Debacle Threatens American Dream
If you want to understand the causes of the subprime mortgage crisis, consider the case of Delores King.
Delores King is 71 years old and has owned her home on the South Side of Chicago for 37 years, through seven presidents, through retirement and into her second career as a foster grandparent to grade-school children.
Several years ago, Ms. King was the victim of an identify theft scam. After the scam put her $3,000 in debt, she tried to do the right thing by paying it off. She jumped at a telemarketer’s offer of a quick mortgage loan, and within a few weeks she had signed the papers for an adjustable-rate mortgage with a “teaser” interest rate of 1.45 percent. Even after the teaser rate expired, the mortgage broker assured her, she’d never have to pay more than $800 a month.
But he didn’t tell her that the rate was set to explode. He didn’t tell her that, on her income, she’d never be able to pay off the interest. He didn’t tell her that, two years later, her mortgage would reach $1,488.
Delores King’s monthly Social Security check is $950. And even with a part-time job and help from friends and family, there was no way she could meet her mortgage payments.
Fortunately, Ms. King received help to save her home. But the threat to her home is far from a unique case. Like Ms. King, millions of homeowners were told they could afford subprime loans — loans that brokers, lenders and investors knew, or should have known, they could not repay. Like Ms. King, more than 2 million Americans have been brought to the brink of foreclosure, and beyond.
America’s foreclosure rates are the highest since national record-keeping began decades ago. Home prices declined last year and look to do so again this year; some say that such a two-year decline has not happened since the Great Depression.
Even those who aren’t losing their homes are losing equity, which they need to pay off bills, send their kids to college and make other investments in an effort to create and secure a prosperous life. For 70 percent of the American people, their homes are the largest financial assets they will ever own, a key to long-term security. When the value of that asset drops or is wiped out, the impact on homeowners, families and communities can be devastating. Indeed, the Center for Responsible Lending has estimated that home equity will drop by $200 billion nationwide in the next several years.
In his State of the Union address, President Bush spoke of “concern about our economic future.” But many millions of Americans have more than mere “concern.” They are deeply worried that our nation’s economy has entered a period that threatens to undermine what so many have worked to build.
The proposed economic stimulus package may provide some short-term benefits for our economy. However, it’s essential that we take long-term steps to confront the underlying problem that brought us to this point in the first place. We must respond with far-reaching measures that put our markets back on a sound footing and give deserving homeowners a decent shot at keeping their homes.
After ignoring the severity of the foreclosure crisis for months, the Bush administration announced in December an effort to encourage lenders and loan servicers to refinance at-risk mortgages. That effort may have been well-intended, but it has proved inadequate to the task at hand.
Sheila C. Bair, the chairman of the Federal Deposit Insurance Corporation, has proposed temporarily freezing scheduled interest rate hikes that, if left unchecked, will cause people to lose their homes.
I’ve proposed creating a temporary “Homeownership Preservation Corp.” that will purchase and refinance mortgages headed toward foreclosure, and do so in a way that neither lenders nor sellers are “bailed out,” and also in a way that the federal taxpayer will, in the long run, be held harmless. Most importantly, many deserving Americans would be able to keep their homes. A similar entity was established for several years during the 1930s and generally is considered to have been an effective tool to preserve home ownership.
Housing markets are currently locked into a crisis of confidence. When a mortgage contains terms and conditions, many of which are hidden, that hold within them the seeds of foreclosure and financial ruination, then it should come as no surprise that borrowers, lenders and investors are deeply reluctant to participate in this market. So, in addition to the paramount and immediate need to mitigate foreclosure, it is imperative that appropriate steps be taken to restore confidence in the housing markets.
Federal financial regulators must do a better job of being effective cops on the beat. Many of the tools they currently have to police the market and prevent abusive and predatory practices are not being used. The Home Ownership and Equity Protection Act, which has been on the books since 1994, requires the Federal Reserve and other regulators to prohibit unfair, deceptive and evasive acts and practices in the mortgage market.
Late last year, the Fed proposed some regulations to finally implement this law. Unfortunately, that proposal, while well-intended, falls short of what is needed to protect consumers from predatory and abusive lending. It even takes a step backward from current law by requiring a homeowner to establish not only that he or she is a victim of unfair and deceptive acts or practices, but that others were, as well. The Fed will hopefully revise this proposed rule and take the strong steps needed to implement this law.
Legislative work is needed, as well, to reform lending practices and restore confidence in the mortgage finance marketplace. That’s why I’ve written the Homeownership Preservation and Protection Act, which will put an end to the kinds of predatory lending practices that have led to record defaults and foreclosures. The legislation will set appropriate standards for brokers, lenders, appraisers, servicers and investors; establish new protections for homebuyers; and provide strong remedies to make sure that the new standards are met.
For millions of hardworking, tax-paying, law-abiding families, the subprime debacle threatens to turn the American dream of home ownership into a nightmare — which is exactly why we must work together and fight it on all fronts. It won’t be easy, but I’m confident that we can find the strength to meet this challenge.
“I will end up out on the street if something doesn’t change soon,” Delores King told me last year, at the height of her personal crisis. She was lucky; her home was saved. But in the broader crisis, millions of other homeowners will not be as fortunate. For their sake, change needs to come now.
Sen. Chris Dodd (D-Conn.) is chairman of the Banking, Housing and Urban Affairs Committee.