Washington, D.C., October 5, 2007 – U.S. Senator Arlen Specter (R-Pa) spoke on the Senate Floor today regarding the mortgage crisis. Yesterday, Specter introduced the Home Owners’ Mortgage and Equity Savings (HOMES) Act which takes aim at the housing crisis by providing relief to homeowners who are in bankruptcy because they can no longer afford to pay their mortgages. Recognizing that many of those facing foreclosure will seek relief in bankruptcy, the legislation seeks to provide relief to low and moderate income homeowners who are caught in the current crisis.
Below is a copy of Senator Specter’s floor statement:
Mr. President, while I have the floor, I want to say a few words about S. 2133, the Homeowners’ Mortgage and Equity Savings Act, which I introduced yesterday. This legislation addresses the very severe problem of the many homeowners who are now in default on their mortgage payments. This problem has arisen largely because of the many homeowners with adjustable rate mortgages who face increased interest rates and unexpected increases in their mortgage payments.
This is a complex matter, but in many cases, I think there is a real question as to whether lenders made adequate representations to borrowers. Regardless of whether the representations were adequate or not, many borrowers are now confronted with interest rates they had not anticipated and mortgage payments that they can’t afford. In the past year, the percentage of homeowners with adjustable rate mortgages who are seriously delinquent–either 90 days past due or in foreclosure–has nearly doubled. In my home State of Pennsylvania, the number of those who are seriously delinquent has gone up by some 40 percent. The problem is particularly severe among borrowers who had weak credit or low incomes and obtained mortgages at subprime rates. The Center for Responsible Lending projects that some 2.2 million Americans with subprime loans originated between 1998 and 2006 have lost or will lose their homes to foreclosure.
Chapter 13 of the Bankruptcy Code currently give debtors breathing space by imposing a stay on collection of debts, including mortgages, and prevents lenders from foreclosing for a period of time. During that period debtors are given the opportunity to get caught up on their mortgage payments. However, the current Code does not permit any modification of mortgages.
Now with many homeowners facing possible bankruptcy due to their mortgages, some relief is necessary.
The legislation which I have introduced will provide a number of remedies. With respect to adjustable rate mortgages, it will allow bankruptcy judges to prevent or delay interest rate increases and to roll back interest rates that have already reset. This will enable the homeowner to continue to pay down the principal amount that they took on when they bought their house, but will give them relief from increases in their payments due to resetting interest rates.
The bill also will allow the bankruptcy judges to waive early prepayment or prepayment penalties. Many of the borrowers face the situation where they could refinance and get less risky mortgages with manageable payments, but the penalties in their current mortgage contracts are so stiff that they cannot refinance.
Now, the bill does not give bankruptcy judges the latitude to reduce the principal on a mortgage. Senator Durbin introduced a bill yesterday that goes beyond the bill I have introduced; it allows bankruptcy judges to reduce or “cram down” the principal on a mortgage in accordance with what the bankruptcy judge determines is the value of the property. My bill would only allow the reduction of principal if the lender and the homeowner agree.
I think there is a very significant risk in allowing cram down. If we allow cram down, lenders will factor the risk of having the principal value of their loan reduced into the interest they charge to future homebuyers. In other words, people who borrow in the future are going to pay more in interest if the lenders don’t have the certainty that at least the principal value of their loan will be recognized and not reduced. Under current circumstances, I think it is fair, on these adjustable rate mortgages–which really are the problem if delinquency rates are any indication–to allow judges to modify interest rate increases which in many cases have been significant and in some cases the mortgage terms may have been fraudulent or just basically unfair. But when it comes to reducing the principal, then I think we go too far.
Many of the consumer groups would prefer to see the bankruptcy judge have the latitude to reduce the principal, and that might help those who are in default now, but that will make it more difficult for those who borrow in the future. That is because — to repeat — lenders will have to charge more interest to take into account this additional risk.
I have discussed the differences in our bills with Senator Durbin. We tried to come to terms and find an accommodation so that we could support the same legislation. However, it appears we do support legislation directed at the same problem. The legislation I introduced is aimed at helping those caught up in the current crisis without making it harder on those Americans who home to own a home in the future.
The Judiciary Committee has jurisdiction on bankruptcy. The Committee has jurisdiction on the Durbin bill and on my bill, S. 2133. My position is not set in concrete. However, I am opposed to what Senator Durbin seeks to accomplish and I am disinclined at this state based on the investigation which my staff and I have made to support his bill.
It is my hope that the Judiciary Committee will have hearings on this important issue and bring in mortgage bankers, consumer groups and investors to give us a better idea as to the intensity of the problem and what really ought to be done. Perhaps at that point we can meld our ideas into a common solution to the problem.
