Press Release
For Immediate Release
December 6, 2007
Contact: Robyn Ziegler


Attorney General Madigan Responds – What the Federal Freeze Plan Means for Illinois Homeowners

Chicago – “President Bush has unveiled a plan that, in reality, does very little to assist struggling homeowners in Illinois,” Attorney General Lisa Madigan said today in response to the President’s announcement of a federal plan to freeze interest rates for up to five years for a small percentage of the nation’s two million homeowners trapped in subprime mortgages with adjustable rates that are scheduled to reset soon.

Madigan has been working to address the state’s burgeoning home foreclosure crisis on several fronts, including drafting the recently enacted Homeownership Preservation Act, which places tighter restrictions on the state’s subprime mortgage industry; filing lawsuits against unscrupulous mortgage brokers; and aggressively working to make sure that loan servicers provide relief for individual homeowners trapped in unaffordable loans.

“I have reviewed the agreement between the administration and mortgage lenders, and I do not see much help here for the majority of those homeowners currently in or facing foreclosure,” said Madigan.

The President’s plan would exclude homeowners who have fallen behind in their monthly payments – estimated to be about 22 percent of all subprime borrowers – and homeowners whose loans’ low introductory teaser rates are scheduled to reset to higher rates before Jan.1, 2008.

“The President’s plan seems to be premised on the faulty belief that America’s homeowners are primarily to blame for this epic crisis,” said Madigan. “In reality, our investigations have revealed that subprime lenders widely engaged in reckless lending practices that pushed borrowers into unaffordable loans. By excluding homeowners who have fallen behind on their payments, the President’s plan gives the subprime mortgage industry a free pass for engaging in irresponsible conduct, leading to this crisis.”

Madigan noted that investigations conducted by her office reveal that in recent years the subprime mortgage industry has combined increasingly lax underwriting standards with abusive sales practices to trap homeowners in loans they could not afford or understand, in many cases placing borrowers into loans with higher interest rates than the rates for which they qualified. By some estimates, more than a third of the nation’s subprime borrowers could have qualified for a prime product, avoiding the tremendous hardship borrowers are now facing.

Calling the President’s plan nothing more than a first step, Madigan outlined the following ways in which the plan does not go far enough to help Illinois families save their homes:

  • The plan does nothing for those homeowners already in trouble or those who have loans that are scheduled to jump to much higher interest rates right now. Instead, the plan only affects loans that are scheduled to reset between Jan. 1, 2008 and July 31, 2010.

  • The plan would offer help to only 10 percent of subprime borrowers who have adjustable rate mortgages that are scheduled to reset out of a nationwide total of 2.2 million subprime loans that are at risk, according to the Woodstock Institute in Chicago. In Illinois alone, there are more than 200,000 subprime loans currently being serviced.

  • · It is unclear whether the plan provides any relief to borrowers caught in the riskiest products – pay option mortgages with teaser interest rates that reset after the first month of the loan and a payment structure that increases the loan’s balance over time. Madigan’s office has found that borrowers with these mortgages were often lured into the loans by deceptive advertising or fraudulent sales practices. Because the loans are generally coupled with significant prepayment penalties, by the time the borrowers are aware of the true nature of their loans, they are trapped.

Madigan called for additional solutions to help Illinois:

  • An immediate, short-term freeze of interest rates on all subprime loans so that lenders, servicers, counselors, government and lawyers have time to determine how to help those in trouble now. This will also help borrowers whose loans have already begun to adjust from falling further behind.

  • Innovative government solutions for refinancing as many loans as possible to make them sustainable for the long term. Under current federal law, cities and states can issue tax-exempt bonds to finance new mortgages for first-time homebuyers. This program should be expanded to allow the use of funds raised through tax-exempt bonds for refinance mortgages. This would increase state and local resources available for borrowers in trouble.

  • Passage of U.S. Senator Richard Durbin’s bill, the “Helping Families Save their Homes Act of 2007.” This legislation would expand the tools available to assist families on the brink of losing their homes by allowing bankruptcy courts to engage in loan modifications to save the home of a borrower who has filed bankruptcy due to financial trouble from a risky loan.

  • Amending the Federal Income Tax Code so that reductions in the principal amount of a homeowner’s loan does not count as taxable income. In some cases, loan servicers are reducing the principal amount of the loan to make payments more affordable. This strategy will not work if the struggling homeowner is hit with a large tax penalty at the end of the year.

The Attorney General offered additional ways to ensure that the president’s plan has an impact for borrowers:

  • For those homeowners who are eligible for the President's plan, lenders should be required to immediately contact those borrowers with qualifying loans so that homeowners can take advantage of the plan before they lose their homes.

  • Because the President’s plan is a voluntary program, lenders should be monitored to ensure proper follow-through with this plan.

In addition, Madigan, along with 10 other attorneys general who have formed a Foreclosure Prevention Working Group, has met with the top 20 subprime servicers/lenders, representing 93 percent of the market, in an effort to push these entities to work with borrowers and prevent foreclosures. Madigan noted that her office and this group will be closely monitoring the effectiveness of the President’s plan.

“We have requested detailed data from servicers and lenders that will tell us whether these entities are actually helping homeowners to avoid foreclosure in any significant way,” said Madigan. “If the President's plan is truly to make a difference, the numbers we receive and the conduct we monitor will tell the story.“


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