Speeches & Testimony Martin J. Gruenberg, Vice Chairman, FDIC 11th Annual Wall Street Project Economic Summit, New York, New York;The Church and the Subprime Crisis;One Thousand Churches Connected Breakfast: Churches and Foreclosure
January 8, 2008
Thank you for that kind introduction. It is an honor for me to be here this
morning. I am pleased to have the opportunity to share with you some thoughts on the
critically important role churches can play in addressing this issue of subprime mortgage
I would like to begin by making a few brief points.
First, we do have a crisis on our hands. There were approximately 600,000 homes
with subprime mortgages which entered foreclosure during the first three quarters of last
year.1 When the numbers for the entire year are in, subprime mortgages entering
foreclosure are likely reach 800,000 to 1 million. The FDIC estimates that in 2008 and
2009 about 1.7 million subprime mortgages will reach their so-called reset date when the
interest rate on the mortgage increases dramatically and the borrowers won't be able to
pay the adjusted rate. Hundreds of thousands of those homeowners will be at risk of
Second, subprime mortgage lending, as you know, is heavily concentrated among
minority borrowers. Under a Federal law, the Home Mortgage Disclosure Act (HMDA),
the Federal Reserve collects data on so-called "high cost" mortgage lending, defined as
mortgage loans which are 3 points above the Treasury rate. According to the most recent
HMDA data released by the Federal Reserve last year, 54 percent of African-Americans
and 47 percent of Hispanics received high cost mortgages in 2006. Only 18 percent of
non-Hispanic whites received high cost mortgages. The Federal Reserve study found that
borrower related factors accounted for only one sixth of this disparity.
Third, when foreclosures occur, it is not only the homeowner and the
homeowner's family that are affected. When two or three homes in a neighborhood are
foreclosed, it affects the value of all the homes in that neighborhood and community.
These subprime mortgage foreclosures will affect neighborhoods and communities all
over this country.
Fourth, it has been said that a lot of these homes were bought on a speculative
basis and people who did that don't deserve help. That is true of some. But it is important
to understand that the majority of subprime mortgages were refinancings of existing
homes. In other words, these were homes in which the homeowner was living, with
mortgages that the homeowner was paying and could afford. In many cases the
homeowner was encouraged or induced to refinance into one of these subprime
mortgages with exploding interest rates that the homeowner couldn't afford.
Subprime mortgage lending was promoted as a way to increase minority
homeownership in the United States. At the end of the day, when this whole process has
played out, subprime mortgage lending may well result in a net reduction in minority
homeownership in this country.
So what can we do? Some of these homeowners may be able to refinance out of
these mortgages into a new loan they can afford, either directly with a private lender or
with an FHA guarantee. That's a good solution. But particularly with falling housing
prices across the country, many people will have difficulty qualifying to refinance their
mortgage. That is why the Chairman of the FDIC, Sheila Bair, came forward with a
simple proposal. For those subprime mortgages whose interest rates will reset and for
which the borrower has been paying the starter rate but won't be able to afford the higher
rate and can't refinance, simply fix the interest rate at the starter rate, which is already at
or above the prime rate in many cases, for the term of the loan. That way foreclosure is
avoided and the investors in the securities in which these mortgages are tied up will
actually benefit because the highest cost option is foreclosure.
This proposal received a great deal of attention. The American Securitization
Forum, which represents the securitization industry and its participants, many of which
are also servicers of these mortgages (the financial companies which collect payments on
the mortgages on behalf of the investors) agreed to put forward a framework under which
the servicers will fix the interest rate on the mortgages at the starter rate for five years for
those borrowers who live in their homes and have been making their mortgage payments
at the starter rate.
The FDIC is encouraging servicers to try to restructure any loan that is owner
occupied and for which the borrower has a willingness and ability to repay. We should
try to keep as many people as possible in their homes. We will be carefully scrutinizing
the level of loan modification activity under reports required by the American
Securitization Forum (ASF) framework, and we will push for changes to the framework
if the level of loan modifications remains low.
Churches can play a crucially important role in encouraging people in their
communities that have one of these subprime mortgages to contact their servicer or
lender. These mortgages can't be modified if the borrowers don't interact with the
servicer or lender. The FDIC and the other federal bank regulatory agencies have urged
the lenders and servicers to proactively reach out to borrowers, but your churches can be
invaluable intermediaries in helping to facilitate that contact.
You really do have a critical role to play. The challenge before us is great and we
all need to make a contribution.
Thank you very much.
1 Estimated based on data reported by the Mortgage Bankers Association's National Delinquency Survey.