The Real Cause of the Mortgage Crisis: Conservative Opposition to Sensible Financial Standards
Home prices are falling and foreclosures rising across the country. With one in six mortgaged homes now worth less than the loan balance, our entire economy is at risk. Few Americans are aware that the housing bubble was the natural result of reckless Bush administration policies. Let’s place blame where it’s due and outline a series of progressive solutions to the problem.
One of every 11 mortgage holders in America faces major loan problems. During the first quarter of 2008, nearly 9 percent of all mortgage holders were delinquent or in foreclosure, the highest rate since recordkeeping began in 1979 [The New York Times]. Foreclosure filings more than doubled from 2007 to 2008 [RealtyTrac].
Houses are rapidly losing value. Nationwide, home values have declined about 16 percent since the summer of 2006 and experts project that the drop will continue until homes have lost about 25 percent of their value [The New York Times]. Sixteen percent of mortgaged homes are now "underwater"; that is, the mortgage owed equals or exceeds the value of the house. It is estimated that by June 2009, nearly one in four homes will be underwater [Chicago Tribune].
The mortgage crisis was created, in large part, by a rise in subprime lending. Subprime mortgages are high-interest loans, supposedly designed for high-risk borrowers. Only two percent of mortgages issued in 2000 were subprime compared to 28 percent in 2006 [The Washington Post]. By 2007, subprime loans accounted for only 14 percent of all outstanding mortgages but fully 64 percent of all mortgage foreclosures [Center for Responsible Lending].
The mortgage crisis was also fueled by an increase in "exotic" and "low doc" loans. Non-traditional or "exotic" mortgages are interest-only loans, no-down-payment loans, and adjustable rate loans (ARMs) with low teaser interest rates that "explode" after only two or three years (2/28 and 3/27 ARMs). From 1999 to 2006, the percent of subprime loans that were exotic 2/28 or 3/27 ARMs went from 53 percent to 93 percent [Center for Responsible Lending].
The mortgage crisis was also fueled by an increase in "exotic" and "low doc" loans. In addition, lenders expanded "no or low doc" loans, requiring limited documentation to verify a borrower's ability to repay the mortgage. In 2000, 23 percent of subprime loans were low doc loans, and by 2006, that skyrocketed to 43 percent [The Federal Reserve].
The lack of rules and enforcement by the Bush administration allowed banks and hedge funds to run wild, recklessly profiteering off exotic and subprime loans. For decades, bonds backed by mortgages were a safe, reliable investment. After conservatives succeeded in loosening the rules that governed financial institutions, all that changed [The American Prospect]. Investment firms could now profit by buying, repackaging and selling high-risk loans. Since mortgage lenders could make a quick buck selling loans to hedge funds, they had little incentive to ensure that borrowers could make their payments. The mortgage industry went from being a safe investment to a kind of pyramid scheme.
Conservative policymakers created the conditions that resulted in America's housing debacle. To increase profits, finance companies sold subprime and nontraditional mortgages to millions of Americans who—the companies knew—could not afford to make the payments. The Bush Administration and the Federal Reserve shirked their responsibility to stop these reckless lending practices.
- As the Washington Post recently pointed out, the U.S. Department of Housing and Urban Development allowed federally-chartered Fannie Mae and Freddie Mac to purchase far more subprime loans from mortgage companies in 2004, thereby encouraging the explosion of these risky loans [The Washington Post].
- The Office of the Comptroller of the Currency and the Office of Thrift Supervision, both agencies of Bush's Treasury Department, had the power to prevent the worst of these loans by designating them "unfair and deceptive practices" but failed to act [Center for Responsible Lending]. Instead, they actually blocked states from regulating subprime lending by nationally chartered banks [The New York Times].
- The Federal Reserve Board has power under the Home Ownership and Equity Protection Act to regulate mortgage lending, but despite repeated warnings about subprime and exotic loans, the Fed sat on its hands [The New York Times]. "The Federal Reserve could have stopped this problem dead in its tracks," said Martin Eakes, chief executive of the Center for Responsible Lending. "If the Fed had done its job, we would not have had the abusive lending and we would not have a foreclosure crisis in virtually every community across America [The New York Times]."
We've got to step into the mortgage crisis and stop the downward spiral, not to save speculators or simply to rescue individuals who agreed to unwise loans, but to protect our communities from an epidemic of boarded-up houses and plummeting home values. The time has long past for real action.
Crack down on fraudulent and irresponsible lending practices. Mortgage brokers should be required to verify that a consumer has a reasonable ability to repay the loan. Predatory interest rates, prepayment fees and balloon payments should be banned, and credit counselors should review subprime loans before they are signed (A bill with these provisions, HR 3915, has passed the House and is awaiting action in the Senate.)
Close the loophole that prevents bankruptcy courts from adjusting mortgage payments. Bankruptcy courts have the power to modify other types of debts, but not mortgages on the debtor's principal residence. The subprime mortgage industry should not be shielded by an obsolete federal law. This would change under a proposal (HR 3609) that is currently being blocked by congressional Republicans.
Mandate accurate disclosure of mortgage costs. Illinois Sen. Barack Obama has proposed the creation of a Homeowner Obligation Made Explicit (HOME) score, (similar to the annual percentage rate), to provide homebuyers with a simplified, standardized method to compare mortgage products and understand the full cost of the loan.