Speech on Subprime Lending

Thank you so much. And I could not have had a better economic development partner in Upstate New York than Lee Beaulac and Rural Opportunities, Inc. We've had a lot of fun. It has been challenging and sometimes frustrating to bring people together to talk about what we were going to do to reinvest in communities and provide economic opportunities and housing and healthcare, microcredit and just a whole a range of issues that we have worked on together for the last six years. But Lee does know how the public sector and the private sector both work and he combines that knowledge with a real passion to improve the lives of people. So I want to thank you in front of all of your peers and your colleagues, someone who I am very grateful to work with and I am so pleased that he could introduce me.

I also want to thank John Taylor because the fact that NCRC is now celebrating 30 years of CRA is a big accomplishment. There were lots of times when we were checking for a pulse. Was CRA still beating? Was it going to be there as a tool that we could use for reinvestment? And thanks to all of you, it is. And we're going to strengthen it. We're going to begin to strengthen it in the Democratic Congress. And it's certainly one of my priorities because I believe in community development investment funds. I believe in empowerment zones. I believe in the tools that we know work in communities. And I was proud during the Clinton Administration to work with some of you and to visit some of the projects like the one that Lee was talking about in Newburgh. So there's a lot of work that needs to go on and we have a lot of good examples of what will make it possible for us to bring people into the mainstream economically and provide economic opportunity across all sectors of our economy and every region of our country.

And I want to thank Irvin Henderson, the chairman of the board of NCRC and all of the board members because obviously they are committed to doing what does work. And to all the New Yorkers who are here today, thank you for being partners in what we have done together over the last six years.

NCRC stands firmly behind a really simple idea that when Americans are given the tools for success, Americans succeed. You know, when the American government is on our side, we all do better together. And it is important that we renew that mission every so often because we face new challenges.

You know, when my husband started running for president back in 1992, which wasn't exactly the dark ages--some might think it was--but I know it wasn't. It was not that long ago. There wasn't really an Internet. There was an Internet that existed for scientists to communicate, but there weren't hundreds of millions of websites. We have changed so much. And we have to keep asking ourselves, what do we do to bring opportunity to everyone?

And Lee mentioned one of my projects up in the North Country of New York. And that was to put small, rural businesses on EBay. Because I said to myself, you know, there's not much of a market up here. These folks are working really, really hard and they're producing high quality products but they don't have many people to sell them to. So what we did was work with EBay to put these businesses on the Internet, help them with their websites, help them get some technical assistance so when the orders started coming in, they would know how to meet them.

Lee mentioned one of the businesses we put on, which was a soap maker. Really high quality soap, she made, in a very painstaking process that was pure and really traditional. Somebody working for Oprah came across one of her soaps and one day after she got on EBay, she gets an order for $40,000 worth of soap. She had to go out and get every person she knew in her community to come in and help her make soap. So that was a good problem to have. And that's the kind of challenges that we want to overcome by being innovative and creative together.

Well, obviously I believe in the basic bargain that I was raised with. You know, if you work hard, you play by the rules, you ought to be able to get ahead. And that's what I was raised with and I think that is at the heart of the American Dream.

Well unfortunately, we still have too much of America that is held back by a lack of capital, investment and opportunity. Middle class families and families struggling to reach and stay in the middle class are really being squeezed from all sides.

You know Americans are struggling to pay for college costs and energy costs and healthcare costs, because after all, premiums have gone up 90 percent since 2000. And I'm concerned that we're not facing the problems that we have. We're not meeting our challenges the way previous generations of Americans did.

We have 47 million people without health insurance. When you have 300 million people dependent on foreign oil; when you have more than 90,000 of our fellow citizens still living in trailers along the Gulf coast, it is time for a change and it is time for [inaudible].

I want to focus on one aspect of the American Dream, of that basic bargain, because I am worried about homeownership. And as we have seen in recent days, the basic bargain that may be breaking down is homeownership.

There has been a lot of attention recently on the volatility in the subprime housing market. But the subprime fallout takes a toll on families as well. These are not just statistics, these are flesh and blood people who are so proud of that first home, who felt like they finally had a real foothold in the American middle class that they were going to have their children in a safer environment.

Now we know that there were more bankruptcies in America last year than college graduates. And half of those bankruptcies were due to an illness and people unable to pay their medical costs.

So a lot of these new homeowners are one illness away from foreclosure. They're one job loss away. They're one, let's cut your hours away. They are hanging on. Because despite what you hear from the happy-talkers on the other end of Pennsylvania Avenue and for some of those folks they put on TV, wages have been stagnant, haven't they?

So you've got CEO pay up. You've got corporate profits up. You've got productivity up, which means that we're all working harder than ever before. But the folks who are doing the work are not getting rewarded. And a lot of those folks during the 90s, when we created 22 million new jobs and lifted more people out of poverty than at any time in our history, they felt that we and our country were on the right track, didn't they? And they thought the sky was the limit. They were going to send that child to college. They were going to get that home. Well, now we are concerned, and NCRC has been sounding the alarm to try to wake us up for the last several years. Well, I sure hope we're awake now.

You can't be surprised, can you? Because the alarm bell about the subprime home market has largely gone unnoticed by this Administration because they keep arguing we have to give trillions of dollars of tax cuts for the wealthy. They keep arguing that a $9 trillion national debt and an increasing trade deficit -- the highest in history -- are signs of increasing strength. Well, I have to say that I don't buy that. I think there are trouble signs below the horizon. Maybe they're not as obvious to some, but you keep sounding that alarm. Because I believe that we've got to take action.

According to most recent statistics, delinquent payments now affect more than 13 percent of subprime loans in our country. That's the highest level in four years. Now, many would attribute this rise to unsophisticated homebuyers, even irresponsible buyers, or the subprime market itself. But the foreclosure rate for all mortgages increased by more than 17 percent in the last quarter of 2006. That's the highest foreclosure rate in four decades.

So when somebody tells you this subprime market thing is no big deal, or maybe, you know what, let the buyer beware, these folks signed on the dotted line, it's their responsibility. Ask them why the rate for all homeowners is so high. Because the economy is not supporting homeownership the way we need it to. And after all, in the absence of an alternative, the subprime market has opened the doors to millions of families and responsible lenders and the market are rightfully casting out some of the worst actors in the subprime industry. But the market will not address the millions of families trapped in unworkable mortgages, hounded by delinquency and facing the grim possibility of foreclosure.

Now there will always be risk, and we cannot absolve it and should not absolve homebuyers of his or her responsibility. But we should make the rules clear and level the playing field.

The subprime problems are now creating massive issues on Wall Street. It's a serious problem affecting our housing market and millions of hard working families.

So what are some of the things we need to do? We need to expand the role of the FHA to issue more mortgages at better rates to these homeowners. We need to give consumers more counseling and information, prevent families from being trapped in high interest loans with pre-payment penalties and in some cases, allow more breathing room from foreclosure. This market is clearly broken and if we don't fix it, it could threaten our entire housing market, which in turn would threaten our entire economy.

So this is a serious issue and I'm so pleased to be in front of a serious group to just spend a few minutes talking with you about it.

You know, often the plight of these families are lost. We just don't focus on who they are, but we all know them. I bet if we had the people who served lunch today come in and asked them to raise their hands, you'd see folks who bought their first home, wouldn't you? Probably some in this crowd know people personally who have. And we know that very often people are paying in rent what they should be paying in mortgage to actually own something, but they don't have anyone to help them cross that bridge.

What we have to do is try to figure out how to help people who because of their credit history or a lack of savings because they're living paycheck to paycheck or for other reasons are diverted into the higher rates of the subprime market. Well that's why I think the Federal Housing Administration must be made to work better.

Because after all the FHA remains an industry leader in serving minority, first time, and low income home buyers. And it continues to help people who don't qualify for prime mortgages to avoid risky and in some cases predatory mortgage products. And, very importantly the rate of minority lending through FHA has grown to more than one in three after many years when it didn't look like that was very welcome, right?

So unfortunately the FHA's impact on the marketplace has declined, because of inefficiencies and personnel shortages, they cannot keep up with demands at FHA. In the 1990's, FHA-backed loans represented about 12 percent of the market. Today, it's closer to three percent.

This is another one of these government programs that this administration wants to starve and by doing so cut off the dream of homeownership. Now, I will soon be reintroducing my 21st Century Housing Act, which will take steps to modernize the agency by allowing the FHA to reinvest a portion of its revenues in new employees and information technology; to develop new mortgages to meet market demand and to position the FHA to work more efficiently with lenders and to serve more borrowers.

I also want to raise the FHA mortgage limits for high cost of living areas so it can reach home buyers in more expensive markets. Many people in New York cannot afford a home within two hours of where they work. If the FHA limit were higher, they could afford a home and we should make that happen.

But what if that family that we're trying to get into their home decides they will seek out a subprime loan? Well, we have to put ourselves in the shoes of a parent signing a mortgage product unaware of a complicated, escalating payment formula that has been worked out on some computer that has balloon payments and pre-payment penalties, which includes the cost of taxes and insurance, and other added on costs that the owner doesn't really understand and nobody takes the time to explain them. Clear and easy to understand disclosure, plain talk meant to inform, not to confuse must be the starting point. Buyer beware is just not enough.

So, I also propose a stop to pre-payment penalties designed to trap borrowers when payments skyrocket. These penalties apply to 70 percent of sub-prime mortgages but less than five percent of prime mortgages.

Now, we can imagine a family stuck in this subprime catch 22. A family tries to be responsible and pay down on their principal and even make payments ahead of time. But, in the fine print they learn that unlike everything else in their world, if they pay things off and get ahead, there's going to be penalties imposed on them. This is totally perverse. So they're stuck waiting for the rate to go up instead of being given the opportunity to protect themselves. And then they may very well find themselves on the brink of foreclosure.

I'm also calling for independent counseling to be made available, so when buyers like this family sign the dotted line they understand what they are signing. And as you know from your own experience at NCRC more than one third of subprime borrowers could qualify for lower rate prime mortgages, but many low income and minority borrowers are simply unaware of there options.

Finally, we also know that sometimes because of a sudden catastrophic illness or an accident that disables or injures the prime bread winner, or other circumstances, very responsible families have trouble making their payments. Now unfortunately, homeowners in distress often simply miss payment after payment and eventually lose their homes. A better alternative would be to create incentives for lenders to identify troubled mortgages and to work out solutions before foreclosure happens. Lenders might for example, give borrowers a period of a foreclosure time-out, during which borrowers will have the opportunity to put their financial houses in order and to work out a payment plan. This proposal can build on the great efforts that NCRC is already leading with your Consumer Rescue Fund Initiative. And I want to applaud you for this because this is wonderful agenda to restore the homeownership market and your network of community groups and responsible lenders and state and local governments should strengthen our ability to respond to this crisis.

But, you know, really when it comes to homeownership we should get back to that basic bargain. If you play by the rules, you can count on the rules being fair, open, and honest. And responsible lenders and community organizations need to be encouraged to really live up to their end of the bargain.

I want to see more opportunities for lenders to go into communities that have not always been well served. And I know it can be done. Several years ago, I challenged New York's credit unions to reach a goal of $100 million in responsible home loans to first time buyers in under served areas. These were areas where usually the only alternative would have been a sub-prime or risky mortgage. The result: well, a year later the credit unions all came back to my office to report that they have exceeded their goal. They announced $150 million in loans and they are still [inaudible].

I think it's also important that we look for ways for the government to incentivize these changes and to provide some kind of safety net if the worst happens and escalating foreclosures begin to mount.

You know, it's true that I travel around the country a lot now and speak in big cities and very small towns just as I did throughout my years in the Senate in New York. And there are a lot of people who are feeling less and less connected to one another. You know, it's ironic that in this age of virtual reality where people are on the Internet and bending over working their text messages and blackberries that there is a sense that perhaps we are not as secure as we once were. You know, people are working more, but their jobs are less secure. The whole family has cell phones, but finds it nearly impossible to sit down around the dinner table together. Our nation is growing more interdependent in the global economy, but increasingly feels divided here at home.

Well, I believe we can pursue policies together that lift us all up and homeownership is one piece of that puzzle. And that is why it's so important that what you're doing continues.

And the Community Reinvestment Act was a wise decision thirty years ago by Congress and President Carter. And it has made a tremendous difference. Bank lending to minorities and lower and moderate income borrowers has gone up 20 percent since then. But we still have a lot to do.

I've done a lot of work in microcredit over the years going back to Arkansas when I worked with my husband and Dr. Muhammad Yunus who just won the Noble Peace Prize for the Grameen Bank to bring Grameen Bank techniques to Arkansas. And I've been in many different settings with borrowers and lenders who are doing microcredit. I'll never forget a woman in Denver who said to me, "more dreams die in the parking lots of banks than anywhere else." We need to figure out how we're going to open up the commercial lending sector and continue to provide more alternatives as well.

And when I go out and speak with my constituents, they're not asking for a handout. They're just asking once again to be part of this great American Dream; this adventure that we are all on together. They just want the tools to help them realize their own ambitions.

Now, when I created an organization called New Jobs for New York, to try and bring more capital from New York City upstate, I went around and met with a lot of the entrepreneurs who were trying to break through and look for a chance to get the capital they needed. And time and time again there was just no place for them to go.

Well, it would be in America's interest to have a big national capital fund that would make bets again on smart people who are willing to work hard. I want to do that in the strategic energy area. You know, I meet people all over the country who have good ideas about alternative energy, but they're not getting the funding they need to translate that into reality. And when it comes to the Renewal Communities which the Clinton administration started back in 2000; well, I see the results of those investments in tourism along the Erie Canal, which had basically been just left to wither. I see those investments in the local wine industry in New York. And I think if we pursue a comprehensive agenda, urban and rural, leaving nobody out, then I think we're going to have the consensus we need in the country to start solving problems again. Because that's what I believe in.

I believe that if we put our heads together and we start looking at the facts and the evidence, and put the ideology on the back shelf somewhere, because I've never seen any ideology that helps you solve a problem, you've got to get together and see what the real facts are. And we know a lot about what works, we've just been stymied a little bit in the last six years. But we're going to get rid of those roadblocks, and we're going to roll up our sleeves and we're going to starting acting liking Americans again. We're going to start solving our problems together.

We brought electricity to rural communities, we brought interstate highway systems, we're going to bring broadband deployment so that every community can be connected up to the global economy. We're going to have a new housing project program that is going to invest in local communities. We're going to have universal healthcare coverage and we're going to use energy to create new jobs. We can do this.

Thank you all.