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We are facing the worst housing crisis since the Great Depression. Over a million Americans are at risk of losing their homes. Many more families will see their life savings disappear as housing values plummet in neighborhoods with boarded up houses headed to auction. Investors are pulling money out of banks—and out of America—fearful of a continuing credit crunch. This isn’t the normal spring flood or fall storm. This is a tsunami headed our way.
But denial is not just a river in Egypt; it is an epidemic in Washington and Wall Street. In the Republican presidential debate this weekend, not one question was directed at the crisis. The president has offered no plan for helping those in trouble. When the House of Representatives passed a modest bill, creating a $900 million fund to help homeowners refinance each year, the president promised to veto it. Treasury Secretary Paulson worked to create a private fund to help bolster the banks, but has offered nothing for homeowners. The banks have started to set aside reserves for losses, but even they have little clue about just how much their securities are worth.
This is a front page story, not a business page report. Every candidate seeking to be president should be asked what he or she would do. The Congress should be kicked into action.
This crisis comes because financial deregulation has opened the floodgates to speculation. We no longer have neighborhood bankers who know who they are lending to. Now “brokers” peddle mortgages, pocket their fees, and sell off the mortgage to others who chop them up, repackage them with thousands of other loans as securities for investors around the world.
With none of their own money at risk, mortgage brokers peddled ever more risky loans often without checking the credit of the borrower. Subprime loans featured interest only teaser rates for two or three years that would then be reset to very high rates, raising monthly payments by 30% or more. Borrowers were told not to worry; they could refinance before the interest rate soared.
But the bubble burst, housing prices fell, banks tightened up, and now responsible homeowners are finding it impossible to refinance. $300 billion in mortgage loans will be reset by end of 2008. Conservative estimates are that as many as one-fourth of subprime loans facing reset will be faced with default.
Those at risk are disproportionately Black and Latino, largely because of the discrimination that still pervades the mortgage market. Studies show that Blacks are often offered loans at higher rates than Whites with similar credit backgrounds. And having taken the riskier loans, they are more likely to be hit with nasty surprises. And no local bank is there to work it out. Credit agencies report they’ve modified less than 1% of the loans in trouble in 2007.
This isn’t just about families caught with a bad loan. It’s about their neighbors whose homes plummet in value. It’s about their communities that lose taxes for schools and police. When a storm hits, it isn’t just the risk takers that get hurt.
The time to act is short. We need the government to step in and renegotiate loans for those who still have the ability to pay. Sustain the original rate for a longer period. Keep homes occupied and neighborhoods healthy. Who pays? Surely the investors who profited by inflating the bubble must bear losses when it bursts. Restructured loans would cost less than foreclosure in any case. And help neighbors and communities avoid the financial tsunami that is ravaging our country.
Reverend Jackson n can be contacted by e-mail at