Hospitals & Asylums






Adjustable Rate Mortgage Ban HA-10-5-07


By Tony Sanders


1. At the end of 2006 there were $13.3 trillion in US mortgage loans. $10.2 trillion were in one to four family residences, $731 billion in multifamily residences, $2.2 trillion in non-farm nonresidential, commercial real estate and $163 billion in farms.  In 2005 the total output of housing services, meaning the income derived from mortgages, was estimated at $1.23 trillion, $928.8 billion from owner occupied units, $250.7 billion net income from rental properties and $54.6 billion other, mostly trailer parks and farms.  In the U.S., about 80% of the value of the total commercial real estate market is held privately.  The number of home sales is also expected to dip from 6.48 million in 2006 to 6.29 million in 2007, a drop of 2.7 percent.  Interest rates, currently at about 6.16 percent for a 30-year fixed-rate loan are expected to rise gradually to about 6.5 percent by the fourth quarter. 


Table 1: Outstanding Mortgage Debt 2007 (in millions of US dollars)


Type of holder and property





All holder





One- to four-family residences





Multifamily residences





Non-farm, nonresidential












Source: Statistical Supplement to the Federal Reserve Bulletin, April 2007, 1.54

2. After more than a decade of setting one sales record after another the housing market entered a period of somewhat lower sales and less robust price gains in late 2005 and early 2006.  The seasonally adjusted annual rate of existing-home sales peaked at over 7.2 million units in the second half of 2005 but have declined steadily through the first half of 2006.  After rising for three consecutive months, total existing home sales, including single-family, town homes, condominiums and co-ops fell 8.4% to the seasonally adjusted annual rate of 6.12 million units in March from a pace of 6.68 million in February and are 11.3% below the 6.90 million unit level of March 2006.  Sales of existing homes plunged in March by the largest amount in nearly two decades, reflecting bad weather in February and increasing problems from loans to people with poor credit.  It marked the biggest one-month decline since a 12.6 percent drop in January 1989. The drop left sales in March at a seasonally adjusted annual rate of 6.12 million units, the slowest pace since June 2003.  Looking as the overall activity in the first quarter home sales averaged 6.41 million, a figure that is moderately higher than the sales pace at the second half of 2006.  Total housing inventory levels fell 1.6% at the end of March to 3.75 million existing homes available for sale, which represents a 7.3 month supply at the current sales pace, up from a 6.8 month supply in February. 


3. The number of total foreclosure filings rose from about 885,000 in 2005 to 1,259,118 in 2006, up 42 percent from 2005, a foreclosure rate of one foreclosure filing for every 92 U.S. households. If trends from the first quarter continue it can be estimated from the seasonally adjusted annual rate that there will be 1.6 million foreclosures 2007.  As this year ends, 2.2 million households in the sub-prime market will either have lost their homes to foreclosure or hold sub-prime mortgages that will fail over the next several years. These foreclosures will cost homeowners as much as $164 billion, primarily in lost home equity.  An estimate 15.6% of all sub-prime loans originated since 1998 either have ended or will end in foreclosure and the loss of homeownership. This rate is nearly double the projected rate of sub-prime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the “Oil Patch” disaster of the 1980s. Additionally only about 1.4 million of 15.1 million loans analyzed from 1998 through 2006 were for first-time home buyers. Most were for refinancing. To date, more than 500,000 of those sub-prime borrowers have lost their homes to foreclosures. An additional 1.8 million are likely to follow as the market deteriorates. That’s nearly 2.4 million lost homes. 


Table 2: Home Sales and Foreclosure Estimates 2004-1st Quarter 2007



Home Sales (annually adjusted)

Change in annual Home Sales 

Foreclosure Filings

Change in Foreclosures
















January 2007
















Source: Total Existing Home Sales, National Association of Realtors; Foreclosures, Realty Trac.


4. As foreclosures rise and credit tightens U.S. home prices fell 1.5 percent in February from a year ago the eighth straight fall in median home prices, the longest such period of declining prices on record and steepest decline in nearly 15 years. The median home price fell to $217,000, a drop of 0.3 percent from a year ago.  Over the past ten years, we have seen extraordinary run-ups in house prices. From 1996 to the present, nominal house prices in the United States have doubled, rising at a 7-1/4 percent annual rate. Over the past five years, the rise even accelerated to an annual average increase of 8-3/4 percent.

Home prices are expected to finish down, the first drop since the National Association of Realtors started tracking values in 1968.  NAR projects a 1 percent decline in the median price of an existing single-family home, to $219,800.  Prices of new homes, at a median of $246,400, are expected to remain steady.  Sales are expected to recover gradually over the second half of the year and prices will begin to edge up again sometime after that. In 2008 price gains of 1.4 percent for existing homes and 2.2 percent for new homes.


5. Sub-prime loans made during 1998-2006 have led or will lead to a net loss of homeownership for almost one million families. In fact, a net homeownership loss occurs in sub-prime loans made in every one of the past nine years.  History has shown that borrowers with lower incomes or blemished credit can be successful homeowners when given suitable mortgages with reasonable terms and fees. But lax underwriting practices, dangerous loan products, and a disregard for affordability have set up vulnerable homeowners to fail. As a result, millions of families with the most to gain from ownership have lost their homes and billions of dollars in equity. Because so many owners refinanced at roughly the same time, much of the sub-prime exposure was funneled into a very narrow time frame. Most sub-primes are so-called 2/28 (or 3/27) loans, meaning that the first couple of years of payments are at the low "teaser" rate. After that, the loans reset every six months or year to the higher, fully indexed rate, which can cost borrowers hundreds of extra dollars each month. The 3/27s done in 2004 and 2/28s from 2005 will all reset this year. Here's what the resets can do to monthly mortgage payments: At the original rates of, say, 6 percent, the payment on a $200,000 home was only $1,200 a month. Upon reset, however, at perhaps 10 percent, that monthly payment jumps to $1,755, a $555 increase.


6. Congress must vest their confidence in the Secretary of Housing and Urban Development, as the lead federal mortgage loan lender and supervisor of government sponsored investment in housing, to redress the slump in housing sales and spike in foreclosures in 2006 and 2007, the GDP growth rate was reported to be only 1.7% first quarter 2007.  The federal government must prioritize investment in residential real estate in advancement of their programs of assistance for the homeless, mentally ill, drug treatment facilities and halfway houses.  It is the policy of the United States to promote the general welfare of the Nation by employing the funds and credit of the Nation to assist States and political subdivisions of States to remedy the unsafe housing conditions and the acute shortage of decent and safe dwellings for low-income families and individuals with physical and mental disabilities.  Government direct sponsored residential homes fall under four categories: Homeless shelters, community mental health and retardation facilities, substance abuse treatment facilities and criminal justice halfway houses.  The annual cost of staffing and operating a facility is roughly the price of the entire mortgage.  The costs to the government are therefore expected to increase as more houses are purchased and staffed however this should be offset by rental payments of residents and reduced cost of community corrections over prison.


Table 3: Estimated Federal Direct Investment in Residential Real Estate


Type of Facility

Estimated Shortfall

Annual Goal for New Shelters

Estimated Annual Cost to Federal Government

Estimated Annual Cost to State and Local Gov.

Homeless Shelters


2,500 for 2 years

$250 million

$250 million

Community Mental Health Shelters


1,000 for 10 years

$100 million

$100 million

Substance Abuse Treatment Facilities


1,000 for 10 years

$100 million

$100 million

Criminal Justice Halfway Houses


25,000 for 10 years

$2.5 billion

$2.5 billion


Source: Hospitals & Asylums


7. On any given night an estimated 754,000 persons will experience homelessness and between 330,000 and 415,000 will stay at a homeless shelter or transitional housing throughout the U.S. depending upon the season. It can be estimated that 3,000-5,000 emergency homeless shelters with 20 to 50 beds are needed to make up for the loss of 115,000 beds between 1996 and 2005 as these facilities shifted from emergency to transitional or permanent residential facilities for the disabled.  There are an estimated 2.5 million community mental health and retardation beds in 100,000 community shelters around the nations supervised by over 5,722 organizations. It is the goal of the mental health system to close all state mental institutions and private psychiatric hospitals to leave only a limited inpatient population in general hospital psychiatric wards with access to community shelters. If the mental health system would push forward with this objective it could be estimated that the mental health system would need to shelter as many 150,000 persons in an estimated 5,000 new shelters.  To make progress towards this goal it is recommended to push for around 500-1,000 new community mental health shelters annually for 10 years to absorb the homeless inpatient population and care for the seriously mentally ill.  There are an estimated 2.5 million admissions to inpatient drug treatment annually meaning that there are an estimated 200,000 drug treatment beds in 10,000 facilities around the nation.  Substance abuse treatment is a growth industry for residential housing whereas an estimated 350,000 drug convictions were overturned in the Blakely decision of the US Supreme Court.  Whereas there is a market of half a million annually for residential drug treatment and another 250,000 looking for longer term transitional drug free housing, it seems reasonable to try to double the number of drug treatment facilities, many for longer term supervision of drug offenders in the community, so the federal government should plan for 1,000 new residential drug treatment facilities annually.    


8. The vast majority of directly government sponsored community reinvestment in residential housing is expected to come from the corrections system.  Each year jails release in excess of 10,000,000, 3.3% of the population, back into the community.  A record 7 million people - or one in every 32 American adults - were behind bars, on probation or on parole by the end of 2005.  Of those, 2.2 million were in prison or jail, an increase of 2.7% over the previous year.  More than 4.1 million people were on probation and 784,208 were on parole.  Nationally it can be estimated that a 1.5 million reduction in prison population is needed to bring the national penal population within norms.  To accomplish this safely it is recommended for the federal government to transfer all unregulated federal financing for local law enforcement, $3 billion annually, to local community corrections programs.  It would be reasonable to expect the federal bureau of prisons and local community corrections boards under the supervision of state departments of corrections to nationally purchase more than 25,000 houses a year towards a ten year goal of 2.5 million beds, and 24 hour staff to resident ratio of 3-8 per prisoner, 500,000 employees of criminal justice halfway houses.  This means that on the average every county will have at least one new halfway house and in counties with large penal populations they will establish ten to a hundred residential halfway houses a year.  The objective is to provide people on probation and parole a crime-free living environment and reduce the total prison population.


9. Furthermore, Congress must get serious about the Adjustable Rate Mortgage (ARM) ban.  Section 129 of the Truth in Lending Act 15USC(41)IB§1639 makes it unlawful to engage in any unfair or deceptive act or practice in providing any sub-prime federally related mortgage loan. The prevalence of these deceptive loans over the past few years is attributed with causing the majority of the dramatic increase in foreclosures.  It would make a lot of sense for Congress to repeal the several laws on the books that permit federal lenders to issue ARM loans so that all mortgage loans have predictable fixed rates that can be reduced after a few years after the borrower has made a substantial number of timely payments.  ARM loans flaunt the law of supply and demand and creates a command economy based upon an impersonal index that fails to make sense of the income of the individual in a society with an increasing division between rich and poor and diminishing middle class that skews national statistics. Adjustable rate mortgages under 38USCIII(37)I§3707 and hybrid adjustable rate mortgages §3707A should be repealed from Veteran’s statute.  These laws are referenced to the terms in Section 215 of the National Housing Act.  Adjustable Rate Mortgage Caps under 12USC(39)§3806 should also be amended to read Adjustable Rate Mortgage Ban with an explanation that this is an all out ban on federal ARM loans. To ban ARM loans by federally insured mortgage lenders it would probably sufficient for the Secretary of Housing and Urban Development to ban the practice of ARM loans by order and for Congress to repeal the aforementioned three sections and any references to ARM loans in federal statutes, when confronted with them.


10. The Federal Government cannot through its direct action alone provide for the housing of every American citizen, or even a majority 
of its citizens, nor can the federal government buy enough houses to offset the foreclosures and slump in housing sales, but it is the 
responsibility of the Government to promote and protect the independent and collective actions of private citizens to develop housing 
and strengthen their own neighborhoods.  To improve the general economy Congress will need to pass the bills before them, the 
Predatory Mortgage Lending Practices Reduction Act H.R.2061 will restore common sense to mortgage lending so that the maximum 
premium is not more than 30-50% of a person’s income, the Community Reinvestment Modernization Act of 2007 H.R.1289 will 
extend reporting requirements to all community lending agencies and the Homeless Emergency Assistance and Rapid Transition to 
Housing Act of 2007 H.R. 840 that establishes a regime for collective applications for federal financial assistance to acquire and staff 
community shelters.  
New bills. The Mortgage Cancellation Relief Act of 2007 HR1876 to exclude from gross income of individual taxpayers discharges of 
indebtedness attributable to certain forgiven residential mortgage obligations. 
Expanding American Homeownership Act of 2007 H.R.1752 to modernize and update the National Housing Act and enable the Federal 
Housing Administration to use risk-based pricing to more effectively reach underserved borrowers.
Home Ownership and Equity Protection Act (HOEPA) of 2007 S.1386 that will direct defaulted Mortgages to the State Homeownership 
Protection Center that Federal Reserve Consumer Advisory Board will be holding hearings on in June.


Sanders, Tony J. Adjustable Rate Mortgage (ARM) Ban. Hospitals & Asylums. 50 pgs.