Financial Services Hearing on Preventing Mortgage Foreclosures
Watch the hearing live via committee webcast or on C Span 3.
Chairman Barney Frank gives opening remarks:
| Chairman Frank: "And there is one last point I would make, and that's the justification for all this energy on the part of high officials of this administration, from HUD and Treasury, members of Congress, and one of the arguments is 'well, why should we help these people who made bad decisions?' Leave aside compassion, the fact that some people were misled, leave aside all those reasons, there is a very good economic reason. I think in economic terms, the externalities of this crisis are severe..." |
Full transcript:
This hearing is called as part of a cooperative effort between the Congressional and executive branches, on dealing with the subprime crisis. We have made it clear that the subprime crisis has required us to take a two-fold approach. On Tuesday this committee will be marking up legislation that will, we hope, if enacted, diminish the likelihood of a crisis such as this recurring. But we are constrained when dealing with existing mortgages and existing contracts from legislating in most cases. We do not want to abrogate existing contracts by law. We are prepared to encourage negotiations. It is a two-track process. I very much appreciate the cooperation we've had for the administration, particularly the bank regulators, but particularly Commissioner Montgomery going forward because this committee already responded, in substantial part, to the administration request in the FHA so we've got a collaborative effort going on. Some differences, but essentially a collaborative effort on the FHA. And the bank regulators, the FDIC, the OCC, the OTS, the credit union administration, and the fed had been cooperative in working with us and drafting legislation. Again, we won't have 100% agreement but we are within a generally agreed upon a framework. That is one part of it, the other part is the ongoing effort we've had to try to persuade people to do modifications of existing contracts, although there has also been some legislative cooperation. The president has supported and the house has already passed legislation to make sure there is no tax liability for mortgagors who given some kind of flexibility.And one other one that I would mention that I think has been a good example, and a necessary example of cooperation here, members of this committee wrote to the Securities and Exchange Commission earlier this year and asked them to intervene with the Financial Accounting Standards Board. To encourage them to make it clear to the servicers, that if the services of mortgages in the secondary market could demonstrate that it was in the interest in the holders of the paper to do a workout, namely that it would be better for them from the economic standpoint not to foreclose, but to do some reworking so that there would be a steady income stream, they could do that. We got the permission of the Financial Accounting Standards Board which is responsive. The reason I sight of these things is this: a lot of pieces and put in place. And the bank regulators have also made it clear to their credit that forbearance will be allowed. We have done a great deal to encourage the holders of the mortgages to show flexibility. We provide some tax help. We have a number of a very useful organizations -- neighborhood organizations, citizens groups -- who are trying to work with the borrowers. What seemed to some of us some time ago, you know, a few weeks ago, is that while the pieces were out there, they were not mashing. While we had put a number of individual policies in place but that we needed to overcome the inertia of everybody and their separate sphere. A lot of efforts like that have been going on, on is this HOPE NOW that the administration has proposed and we thought it would be very useful to get a report on that and we have. And we have two panels. First, representatives of the administration, secondly neighborhood and citizens groups and also some of the businesses. One of the things we do want to make clear, we are not talking about legislation that compels anybody to do anything. We are not talking about any kind of a bailout in the sense of public money. No public money is gone to go either to mortgagors or mortgagees. No public money is going to go to payoff people, in terms of the loan. Public money is [being used] to make sure the advocates are available, that we can reach out.
Secondly I want to deal with those who claim that there is some moral hazard involved here. Namely that we are going to be so effective in alleviating problems that a number of people will say "boy, that was fun, lets do it again." As anybody involved in this knows, that is not remotely true. We are mitigating pain, we hope, we are diminishing terrible consequences. Nothing we are doing, if we are 100% successful, is going to make anybody on either side of the transaction want to go through it again. We are talking about losses of lenders that they deserve to have because they made, in some cases, bad decisions. We are talking about pain on the borrowers that we cannot avoid, we can diminish. So I really want to make clear we're not talking about moral hazard.
And there is one last point I would make, and that's the justification for all this energy on the part of high officials of this administration, from HUD and Treasury, members of Congress, and one of the arguments is "well, why should we help these people who made bad decisions?" Leave aside compassion, the fact that some people were misled, leave aside all those reasons, there is a very good economic reason. I think in economic terms, the externalities of this crisis are severe. That is the negative economic effects on people, who by nobody's definition did anything remotely unwise or incorrect are severe. In particular, we have a large number of people in this country who are making, what? $30,000 to $50,000 or $60,000 a year. They took out mortgages, their working hard to pay their mortgages, and they are among the victims of a widespread foreclosure pattern. Because if you own a home, and you're paying your mortgage and the house across the street is foreclosed upon and three houses down and others, you have a deterioration of the neighborhood. You get vacant housing, which becomes a source of difficulty; you get a deterioration of property values. So there is a public policy reason to both deal with this crisis now and make it less likely in the future.