T he implosion of the subprime lending industry is more than a temporary blip in our econ-omic progress. It is a cancer that, given today’s integrated financial markets, threatens to spread with devastating impact to housing and to our economy as a whole, unless we act to contain it.
It is also a parable about how an excess of lobbying and influence can defeat common sense rules of the road, placing both consumers and our nation’s economic well-being at risk.
This all started as a good idea - helping people buy homes who previously could not afford to. But over time, lenders began pushing low-income buyers into homes they could not possibly afford, abusing the system by lowering their lending standards, making loans that required no money down and offering low, teaser interest rates that explode after the initial grace period. Some borrowers were also lying to get mortgages or engaging in irresponsible speculation.
Nearly everyone - from lenders to investors to borrowers - fooled themselves into thinking that what they were doing was low risk when it in fact involved a lot of risk.
But we also know that Washington played a role. At a time when non-bank lenders were offering new kinds of mortgage, the federal government should have made sure it was all being done on the level. Instead, our government failed to provide the regulatory scrutiny that could have prevented this crisis.
There is a reason why this has happened. Over the past several years, while predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (£92m) lobbying Washington to let them get away with it. So if we really want to make sure this never happens again, we need to end the lobbyist-driven politics that made it possible.
Today, as we weigh our options on how best to resolve this crisis, many argue that bailing out the borrowers and investors will just encourage them to engage in more of the same irresponsible practices.
But I think we also have to recognise what will happen if we reward the mortgage industry’s lobbying: they will keep using the same kinds of deceptive practices to make a quick buck, no matter what the consequences to home buyers and their communities. Rather than correct what they are doing wrong, these companies will know that if things go badly, they can always lobby Washington to let them off the hook.
The real victims in this crisis are the millions of borrowers who followed the rules, whose only crime was taking out mortgages that lenders told them they could afford. Normally, these borrowers could avoid foreclosure by refinancing their mortgages or selling their homes. The problem today is that they cannot refinance because no one will lend to them, and they cannot sell because the housing market has fallen. With some arguing that the effects of the worst subprime loans will not be felt until 2008 and 2009, this may be just the beginning.
We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners - at least until this crisis passes - is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.
But we have to do more than just deal with the present crisis. If we do not address the root of these problems, it is just a matter of time before we will be dealing with them again.
The rules currently governing mortgages were written in the 20th century to make borrowing easier to understand for borrowers. We need to update these rules for the 21st century and enact the regulatory and disclosure laws that the mortgage industry has been lobbying against.
That is why I have proposed a Home Score system that would create a simplified, standardised metric for home mortgages - rather like the annual percentage rate (APR), the effective interest rate a borrower ends up paying on a loan - allowing prospective home buyers easily to compare various mortgage products so they can find out whether they can afford to make the payments.
I have also introduced a bill in the US Senate called the Stop Fraud Act that would treat those who commit mortgage fraud as the criminals they are.
Owning a home represents a big part of the American dream and all Americans - no matter what their income level - should have the power to reach for that dream. But that is not going to happen until we stop the unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low-income borrowers into taking on loans they cannot afford.
If we are serious about stopping this crisis and preventing much larger turmoil in US housing markets, Washington needs to stop acting like an industry advocate and start acting like a public advocate.