Statement of
Michael H. Krimminger, Special Advisor
For
Policy, Office of the Chairman,
Federal Deposit Insurance Corporation
On
Foreclosure Prevention and Intervention:
The Importance of Loss Mitigation Strategies
for
Keeping Families in Their Homes;before the
Subcommittee on Housing
and
Community Opportunity of the
Financial Services Committee;
U.S. House Of Representatives;
Los Angeles, California
November 30, 2007
Chairman Waters and members of the Committee, thank you for the opportunity to
testify on behalf of the Federal Deposit Insurance Corporation regarding foreclosure
prevention. This is a subject of tremendous concern to FDIC Chairman Sheila Bair. My
testimony will discuss the impact of recent problems in the subprime mortgage market
on homeowners and the economy, as well as steps that can be taken to prevent
unnecessary foreclosures.
The U.S. housing boom of the first half of this decade ended abruptly in 2006. Housing
starts, which peaked at over 2 million units in 2005, have plummeted to just over half of
that level, with no recovery yet in sight. Home prices, which were growing at double-digit
rates nationally in 2004 and 2005, are now falling in many metropolitan areas and for
the nation as a whole. With declining home prices, there are large increases in problem
mortgages, particularly in subprime and Alt-A portfolios.1 The deterioration in credit
performance began in the industrial Midwest, where economic conditions have been the
weakest, but has now spread to the former boom markets of Florida, California and
other western states.
The current problem in subprime mortgage lending arose with the rapid growth of 2- and
3-year adjustable rate subprime hybrid loans after 2003. Between year-end 2003 and
mid-2007, some 5 million of these loans were originated. Of these, slightly over 2.5
million loans with outstanding balances of $526 billion remain outstanding.
The typical structure of these loans is to provide for a starter rate (typically between 7
and 9 percent), followed in 24 or 36 months by a series of steep increases in the
interest rate (often totaling 5 percent or more) and a commensurate rise in the monthly
payment. Almost three quarters of subprime mortgages securitized in 2004 and 2005
were structured in this manner, as were over half the subprime loans made in 2006.
Michael H. Krimminger, Special Advisor
For
Policy, Office of the Chairman,
Federal Deposit Insurance Corporation
On
Foreclosure Prevention and Intervention:
The Importance of Loss Mitigation Strategies
for
Keeping Families in Their Homes;before the
Subcommittee on Housing
and
Community Opportunity of the
Financial Services Committee;
U.S. House Of Representatives;
Los Angeles, California
November 30, 2007
Chairman Waters and members of the Committee, thank you for the opportunity to
testify on behalf of the Federal Deposit Insurance Corporation regarding foreclosure
prevention. This is a subject of tremendous concern to FDIC Chairman Sheila Bair. My
testimony will discuss the impact of recent problems in the subprime mortgage market
on homeowners and the economy, as well as steps that can be taken to prevent
unnecessary foreclosures.
The U.S. housing boom of the first half of this decade ended abruptly in 2006. Housing
starts, which peaked at over 2 million units in 2005, have plummeted to just over half of
that level, with no recovery yet in sight. Home prices, which were growing at double-digit
rates nationally in 2004 and 2005, are now falling in many metropolitan areas and for
the nation as a whole. With declining home prices, there are large increases in problem
mortgages, particularly in subprime and Alt-A portfolios.1 The deterioration in credit
performance began in the industrial Midwest, where economic conditions have been the
weakest, but has now spread to the former boom markets of Florida, California and
other western states.
The current problem in subprime mortgage lending arose with the rapid growth of 2- and
3-year adjustable rate subprime hybrid loans after 2003. Between year-end 2003 and
mid-2007, some 5 million of these loans were originated. Of these, slightly over 2.5
million loans with outstanding balances of $526 billion remain outstanding.
The typical structure of these loans is to provide for a starter rate (typically between 7
and 9 percent), followed in 24 or 36 months by a series of steep increases in the
interest rate (often totaling 5 percent or more) and a commensurate rise in the monthly
payment. Almost three quarters of subprime mortgages securitized in 2004 and 2005
were structured in this manner, as were over half the subprime loans made in 2006.
Most of these loans also imposed a prepayment penalty if the loan was repaid while the
starter rate was still in effect.
These resets of these subprime loans will have a tangible impact on the overall
economy. Subprime resets in the U.S. between September 2007 and December 2008
are predicted to total more than $330 billion. California's share is slightly over $102
billion, or 31 percent -- with more than 288,000 first-lien, nonprime loans expected to
reset during this period.2
The Effect on California
Exposure to subprime mortgages is particularly significant in California, Combined with
large numbers of so-called Alt-A mortgages, the significant numbers of subprime hybrid
ARM loans with approaching resets in California have introduced additional uncertainty
for California homeowners, lenders, and the public. If the industry fails to take action to
respond to the potential defaults and foreclosures that are likely to occur when
borrowers cannot make the reset payments, the economic consequences for California
will be significant.
California's subprime mortgage problems already have spread to the broader housing
sector and related industries, as is evidenced in declining employment levels.
Construction employment throughout the state as of the third-quarter of 2007 was down
16 percent from a year-earlier -- and the non-depository finance and services sector
also experienced a decline of 3 percent from a year ago.
The slumping housing market led to thousands of job losses throughout California. In
October alone, the state lost over 15,800 jobs. Of the 11 major industries, construction
job losses were the greatest at 4,200. The job losses are accelerating, leading the
Anderson Center for Economic Research at Chapman University in Orange, California,
to expect that the worst of the fallout lies ahead. Job losses have intensified and will
probably continue well into 2008. The weakness in construction and real estate has
spread to retail businesses as well, with losses of 1,700 workers in October and 900 of
those layoffs occurring at building-material and garden-equipment stores.3
Problems in subprime lending affect California's fiscal condition as well. State sources
predict that curtailed tax revenues associated with the housing market decline will
contribute to an expected budget shortfall of nearly $10 billion over the next two years.
Tax revenue shortfalls are largely attributable to the laid-off construction workers and
mortgage lenders who are no longer paying income taxes. Additionally, slumping home
sales are associated with declines in tax-generating purchases of items such as dryers
and refrigerators. Similarly, declines in home equity loans are associated with dropoffs
in big ticket purchases such as cars.4
Finally, foreclosure rates in California have been rising as many borrowers are unable to
afford their higher mortgage payments following the reset of their interest rate. Over
72,000 Notices of Default were filed on California residences during the third quarter of
starter rate was still in effect.
These resets of these subprime loans will have a tangible impact on the overall
economy. Subprime resets in the U.S. between September 2007 and December 2008
are predicted to total more than $330 billion. California's share is slightly over $102
billion, or 31 percent -- with more than 288,000 first-lien, nonprime loans expected to
reset during this period.2
The Effect on California
Exposure to subprime mortgages is particularly significant in California, Combined with
large numbers of so-called Alt-A mortgages, the significant numbers of subprime hybrid
ARM loans with approaching resets in California have introduced additional uncertainty
for California homeowners, lenders, and the public. If the industry fails to take action to
respond to the potential defaults and foreclosures that are likely to occur when
borrowers cannot make the reset payments, the economic consequences for California
will be significant.
California's subprime mortgage problems already have spread to the broader housing
sector and related industries, as is evidenced in declining employment levels.
Construction employment throughout the state as of the third-quarter of 2007 was down
16 percent from a year-earlier -- and the non-depository finance and services sector
also experienced a decline of 3 percent from a year ago.
The slumping housing market led to thousands of job losses throughout California. In
October alone, the state lost over 15,800 jobs. Of the 11 major industries, construction
job losses were the greatest at 4,200. The job losses are accelerating, leading the
Anderson Center for Economic Research at Chapman University in Orange, California,
to expect that the worst of the fallout lies ahead. Job losses have intensified and will
probably continue well into 2008. The weakness in construction and real estate has
spread to retail businesses as well, with losses of 1,700 workers in October and 900 of
those layoffs occurring at building-material and garden-equipment stores.3
Problems in subprime lending affect California's fiscal condition as well. State sources
predict that curtailed tax revenues associated with the housing market decline will
contribute to an expected budget shortfall of nearly $10 billion over the next two years.
Tax revenue shortfalls are largely attributable to the laid-off construction workers and
mortgage lenders who are no longer paying income taxes. Additionally, slumping home
sales are associated with declines in tax-generating purchases of items such as dryers
and refrigerators. Similarly, declines in home equity loans are associated with dropoffs
in big ticket purchases such as cars.4
Finally, foreclosure rates in California have been rising as many borrowers are unable to
afford their higher mortgage payments following the reset of their interest rate. Over
72,000 Notices of Default were filed on California residences during the third quarter of