Remarks on Wall Street on Housing Crisis

Thank you all very much. It is a real pleasure to be here and I appreciate those kind words. It's wonderful being back in the city - and to have a chance to come here again, I believe for the fourth time, and to have a chance to speak with you about an issue that is on the minds of everyone, whether I'm here in New York or in New Hampshire, or in Iowa or any of the other places I've been traveling to lately. It's a topic of conversation that has to be put at the top of our nation's agenda.

Now we know that not far from here Wall Street is humming. The phones are ringing, the blackberries are buzzing. And people are making billions of transactions that raise capital for corporations and deliver value to shareholders every day.

And what happens on Wall Street today - like every day - will ripple across the country and the world. I'm proud to represent New York, to represent the financial capital of the world. I see a lot of people who I recognize in this audience that are integral to what happens in our markets, how we create wealth, how we provide a dynamic economy that will hold out the promise of a better life for so many of our fellow citizens, but indeed for people far flung from here. I do want to recognize Speaker Silver, Shelly Silver, thank you very much for being here with me.

And we in New York, probably more than anyone anywhere, know how critically important is it for our economy and for the global economy, that Wall Street stay on the cutting edge of finance and remain what it always has been, the global finance capital of the world. But we know that the standard for any economic system is not just that it creates growth, but that it lifts up families across America who work hard and dream big every day.

As we've seen the home foreclosure crisis these past few years build, the ripples from Wall Street we know, can have a significant impact on families far away in Pahrump, Nevada, where I recently was and other places that might never give much of a thought to what goes on here, but whose daily lives will be impacted. As we've seen with the home foreclosure crisis, too many American families are not sharing in the growth that is created and driven from this city.

Now, productivity has risen 18 percent among American workers over the past six years, yet wages have stayed flat, and family incomes have fallen by nearly $1,000. There are five million more people in poverty here in our country than there were in 2000.

On top of stagnant wages, we've seen a rise in economic anxiety. Students struggling with the skyrocketing cost of college, families burdened by health care costs, premiums have doubled in the last six years, and we see the increasing role that energy prices play in people's lives.

Gas prices have doubled in the past seven years. Home heating costs continue to rise. In fact, the typical family is paying $2,000 more for energy this year than in 2000. That's like a $2,000 energy tax - more than 3 times what the typical family got under the Bush tax cuts.

We've seen people hit hard by a deepening housing crisis. Families who've worked hard, thought they were doing the right thing. Who've spent years scrimping and saving to buy a house, but their dream of homeownership has turned into a nightmare of escalating payments and threatening letters.

In short, we've seen too many middle class families struggling in an economy that is simply not working for them right now. An economy that, in recent months, has been the subject of increasingly worrisome headlines about weakening consumer confidence, about a declining dollar and ballooning national debt.

Now these economic problems are certainly not all Wall Street's fault - not by a long shot. But the reality of our interconnected economy is that what happens on Wall Street impacts main streets across America. It happens sometimes within minutes, sometimes over the course of months or even years.

If we're honest, we need to acknowledge that Wall Street has played a significant role in the current problems, and in particular in the housing crisis. A "see no evil" policy that financed irresponsible mortgage lending. A bond rating system riddled with conflicts of interest. A habit of issuing complex and opaque securities that even Wall Street itself doesn't seem to understand.

I believe we need a new beginning in our economic policy - one that strengthens our middle class and ensures that prosperity is widely shared, and is based on an ethic of shared responsibility. A new beginning that makes Wall Street shoulder its responsibility for this crisis, and that gives homeowners the breathing room they need. One that makes the most well-off among us pay our fair share and gives the middle class the help it needs for education, health care, and retirement security.

Our economy has been at risk by investment schemes aimed at making not just a few, but many extra dollars, and we need to start insisting on the right rules and transparency so this doesn't happen again.

So I'm here today to call on Wall Street to do its part - to help end the foreclosure crisis that is devastating middle class families and threatening the health of our economy.

Wall Street needs to be part of a comprehensive solution that brings to the table all those responsible and calls on them to do their part. Wall Street helped create the foreclosure crisis, and Wall Street needs to help us solve it.

Let's start with an honest, clear-eyed assessment of what went so terribly wrong.

Over the past seven years, as incomes fell and wages stagnated, many families were lured into risky mortgages with rates that later jumped beyond what they could afford. Now, we can debate what was technically illegal; we can debate what should be defined as predatory. But there is no debate that what happened did not reflect the best of our financial system.

It did not reflect prudence, transparency, or even an understanding that behind large bundles of securitized mortgages are real families who were led into bad situations by people who should have, and even did, know better.

As a result, 1.8 million foreclosure notices have gone out this year, an increase of 74 percent from last year. And the worst may be yet to come. The rates on 2 million mortgages are set to escalate over the next two years. Meanwhile, there's been an unprecedented national decline in home values.

Middle class families can't afford to refinance their loans, and it's gotten a lot harder to sell their homes. Many families are finding themselves trapped - stuck with mortgages they can't pay and expenses they can't meet.

So they're facing wrenching choices: pay their medical bills - or pay their mortgage. Put off retirement - or lose their homes. And many people who worked s hard and did try to follow the rules are receiving that same grim letter in the mail that says "get out now."

I met a woman in Derry, New Hampshire - a stay-at-home mom with three children - whose husband lost his good-paying job. He was in the computer industry. They kept making their loan payments for six months after he was laid off, but just at that time, their interest rate ballooned from about 8 percent to about 11 percent.

They tried to file for bankruptcy, but the bank still foreclosed on their home. And even after her husband found a new, high-paying job within a year, they were unable to make their back payments. Basically the door was shut in their face. When I met her, it was literally the day before her family was being forced out of their home with nowhere to go.

As the foreclosures mount, the housing crisis is also becoming a municipal crisis. Cities and towns face the prospect of blight, higher crime rates, vacant properties marring neighborhoods, cutting tax receipts, and dragging down property values.

And I believe the housing crisis also threatens the economy as a whole. Even Americans who don't face foreclosures are feeling the impact. 60 percent of the total wealth of middle class families resides in their home equity. And home equity withdrawals accounted for more than 8 percent of families' disposable income in 2005.

So as housing prices decline, people have less money to draw on for everything else, from medical bills to car payments to college tuition. We know that consumers are the backbone of our economy that has been true from the beginning. It's been especially true in the last years. And right now consumers are hurting. I talked with CEOs of the some of our large discount retailers. They tell me that the amount of money being spent is down. The number of shopping days has decreased. People come in the beginning of the month when they actually get paid and in the middle of the month but otherwise they're much scarcer as consumers than they used to be.

With the holidays quickly approaching, a lot of middle class families are feeling the pinch. And the global financial markets are also suffering. Risky loans have been packaged and sold around the world. Mortgage companies have collapsed. Financial firms have recorded losses in the tens of billions, and there's predictions for tens of billions more. Central banks have had to step in to keep the system running. And banks are reluctant to give out loans, so companies are finding it harder and harder to get the capital they need to grow and create new jobs even if they're not in the home industry.

Now, who's exactly to blame for the housing crisis? Well, that's always a question that the press and people ask and I think there's plenty of blame to go around.

Responsibility belongs to mortgage lenders and brokers, who irresponsibly lowered underwriting standards, pushed risky mortgages, and hid the details in the fine print.

Responsibility belongs to the Administration and to regulators, who failed to provide adequate oversight, and who failed to respond to the chorus of reports that millions of families were being taken advantage of.

Responsibility belongs to the rating agencies, who woefully underestimated the risks involved in mortgage securities.

And certainly borrowers share responsibility as well. Homebuyers who paid extra fees to avoid documenting their income should have known they were getting in over their heads. Speculators who were busy buying two, three, four houses to sell for a quick buck don't deserve our sympathy.

But finally, responsibility also belongs to Wall Street, which not only enabled but often encouraged reckless mortgage lending. Mortgage lenders didn't have balance sheets big enough to write millions of loans on their own. So Wall Street originated and packaged the loans that common sense warned might very well have ended in collapse and foreclosure. Some people might say Wall Street only helped to distribute risk. I believe Wall Street shifted risk away from people who knew what was going on onto the people who did not.

Wall Street may not have created the foreclosure crisis, but Wall Street certainly had a hand in making it worse.

We also must recognize, though, that good things have happened in the housing market. Home ownership is at the heart of the American Dream, and ownership rates rose to a record 69 percent in 2006. That means millions of new stakeholders in their communities. And the largest gains were among low-income and minority families.

The challenge for us is to preserve the best of this system - which has allowed people to own their own homes - while getting rid of the abuses. And to do that, we need to look at this problem, as complex as it is, honestly. We also need a President who understands the complexity and magnitude of the challenges we face because obviously it's not only about the mortgage industry and the credit crunch, it's about our debt, about the declining dollar, about all the challenges we face in the global economy. I'm confident we can navigate through this but we can't do so acting like ostriches or in a fit of denial. We have to be willing to roll up our sleeves and start doing what we do better than anybody in the world and that is solving problems.

Earlier this week, I wrote to Treasury Secretary Paulson urging him to fashion an agreement with the mortgage industry and Wall Street that matches the scale of the problem. I'm heartened that the Administration has heeded an earlier call of mine to convene a "crisis conference" of housing stakeholders - lenders, investors, mortgage servicers, regulators, representatives of homeowners, and others - to convert unworkable mortgages into stable loans that families can afford.

This is a moment for shared responsibility in America. Investors, lenders, and homeowners all have a part to play and sacrifices to make. If the agreement is inadequate, or the talks fail outright, the cost to our economy will only increase.

For this "crisis conference" to succeed, Wall Street must be on board. Wall Street has a responsibility for the past as well as an enormous stake in the future. So today, I'm calling on investors who control the mortgages that need modifying to be part of the solution. You are at the end of a long chain of decision-making and responsibility. But without your cooperation, a voluntary solution can be of limited effectiveness.

I urge Wall Street and the mortgage industry to voluntarily agree to the following three steps:

First, we need a moratorium of at least 90 days on foreclosures of subprime, owner-occupied homes. The moratorium will stop foreclosures until lenders and servicers have contacted borrowers and frozen mortgage rates. It will also give financial counselors time to work with families.

Second, we need to freeze the monthly rate on subprime adjustable rate mortgages, with the freeze lasting at least five years until the mortgages have been converted into affordable, fixed-rate loans.

A rate freeze is critical. An average of $30 billion in loans will reset each month next year, and the average reset will increase monthly payments by 30 to 40 percent. These rate resets are the major driver of the foreclosure costs.

The long rate-freeze will give the housing market time to stabilize. It will give families an opportunity to rebuild equity in their homes. It will also give the mortgage industry the time - and incentive - to convert mortgages that were designed to fail into loans that actually can be repaid.

Third, the mortgage industry must provide status reports on the number of mortgages it is modifying. Accountability is essential. Despite all the media coverage, despite all the hearings, despite the Secretary of the Treasury, despite all that has gone on in the last 30 to 60 days, the mortgage industry has only modified about 1 percent of at-risk mortgages this year. That' is simply not enough.

Now, I hope everyone will voluntarily agree to these steps, because we cannot fail at this. The costs are just too high.

If we cannot reach a voluntary agreement, I will consider legislation to address the problem. Mortgage servicers can work with borrowers to modify their mortgages. In the process, they can save families their homes, save investors from losses down the road, and help the economy.

But this is unchartered territory for them, and many are worried about opening themselves up to lawsuits from the investors who actually own the loans. I'm prepared to consider giving legal protection to servicers and others who administer these loans and who do the right thing by balancing the interests of homeowners, the investors, and our economy.

All of these proposals build on the work I've done throughout this year to urge immediate action on problems regarding housing. I've called on the mortgage industry to observe a "foreclosure timeout." I've put forward a plan to crack down on unscrupulous mortgage brokers, to end lending abuses, and expand the financial counseling programs that have been shown to reduce defaults and foreclosures.

I've proposed that we allow the state housing finance agencies to issue tax-exempt bonds to help families refinance their mortgages. On Monday, the Bush Administration said it will give this idea a try, and I'm pleased to hear that. But I wish they'd done it when I proposed it two months - and more than 225,000 foreclosure notices ago.

While we work to solve the immediate housing problem, I am also calling on the Administration, the regulators, and the mortgage industry to ensure that the abuses of recent years don't happen again.

We need an industry-wide commitment to tightening underwriting standards and disclosure obligations. We need to vigorously enforce federal prohibitions against abusive lending practices. And we need to eliminate prepayment penalties. This has been one of the most heart breaking elements of this crisis. I did an event about this down in Orlando, Florida early last spring talking with a lot of homeowners who had gotten into sub-prime mortgages. They fit the profile - many were first time homeowners. One got in trouble because he thought he was doing the right thing. His family and everyone told him, "Well as much money as you can save, pay off the loan as fast as possible." So he began putting more and more money aside to begin paying over what his mortgage payment was only to find out he had triggered the prepayment penalties and found himself with an increasing interest rate that forced him into foreclosure.

We obviously need to clean up the standards and make all of the disclosures much more understandable to everyone but we do need to prosecute mortgage servicing fraud and foreclosure rescue fraud to the fullest extent of the law. And we certainly need to expand financial counseling for homeowners and buyers.

What I'm proposing is a comprehensive "work out" - not a "bail out" - of our most pressing economic problem. And I do hope that many of you here and a lot of our leaders on Wall Street will join with me and others in helping to find these solutions. I was pleased that Mayor Bloomberg announced today a fund that will be a non-profit fund along the lines that I've been advocating to help homeowners here in the city facing foreclosure. Because addressing this issue with the right leadership and a commitment to shared responsibility will solve the problem.

But let's remember that addressing the housing crises is only one piece of what has to become a broader agenda for creating shared prosperity for Americans again.

That's why I've put forward a package of middle class tax cuts that will help restore the basic American bargain. If you work hard you can get ahead - with dignified work, a college education, affordable health care, child care, savings and wealth creation. We need to change our tax code to reward middle class families and by doing so, we can get money into the pockets of tens of millions of people who will spend it.

I also will extend middle class tax cuts, including the child tax credit, the marriage penalty relief. I want to give generous tax credits to help families afford health care. My plan called the American Health Choices plan includes health care tax credits so that individuals and small businesses will be able to afford health care through the congressional plan that I will open up to everyone. It's a really good plan. It's not government medicine, it is government-administered and Congress people love it. You get more than 250 choices at an average cost that is less than what you can find through your employer or in the market place. Unfortunately it is limited to federal employees. By increasing the pool dramatically we will lower costs and be able to deal with some of the other cost drivers in the health care system. I'll also offer up to $1,000 in matching tax cuts to help families save for retirement.

We also have a savings crisis. We have the lowest rate of savings since 1929 and coincidentally we have the highest income inequality gap since 1929. That was not a good year for America. So I think we need to be smart about how we're going to move forward together.

I want to expand the Earned Income Tax Credit, increase the education tax cuts. It was interesting as I started traveling around the country last winter. I would be in small groups with my supporters and a lot of my wonderful donors, some of whom are here today, and I'd go through my list of what I wanted to do as President and I would say I wanted to increase college affordability and people would nod and they would be in obvious agreement but if I said it in a gymnasium in front of 2,000 people in Concord, NH, they stood up and cheered and kicked the bleachers because it has become so expensive. We are shutting the door on college for a lot of worthy and motivated young people.

I believe we should tie the minimum wage to Congressional salaries, so that Congress can't get a raise unless working men and women do too.

We have to reform the Alternative Minimum Tax, and I give Congressman Rangel a lot of points for courage in trying to take this on because it will increase the tax rates on millions of New York taxpayers and millions of others throughout America just at a time when we need stimulus so we've got to deal with the AMT. It's a stealth-tax that most people were never meant to pay.

But, the growing concerns in our economy should prompt us to consider whether working families need more immediate assistance in the form of economic stimulus.

Just like the housing crisis, the Administration has been asleep at the switch as overall economic conditions have worsened. We need a President who will wake up every morning focused on keeping our economy on track. And if we wake up to the current economic forecasts, a vigilant president should be talking about the right kind of stimulus today. And by right kind I mean broad based. We have, as my husband and I often say, certainly benefited over the last seven years of this administration as we've seen the vast majority of Americans basically stall. So if we talk about stimulus lets talk about the right kind of stimulus.

More and more economic forecasters and even just families across America worry we may face an economic set of issues that will stall growth even more, hit much harder on the income and the assets of people who are living in what I call the "trap door economy" right now - one pink slip, one missed mortgage payment, one medical diagnosis away from falling through and losing everything.

That's why I have called for up to $5 billion in immediate assistance to help communities and distressed homeowners weather this foreclosure crisis. If we can help stabilize the patient we'll have a lot better chance of getting all of us healthy again.

I've called for $2 billion in emergency energy assistance for families facing skyrocketing heating bills this winter. We need to be aggressive in getting this assistance out fast to working families and seniors so that they can spend it and protect themselves.

These are initial steps and I believe we should be ready to take further steps if the situation deteriorates. We should do this in a way that makes economic common sense. In 2001, President Bush used stimulus as an excuse to force through long-term tax cuts for the most fortunate among us. The result was a weak stimulus that continued us on a path to higher deficits, ballooning debt, and increased borrowing from foreign governments.

This time around, let's make sure we get it right. Let's make the stimulus temporary and not an excuse for long-term fiscal recklessness. Let's focus on hard-working families. Let's support them because they're the most likely to really provide what the economy desperately needs - a jumpstart.

The Administration was asleep at the switch but we can't wait until we have a new President. We need to make sure we do everything we can to get this President and this Administration to take action.

And we need then to have a President starting in January 2009 who is ready to change our policies and lead our country. That means anticipating economic problems that may arise in the future and taking action to ameliorate or eliminate them. It means calling together immediately those who are stakeholders and decision-makers.

America is at its best when we work together. We haven't really been called to do that in the last seven years. Many of us in New York waited to be called for some kind of commitment, sacrifice, responsibility after we were so horrifically attacked on 9/11. The call never came. I think it was a missed opportunity of historic proportion.

What we need always to be ready to do is to respond as Americans. We need to start acting as our best selves again. We need leadership who will summon us to do that. And I'm calling particularly on those who are so able and so smart and so resourceful to help us find our way forward here. Don't wait for the Administration or Secretary Paulson to call. Call yourself. Make sure that you're part of this ongoing “work-out.” It's the right thing to do for the economy, but even more importantly it's the right thing to do for America.

Thank you all very much.