Hearings on Foreclosures Before Joint Economic Committee

The Congressional Joint Economic Committe held a hearing today entitled "Current Trends in Foreclosures and What More Can be Done to Prevent Them" to investigate the ongoing foreclosure crisis in the residential housing market. It is reported that the Committee "will review past federal regulatory failures" and efforts by the current Administration and Congress to address the situation.

Congresswoman Carolyn Maloney remarked that the foreclosure crisis is not striking evenly across the U.S. and that there are heavy pockets of concentration in certain areas such as California, Florida, Illinois, Massachusetts, Nevada, and New Jersey.

Professor Joseph R. Mason explained that the following factors are among those why mortgage servicers are having difficulties dealing with distressed mortgages: 1. mortgage modification is expensive to service, 2. mortgage arrearages hurt servicer's profits as they have to advance the mortgage payments to the investors, 3. mortgage servicing fees cease upon default, 4. increased fees to do not cover typical increased costs, and 5. difficulties in retaining staff. He also noted that mortgage investors, such as Aaa-class investors and senior bondholders, are weary that the current policy may be gamed by the servicers to protect its interests, such as maintaining the value of the servicer's residual or interest-only strip or to allow the release of overcollateralization to the servicer.

Dr. Susan M. Wachter noted that foreclosure rates are presently four time the historical average and the highest since the Great Depression. She stated that the residential foreclosure crisis began with a wave of subprime mortgages and that the next wave will be payment option mortgages. She also explained that the crisis will abate when home prices stop falling as "level of prices determines whether it is possible to repay the mortgage upon sale." Dr. Wachter further stated that mortgage servicers may lack the incentive and capacity to provide mortgage modifications, that loan modifications with principal write-down are necessary, and that regulatory supervision is necessary to avoid a failure of regulatory and market structure such as the present which triggered a crisis and brought down the system.