Let's Not Discard Working Families That Got Subprimed

The economic downturn that has rocked our nation over the last few months has been attributed in part to the subprime mortgage crisis. Its impact on our nation's biggest mortgage lenders, major banks and Wall Street investment houses with holdings and investments in subprime mortgages has been devastating. Many billions of dollars have been lost as a result of the crisis and the tally continues to soar. This is serious.

A crisis of this magnitude certainly requires a set of remedies commensurate with its significance. Currently, Congress, the White House and the Federal Reserve Board are wrestling with solutions that would buttress major financial institutions. Regrettably, it does not appear that many of these solutions will reach down to the hundreds of thousands of working families facing foreclosures who took out questionable mortgages hoping to secure a piece of the American dream and accumulate some wealth. Many of them are Black and Latino first-time home buyers. There will be an estimated 2 million mortgage defaults this year, up from 893,000 in 2006. It is terrifying to imagine how many children will be evicted from their homes as a result.

Our national leaders must find ways to help working families who truly need mortgage relief. We must reject the callous view that we should do little to help individuals who have been hurt by the subprime crisis because they voluntarily took out these mortgage loans. That's neither a fair nor complete picture. Many of them were the victims of predatory and lax lending standards in a largely unregulated industry.

The subprime crisis is a financial disaster from which affected families may not recover for a long time -- if ever. Many borrowers took out loans they could not afford. To finance home purchases in recent years, a large number of low- and middle-income families assumed mortgages at high interest rates on risky terms or were convinced to take an adjustable-rate mortgage loan with interest rates that started low but reset two or three years later at substantially higher rates. The fact that the rates could balloon by 29 to 50 percent was often buried in the fine print. Then they were pressured into refinancing the loans at even higher interest rates. Mortgage brokers and loan originators raked in fat fees from these transactions. Many of these risky loans were refinancing agreements with homeowners who were induced to tap the equity in their homes for ready cash to meet pressing financial obligations, according to the Center on Budget and Policy Priorities. After a foreclosure, they lost all of the invested wealth they had built up in their homes over the years.

From 2003 to 2006, the proportion of all new mortgages with subprime terms grew from 8 percent to 28 percent, according to the Center for Responsible Lending. A disproportionate share of these subprime borrowers is minority. In 2005, by one estimate, 50 percent of all new mortgages made to African American borrowers and 40 percent of those made to Latino borrowers were subprime loans.

The growth of subprime mortgages and poor lending standards (such as the increase in loans granted to families lacking sufficient income when the loans were made), combined with a weakening U.S. economy and a decline in home prices already have led to an explosion of delinquencies and foreclosures. Things will get worse when subprime loans issued in 2006 and 2007 reset, as scheduled, at substantially higher interest rates in 2008 and 2009. The explosion in foreclosures has ravaged families and devastated communities, further driven down property values and left some communities pocked with vacant dwellings.

Also hurt by the crisis have been tenants of multifamily rental dwellings, often owned by speculators. When these properties were foreclosed, it was the tenants who lost their homes.

Although several legislative initiatives are pending in Congress to address the crisis, so far, the federal government has done little to help affected low- and middle-income families. In late 2007 the Bush administration announced a voluntary agreement with lenders to allow some borrowers with adjustable-rate mortgages to extend the period before which their interest rates reset upward. But that plan is likely to help only a small percentage of subprime borrowers and does nothing for those who have already fallen behind on their payments.

As the government further explores bailouts and fixes, it must not forget ordinary working families. After all, in the 1980s, the government spent hundreds of billions of dollars bailing out the savings and loan institutions whose mismanagement caused a national financial crisis. Hardworking families affected by the subprime crisis that play by the rules deserve no less. They must not be turned out of their homes and into financial ruin often with no place to go. That's not fair.

Follow Marian Wright Edelman on Twitter: www.twitter.com/ChildDefender

Comments

[NewsView]

There is some truth to each viewpoint. Some homeowners, aware of the risks, took a foolish gamble. If, however, lenders had required proof of income, the mortgage crisis wouldn't be this severe.

Many homeowners made payments until they doubled or tripled, which is unacceptable given that interest rates have fallen many times. Meanwhile, White House leaders encouraged lenders to make it easier for people to get into the housing market. President Bush's advice after 911 was to go out and spend money, and the recent economic stimulus "tax rebate" follow that same credo. The economy used to run on productivity, now it runs on consumer spending. And given the average 0% personal savings rate translates into credit card debt. Credit card companies are even running TV ads that depict a "rude customer" holding up a store line by paying cash! Meanwhile, President Bush has borrowed trillions against our grandchildren to finance the war.

Even if one's own mortgage isn't threatened, chances are you or someone you know will never retire because one must become a multi-millionaire to retire. The average nursing home costs over $70,000 a year -- in today's dollars! Twenty years from now are we going to be having the same discussion about consumers who are working jobs that no longer offer pensions, who can't afford health care and retirement, who no longer have Medicare or Social Security entitlements --- how they did it to themselves? Or is it answer "D", as in all of the above?

[Sundialsvc4]

Marian, mark my words. As the Great Depression of 2008 settles over this country, it will discover that the supposed powers of the Federal Government cannot help it. There are already "Hoovervilles," although they are kept out of the headlines. An attempt to blame this disaster upon the stupid and ignorant -- "who just HAD TO HAVE that Sub Zero refrigerator" etcetera -- is a chimera.

We find ourselves here for precisely the same reason that the finances of Germany collapsed between World Wars I and II. But we couldn't stuff "all that money" into our cook-stoves because there aren't enough trees to make the necessary amount of paper. (To meet just this year's Federal Budget, we're already "printing" more than $96,000.00 a SECOND.)

"Printing" more "money" isn't going to help.

47 years ago, Dwight D. Eisenhower saw this coming. But it was "eat, drink and be merry." The seed-corn was taken up and eaten, and desolation grew in its place. War was started for war's own sake. In but a generation's time, the muscle-bound Uncle Sam finds itself on life-support.

History will play its course. Just as the Prodigal Son did not realize that he was, and had always been, a prince UNTIL he was stealing slop from a farmer's pigs... we have not yet quite hit the bottoms of despair... that we may get up, rip out those tubes, impeach several dozen leaders, and start rebuilding our own TRUE economic strength.

[AnninCA]

I agree. But we have a good proposal now from Hillary. Look it over.

[BOfever]

If you read that and think it makes sense I think you need to stay away from those pot vending machines in CA. A freeze on foreclosures? Why delay the end result? It will just prolong this recession.

[NewsView]

Mortgage lenders avoid punishment because they sell the loan to third parties. For example, China owns $107.5 billion in mortgage-backed securities (See http://www.atimes.com/atimes/China_Business/IG26Cb02.html). Many borrowers have no idea who collects the money.

Another factor: Ruining one's credit may be as easy as enrolling in college. Between student loans and the plastic banks hand out on college campuses, graduates face a rough start. Some colleges have even banned CCCs from campus, yet students need to build credit. Unfortunately, it's often a trial-and-error process. Consequently, I can see how a homeowner that shouldn't have qualified for a loan may not have realized it. They don't teach this in school.

It also depends what you do. Take a couple who pays their way through med school. On top of outstanding student loans, they finance a wedding, buy a house and have children. They owe $2 million dollars, which works out to 5x their income. Lenders looks at their income potential and lend anyhow. Yet all it will take to throw repayment projections off is one one Katrina-like disaster, or one serious illness or injury. Wiser folks may opt to wait until they are debt free, but the money saved may become money borrowed later, as evident by the booming business in fertility clinics. So many more problems that we typically don't associate dollar devaluation--more money to cover fewer expenses--are a manifestation of economic policy.

[livesimply]

What is not mentioned is the ridiculous cost of homes while these buyers were being scammed.

[Rule Of Law]

All conveniently driven by the loose money policies of the Fed in the early 90's, courtesy of--drum roll--Alan Greenspan. Who also suggested MORE flexible rate mortgages and sub prime loans, more creative financing instruments and those two things are what inflated the housing market! Once millions had been sucked into the game, he went about raising the rates over the next two years so that all those who got into variable rate loans or other sub prime packages, were suddenly faced with huge jumps in their monthly payments. In the Stock Market, that sort of behavior is called Manipulation, and sends people like Martha Stewart to prison. But not Al.

[parisblues]

Families who put their life's savings into a down payment on a home are definitely entitled to government protection from swindlers. Those who put nothing down have absolutely nothing to lose. They simply walk away and go back to being renters. This latter group does not deserve to be bailed out by those of us who are still working hard to earn that down payment!

[BOfever]

Those that put money down, 20%, got a 30 year fixed loan.

[NewsView]

One of the reasons that the lenders don't get punished or have to rewrite the loans to allow more people to keep their homes is because loans are routinely sold off. Chances are, the lender you think you are paying off, isn't the one to whom the check goes. I once read that 40 percent of US mortgages are actually owned by the Chinese! According to the Asia Times, the Chinese hold over $107 billion in mortgage-backed securities (http://www.atimes.com/atimes/China_Business/IG26Cb02.html). So do you think that the third or fourth party is going to work with a homeowner — probably not. Also, the other part of this story, which Greenspan told NPR, is that the mortgage crisis is a worldwide problem. The folks abroad are going into foreclosure in record rates, too. And watch out for the next wave: Credit Default Swaps. The mortgage crisis is tame next to this growing monster under the bed.

[jozap]

I know several, middle to upper middle class, people who got large reifs, large equity loans.

They all lied, knew they were lieing and simply wanted what they wanted. And wanted it now.

The lender knew they were lieing, the appraiser knew the amount was inflated, the loan guy didn't care in the least about any of it.

Greed from the bottom up and the top down.

And those families being forclosed on, they can rent. They are not going to be in the street. They have made house payments for a year or two or three, they can afford rent. What they are not going to have is the 3,000 square foot McMansion that they couldn't afford in the first place.

[1dogs2]

The people you describe are not the ones Ms. Edelman wrote about. Many in this country live one paycheck away from disaster, and not because they live extravagantly. What makes you so certain that the people Ms. Edelman is converned about can rent? A foreclosure will ruin their credit rating, making property owners unwilling to rent to them. To rent an apartment or a house, you generally need to have two months' rent upon signing the lease. Rent may be as high as the mortgage they were paying, and they may very well have used any savings they had to try to get current with their mortgage before they were foreclosed upon.

The comments in this thread that demonstrate the writers' inability or unwillingness to put themselves in someone else's shoes and see how the world looks from there sadden me.

[Rule Of Law]

jozap, maybe you should improve the quality of people you hang with? Just a thought, because I don't know anyone like that, but I know plenty of people who got screwed by these creative mortgage products and Greenspan's manipulation of the interest rate.

[charon]

The hands-off approach worked fine for Hoover. Drove the country into a deep depression. Woohoo, workers and girls were never so cheap for the guys at the top! The top 30% were doing fine, the top 1% were absolutely having the times of their lives!

[Researchguy66]

Doesn't Obama say that tax cuts will fix things for them? That's perfectly consistent with the belief that they got themselves into this mess and should get themselves out, but tax cuts for people that matter can never hurt...,

[rojo7449]

Tax cuts are such a myth. Have you ever had a tax cut that you noticed in your wallet? Obama probably did, but that big cut that took place back in 2004 didn't change my withholding by so much as a dime. Even if Obama brought those cuts to the lower income, I still wouldn't see a difference of more than $20 a month. Can't imagine who he thinks is jumping up and down over his tax cut plan.

[Rule Of Law]

Both of you nailed it--tax cuts are a lie that only help the already rich. Even Bush The First, and Clinton, increased taxes to stabilize the economy. And it worked. Apparently Junior hasn't figure that out yet.

[BOfever]

Actually you should notice the tax cuts that will be gone very soon, families that make $75k a year will be seeing a lot less money since the Bush tax cuts were not renewed.

[BOfever]

the 15% bracket's lower threshold was indexed to the new 10% bracket
the 28% bracket would be lowered to 25% by 2006.
the 31% bracket would be lowered to 28% by 2006
the 36% bracket would be lowered to 33% by 2006
the 39.6% bracket would be lowered to 35% by 2006

Enjoy losing at least another 3% for next year and you will get nothing for it :)

[Spesabsquemetu]

From FOX:

Maggie Williams, Hillary Clinton's campaign manager, according to FOX, earned about $175,000 working for subprime lender, Delta Financial Corp in 2000, one month after a federal settlement was reached with Delta over discriminatory lending practices.

According to one individual: Delta's practices literally turned the American dream of homeownership into a living nightmare.

According to Hillary Clinton, subprime mortgage lenders shoulder much of the blame for the recent credit crunch. Subprime lenders are responsible for charging repayment penaltites, a practice which HIllary Clinton stated she was against.

When Williams joined Delta, it had 5% foreclosure rates nationwide ( double the industry standard).

Delta claims that Williams did not have a role in day to day operations and management.
Maybe Sen. Clinton can ask Maggie Williams for some suggestions on how families should be treated who were victimized by subprime lending practices.

[BOfever]

I won't vote for Obama or Clinton but for the fairness in conversation, please post what is going on with Obama's guy Tony Rezko and his federal trial.

[Purple Girl]

Our Founding Legal Rights ahve been seized by Organizational Entities.
these Rights and Protection were not written down for THEM- But for US. the goal was to assure we never become enslaved by Entities Again!
any and everyone involed with this SCAM should be Prosecuted and theri Assests Seized, Including From those Decendants who have benefited from such Criminal Activity (Fruit of the Poisonous Tree). That how the gov't handles those citiizens who fail to pay Personal Income Tax. We MUST turn the Tables, we have been infiltrated , deceived and Betrayed- Nothing short of TREASON, intentional De stablization of the National Economy, Reckless endangerment and Malpractice

[hoopesaz]

I'm not exactly sure what you are saying. But I would suggest people have ENSLAVED themselves via greedy, stupid decisions. NOBODY made them take them home equity loan. NOBODY made them refinance with a pay-option loan and only pay the starter rate of about 1%.

While I find many positions of liberals to be respectfull and sensible, the position that we are all being duped by someone else -- that we are all VICTIMS and simply cannot control our victimhood -- I find that notion so disagreeable that it taints every other positive thing the democratic party stands for.

Playing the victim and being responsible are almost always (perhaps always) mutually exclusive.

[NewsView]

To read a site with "intellectual content" suggests you are anything BUT average, which is why the word "victim" is so difficult to comprehend.

Average people have trouble hooking up surround sound systems, let alone making sense of mortgage documents. Many are first-time buyers. Some are immigrants with poor English. I've even seen MDs who can't hire a housepainter without being scammed. Anyone can be taken by someone, somewhere, some time. There IS such a thing as falling victim to one's inexperience. In reality, NONE of us can be good at everything. A person could spend 10 hours studying a lending contract and still be duped unless, perhaps, they were to compare 10 different contracts side-by-side, word-by-word. This is a banker's territory, folks. If you get a fair shake, it has more to do with one's credit score than intellect.

Remember, too: Those who lose their homes can't necessarily rent. Foreclosure destroys one's credit rating, and prospective employers often run credit checks, too. Meanwhile, that $12,000 econo box you buy will now cost $40,000 with interest. Bad credit is like quicksand: Getting out without a helping hand is next to impossible.

Another factor: If you've got an adult who can barely read 9th grade English because half the US population is functionally illiterate, it translates into people who are ripe for a scam. It's easy to judge others when your good fortune has kept hardship at arm's length. Live long enough, and that may change.

[Rule Of Law]

As usual, Purple, right on! It is a planned attack on the middle class where they use our own money against us. It is for the benefit of the Ultra-Wealthy, not you or I. And if you google Greenspan and the mortgage bubble, you'll find everything needed to know just who did what and how we end up paying for it.

[BOfever]

Attack on the middle class? Maybe those in the middle class that thought they could live like the upper middle class. As a 25 year old, I have a house, they offered my a baloon payment mortgage and decided to go against it because it seemed fishy. I decided to save up and throw down 20% for a 30 year fixed.

If I can see it at the age of 23 when I bought the house, there is no reason others couldn't have.

[hoopesaz]

"Many of them were the victims of predatory and lax lending standards in a largely unregulated industry"

We need to face the truth here. The truth is "some" were victims, but a vast majority of people that I know who are in trouble were playing the "lottery". They accepted a huge risk and rationalized it as being worth it. They cashed in and levereged themselves to consume like crazy and to live well above their means. And now they are paying for it. And the banks have some blame, but no more than most of the consumers.

This isn't a story of evil big business. It is a story of greedy business and greedy consumers. And we all lost as a result.

[NewsView]

If Big Brother bails out Big Banks, it teaches them that because the economy cannot sustain their loss, Big Brother will have no choice but to play the role of enabler (that is, to cover for their irresponsibility). In the short term, Bankers may voluntarily reform, but before long they will go back to pushing the envelope because, after all, it didn't hurt so bad because the Feds showed up with a payload of cash to bail them out. What this scenario forgets is that our economy is consumer based. If consumers cannot or won't spend because consumer-friendly policy is exchanged for what amounts to corporate welfare, Big Business will run cash-strapped consumers right out of the economic picture. In other words, craft enough policies to help corporate and banking interests at the expense of ordinary Americans, and what you end up with is a recipe for economic suicide. When your buyer can no longer buy or borrow, what else can happen? So you either bail out everyone — or at least try to provide some equality to the effort — or you let everyone fall on their faces, consumer and corporations alike, in hopes that they will learn not to repeat their mistakes. Is it time for some "tough love" — or leniency?

[Rule Of Law]

New, great post! My answer to your question would be that it's time to be fair and just!

If a homeowner, not a speculative real estate magnate on the make, but an honest to god-lives in the building he bought with his little family-home owner, played by all the rules as they were explained to him and got screwed by these predatory lenders for his trouble, then in the America I grew up in, we make that person's problem right!

And if the Investment Banks packaged these securities up, called them AAA when they weren't sold them four or five times and inflated their value by a factor of 20 to 30 or more and now has to pay the piper for bad business practices, then they deserve Nothing. Certainly not more of my or your money to bail their cheating lying asses out. No sir.

[ShawnMichel]

How true, how true.

Here in SoCal, I remember having more than one heated argument with a hopeful homeowner. I tried using reason: an 800 sq.ft. house--for $780,000? Are you *serious*? And yet, they refused to listen to me. (And yes, that's how much many of those-sized homes were going for.)

I feel sorry for the *actual* victims, yes. But most aren't. Most bought into the hype, the crap, and had to--HAD TO--have that home. THEY HAD TO, BY GOD, AND THEY WERE GOING TO GET IT, COME HELL OR HIGH WATER! Should I feel sorry for them. Hmm. I don't think so.

That's like feeling sorry for the nimrod holding the vial of crack to his nose. He bought the bullshit; let him snort it. He's not going to listen to you, that's for damn sure.

[BOfever]

"It is terrifying to imagine how many children will be evicted from their homes as a result."

Let's be realistic here for second, about 35-50% of all homes being foreclosed on are people that were trying to flip the houses for profit or renting them out, using the equity to but another and renting that out and so on.

My question to you would be where has personal responsibility gone in this country? If you can't pay for the house you obviously have no business being in it. We all know kids get caught up in the mix but there are also millions of kids who have parents in jail . . . should we release the criminals too then? No, all you can say is maybe your parents should have made better decisions.

Why on Earth should the Government bail these people out? Did the government force them to enter into the loan or make them buy a house they can't afford? Basically what you are saying with a bailout is I will reward the stupid people and punish those that made good decisions like saving up, making a down payment and getting a 30 year fixed loan.

[Rule Of Law]

"Let's be realistic here for second, about 35-50%" Please verify this statistic.

[BOfever]

I'll see if I can grab it, they displayed it o NBC news on a story about renters being asked to leave within 30 days. The national rate was around 40% but higher in NV , CA and NY.

[NABNYC]

Unfortunately the best thing that can happen to most of the people whose houses are in foreclosure is for them to move out and move on. Usually they have bought a house they could not afford under conventional terms (20% downpayment, 80% 30-year mortgage) and they have received loans for which they did not really qualify. Let's say that someone with an interest-only five year loan with a balloon is now in default, and let's further say that even if we gave them a 30-year loan with market rate interest, they could not afford the payments. Then what is the solution other than for them to move out and move on?

If our society is going to help people buy homes, that help should be based on need, not based on the vague category of people who can't afford their house payments. I know people with nice homes, expensive cars, new clothes, living the good life, but they're in default on their mortgage. They can't afford the house.

It's one thing to feel sorry for people. It's another to suggest emptying out our collective coffers to prop up a housing market that has values 3 times what they should be. Let the forclosures proceed. Let the market crash. When it does, when it all shakes out, these people will be able to buy a house for 1/2 the cost of the house they are currently in. In the long run, that's the only way to go.

[BOfever]

Exactly, if you try and bail these people out what will happen? All you do is delay the inevitable. These people have proved they are not and will not be responsible and we shouldn't punish those that bought a less expensive car or less expensive while living within their means.

One thing the Government should not do and it has become a habit is rewarding the irresponsible.

[livesimply]

Like rewarding the lenders?

[em0199]

I agree with you but I also don't think we have a responsibility to bail out these lenders either. They were just as irresponsible as people who bought houses they could not afford. I say we don't bail out the lenders either. That only shows them they can do these kinds of things and the government will be there to get them out of trouble.

[Rule Of Law]

The problem is those bankrupted in the process by predatory lenders, with credit destroyed as well. For those people for whom their home is their only and primary residence, some relief must be given. All the money can't go to the same financial vampires that caused this mess in the first place. We have nearly record low Fed rates right now and that is not being reflected in mortgages because the banks are sitting on that cash.

Let's rewrite all those non-speculative home loans at the same relative rate that 30 year paper was going for in 2004. Today's Federal Funds rate is 2.25. Find the historic spread, tack that on and there's your new mortgage rate! The banks get paid, the people keep their houses. Unless it can be proved that these creative loans that Greenspan requested were fraudulent and predatory; In that case, I think the punishment for the lenders should be that all of those loans reset at todays Fed Rate, and stay there for 30 years!

Some posters here refer to the mainly low income and less educated Americans taken in by this scam that originated with Greenspan as, "Those People!" (see below) What a classist and bigoted thing to say. But it's just more of the good old neo-con divide and conquer logic: Those Muslims, those women, those Blacks, those poor people--How dare they! Don't ever hear them complain about the billions of Our Money being given to the Banks!

[ICUP]

How will you determine what is speculatory and what is not? The vast majority of these loans were speculatory because the borrowers believed that the value of their homes would rise as would their incomes. That's speculation pure and simple.

Also, don't you take an attorney with you to closing? Is it not that attorney's job to inform you as to the details of the contract? I'd say those lawyers ought to also be on the hook for this fiasco.