Since 2002, President George W. Bush has designated June as National Homeownership Month to increase awareness of the benefits of owning a piece of the American dream. For untold scores of Americans, that dream is not on hold.
As a child, I was fascinated by houses created from playing cards. I loved watching as the builder steadily stacked one flimsy card on top of another, creating impressively tall towers. It was magical. There was only one problem: With nothing of substance to support it, the house of cards came crashing down — an apt image for the subprime lending market today.
For almost a decade, an increasingly concerned Congress has watched a burgeoning subprime market grow larger and more dangerous. Each year, the problems mounted: outrageous fees, racial targeting and steering, abusive refinances, and, most recently, dangerous loans virtually guaranteed to end in foreclosure. And each year for the past seven years, Congress has done nothing except wring its hands at annual hearings on predatory lending and abuses by subprime home-loan industry. Meanwhile, subprime lenders were free from restraint and oversight, but not greed.
Unchecked by the Federal Reserve and a Congress alternately controlled by both Republicans and Democrats, the industry became bolder with both its greed and methods. Subprime lenders began pushing "exploding" adjustable-rate mortgages. These are loans that appear deceptively affordable but soon balloon into jumbo-sized payments that crush the family budget. Families holding subprime mortgages are losing their homes at an epidemic rate. Overall foreclosures in April were 62 percent higher than a year ago, mostly because of bad subprime mortgages. Lehman Brothers predicts a 30 percent loss rate on subprime loans made in 2006 — nearly one out of three, which translates into thousands of families across America losing their homes.
While those suffering eviction and foreclosure from subprime loans cuts across the spectrum of race and income, African-American and Latino homeowners received a disproportionate share of subprime loans. Instead of helping people of color make gains in wealth and homeownership, subprime lending caused a net loss in homeownership. Less than 10 percent of subprime borrowers have used subprime loans for buying a family's first home, thereby increasing the national homeownership rate. Now, that dream of homeownership is in jeopardy unless the feds get in the game and help these Americans save their homes.
Sensible policies to protect homeowners could prevent future losses. Congress had a chance to prevent this debacle. Clearly, it failed. Less clear is why it failed. A recent report by Common Cause offers a compelling clue. From 1999 through 2006, the mortgage-lending industry spent $210 million lobbying Congress and providing campaign contributions to members. While the majority of the money was spent on Republicans, Democratic members hand their hands out and palms greased, too. It is no coincidence that a Congress awash in mortgage-lending largesse has steadfastly refused to rein in the industry. Shame on them.
Policymakers need to encourage sensible policies that protect homeowners and stop protecting subprime lenders, like Ameriquest and New Century, that used despicable tactics to push people into bad loans. While much of the media coverage has focused on Wall Street and investors, we need to remember that this crisis is affecting ordinary, hardworking families. Behind every subprime loan gone bad, there's a family with devastated credit, a forfeited home and dashed dreams.
Recently widowed, a woman from North Carolina traveled to Washington last February to tell Congress the story behind the statistic. She told members of the U.S. Senate Committee on Banking, Housing and Urban Affairs about how she trusted the lender who refinanced her home with a loan that appeared affordable. And it was, until it suddenly wasn't. The "affordable" loan ballooned overnight into a monster that devoured nearly every penny her family could rub together.
The worst is yet to come. "Resets" is the term used when a homeowner's monthly payment jumps, typically by 30 percent to 40 percent. The vast majority of resets will hit home over the next 18 months. Nevertheless, subprime lenders continue to qualify folks with no ability to pay the higher mortgage amount.
It is not too late for Congress to do the right thing. Homeowners struggling with subprime mortgages and drowning in red tape need a fighting chance to keep their homes. Congress can encourage investors and loan services to remove the self-imposed barriers preventing them from modifying abusive subprime loans into affordable mortgages. Congress also needs to update the Home Ownership and Equity Protection Act of 1994, which is supposed to empower the Federal Reserve Board to protect people from unfair and deceptive lending practices. And we need to reform bankruptcy law so it helps struggling homeowners instead of making foreclosures more likely.
A house of cards is not strong enough to stand for long. Families need to be able to buy houses with loans that are based on responsible financing and designed for sustainable ownership — not temporary shelter.
Donna Brazile is a political commentator on CNN, ABC and NPR, contributing columnist to Roll Call, the newspaper of Capitol Hill, and former campaign manager for Al Gore.
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