Statement of
Sheila C. Bair Chairman
Federal Deposit Insurance Corporation
On
A Review of Foreclosure Mitigation Efforts
before the
Financial Services Committee
U.S. House of Representatives
September 17, 2008
2128 Rayburn House Office Building
Chairman Frank, Ranking Member Bachus, and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) concerning strategies to avoid unnecessary foreclosures, including
implementation of the HOPE for Homeowners Act of 2008 and the FDIC's recent loan
modification efforts at IndyMac Federal Bank.
My testimony will provide a brief discussion of the problems created for communities
and individuals by unnecessary foreclosures and the importance of converting
distressed loans into long-term, sustainable loans through programs such as the HOPE
for Homeowners. In addition, I will provide an update of the FDIC's recently launched
loan modification program for customers of IndyMac Federal Bank.
The Housing Markets and the Impact of Unnecessary Foreclosures
In testimony before this committee in April, I discussed various proposals to address the
turmoil in the mortgage markets and stem unnecessary foreclosures. This turmoil was
caused by a complex set of interrelated causes, including weakened lending standards,
inadequate consumer protections, regulatory arbitrage and speculative activity. Steep
home price declines are an important dynamic that drives up foreclosure rates. Falling
home prices reduce homeowner equity, which then makes it more difficult to refinance
or sell a home, leading to lower sales and higher delinquencies.
Following a period of sustained growth in home sales, new home construction and
average home prices in the first half of this decade, U.S. housing markets are now
experiencing their most serious downturn of the past 60 years. Severe housing market
downturns have occurred in California, Nevada, Arizona, Florida and other boom
markets where rapid increases in home prices proved unsustainable. Dozens of cities
have now experienced average home price declines of more than 10 percent, and the
Case-Shiller index of 20 large U.S. cities has declined by almost 19 percent from its July
2006 peak.
Through the second quarter of 2008, U.S. residential construction activity has fallen for
10 consecutive quarters, subtracting an average of almost 1 percentage point from
annualized GDP growth over that period. Yet even as construction activity has declined,
Sheila C. Bair Chairman
Federal Deposit Insurance Corporation
On
A Review of Foreclosure Mitigation Efforts
before the
Financial Services Committee
U.S. House of Representatives
September 17, 2008
2128 Rayburn House Office Building
Chairman Frank, Ranking Member Bachus, and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) concerning strategies to avoid unnecessary foreclosures, including
implementation of the HOPE for Homeowners Act of 2008 and the FDIC's recent loan
modification efforts at IndyMac Federal Bank.
My testimony will provide a brief discussion of the problems created for communities
and individuals by unnecessary foreclosures and the importance of converting
distressed loans into long-term, sustainable loans through programs such as the HOPE
for Homeowners. In addition, I will provide an update of the FDIC's recently launched
loan modification program for customers of IndyMac Federal Bank.
The Housing Markets and the Impact of Unnecessary Foreclosures
In testimony before this committee in April, I discussed various proposals to address the
turmoil in the mortgage markets and stem unnecessary foreclosures. This turmoil was
caused by a complex set of interrelated causes, including weakened lending standards,
inadequate consumer protections, regulatory arbitrage and speculative activity. Steep
home price declines are an important dynamic that drives up foreclosure rates. Falling
home prices reduce homeowner equity, which then makes it more difficult to refinance
or sell a home, leading to lower sales and higher delinquencies.
Following a period of sustained growth in home sales, new home construction and
average home prices in the first half of this decade, U.S. housing markets are now
experiencing their most serious downturn of the past 60 years. Severe housing market
downturns have occurred in California, Nevada, Arizona, Florida and other boom
markets where rapid increases in home prices proved unsustainable. Dozens of cities
have now experienced average home price declines of more than 10 percent, and the
Case-Shiller index of 20 large U.S. cities has declined by almost 19 percent from its July
2006 peak.
Through the second quarter of 2008, U.S. residential construction activity has fallen for
10 consecutive quarters, subtracting an average of almost 1 percentage point from
annualized GDP growth over that period. Yet even as construction activity has declined,
inventories of unsold homes have steadily risen. The Census Bureau reports that the
inventory of unsold new homes in July stood at a level equal to 10.1 months of current
sales--r twice the level at the end of 2005.
Declining home prices and an excess supply of unsold homes are closely linked to the
historic levels of credit distress that have recently been recorded in nonprime mortgage
portfolios. As of June, seriously delinquent loans amounted to some 4.5 percent of all
U.S. mortgage loans outstanding and almost 27 percent of subprime adjustable-rate
mortgages.1 An estimated 1.5 million mortgages entered foreclosure during 2007,
followed by almost 1.2 million additional loans in the first half of 2008. Distressed sales
continue to place downward pressure on home prices in the most troubled markets. An
estimated 45 percent of all California home sales in July 2008 were foreclosure resales,
up from 7.6 percent one year ago.2
The rising trend of foreclosures imposes costs not only on borrowers and lenders, but
also on entire communities. Foreclosures may result in vacant homes that may invite
crime and create an appearance of market distress, diminishing the market value of
other nearby properties. In addition, the direct costs of foreclosure include legal fees,
brokers' fees, property management fees, and other holding costs that are avoided in
workout scenarios. These costs can total up to 40 percent or more of the market value
of the property.3
Minimizing foreclosures is important to the broader effort to stabilize global financial
markets and the U.S. economy. Foreclosure is often a very lengthy, costly and
destructive process that puts downward pressure on the price of nearby homes, as
noted above. While some level of home price decline is necessary to restore U.S.
housing markets to equilibrium, unnecessary foreclosures perpetuate the cycle of
financial distress and risk aversion, raising the possibility that home prices could
overcorrect on the downside.
Over the past year and a half, the FDIC has worked with mortgage lenders, the
securitization industry, servicers, consumer groups, other regulators and Congress to
identify and correct barriers to solving current market problems while establishing
controls to guard against their reappearance in the future.
The HOPE for Homeowners Act
As I stated in April, no single solution or "silver bullet" can address the adverse effects
of the deficiencies that have contributed to the current market turmoil. Rather, a number
of approaches emphasizing different solutions for the different segments of the market
are required. One of these approaches, for which Congress should receive significant
credit, is the HOPE for Homeowners Act. The HOPE for Homeowners Program
(Program), which the Act established, will make a positive difference for many
homeowners facing foreclosure.
inventory of unsold new homes in July stood at a level equal to 10.1 months of current
sales--r twice the level at the end of 2005.
Declining home prices and an excess supply of unsold homes are closely linked to the
historic levels of credit distress that have recently been recorded in nonprime mortgage
portfolios. As of June, seriously delinquent loans amounted to some 4.5 percent of all
U.S. mortgage loans outstanding and almost 27 percent of subprime adjustable-rate
mortgages.1 An estimated 1.5 million mortgages entered foreclosure during 2007,
followed by almost 1.2 million additional loans in the first half of 2008. Distressed sales
continue to place downward pressure on home prices in the most troubled markets. An
estimated 45 percent of all California home sales in July 2008 were foreclosure resales,
up from 7.6 percent one year ago.2
The rising trend of foreclosures imposes costs not only on borrowers and lenders, but
also on entire communities. Foreclosures may result in vacant homes that may invite
crime and create an appearance of market distress, diminishing the market value of
other nearby properties. In addition, the direct costs of foreclosure include legal fees,
brokers' fees, property management fees, and other holding costs that are avoided in
workout scenarios. These costs can total up to 40 percent or more of the market value
of the property.3
Minimizing foreclosures is important to the broader effort to stabilize global financial
markets and the U.S. economy. Foreclosure is often a very lengthy, costly and
destructive process that puts downward pressure on the price of nearby homes, as
noted above. While some level of home price decline is necessary to restore U.S.
housing markets to equilibrium, unnecessary foreclosures perpetuate the cycle of
financial distress and risk aversion, raising the possibility that home prices could
overcorrect on the downside.
Over the past year and a half, the FDIC has worked with mortgage lenders, the
securitization industry, servicers, consumer groups, other regulators and Congress to
identify and correct barriers to solving current market problems while establishing
controls to guard against their reappearance in the future.
The HOPE for Homeowners Act
As I stated in April, no single solution or "silver bullet" can address the adverse effects
of the deficiencies that have contributed to the current market turmoil. Rather, a number
of approaches emphasizing different solutions for the different segments of the market
are required. One of these approaches, for which Congress should receive significant
credit, is the HOPE for Homeowners Act. The HOPE for Homeowners Program
(Program), which the Act established, will make a positive difference for many
homeowners facing foreclosure.