At a Congressional hearing of the House Financial Services Committee on Tuesday, speakers explored ways to clear up the subprime mortgage mess.

ARMs (Adjustable Rate Mortgages) have fueled the foreclosure increase when, after the initial fixed part of the loan ends, rates balloon into payments borrowers can no longer afford.

In addition to setting up a rescue fund for borrowers who face short-term problems due to illness or job layoff, recommendations included establishing a bond fund to help pay for borrowers switching out of their ARMs and into traditional fixed-rate mortgages. In cases where consumers fall victim to predatory lenders, the government would refinance loans through Fannie Mae.

Lenders may be willing to go along with these recommendations due to the cost of foreclosures. Typically, a bank loses money on a foreclosure because of costs involved in keeping the house on the books, maintenance and sales commissions. Additionally, houses that have been foreclosed upon sell for less than market value.

Panelists at the hearing included spokesmen for the FDIC, HUD, Fannie Mae and Freddie Mac, various consumer groups and lenders.

According to a study by the Center for Responsible Lending, subprime mortgages produced more than $2 trillion in home loans but these loans have led to a loss in home ownership, not an increase.

A higher percentage of subprime loans end in foreclosure than prime loans. The CRL estimates that more than 15% of subprime loans orginated since 1998 either have ended in foreclosure or will end in foreclosure. It isn’t just new home buyers who have experienced loss of home ownership, these figures include borrowers who refinanced loans.

Foreclosure has long-term effects and homeowners who lose their homes may not get back into homeownership for ten or more years.

Subprime Lending is a Net Drain on Homeownership