If you think today's home-loan crisis has changed anything in the mortgage world, accept that you're wrong. Go online to check out the Web sites of subprime lenders, the folks who brought us the current foreclosure crisis and ensuing credit crunch that's rocking economies both here and abroad.
"We help you use your home as a powerful financial tool, regardless of past credit," promises a Novastar ad. "Been turned down?" asks my own mortgage broker, Countrywide. "We write loans for a wide range of credit." Something is wrong with this picture.
Nearly every subprime lender makes the same promise of "fast, easy qualification." Haven't loose lending standards already done enough damage to consumers by causing the highest level of home foreclosures since the Great Depression?
The same lenders who remain so eager to sell mortgages with deceptively affordable and flexible terms are the very ones who have made it harder and costlier to get a home loan. These are the lenders who continued offering unaffordable loans with huge payment shocks even after the foreclosure epidemic was well under way. And these are the same lenders whose K Street lobbyists try to minimize the consequences of the subprime spree. Pay no attention to those 2.2 million foreclosures behind the curtain, they whisper to Congress those families are merely the unlucky ones.
Wake up, lawmakers!
What will it take for Congress to help the current victims, to stop the crisis from spreading into another year, and to ensure that consumers never again experience such a disaster?
Look at Cleveland, among the hardest hit by foreclosures. In an op-ed published in The Washington Post recently, Ohio's Cuyahoga County Treasurer Jim Rokakis described the devastating effects on Slavic Village, a Cleveland community once known as a safe and pleasant place to live. Now Slavic Village is a playground for drug dealers and thugs who routinely pillage the hundreds of abandoned homes that have resulted, directly and indirectly, from massive foreclosures in the wake of the subprime-lending frenzy. The lesson is clear: Bad loans hurt more than just the families; they destroy entire communities.
In a way, though, it's hard to blame the mortgage-lending industry. Incentives to give people bad loans remain firmly in place. While subprime lending has slowed down this year and loan volume will most certainly drop drastically compared to the astronomical gains of years past, subprime investors and lenders and service providers still have every reason to pump up the volume by luring people into dangerous loan products. And their victims will be, as they are today, disproportionately African American, Latino and elderly.
Who will stop them? The last time Congress offered any meaningful protection to homebuyers was in 1994 with legislation that now is as outdated as my Beta tape player. That protection was modest, and still the loan industry fought hard against it. Certainly lawmakers at the time didn't foresee the creative equity-stripping practices and exotic loan products that would later flooded the market.
For years, mortgage-industry lobbyists have fought hard against consumer protections. They are fighting hard in Washington today. They argue that tougher lending rules would dry up credit for mortgages. The truth is that risky lending is destroying the credit markets. What we're experiencing today is not a market correction. It's a market dysfunction. With the fate of Slavic Village being replicated in communities across America, all of us will pay unless Congress acts to restore health and stability to the markets.
First, it's time Congress addresses the needs of families losing their homes. Today's bankruptcy law allows families relief on debt attached to luxury boats and beach houses, but it specifically excludes relief on primary residences. What's up with that? This unfair standard must not stand. A simple tweaking of the law would permit judges to set a fair market rate on a home loan, allowing families to continue paying their mortgages and avoid foreclosure. This fix would cost taxpayers nothing.
Congress must also prevent this debacle from happening again. Until the explosion of irresponsible subprime mortgages, lenders always conservatively assessed a borrower's ability to repay a loan. The industry must return to common-sense standards. We also need to eliminate the kickbacks to brokers that provides their incentive to push people into more expensive and riskier loans. And we need to eliminate the prepayment penalties on subprime loans that trap families in bad loans and make a bad situation worse.
We need financial policy that supports sustainable homeownership and severely punishes an out-of-control subprime market spewing toxic products. Wake up, Congress! Change the bankruptcy law. Set limits on an industry that is happy to accept government protections like federal deposit insurance but has proven incapable of policing itself. Restore common sense and fair dealing to the home-lending business. Restore trust in our mortgage markets. Restore the American Dream, both our faith in it and our access to it. So that we may sleep peacefully in our homes, Congress needs to wake up.
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.