Stephanie and her husband, a young couple with a family in Napa Valley, CA, took out loans to buy their first house in 2003. After making payments for two years, they refinanced to one loan, then their bank sold the loan to a subprime mortgage lender--and they quickly plunged into a financial vortex. Accused of a late payment, then allegedly swindled by a loss mitigation group, Stephanie and her husband ultimately sold their house, with nothing but stress to show for it.
Gertrude Robertson, 89, lives in Seattle. When an independent mortgage broker convinced her to refinance three years ago, she obliged--and two years later, her payments rose by over $1000 and she's now terrified of being evicted.
"I just wanted to be able to eat and sleep in my house and have a roof over my head," says Ms. Robertson.... "Every day at midnight when I go to sleep, I think maybe when I wake in the morning, they'll tell me to get out."
U.S. foreclosures rose 42% last year; 1.2 million homes are in jeopardy. Each one has a story, like Stephanie's and Gertrude's.
The questions are: Why are foreclosures rising? What will that mean?
And what could we have done to stop it sooner?
One simple reason for the rise in foreclosures is the recent flourishing of subprime loans in the last decade. As lending changed and it became lenders, not banks, who commonly made home loans, many new mortgage products appeared, and more and more consumers were aggressively steered to refinance their homes using subprime loans. A typical version has a fixed low rate for a few years, then the rate can rise quickly. And most applicants are measured on whether they can afford the low "teaser" rate, not the later, higher rate; when they can't pay it, like Gertrude Robinson, they may face foreclosure.
What does this mean? The rash of foreclosures means a buildup in the supply of housing, which drives prices down--in other words, it generally weakens the housing market. The larger concern is that a substantial weakening of the housing market could hurt the larger economy as a whole.
Why didn't we stop it?
Some crucial answers lie in a new report by Common Cause, titled, "Ask Yourself Why... Mortgage Foreclosure Rates Are So High." Several experts testified before Congress in 2000 to warn of lending abuses, persuasion of families to take out loans beyond their means, steering minority homeowners into subprime loans unnecessarily, and more. Yet Congress didn't act.
Over the next seven years, the mortgage lending industry spent $210 million in Washington lobbying and in campaign contributions as they worked to stave off regulation. Here's a few selections of how the report describes what happened:
Since 1999, ten of the nation’s largest subprime mortgage lenders, their trade groups and their corporate parents have given more than $22 million in political contributions to federal candidates: $14 million to Republicans and more than $8 million to Democrats, according to Federal Election Commission reports. These special interests also have spent more than $187 million lobbying Washington over the same period, according to data from the Center for Responsive Politics and the Senate Office of Public Records.
As consumer and housing advocates successfully pushed for more state regulation of mortgage lenders, the industry went on the offensive. The industry backed legislation championed by former Congressman Bob Ney (R-OH). The Ney bill, reintroduced in 2005 with the sponsorship of Democratic Rep. Paul Kanjorski (PA), would have pre-empted many state restrictions in exchange for looser federal regulation. Since 1996, Ney and Kanjorski received more than $300,000 from the mortgage lending industry, more than $173,000 going to Ney and $140,500 to Kanjorski.
Throwing in with Bob Ney? Not exactly a compelling case for the industry. There's more:
According to congressional testimony and news accounts, millions of homeowners who took out subprime loans over the past several years to buy or refinance their homes did not understand the terms of those loans. As the interest rates on their mortgage loans increased over time, they found it impossible to keep up with their rising house payments. And in a housing market where home values are beginning to fall, they are not able to sell their homes for as much as they paid for them. As a consequence, millions of families now are facing foreclosure, and thousands more have already lost their homes.
And it continues today:
Even in 2007, faced with nearly daily headlines about abuses in subprime lending and growing worries about foreclosures, the mortgage lending industry is underplaying its responsibility for the problem.
We're faced, again, with the problem of one wealthy special interest making a profit on the backs of average Americans, turning around and spending that profit on campaign contributions and heavy lobbying, and blocking policy that would protect individual citizens. They won't change their practices unless we change it for them, which is why we need to change our system and pass public financing for congressional elections.
In such a system, where candidates who swear off private contributions and agree to spending limits can qualify to earn public funds to run their campaigns, we can elect lawmakers who respond first to voters, not to big money donors.
Or we can continue to watch special interests dominate in Washington, as foreclosures continue to increase around the country, and the Gertrude Robinsons of the world go to sleep thinking, "maybe when I wake up in the morning, they'll tell me to get out." What kind of system do we want?
Cross posted at CommonBlog.