There were some pretty scary statistics swirling around Capitol Hill on Thursday
as the Joint Economic Committee (JEC) released a report attaching dollar figures
to the impact of the subprime mortgage fallout.
The report, entitled "The Subprime Lending Crisis: The Economic Impact
on Wealth, Property Values and Tax Revenues, and How We Got There" estimates
that two million homes will be foreclosed over the next two
years as their owners fail to make payments on their subprime mortgages and
that families, state and local governments will lose billions of dollars in
equity, property values, and lost property tax revenue.
Committee Chairman Chuck Schumer (D-NY), in releasing the report said "The
current tidal wave of foreclosures will soon turn into a tsunami
of losses and debt for families and communities. The administration must act
quickly to save financially-strapped families from drowning in this flood of
subprime foreclosures."
The report speculated that the catastrophe is likely to feed on itself as prices
continue to spiral downward. Using data from the various states, the report
makes several estimates for the remainder of this year and for 2008:
- There will, as stated above, be 2 million foreclosures as the riskiest of
the subprime adjustable rate mortgages reset to higher interest rates.
- Approximately $71 billion in housing related wealth will be destroyed by
those 2 million foreclosures and another $32 billion will be lost because
of the spillover effect of foreclosures in neighborhoods and communities.
The report quoted a study on housing values in Philadelphia which found that
an abandoned property lowered the value of homes located within 150 feet by
an average of 10 percent and those within 450 feet declined in value by an
average of 5 percent.
- Collectively the states stand to lose close to $1 billion in revenues as
property tax assessments drop in value.
- Foreclosures aside, there will be a 10 percent decline in housing prices
which will lead to a $2.3 trillion economic loss.
The ten states which are expected to suffer the greatest number
of foreclosures are California, Florida, Ohio, New York, Michigan, Texas, Illinois,
Arizona, and Pennsylvania but there are other states which are not far behind
in the rankings.
Committee member Sherrod Brown (D-OH) said "Since January, Ohio foreclosure
filings were almost double what they were last year - 100,000 through
September. This fall will probably be worse... We need to act and act now.
The problems Ohio is facing are spreading across the country - from New
York to Florida to California. We should apply the same attention to Main Street's
problems that we do to Wall Street's."
Even this early in the slide, the report said, housing prices are down 3.2
percent from their peak in Quarter Two of 2006. Inventories of unsold homes,
both new and existing, are growing and with housing prices no longer rising
subprime borrowers are unable to refinance.
The report argues strongly for foreclosure prevention and
makes the following suggestions:
- Provide more resources to nonprofits that specialize in foreclosure prevention
counseling. They have been highly effective in helping borrowers negotiate
safe and affordable loan modifications and refinancings but "they're inundated."
- Temporarily increase Freddie
Mac and Fannie Mae portfolio caps so the two GSEs can provide funding
to lenders to refinance struggling borrowers.
- Pass legislation currently before Congress to modernize
the Federal Housing Administration, increasing its capacity and flexibility
to insure subprime mortgages that can be refinanced.
- Amend the new bankruptcy code which prevents the courts from providing relief
on mortgage loans. The report recommends that the code be amended to either
temporarily or permanently exclude primary home loans from the remedies that
are available on other less important debts.
- Encourage more loan modifications and refinancings, perhaps even requiring
specific loss mitigation efforts prior to any foreclosure filing.
- Waive the requirement that debt forgiven by lenders in the course of foreclosure
or loan restructurings be reported as taxable income to the borrower.
- And of course, the report joined the chorus decrying predatory lending
practices and calling for reform including elimination of prepayment
penalties, consumer education and enhanced disclosure of loan terms and mechanisms.
Other suggested reforms include increased regulation of mortgage brokers and
originators by establishing a fiduciary duty between brokers and their customers
and requiring lenders to escrow tax and insurance payments so that borrowers
are clearly informed about the real costs of owning a home.