On June 23, the House Financial Services Subcommittees on Housing and Community Opportunity and Financial Institutions and Consumer Credit held a joint hearing to examine responses to abusive lending practices in the subprime mortgage market. In particular, the subcommittees focused on whether Congress should legislate national standards for the subprime market, which provides loans to individuals with less-than-perfect credit. Noting the increase in subprime loans from $34 billion in 1994 to $213 billion in 2002, Financial Institutions and Consumer Credit Chair Spencer Bachus (R-AL) said, “This increase in subprime lending has given many Americans the opportunity to realize their dreams of homeownership, but has also created opportunities for unscrupulous lenders to take advantage of financially unsophisticated consumers.”
Calling attention to the fact that minorities are often targeted by predatory lenders, Rep. Ruben Hinojosa (D-TX) pointed to the gap in homeownership. “While the national homeownership rate is above 68 percent—and nearly 76 percent for white, non-Hispanic families—only 50 percent of minority families own their own homes,” he said.
Witnesses offered their comments on proposals aimed at ensuring liquidity of the subprime market. In particular, they focused on proposals that seek to assign liability to loan purchasers in an effort to dissuade predatory lenders; to date, 40 states and localities have enacted such proposals. Witnesses expressed mixed views about whether assigning liability to loan purchasers actually prevents predatory lending or has the unintended consequence of undermining the subprime market.
Micah Green, president of The Bond Market Association, explained the process of securitizing subprime loans, which in turn creates a liquid market. “Mortgage securitization involves the transformation of mortgage loans into mortgage-backed securities that are issued and traded in the capital markets. The principal and interest payments on mortgages are pooled and passed through as payments to bondholders. The financial institution that originated the loan can put its proceeds from selling the loan back to work in the form of a new mortgage,” he said, adding, “Securitization and the secondary market efficiently links the mortgage and capital markets, providing more credit at a lower price than would otherwise be available. As a result, more subprime borrowers are able to obtain mortgage financing and purchase homes than would otherwise be the case.”
Mr. Green advised against enacting provisions to assign liability to loan purchasers. “Assignee liability provisions have caused some loan purchasers to curtail and—in some instances—stop securitizing loans made in certain jurisdictions. The situation threatens to drive up the cost and limit the availability of credit for subprime borrowers.”
Michael Calhoun, general counsel to the Center for Responsible Lending disagreed: “There is no evidence that changes in mortgage laws at the state level have had a deleterious effect on the subprime market…Both subprime lending and the securitization of subprime loans increased by 50 percent in 2003 over 2002.” Mr. Calhoun pointed to North Carolina, the first state to pass an anti-predatory law in 1999, saying that “North Carolina subprime home loans have continued to be widely available and sold on the secondary market.” However, he did urge Congress to leave regulation of the subprime market to the states.
Mr. Calhoun also offered statistics from a North Carolina-based nonprofit community development lender, Self-Help, which provides loans in the subprime market: “Through our commercial loans, we have created or maintained approximately 20,000 jobs, allowed child care providers to create space for 20,000 children, and enabled more than 9,000 students to attend public charter schools. Because we seek to serve those who have traditionally been denied access to credit, Self-Help’s loans go disproportionately to women, African Americans, Latinos, and rural borrowers.” Additionally, the program has “financed over $3.1 billion of loans to 36,500 families across the country through thirty lenders. Forty-one percent of the program’s home loans had been made to minority families, 39% were made to female-headed households, and 21% of the loans were made to rural families.”
