[Congressional Record (Bound Edition), Volume 153 (2007), Part 24]
[Senate]
[Pages 33278-33279]
[From the U.S. Government Publishing Office, www.gpo.gov]




                            MORTGAGE CRISIS

  Mr. MENENDEZ. Mr. President, today I rise on behalf of more than 
130,000 New Jersey homeowners who have a subprime mortgage. I rise on 
behalf of the 7 million American homeowners with a subprime mortgage, 
and I rise on behalf of the more than 2 million Americans who are or 
may be facing foreclosure in the coming year. This is a national crisis 
and certainly the time to respond is now.
  Families across this country are having their homes ripped from their 
grasp, and there is no end in sight. Some have been saying that the 
storm is over and others have been sitting silently as the black clouds 
roll by, but the reality is this storm is going to get worse. More 
families are going to be facing foreclosure, more homes are going to be 
lost, and more damage is going to be done to our economy unless we act. 
There is no point in letting an invisible hand guide this destruction. 
If we have any sense of human compassion, we will help these families.
  Many families are in trouble because they got a deal they didn't 
understand, a loan they couldn't afford, and now their adjustable rate 
mortgages are resetting. But these families are only the beginning. The 
storm is only going to get worse. Many of the adjustable rate mortgages 
that were made in 2006 will explode with higher interest rates sometime 
in 2008. Another type of adjustable rate mortgages, known as payment 
option, is set to explode after that.
  Already, foreclosure rates have doubled and tripled in many areas. 
Hundreds of thousands of families are already losing their homes. Over 
the next year, absent strong action, the wave will build into a 
mortgage tsunami.
  Not only will families lose their homes, often the largest asset they 
have, but the ripple effects will devastate neighborhoods and the 
broader economy.
  If we do not act now to help those families, the effects will be 
catastrophic. We can see the storm coming. We know the damage it will 
cause. So we had better reinforce our levies. In Congress, we should be 
working to help hundreds of thousands of homeowners modify their 
mortgages to avoid foreclosure. We should be working to pass a bill 
that will help homeowners modify their loan, for example, in a 
bankruptcy proceeding. We must pass, over Republican objections that we 
have had, legislation to modernize the Federal Housing Administration.
  But this is the beginning. Banks and lenders, without the prodding of 
Congress, should be reaching out to help those troubled homeowners 
renegotiate their loan terms. This is not a suggestion, this is an 
expectation. President Bush is announcing today his plan to address 
this crisis. He has reached an agreement with major mortgage firms to 
freeze interest rates for 5 years for financially troubled homeowners.
  While I applaud the President for taking a step in the right 
direction, the plan simply does not seem to go far enough. It seems to 
operate under the assumption we only have to do what is minimally 
necessary. Depending on the details of this plan, on how they determine 
who is eligible, many homeowners may be left out in the cold. A 
strictly narrow approach will keep relief out of reach for many who 
need it.
  I am concerned about the family next in line when they close the door 
on eligibility. I am concerned about the millions of Americans who 
cannot pay their bills, and I am concerned President Bush's plan will 
only help a fraction of the families at risk.
  Hard-working families are at a crisis in America, and in a time of 
crisis they expect strong and bold leadership to help them through. We 
need to provide that leadership. Congress, the administration, and the 
industry all have key roles to play to help those families.
  But what about the families who have yet to sign that stack of papers 
to get their future mortgage loan? What about when my son or daughter 
or yours buys their first home? What about the homeowner who needs to 
refinance out of an unsustainable mortgage? In order to protect those 
families, we need to make sure we stop predatory lending before it 
starts.
  As a member of the Senate Banking Committee, I have repeatedly said 
that in order to prevent the mortgage crisis from happening again, we 
need to find the root of the problem and fix it. That requires all 
parties--all parties--to step to the plate and admit where they went 
wrong.
  A ``not me'' attitude will simply not work. Everybody who was 
responsible must be held accountable. I am proud to be working with 
Chairman Dodd on a bill that will hold all parties accountable.
  Now, when I considered what I hoped to see in a final bill, I looked 
at all of those responsible parties, from the regulators, to the 
lenders, to the brokers and beyond. But one particular piece concerned 
me; that is, the secondary market. In order to understand what I am 
talking about, I think it might help to step back for a moment and walk 
through the life of a subprime loan.
  A consumer decides to seek a loan to purchase a home or refinance an 
existing mortgage or, more likely, a broker or lender approaches a 
consumer about a new loan. As soon as the loan settles, the broker gets 
a commission from both the consumer and the lender.
  Now, here is where the secondary market comes in. Within 90 days 
after that consumer signs those settlement papers, the lender sells the 
loan to that secondary market, essentially selling the loan to Wall 
Street. That lender then washes its hands of the loan, but keeps the 
fees, regardless of what happens later on.
  Once in the secondary market, the loan is bundled with thousands of 
other loans into what we call a mortgage-backed security. This bundle 
of loans then passes through one or more corporate entities on its way 
to the trust where it will reside.
  The trust is usually a private company with an investing firm. The 
trust then slices those bundles of loans into different categories 
called tranches, and investors purchase security interests in the 
tranches.
  The trust is considered the owner of the loan, and the investors are 
represented by a trustee who acts on behalf of the trust. A servicer, 
possibly the original lender, possibly another company, services the 
loan on behalf of the trust, meaning they collect and remit payments, 
monitor the accounts, and provide monthly reports to the trustees.
  Because the servicer is the only one in direct contact with the 
homeowner, most homeowners think the servicer is actually the owner of 
their loan. If the home goes into foreclosure, it is the trust that 
forecloses. But for the homeowner, they may not know who is foreclosing 
on them.
  Even if a homeowner had a predatory loan and has a good argument 
against foreclosure, if that homeowner cannot identify the owner of the 
loan and hold them liable, they cannot save their home. That is the 
life of a loan. It is no wonder it is a process few understand. 
Essentially, the loan is a hot potato. It gets tossed from the broker 
to the lender to the trustee. Along the way each one wipes their hands 
of responsibility after they send the loan on down the chain. When a 
bad deal is made, each one points the finger at the previous owner.
  Well, it is time to stop passing the buck. For me, that buck must 
stop with Wall Street. We cannot allow Wall Street to purchase loans 
without scrutinizing the details of that loan. If the trustee had to 
make sure each loan was a good loan, that it meets specific standards 
and practices, and the lender had to make sure it was a good loan, the 
brokers would have to stop making bad loans because they would not be 
able to sell them if they did.
  That is why I support a strong liability standard. If a loan is made 
illegally or contains illegal terms, the homeowner should be able to 
sue the owner of their loan. Otherwise, whom do they hold accountable? 
Their broker and

[[Page 33279]]

lender could both be long gone. Nearly 100 subprime lenders have gone 
out of business in the last year alone, and then where does the 
borrower go for protection? They have to be able to reach the holder of 
the loan.
  Without assignee liability, a subprime bill has no teeth. Yes, of 
course, we need stronger broker and lender standards, but we also need 
a standard for Wall Street.
  Let me be clear. I am not talking about holding specific investors 
accountable who act much like shareholders in a public company. They 
would see a reduction in the value of their stock if the company 
experienced financial losses but would not be personally responsible 
for those losses. I am talking about the trusts, the company who owns 
the loan. That is who must be liable.
  This is not a popular provision I am calling for, but I think it is 
the right thing to do. We are in a crisis in America. It is going to 
take bold decisions to get the system back on track.
  These are not kinks that are going to work themselves out. We have 
seen that the industry is not going to police itself. Voluntarily 
changes are needed, but the bottom line is, without accountability, we 
are not going to see responsible behavior.
  As I said at the opening of these remarks, I am standing today for 
the American homeowner. If we want to prevent a similar problem from 
happening again in 5 or 10 years' time, our final subprime bill must 
hold Wall Street accountable.
  There are steps we must take today in order to help tomorrow's 
homeowners. We cannot kick the can down the road. Let's make sure our 
homeowners get fair, sustainable mortgages and that future homeowners 
are not caught in a future subprime storm. Enough is enough. It is time 
for real changes.
  I have enjoyed working with Chairman Dodd on this issue over the past 
few months. I look forward, under his leadership, to passing a strong 
subprime lending bill to help millions of American families.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Wyoming.

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