refinance their loan and avoid foreclosure," he said. "We are proposing that the federal government, in coordination with the [Federal Housing Administration], give some immediate emergency money to those nonprofits in the communities affected so that foreclosure will not increase dramatically in these communities, decreasing property values, decreasing revenue for local governments, and increasing the costs to the variety of lenders."
Sen. Schumer said the second step would be "strengthening and reforming FHA, which right now issues more than $100 billion in mortgage insurance annually for loans made by private lenders, and have them get involved as we refinance."
Two bills have been introduced in the House and one in the Senate that would let the FHA insure more expensive loans in high-cost areas and let first-time homebuyers purchase a house with a zero down payment.
Sen. Menendez said FHA reform would be a vital part of the solution since the program is virtually worthless in some states, including New Jersey, due to its low lending limits.
"Raising those FHA levels... is something that I think could be done in relatively short order," he said. Such reform would "cover a lot of those loans that are in potential default," he said, and the program has an existing process in place and consumer safeguards.
Sen. Schumer also reiterated calls for tighter regulation of mortgage brokers and a bill that would restrict lenders to making loans that are "suitable" for the borrower. The banking industry has opposed a suitability standard, arguing it would be subjective and open them up to increased legal liability.
When asked whether he would hold Wall Street firms and others responsible for abusive loans bought on the secondary market, Sen. Schumer said, "You can't do that ex post facto."
"What we do believe... is the so-called suitability rule which applies to stockbrokers [and] should apply to those who issue mortgages and those who refinance mortgages," he said.
"We would make the same suitability rule apply to mortgages, and that would apply up and down the line to the mortgage broker to the mortgage lender."
Last month Sen. Schumer said that he would pursue legislation, eclipsing Sen. Dodd, who has gone back and forth on whether a bill is needed.
The report from the Joint Economic Committee, which Sen. Schumer heads, offered detailed statistics on foreclosure rates nationwide. It said that subprime foreclosures are expected to increase this year and next as 1.8 million hybrid adjustable-rate mortgages reset in a "weakening housing market environment."
The report calls for uniform broker and loan officer licensing requirements, improved Home Mortgage Disclosure Act data, increased consumer education and borrower counseling, and rescue loans for borrowers with loans they cannot afford.
Sen. Schumer said he was not proposing a new regulatory agency to oversee mortgage brokers. "We would basically license brokers," he said. "We are not talking about a new federal regulator, but we want to see mortgage brokers close to banks."
The report also recommended that Congress consider prohibiting "certain types of harmful loan provisions and practices altogether, like prepayment penalties, stated income, or low documentation loans."
It suggested lawmakers consider requiring all subprime lenders to escrow property taxes and hazard insurance.
The committee's report called for better disclosures regarding alternative mortgage products including a table displaying a full payment schedule over the life of the loan, fees, and an explanation of the risks of features like negative amortization.