What do you do when your neighbor’s house catches on fire? You can blame your neighbor; perhaps he drinks and smokes late at night, and his high risk life style finally caught up with him. But if the wind is blowing, the fire will spread. That’s why we have fire departments. To put out even the fires brought on by negligence, in order to keep them from spreading across a neighborhood.
Today, the fire has started in the collapsing housing market, and the wind is blowing. The housing bubble has collapsed. New houses are standing empty. Old houses aren’t selling. Foreclosures are skyrocketing, as more and more families who took on subprime, adjustable rate mortgages are in trouble. Economist Dean Baker estimates that in returning to the norm, housing construction will decline by 30% or so from its peak, and housing sales by 30-40 percent. 2 million jobs are at risk in the housing and sales industry alone.
That’s not all. Families took $600 billion in value out of their houses last year in home equity loans or remortgaging, often to help make ends meet. That fueled the consumption led growth we’ve witnessed over last years, as savings levels were negative for the first time since the beginning of the Great Depression. Now with home values plunging, hard pressed families are tightening their belts, and turning to credit card debt as food and energy prices continue to soar. As consumers cut back, the entire economy is at risk.
At the root of this crisis is the deregulated financial system. Instead of neighborhood banks, national lending companies peddle adjustable mortgages with hidden fees to borrowers, often with little or no check on their ability to pay. The lenders immediately sell the mortgages to other investors that slice and dice them in parts, repackage them and sell them to other investors, earning high fees in the process. That makes it harder to work out a deal for homeowners in trouble because the loan has been divided up so much. Worse, the national company has no real stake in any one neighborhood, and can earn fees on the foreclosure process. Not surprisingly, workouts in the current crisis have been hard to come by.
The result is that the fire now threatens responsible homeowners. When a family is forced to default, the house stands empty. Boarded windows are an invitation to mischief and drug dealers. Foreclosed homes drive down the value of neighboring homes. The contagion spreads.
Should we help those in trouble? Many took on more debt than they could afford. They gambled that housing prices would continue to rise and they lost. They are lying in the bed that they made.
Two problems with that conclusion. One is that the lenders were equally, if not more, irresponsible. They abandoned responsible lending principles, often misleading families about the hidden costs and the skyrocketing payments.
More important, the innocent as well as the irresponsible are at risk. Entire neighborhoods are devastated and if the conflagration spreads, we may all get burned.
What can be done? Why not work out the mortgages for as many lenders in trouble as possible. At the very least, Congress give bankruptcy courts the right to renegotiate mortgages. That would give the lenders an incentive to work out mortgages with borrowers before bankruptcy. Congress also should empower Fannie Mae to assume mortgages, with work outs that hold the lenders responsible too.
One thing is clear. It’s time for the fire department to arrive before we all get burned.
Reverend Jackson n can be contacted by e-mail at