Speech on Housing and the Mortgage Crisis

Thank you so much, Christie.

And it's not easy to come here and do this, for her and for her family. I am just very grateful that she would share her story. Of course, it's an abbreviated version of her story.

Her husband's job was outsourced. He actually trained his replacement. That's when they ran into all the problems that they faced with trying to pay the mortgage payments that kept going up.

And I don't know whether there is anybody in this audience or anyone who, through the media, who might be following this, who could do anything to help Christie and her family, but I hope somebody will try. Because it's really important to her and particularly her children. One of her children has a challenge in learning, and being in the school district has worked out really, really well. So I hope that somebody might be able to step forward who has a rental or who has some other way of helping Christie.

You know, the bank actually bought the home at higher than market value. So maybe if somebody with the bank or with someone associated with Ameriquest, which started this downward spiral, could step forth and try to, you know, show some humanity and compassion, that would be a good way to start what we need to do to repair some of the damage that is being done to families across our country.

You know, before I came out, I met with Michael Dillon and his fiancée, Jenna Kresky, and their attorney, Walter Maroney, who also shared a story of deception, fraud, abuse -- just enough to make you wonder what's going on in our country.

And as Christie and I were talking before we came out, I was thinking how, in 1991 and '92, when Bill and I were here campaigning as he was running for president, we actually focused on the issue of home foreclosures. Some of you might remember.

We had an event in a home, just like the home that Christie shares with her husband and three children, because that home was being foreclosed on. And because of the economic conditions and some of the problems that people in New Hampshire were facing at that time, people were losing their homes.

Well, we all took a big sigh of relief during the 1990s, didn't we?

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And we didn't face a lot of these economic problems that just cut right to the heart of the American dream for hard-working families like Christie's and like Michael and Jenna and others.

Well, here we are; we're back again. And it's a combination now of economic conditions that are not working for the vast majority of Americans and unsavory practices that are undermining the dream of homeownership.

So as much as I wish that Christie's story was the exception and that no one would ever have to go through what she and her family are going through, the reality is that they are, by no means, alone.

Their story is now the story of hundreds of thousands of families across America, including many right here in New Hampshire: families who have worked hard and done everything right, who maybe lose a job, maybe have a medical emergency or some other intervening event.

And they've spent years scrimping and saving to buy their home, they have signed exactly where the mortgage company told them to sign and submitted all the right papers. But then some kind of crisis intervenes, or, maybe because of some provision buried in the fine print, they discover that their mortgage rates are actually much higher than they thought. Maybe they realize too late they've been lured into buying a more expensive home than they could actually afford. Maybe they hit the end of a fixed-rate period and their rates double, but they can't pay off the principle without facing prepayment penalties.

And before they know it, their dream of homeownership has turned into a nightmare of escalating payments and threatening letters. And too many families end up in default, and too many lose their homes altogether.

This past June, there were nearly 165,000 foreclosures in America, 87 percent more than the previous June, in 2006. Here in New Hampshire, there were 1,400 foreclosures in just the first six months of this year, compared with 147 for all of 2006.

And, according to the New Hampshire banking commissioner, approximately 4,000 New Hampshire households with sub-prime mortgage loans -- that's 20 percent of all the sub-prime mortgages in the entire state -- will experience a jump in their monthly payments of between 50 and 100 percent. So a $1,500 mortgage becomes a $3,000 mortgage. And that's what we're looking forward to.

The problems we're seeing, however, are not limited to what's called the sub-prime market. They're not just affecting low-income families. Defaults and foreclosures are spreading, and they're hitting middle-income families like Christie's.

So what exactly is going on here? Well, I think several things.

Over the past few years, risky loans have been packaged and resold around the world, mortgage companies have collapsed, and the entire stock market is feeling the effects.

Those effects are spreading from Wall Street to Main Street. And Americans who have long counted on their homes as their biggest asset to carry them through retirement are seeing that sense of security be shredded.

Now, the Bush administration constantly reassures us that the economy is fine, that everything will be OK. Well, given their track record, that is not exactly comforting or believable.

Now, we know the mortgage problem is extremely complex. It has many, many roots. But one of the root causes is the trend in wages.

Wages have been stagnant. Housing prices, on the other hand, have been going, literally, through the roof. So we've had an affordability gap. Many families could not afford to buy homes with traditional mortgages.

So the mortgage companies came with a really seductive offer. They started offering more high-risk mortgages for people strapped for cash: products like interest-only and no-money-down mortgages. Unscrupulous brokers who get paid based on the size of the mortgages they sell lured many families into buying more expensive homes than they could actually afford. And many families were not told, were not counseled, were not warned, and did not understand the implications of signing on the dotted line.

At the same time household incomes have declined $1,300 over the past six years, costs have risen. Health-care costs are up 87 percent. College costs rose 40 percent. Gas prices have more than doubled.

So many people started borrowing against the equity in their homes to cover their expenses. Believe it or not, the amount of people's disposable incomes that comes from their home equity is double what it used to be.

Now, back when mortgage rates were lower and home prices were rising, if you got behind on your mortgage you could refinance your home or sell it, and you'd be just fine. As my friend Warren Buffet reminds us, a rolling loan gathers no loss.

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He always has a way of saying things like that.

But then mortgage rates started to rise, so people could not afford to refinance anymore. Housing prices started to fall, so it got a lot harder to sell in many markets. Today we've got nearly a nine-month backlog of unsold homes. As a result, many families are finding themselves trapped: stuck with mortgages they can't pay and expenses they can't afford.

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 have worked hard their entire lives are receiving the same grim letter in the mail that Christie's family received.

Now, there are those who will tell you -- they tell me this -- "Well, that's just the way the market works, Hillary. Nothing we can do about it." Or they'll say, "Buyer beware. People just need to be more careful." Well, now, that's easy to say when it's not your home being taken away.

And I don't think unscrupulous mortgage brokers should be part of how our markets work. I don't think families should be lured into buying homes they can't afford so brokers and mortgage companies can make a bigger profit. I don't think people should have to be on the lookout for unfair clauses buried on page 700 of the fine print. And I don't think it's right that so many hard-working, responsible families across this country are losing their most precious possession and their most valuable asset.

So let's be clear: This isn't just a problem for families. What happens with mortgages can have a big effect on the economy. That's what we've been reading about in the newspapers over the past weeks. Auto companies have recently noted the weakness in the housing market is even affecting car sales.

And, as we've seen throughout American history, homeownership is not just about economy stability. It is also about economic growth.

Think about what happened after President Roosevelt signed the G.I. Bill, which helped returning soldiers obtain their mortgages. Families across America bought their first homes. A thriving middle class was born and flourishing. We had unprecedented economic expansion.

So today, we have a clear choice: We can look at the statistics, wring our hands, and continue to do nothing. Or we can do what America has done in times of difficulty: acknowledge that we have a real challenge and confront it head-on with real solutions.

Now, I think the choice is obvious. I think we need to act now with smart, practical solutions to strengthening our housing and mortgage markets. We need to put an end to fly-by-night mortgage brokers peddling loans to unqualified applicants based on inflated appraisals. We need to help those facing the pain of foreclosure. And we need to secure the marketplace and put reform in action right now.

Now, back in March, I announced an agenda to address abuses in the sub-prime lending market, because back in March, that's all anybody thought was going to be at stake. People said, "Well, maybe there are problems in the sub-prime market, but, you know, that's not really going to be that significant."

Well, I disagreed then, and I disagree now. I think the sub- prime market was sort of like the canary in the mine. You know, it was telling us loudly and clearly, "There are problems here." And now the problems have unfortunately spread to the conventional mortgage market as well. In fact, some of the very same tricks of the trade are being used to hurt people in the conventional market that have been long used against people in the sub-prime market.

So that's why today I'm announcing a four-part plan for how I, as president, would address abuses across the mortgage industry -- a plan to curb unfair lending practices and hold brokers and lenders accountable, give families the support they need to avoid foreclosure, and increase the supply of affordable housing.

I'll be introducing this plan as legislation when the Senate goes back into session after Labor Day. We're going to try, in the Democratic Congress, to push forward on this agenda.

But if the president won't sign our proposals that we will send to him in the next months, when I'm president I will take a very active role in making this a priority, and I will sign into law provisions to do exactly what I'm outlining.

The way I see it, one of the most...

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You know, the way I see it, one of the most important jobs of the next president is to restore a sense of economic leadership to our country and a sense of fairness to our economy.

I believe in shared responsibility and shared prosperity. I see myself as a modern progressive. I believe one of the crowning achievements of the early American progressives was reforming our economic system, making changes that made the economy work for more Americans.

That is why lending reform is so important, because abuses in this area affect those who can least afford to lose their homes. And in today's world of loan repackaging, these failures can and will have ripple effects throughout the entire economy.

So it's precisely in areas like mortgage lending, where we see this gathering storm, that we have to act quickly and responsibly to reform the system.

And that's where I fundamentally differ with Republicans. They believe in letting everyone fend for him- or herself. They believe in what the president calls an ownership society, which is really, "You're on your own." It's the yo-yo economy: Some go up, and some go down, and the strings are pulled by other people.

Well, I don't think that is the way America works best. I think when we see a problem; we need to roll up our sleeves and get together to fix it.

And that is the kind of president that I intend to be: reaching toward big goals like universal health care, ending the war in Iraq, but also making...

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... also making the economy work for everyone again.

You know, that's why, when I was listening to Christie and thinking about where we were in '91 and '92, where the economy was flat on its back, where people were being so left out and at their wits' end, and yet it took a lot of effort and it was politically difficult -- because I'll tell you something: Change is not just a word, it is a challenge.

And to get the changes we need in America, we're all going to have to get together and stand up to those who have a lot to gain from keeping our system the way it is. And it's the mortgage industry, and it's all the people they sell loans to, and it's the people who package them, and it's the people who make money off of them.

So let me tell you what I would do.

First, I would focus on cracking down on unscrupulous brokers who lure unsuspecting families into unfair mortgages.

Many families assume their broker has their best interests at heart. But that is often not the case. What they don't realize is that the more expensive the mortgage a broker sells, the more money the broker makes. So brokers have a strong incentive to steer their clients toward the biggest, most expensive mortgages, even if clients can't afford them.

We need to help families go into home buying with their eyes wide open. So I'm proposing, as a matter of federal law, we require brokers to tell families up front they're paid on the basis of the size of the mortgage they sell. That will put buyers on notice that they need to ask tough questions...

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... and be wary of the products that are being offered.

We also need to do more to screen mortgage brokers to ensure they're qualified and that they deal fairly with clients.

You know, I had a roundtable event about this down in Orlando, Florida, a couple of months ago. And a former broker from Ameriquest said he could not sleep at night any longer. He quit his job, and he came in and he spilled the beans. And he sat there and he talked about all the tricks and all the pressure that are put on the brokers to make them go out and sell these loan packages that are going to explode in the face of the borrowers.

So we've got to do more to really make sure that we have national standards for brokers. Many states don't even have basic licensing standards. In a lot of states, you don't even have to be licensed to be a mortgage broker. So the average homebuyer has no reliable way to know whether a broker is trustworthy or not.

And that's why I'm proposing that the federal government work with the states to develop strong, meaningful broker licensing standards to stream brokers and govern their conduct.

I will also require...

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... that brokers register with the federal government. That way, we can establish a single database to track rules violations, complaints and employment history.

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So before you hire a broker, you can get online and do your own background check to ensure you're dealing with someone who will deal with you fairly.

This is especially important in the home equity refinancing area, because a lot of that business is sold over the phone. People get a call. I'll tell you something, some of the brokers don't even use their real names on the phone. And so, people are listening, and it sounds really good. And they particularly prey on the elderly.

So we've got to have more standards governing brokers.

Second, I will also crack down on the mortgage lenders by eliminating prepayment penalties and working to ensure...

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... that lenders don't lure people into unworkable mortgages in the first place.

Now, as some of you know from unfortunate personal experience, prepayment penalties are a gold mine for mortgage lenders and it's a trap for homebuyers.

The way many high-risk, non-traditional mortgages work is that you pay a low rate for a number of years -- which is probably why you took the mortgage in the first place -- then, once that time period is up, the rates skyrocketed. Then you are faced with this increasing rate.

Now, what many people didn't know and what seems to me to be so perverse is that, when you first get that new notice that your rate has doubled -- which is going to happen to a lot of people in New Hampshire in the next year, because of the mortgages they already have -- a lot of people say, "Oh, my goodness, let's try to start paying down the mortgage as fast as we can." I mean, that's kind of part of the American ethos, you know, pay down the mortgage, get out of debt. What people don't realize is that if you try to pay your mortgage early while you still have the low rate, the lender slaps a huge prepayment penalty on you.

So lenders are actually discouraging people from being responsible and paying off their mortgages early, because they want to increase their profits. So it's not surprising that loans with prepayment penalties have a 52 percent greater risk of default than those without.

That's bad for families, and it's bad for the housing market, which is why I propose prohibiting all prepayment penalties on all mortgages. I think we should encourage people to pay off their mortgages early.

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You know, I'm old enough to remember, you know, mortgage-burning parties, where somebody in the neighborhood would pay off their mortgage; they owned their home free and clear. And all the neighbors would get together, and they'd burn the mortgage documents. That was like a, you know, a great celebration. Well, we're not letting people do that. So we're going to change the way mortgage lenders operate.

We also need to do more to stop lenders from trapping people in unworkable mortgages in the first place.

Right now, lenders have a lot of discretion when deciding whether someone qualifies for a mortgage. In making this assessment, many lenders don't take into account whether a family will be able to pay property taxes and property insurance.

And too many families, especially first-time homebuyers, don't know to budget for these expenses. But once they're locked into the mortgage and tax time rolls around, they experience payment shock and suddenly realize they may be in over their heads.

That's why I propose requiring lenders to take into account their borrowers' ability to pay property taxes and insurance fees when deciding whether to make that loan in the first place. The requirement would apply to all high-risk mortgage products.

These costs for property taxes, insurance, you know are a huge part of what you have to be able to put aside to pay for when you own a home. And lenders say, "Well, that shouldn't be our responsibility," but I think it is, because if they go after first- time homebuyers, they ought to be willing and we'll require them to be more helpful.

Now, I've been talking about how to keep people from getting trapped in unaffordable mortgages in the first place, and that's critical. But we also have to do more to help people stay on track and avoid foreclosure once they have their mortgages. And that's the third part of my plan.

Back in March, when I spoke about sub-prime mortgages, I called for a foreclosure timeout. And we can't, you know, make that happen yet, because we don't have any legal tools certainly, but we certainly can talk about it, and we can try to persuade the Fed and others to encourage the lenders to think more creatively about how to have a foreclosure timeout: helping people refinance loans, helping people pay a lower rate for longer, doing things that will avoid this cascade of home losses.

I propose we expand the role also played by Fannie Mae and Freddie Mac, the government-chartered and -backed institutions that do so much with homeownership. They should have to help at-risk homeowners avoid foreclosure. They are supported by the federal government. That is a public service that they should be required to perform.

They do an excellent...

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They do an excellent job in helping to provide reasonably priced mortgages for Americans, and they have a lot of foreclosure prevention programs. But we have to expand them, because the numbers of people facing foreclosures are going up exponentially.

And I think we should also have a billion-dollar fund in the federal government to support state programs that help at-risk borrowers avoid foreclosure.

Now, several states, including New York, have included rescue funds to assist people who are on the brink of foreclosure, people who have often nowhere else to turn and are terrified of losing everything they have.

Such a program could help Christie's family. You know, her husband did get a new job, paying in the six figures. He will be back on his feet, after having had his job outsourced. If somebody would take the time to sit down and help them and maybe talk to the bank, they will be able to get back into paying for the mortgage on their home. So we need people who are playing that role.

Now, this is not easy to implement. Chicago actually tried to have face-to-face counseling and support for people, both before they bought and during the homeownership period. And there was a massive outcry by the lenders and the brokers.

So, again, this sounds so common-sensical, but we have to, you know, get together and work to get it passed in order to make it happen, or get Freddie Mac and Fannie Mae to also step up and do this on their own, maybe with some prodding by the Federal Reserve.

Fourth and finally, we need to make a national commitment to creating more reasonably priced housing options, so people don't have to resort to risky or unworkable mortgages in the first place.

You know, really, the mortgage issue is partially an affordable- housing issue. Even with recent declines, real estate prices are still quite high, and families are committing more and more of their incomes to mortgage payments.

Between 2001 and 2004, the number of households devoting more than half of their incomes to housing increased by 1.9 million. Think about that: half of more of your income going to support your housing. Some families forgo basic necessities to pay mortgages. Others just forgo homeownership in the first place or turn to risky mortgages.

I think we should have another $1 billion committed by the federal government over five years to help state, county and municipal governments build and rehabilitate affordable housing across America.

Now, that, in and of itself, would not...

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... you know, would not do it, but it would incentivize others to do it.

We have an affordable-housing crisis. And it is all over the country. It started in high-cost areas, but now it is spreading. We don't have enough affordable rental units, and we don't have enough affordable homes.

There are some good examples across America. There are already, in many states and localities, trust funds in place to help people get into affordable housing.

And guess what? That also creates new jobs.

So it really is a win-win. And it's time the federal government supported these state and local housing trust funds.

We also need to look more generally at infrastructure. And I'll be back in New Hampshire tomorrow to talk about what we need to do concerning infrastructure. Because, of course, with the collapse of the bridge in Minneapolis, now everybody's talking about it.

You know, some of us have been talking about it a long time. Our bridges, our tunnels, our roads, our mass transit, our ports, our airports are woefully underinvested in as a nation.

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And we just have to get serious again, as Americans, that we want to remain the leader in the world. We want to have our children, like these beautiful children here, feeling that, when they grow up, America will be there for them, just as America was there for us; that there will be opportunities to work and to raise a family and to have a home.

And, you know, we want to continue to be the strongest, safest, smartest, richest country in the world, don't we? Well, you've got to make investments in order to make that happen.

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You know, together, my proposals and others that people are putting forth can help curb the abuses that have contributed to the problems we face today. And we can assist people facing foreclosures, we can create more affordable housing and protect the American dream of homeownership.

Because we know that's about more than financial security. It is about laying roots deep in a community. It's about knowing who your neighbors are. It's about knowing where your kids go to school. It's about having that sense of belonging and community. And that's what I believe in.

You know, my late father, who was in the Navy for five years, and when he came out he wanted to start a small business and start a family. And so, he -- you know, we lived in an apartment when I was born, but for him and my mother it was all about having a home.

So he paid for a brick home that, you know, when I was little looked like a castle. When I see it today, it's not as big as I remember it, but it was certainly big enough for my parents and my bothers and me.

And back in 1975, Bill and I were living in Arkansas and teaching at the law school. And as I've written about in my autobiography, I was trying to decide whether or not to get married. And it was, you know, one day "yes," one day "maybe," back and forth. And one day, we drove by a little red brick house with a for-sale sign in front of it. And I casually remarked, "That was a really sweet-looking house." That is literally all I said.

Then I went away for a few weeks and came back to start teaching again at the university law school, and Bill picked me up at the airport, and he said, "Do you remember that house that you liked?" I couldn't remember. And he said, "Well, I bought it."

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So he said, "Now we have to get married."

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So actually we did, in the house.

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And it's hard to believe it cost $21,000. And, you know, we thought, again, it was just the most wonderful house. You know, the kitchen needed a lot of work, and it was, you know, a little bit funky in many ways. But nevertheless, we were married in our living room, surrounded by our closest friends and family.

And that home meant the world to us. It was where we started our life together. It's where we did celebrate, as Christie said, birthdays and holidays and where we hosted our family and friends.

Every family should have that same opportunity. That is what America stands for. And...

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... I hope that I can earn your vote to become the president who will once again stand up for an economy that works for everyone and stand up for homeownership.

And let me end where I started. If you have any ideas about how to help Christie and her family, I hope you will.

You know, it's heartbreaking to me that our system operates so well for so many in so many different ways. We have the greatest economy in the world. It's dynamic, it's complex. But it's not working the way it needs to right now for too many.

And therefore, we've got to figure out how we're going to help each other until we finally once again have a president who doesn't think his only job is helping those who are already rich get even richer.

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Thank you all very much.

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