Last week, turmoil hit the American home loan market and its impact reverberated globally. Panic infiltrated the stock market and Wall Street suffered its largest one-day loss since February.
The fluster began when France's BNP Paribas, suspended investors' ability to remove money from three funds that had invested heavily in American mortgage securities.
To calm jittery investors, central banks around the world pumped in nearly a half-trillion dollars. Questions remain as to just how much financial markets are exposed to lose as credit tightens and borrowing costs increase.
Whatever this means for Wall Street is inextricably linked to what is happening on Main Street.
The fastest growing segment of the housing market was subprime loans -- loans to homeowners with less than perfect credit. Subprime loans have contributed greatly to U.S. homeownership rising to nearly 70 percent of the nation's households.
With low interest rates along with creative products such as first-time homebuyers and interest-only loans, subprime mortgages transformed many people who otherwise would be renters. Moreover, subprime loans have been critical to the increase in homeownership among women and minorities.
For all the good news of increased homeownership across all sectors of society, there was a dark side. Two weeks before market decline, DataQuick Information Systems of La Jolla, which tracks foreclosure rates, issued a report indicating that California set a record last quarter for the number of foreclosures. Bay Area homes lost to foreclosure during the last quarter also hit its highest level in nearly two decades.
Ironically, DataQuick issued a similar report last year, indicating a 10-year high in foreclosures.
According to DataQuick analyst Andrew Lepage,
"A combination of little or no appreciation and, in some markets, depreciation, and some pretty funky financing ... has come back to haunt some borrowers.
"People used risky financing to stretch beyond their means. Now, in all likelihood, they're either experiencing payment shock because of a reset from a teaser rate, or they see (higher payments) coming and are throwing in the towel early, if they think (home) prices might go down more."
Contra Costa and Solano counties with modest average incomes possessed the area's highest foreclosure rates. Conversely, the three most affluent counties -- San Francisco, Marin, and San Mateo -- had lower foreclosure rates.
The Federal Reserve reported this week that a majority of banks responding to a survey reported they had tightened their lending standards for sub-prime mortgages.
I have little doubt that these measures are needed in the short-term. But the underlying problem continues to exist.
What many economists worry about is the economic theory of "moral hazard," suggesting that a bailout could lead to a person's or organization's not bearing the full adverse consequences of its actions, thereby opening the possibility of repeat behavior.
This probably led to the president opposing Fannie Mae -- the government sponsored agency that is the largest purchaser to home loans -- using $72 billion to buy loans from banks. As the New York Times' editorial page opined, such actions "could be deployed ... as part of a well-regulated plan to help homeowners who are now at risk of default as tight money makes it difficult to refinance."
Perhaps the real moral hazard lies in government's willingness to be there for Wall Street when it propped up the housing market on the backs of low- and medium-income individuals, using subprime loans to enhance their profits. Many of these people have seen their good paying job at General Motors become a bad paying job at Wal-Mart. Meanwhile, there is little corresponding support for those on Main Street.
The obvious need to tighten credit will further squeeze those on the margins. This cannot be good for those in jeopardy of losing their home or for the global hedge funds that hold these mortgages. The government cannot save everyone, nor should that be the goal.
But if government can be there for Wall Street, surely it can possess a modicum of compassion for those on Main Street.
Byron Williams is an Oakland pastor and syndicated columnist. E-mail him at byron@byronspeaks.com or leave a message at (510) 208-6417.