Although Congress has taken significant steps to stabilize financial markets, it has yet to address the fundamental cause of the nation's financial crisis—the skyrocketing number of mortgage foreclosures. Immediate action is needed to help struggling homeowners keep their homes, stabilize housing markets, and assure the long-term viability of our nation's mortgage-finance system.
Higher mortgage costs, declining home values, and rising unemployment are forcing thousands of homeowners into foreclosure each day. Some 2.2 million subprime mortgages are expected to go into foreclosure between late 2008 and the end of 2009. This is in addition to the 1.2 million foreclosures that have already occurred, as well as an anticipated second wave of foreclosures involving millions of prime and Alternative-A rate mortgages made after 2005 with payments and interest rates that begin to adjust in 2009.
The foreclosure crisis has not only victimized many younger and first-time homebuyers, but many older home owners as well. A recent AARP Public Policy Institute study found that, for the period from July to December, 2007, 684,000 homeowners age 50 or older were either delinquent in their mortgage payments or in foreclosure, representing 28 percent of all delinquencies and foreclosures of primary mortgages during that period. The study found a high correlation, roughly twice the national rate, between older homeowners with little or no equity in a home and likelihood of foreclosure. In 2006, some 2.3 million households headed by persons age 50 or older had less than 20 percent equity in their homes. Since then, housing prices have fallen a further 20 percent and are expected to fall at least 10 percent more. Potentially millions of older homeowners will face possible default or foreclosure in the coming year.
Undoubtedly, each foreclosure is a tragedy for the individuals and families who lose their homes. Widespread foreclosures are also undermining the economic security of entire communities, as neighbors' homes lose equity as homes in the neighborhood are abandoned and left unkempt.
The impact of foreclosure or loss of home equity is often more significant for older households, which have less time and fewer resources to recover from the financial loss. With almost twice the number of homeowners carrying significant mortgage debt into retirement than two decades ago, the potential for foreclosure and loss of retirement security is increasing dramatically.
Among those most affected by foreclosures are the millions of low-income households that face reductions or loss of vital health, transportation, nutrition, and other services as local governments adjust to declining home values and loss of property tax revenues.
Many low-income home owners who have low incomes are turning to rental housing as they work to rebuild their credit. Adding tens of thousands of former home owners to the rental markets also places serious downward pressure on the nation's already inadequate supply of affordable rental housing. A 2008 Harvard Joint Center on Housing Studies report concluded that some 9 million of the lowest-income households must compete for just 3 million affordable and available rental units. Rising foreclosures can only intensify the long-standing rental housing crisis facing low-income households of all ages.
Legislative and Regulatory Action
AARP urges Congress to take the following actions to help homeowners avoid foreclosure, expand affordable-housing options, and begin the process of reforming the mortgage finance system.
Mortgage modification in bankruptcy: Enact the bankruptcy code changes previously advanced through S. 2136/H.R. 3609, which was proposed in the110th Congress by Sen. Richard Durbin (D-Ill.) and Reps. John Conyers (D-Mich.), Brad Miller (D-N.C.), and Steve Chabot (R-Ohio). The legislation would allow bankruptcy judges to restructure mortgage loans for primary residences in Chapter 13 proceedings on the same basis as currently allowed for vacation homes, yachts, and investment properties.
Foreclosure deferral: Enact a one-year foreclosure deferral period, similar to H.R. 6076, which was proposed in the 110th Congress by Rep. Doris Matsui (D-Calif.). The bill would provide distressed homeowners who continue to make adjusted payments on their mortgages adequate time to modify their existing loans or refinance into new loans.
Foreclosure prevention and servicing reform: Enact an expanded version of H.R. 5679, which was proposed in the 110th Congress by Rep. Maxine Waters (D-Calif.). The bill would require lenders and loan servicers for any federally related mortgage, as well as any financial entity receiving federal emergency stabilization assistance, to undertake loss mitigation and loan modification prior to initiating a foreclosure proceeding. Congress should expand this legislation to establish appropriate compensation and provide liability protection for servicers that undertake meaningful loan modifications.
Accountability for lending abuses: Enact assignee liability and due diligence standards to correct a fundamental flaw in the mortgage securitization process—the lack of continuing accountability for improper marketing, lending, and underwriting of mortgage loans that are securitized and sold to investors.
Expansion of reverse equity mortgages: Enact changes to the Federal Housing Administration's Home Equity Conversion Mortgage (HECM) program to make HECM loans more widely available as foreclosure avoidance options by eliminating the cap on the number of HECM loans that can be insured by raising the loan value limit to $625,500 to permit loans to older home owners with homes of higher value.
Affordable housing assistance: Provide sufficient funding—to fund for renewal of expiring contracts for Housing and Urban Development Section 8 and Section 202 projects, to undertake substantial rehabilitation of older Section 8, Section 202, and Public Housing facilities, to maintain funding for current numbers of Section 8 vouchers, and to increase funding for housing counseling, and in particular, funding of mandatory reverse-equity-mortgage counseling.
The Cost of Doing Nothing
Although the financial crisis has spread well beyond the housing market, its root cause was the unsustainable mortgage lending that has led to an unprecedented tide of foreclosures. Failure to stop these foreclosures will undermine efforts to revive our economy and could turn our current unstable economy into a depression. Unless we create fair and effective "rules of the road" for mortgage lending moving forward, we risk future economic problems fueled by another mortgage meltdown. It is critical that Congress act now to help our economy recover and prevent future housing crises.