Thursday, January 10, 2008

BACK TO THE FUTURE TO CURE MORTGAGE SCANDAL?

BACK TO THE FUTURE TO CURE MORTGAGE SCANDAL?

By Neal Peirce

Can it be as bad as some say -- 2 million home foreclosures in 2008, the worst housing slump since the Great Depression? Will there be heartbreak for so many more families, boarded-up windows and abandonment ravaging vulnerable neighborhoods coast to coast?





























The prognosis is not favorable. Sub-prime lending -- high-interest rate mortgages with rates that suddenly escalate after a few years, forcing often naive and unprepared homeowners to default -- is taking a heavy toll. Houses vacated by foreclosures are deteriorating into eyesores, encouraging crime, depressing property values, costing localities revenues they need for schools, police, other vital services.


Some Northeastern cities -- Cleveland, Buffalo, Pittsburgh among them -- are said to be the hardest hit of all. Among the states. Florida, California and Indiana are registering the most foreclosures.

But the pain’s being felt nationwide. The U.S. Conference of Mayors projects the weak housing market and large inventory of unsold homes may reduce cumulative U.S. home values by $1.2 trillion this year.

Is there a villain in this story? Yes, and he’s hidden in plain sight: a heavily lobbied federal government that lost sight of ordinary Americans’ interests.

That’s the story told in The American Prospect magazine by John Atlas of the National Housing Institute and Peter Dreier, a professor of politics at Occidental College in Los Angeles. The problem, they say, is that Washington succumbed to pressure from Wall Street and other financial players and deregulated a once stable, smoothly-functioning American housing finance market. And that the only way out is a U-turn, back to circa 1970 in national regulation.

The history’s illuminating. The ravages of the Depression triggered a range of bank regulations and agencies to protect consumers, among them the Federal Deposit Insurance Corporation, the Federal Home Loan Bank System, Fannie Mae and the Federal Housing Administration. The savings-and-loan industry was highly regulated, its mission to take peoples’ deposits and use them exclusively for home mortgages. Washington also insured loans through the FDIC, created a secondary market to keep capital flowing, and required savings and loans to make predictable 30-year fixed-rate loans. Homeownership soared and there were few foreclosures.

But in the early 1980s, the politically powerful lending industry convinced Congress to eliminate interest-rate caps and loosen mortgage controls. The S&Ls got permission to compete with conventional banks, then began a decade-long orgy of real estate speculation. Banks and S&Ls started devouring each other and making loans for shopping malls, golf courses and condo projects with scant financial logic. Result: by the late ‘80s hundreds of banks and S&Ls went under and the federal government had to step in to bail out depositors.

In the aftermath, with stable S&Ls vanished and federal controls emasculated, a giant “financial services” industry of banks, insurance companies, credit card firms and other money lenders emerged. Mortgage brokers, Atlas and Dreier charge, become “the street hustlers of the lending world,” making a fee for each borrower they recruited and handed over to a mortgage lender -- often collecting an extra fee in return for negotiating an inflated interest rate.

Large mortgage finance companies began to make massive profits on sub-prime loans. Wall Street in recent years created special investment units to buy up those mortgages from the lenders, bundling them into mortgage-backed securities and selling them (at fat fees) to unsuspecting investors around the world.

But when thousands of the unregulated mortgages started to go south, the present collapse was triggered, with billion-dollar losses for Wall Street firms and dark clouds across all mortgage lending.

So how should we recover? President Bush’s so-called interest rate “freeze,” announced in November, is hardly the answer. It’s entirely voluntary and is projected to apply to only 12 percent of the mortgage holders that are likely to have severe difficulty making their monthly payments, including none of those already in default in 2007..

Some better ideas are before Congress, including a recently House-passed bill that requires lenders to verify all applicants’ income and document their creditworthiness. Mortgage companies and brokers would have to be licensed, like stockbrokers and insurance brokers.

But Dreier tells me he’d go further -- for example simply forbid adjustable-rate mortgages because they’re just as risky, he insists, as playing the stock market. And he’d strengthen non-profit lenders like the federally-chartered Neighborhood Housing Services of America. NHS has made thousands of loans to low-income borrowers with an enviable delinquency rate of just 3.34 percent -- mostly because it requires every borrower to take its strong mortgage education program before and after a loan is made.

“Daylighting” the lending process, putting tight rules on all mortgage lending? Would those moves be too restrictive, harm our free market? No way, I’d say. Strong regulations led post-World War II America toward world-leading homeownership rates and an expansive economy. Capitalism works best with clear rules. Let’s go back there.

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