How to end the crisis in defaulted mortgages.
Then, down the line, these mortgages triggered "resets"—higher, unaffordable interest rates promised to the down-the-line investors seeking high returns. Also piled on were high-cost insurance and other fees. According to one report, up to half of subprime borrowers actually qualified for better terms but were steered to the more costly deals. In a lot of these families, parents were working two jobs to make ends meet or addicted to credit cards. When the "resets" they'd agreed to triggered higher interest rates—when their mortgages exploded—the borrowers defaulted at previously unheard of rates.
What about the information about borrowers that down-the-line investors need to assess the risks? "Common sense suggests that a mortgage lender would almost always wants to verify the income of a riskier subprime borrower," says John Dugan, the U.S. controller of the currency responsible for keeping our banking system sound. "But the norm appears to be just the opposite: Nearly 50 percent of all subprime loans last year accepted stated income." This means that in contrast to the not-so-old days, lenders don't verify the income that buyers say they have on their loan applications. Actually, it's worse than that. Subprime players often encourage borrowers to lie by overstating income, assets, and other qualifications. Or, more politely, they look the other way and hurry the borrowers along. As one subprime appraiser for industry leader New Century Financial said about these so-called "liar's loans" to the Washington Post, "You didn't want to turn away any loan because all hell would break loose."
No wonder subprime delinquencies are skyrocketing. None of this, however, means investors need to turn their backs on low- and moderate-income Americans who want to buy houses. Instead, they should invest in the nonprofits with the low default rates, by rewarding their superior track records with the capital to expand. Nonprofits like these haven't forgotten the wisdom of old-fashioned banking. They educate homebuyers about the full responsibilities of ownership. They encourage homebuyers to look only at homes, and financing, that they can understand and afford. They often hold on to some part of the loan, so they have a stake in its success. And, if trouble brews, the nonprofit—just like the banks of yesteryear—is there to counsel and help homeowners through the crisis.
Instead of a hard sell, the nonprofits offer education. Instead of exploding mortgages, affordable financing. Instead of high-priced homes that maximize commissions, more modest ones. Instead of winking while borrowers sign liar's loans, looking them in the eye to stress the seriousness of owning a home. Instead of bad deeds, good deeds. This is the way to go for poorer families who want to own a home and for investors who want a dependable return.
Douglas K. Smith is the author ofOn Value and Values: Thinking Differently About We … In An Age Of Me.
Photograph of home for sale by Justin Sullivan/Getty Images.