It seems that every day in the newspaper there is another story about an effect of the current turmoil in the subprime lending market. Some 40 companies have gone out of business due to an unwise concentration in specific types of subprime mortgages. Many of the loans that may cause concern in the future have yet to reset or adjust upwards, so there is strong evidence that we are really on the leading edge of a wave of defaults. It is important to note, however, that not every homeowner who misses a payment or two loses their house. The lenders involved in the mortgage process tend to lose some $50,000 dollars for every property that is foreclosed. They have every incentive to avoid foreclosure. What we are seeing today is a marketplace which is beginning to find innovative solutions outside of congressional action. 

The problem of foreclosures is one which I am acutely aware of in my Northwest Ohio district. Even before the significant loosening of credit standards began affecting the subprime market across the country, Ohio ranked high in foreclosures. As the rest of the country experienced an expanding economy, Ohio’s job market — as well as that of Michigan and the rest of the Midwest — was slow to realize the gains, and too many people suffered financial difficulties, making it more difficult to pay their mortgages.

Congress should continue to offer extensive oversight of the mortgage markets, as there is little doubt we can do more to keep people in their homes. However, I would encourage all of my colleagues to take their time when considering how best to respond to the chorus of those who are demanding federal legislation immediately. This is a problem that on the surface appears to be solvable by market corrections.

It is also important to point out that the problems in the subprime market have not come on loans from federally regulated banks or savings and loan associations. Most of the problem loans were by non-bank lenders regulated by the states. An overreaction from Congress could lead to the drying-up of credit.

In the subprime market in Ohio and elsewhere, there is no doubt that the past several years have seen a general loosening of underwriting standards. America has one of the highest rates of homeownership in the world. That is a good thing, and we should continue to encourage homeownership.

However, you are not doing anyone a favor by putting them in a home with the type of mortgage that, when interest rates go up, or they have an economic reverse, they are thrown out of their home.

When considering how best to move forward, Congress may wish to separate out the causes of foreclosure. Legislation that fixes the problem for one segment of borrowers may not fix the problem for other segments. The vast majority of homeowners in the subprime market are able to handle the complex hybrid mortgage options available, but even the most educated, well-intentioned homebuyer could have difficulties making his payments should his job situation change around the same time as his rate. 

It is also important to note that there are differences between subprime and predatory lending. They are separate animals and require separate solutions. Predatory lending is something that the Financial Services Committee has looked at closely over the years, and I commend the work of Mr. Spencer Bachus (R-Ala.) and others who have worked tirelessly to address the problems that arise when unscrupulous lenders sell mortgage products to consumers with the knowledge that the buyer will never be able to make his or her payments. The turmoil we are witnessing in the subprime market has more to do with a loosening of credit standards where loans were made to consumers who thought the appreciation of their home would allow for a refinancing prior to the rate-adjustment shock.

I would hope that as the Congress continues its investigation into the circumstances that have led us to today’s subprime market crisis, it will spend some energy considering current disclosure requirements. Much of the problem with today’s mortgage market, prime and non-prime, is that the average prospective homebuyer is snowed-in with paper, much of it difficult to understand and duplicative. This is not breaking news. The federal government and the states have shared blame for the complexity of the home-buying process and both must work to reform the system. Any legislation that comes before the Financial Services Committee should focus on reforming the Real Estate Settlement Procedures Act (RESPA) and improving disclosure.

Gillmor is a member of the Financial Services Committee, where he is ranking member on the Subcommittee on Financial Institutions. He is also a member of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises and the Subcommittee on Housing and Community Opportunity.

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