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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
communities devastated.
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.
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