- The Washington Times - Sunday, March 11, 2007

We all know what happens when a disastrous act of God (e.g., Hurricane Katrina) is combined with inept and callous acts of political leaders. Those with the least power and fewest resources suffer losses that could have been avoided. Then they wait for their leaders to figure out a way to help them.

Today, many of those same people and others are facing another large-scale disaster that’s leaving a trail of unnecessary losses, but there’s nothing even partly natural or divine about it. This one is all about human greed and neglect.

I’m referring to the rising flood of foreclosures on dangerous home loans in the high-risk, high-cost subprime market. Subprime lenders target people with blemished credit, offering them loans at 1 percent to 5 percent higher interest levels than the prime rate offered to applicants with strong credit histories, preying on the families already struggling to make ends meet. They could use some leaders with courage to stand up and help them hold on to the American dream of homeownership.

In recent years, subprime loans have become a bigger and riskier part of the total home-loan market. Subprime lenders have touted these loans as “expanded credit,” but they are adding up to expanded foreclosures. A new study by the Center for Responsible Lending shows 2.2 million families either have lost their homes to foreclosure or hold subprime mortgages that will likely result in foreclosure over the next several years. More than 2 million. That’s more than twice the number of Gulf Coast residents displaced by Hurricane Katrina.

Like weak levees, these subprime mortgages weren’t designed to last, and when they fail, foreclosure can be as devastating as floodwater. These mortgages promote failure with their hidden pitfalls and veiled traps.

For example, most of these loans come with an adjustable interest rate that can result in staggering payment increases. The most common subprime-loan type begins with a temporary interest rate that — like a ticking time bomb — is set to rise after two years and keeps going up every six months after. Subprime lenders call these loans “2/28s,” but they also have earned the nickname of “exploding” ARMs (adjustable-rate mortgages). Guess who is harmed by this exposure: the middle class and working poor.

The consequences of exploding mortgages aren’t as visually dramatic as the havoc wreaked by Katrina. But for the families involved, the results are equally devastating. Consider the case of Mr. L., a mechanic who lives in San Leandro, Calif., with his wife and kids. Although their net monthly income was $4,000, a mortgage broker convinced them to sell their home and use the proceeds as a down payment on a much more expensive property in Stockton.

They went from paying a mortgage of $1,700 a month, including homeowner’s insurance and property taxes, to paying almost $4,700 — not including taxes and insurance. The new loan began with an interest rate of 8.6 percent and ultimately it could go as high as 14.6 percent. This family is now struggling to make their payments and keep their home.

Working families seeking greater financial security lose the most from subprime failures, and those in communities of color are hit hardest, since subprime home loans go disproportionately to African-American and Latino families. Last year, more than half of mortgages received by African-Americans were subprime. Research shows people of color are likelier to receive a subprime loan even if they have the same income and credit scores as white homebuyers. This is made possible by the aggressive marketing of subprime lenders and brokers who use the complexity of mortgages to their advantage.

Do we need to encourage a higher rate of homeownership? Absolutely. Slightly less than half of African-American and Latino families own their homes, compared to 70 percent of white families. This gap is troubling, since owning a home represents any family’s best hope for achieving sustainable economic security.

Rather than an opportunity, subprime mortgages have become a high-stakes gamble. Even during the early part of this decade, when interest rates were low and housing appreciation was high, 1 in 8 subprime mortgages failed. Now that the housing bubble has burst in many areas, the failure rate is sure to climb. For subprime loans made during the past two years, the Center for Responsible Lending finds 1 in 5 will end in foreclosure.

It wouldn’t be hard to stem the tide of these foreclosures, and recent events give me some hope. Last week, federal banking regulators proposed to provide basic protections for families who receive subprime loans with adjustable interest rates. And Freddie Mac, one of the largest mortgage investors, announced it will no longer buy unaffordable loans that have huge built-in payment increases.

It is encouraging that regulators and Freddie Mac have taken major steps in the right direction. Now we need follow-up: Regulators need to stick with their position and enact the new protections immediately. Fannie Mae and other mortgage investors should follow Freddie Mac’s example voluntarily. And the Federal Reserve could do the most good by using its authority to extend protective regulations to cover all mortgage lenders, including the finance companies that originate the bulk of subprime home loans.

I just returned from the Gulf Coast, where I helped one of my younger siblings and her family move out of a Katrina trailer and into a new home.

None of us knows when the next hurricane may blow in, but we can prevent future disasters in the mortgage market. Let’s keep the dream of homeownership alive and call on Congress and the Bush administration to hold mortgage lenders and brokers accountable for their action.

Donna Brazile is a political commentator on CNN, ABC and NPR and former campaig manager for Al Gore.

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