March 15, 2007
“A Mortgage Crisis Begins to Spiral, and the Casualties Mount,” read the headline in The New York Times last week. I clicked on the link expecting to read about the growing numbers of victims of “exploding” subprime mortgages, suddenly stuck with unaffordable payments as interest rates tick up and housing prices fall. Instead, the “casualties” of the headline were the subprime mortgage bankers and brokers, multimillionaires who are losing their red Ferrari convertibles and private jets now that the housing bubble has officially burst.
Yes, this current stock slump looks to a lot of people like the tech bust 2.0, and it may very well affect the whole economy. The economic big picture is an important angle, also explored by the Times here, here and here.
But what about the angle involving real people who are actually going to lose their homes? "Subprime" lending is a creature of our recent unprecedented era of unrestricted credit. It is the business of providing mortgages at exceptionally high interest rates to people with poor or spotty credit histories, who in this economy, tend to be lower earners, less educated and disproportionately minority. It also often has an uglier name—predatory lending.
In the just-passed era of record-low interest rates, the lenders who are now in trouble dangled homeownership before millions of people who never dreamed of such a thing before, enticing people into barely affordable contracts with low introductory rates and zero percent down, helping drive housing prices up and inflating our homeownership rate to the highest in American history. Not to mention minting money for themselves.
And President Bush bragged about it, because it looked like progress. He repeatedly cut funding for Housing and Urban Development programs, even in the wake of the Katrina diaspora crisis. Yet, because of the proliferation of subprime loans, he was able to tell a black audience in 2005, “Today, nearly half of all African Americans own their own homes. And that's good for our country.” It was the ultimate in privatization.
Unfortunately, sometimes the risk gets so high that owning is not really owning. The Center for Responsible Lending, a nonprofit that takes on all forms of predatory lending, estimates that predatory mortgage lending costs Americans more than $9.1 billion each year. And African Americans and Latinos are more likely to get subprime mortgages even when they have the same qualifications as whites. "Nontraditional loans in the subprime market are seriously eroding the traditional benefits of homeownership," Michael Calhoun, the Center’s president, has said. "By their very nature, they pose a high risk of losing valuable home equity or foreclosure."
Now the brokers are going to take some losses and switch to trading something else—fine for them. But what about the millions of marginally middle-class people stuck up to their neck with higher and unaffordable monthly payments? Their futures hold delinquency, defaults, foreclosures and bankruptcy.
According to Barron's , during the next two years homeowners can expect increased monthly payments on an estimated $600 billion of subprime mortgages. The last quarter of 2006 had a record rate of foreclosures. Senator Christopher Dodd, D-Conn.,, the chairman of the Banking Committee, told reporters that the next 18 months may bring as many as 2 million more.
America is at another Enron moment. Rather than shedding a tear for the traders who pumped up this market, we are now required as a country to reexamine the responsibility that creditors have to borrowers—to make a sane assessment of the ability to repay, not merely to make as much money as they can out of the risk. It is high time to block predatory lending of all kinds by reinstating usury laws, limiting interest rates, penalties and fees that creditors can charge.
Will our Democratic lawmakers accept this moral challenge? The jury’s still out. On the one hand, 14 Democratic senators voted for the credit-industry-authored bankruptcy bill in 2005. On the other hand, Senator Carl Levin, D-Mich., recently held some pretty harrowing hearings on predatory credit card industry practices, in which he raked over the CEOs of the top three credit card issuers in the country.
Several lawmakers, including Ted Kennedy, D-Mass., and Hillary Clinton, D-NY, have introduced reforms of the extremely predatory practices of student lenders. And Senator Chris Dodd and Representative Barney Frank, D-Mass., are each discussing introducing legislation on subprime lending, Dodd to protect the borrowers already trapped and Frank to restrict these risky mortgages going forward.
I have high hopes that predatory lending could become the moral values issue of 2008. In the meantime, let’s keep in mind who the real casualties are.