The recently exposed problems in the subprime lending
segment of the mortgage market should come as no surprise. Too many lenders offered too many loans with
payments that seemed affordable during a brief introductory period, but
skyrocketed shortly thereafter--leaving borrowers in foreclosure and
In many respects, the widespread availability of mortgage credit has had a positive effect on communities throughout the country. Home ownership rates are at a record high and families that, in a previous era, would have been lifelong renters are living comfortably and building equity in their own homes.
But inadequate, and in many cases, nonexistent underwriting standards continue to spoil the dream for some and damage the property values of many. There is a strong connection between the growth and concentration of subprime lending and increases in foreclosures--not just in recent weeks, but in recent years.
It seems reasonable to hold lenders accountable to basic standards that make sure borrowers are getting loans they can truly afford. While this seems simple, our experience with predatory mortgage reform at the state and federal levels has been anything but simple. Previous laws failed to prevent the problems we are now seeing for a very straightforward reason. The nature of predatory lending is such that any attempt to regulate specific products or practices simply serves as an impetus for unscrupulous lenders to develop new methods for preying on vulnerable home owners.
What we need is a national standard--which is clear to both borrowers and lenders--to ensure that loans fit the borrower's short and long term financial situation. First, loans should be underwritten to ensure that potential home owners can afford the loan throughout its entire term, not just the introductory period. Second, when a loan is refinanced, there should be some clearly defined, long term benefit to the home owner. But standards must be enforced. The federal Home Ownership Equity Protection Act provides that the Federal Reserve Board shall prohibit unfair and deceptive practices has simply not been applied with any vigor or effectiveness.
Reforms based on these standards and a new sense of urgency and responsibility on the part of federal regulators can restore confidence in the subprime industry while making sustainable home ownership a possibility for millions of Americans.