The economic grenades are going off. Just pick up today’s newspapers. The subprime lending crisis is metastasizing; foreclosures on homes purchased with subprime mortgages are expected to reach two million by the end of next year, according to a new Congressional report; the dollar has sunk to a new low; China is threatening to stop investing in US assets and buy more Euros; oil is about to hit a $100 a barrel; the credit crunch is causing an unprecedented liquidity sqeeze; and consumer spending is expected to dip sharply. While one of the country’s largest home lenders said last month it would help borrowers restructure %16 billion in mortgages, the financial pain and stress is rippling fast thoughout the economy and country. While we hear more about the impact of the credit crisis for Wall Street’s big boys –as a few heads roll –don’t lose sight of the impact on Main Street. Bold and big ideas are needed.
For now, Congressman Barney Frank is trying to push through legislation that extends moderate regulation to the subprime market. But he’s facing a tough fight because money still rules in DC. Just as the richest of the rich, the hedge fund and private equity cowboys, have lubricated the lobbying troughs and candidates’ warchests to avoid paying taxes at the same rate as a waitress or policeman, the mortgage industry is pouring in bucks to stave off even modest regulation of its often predatory practices.
If we reward the mortgage industry’s lobbying, they will keep using the same kinds od deceptive practices to make a quick buck, no matter what the costs to home buyers and their communities. They know they can always lobby Washington to get them off the hook if things go badly–as they have. Just remember that while predatory lenders were driving low-income families to financial ruin, 10 of the country’s biggest mortgage lenders were spending more than $185 million lobbying DC to let them get away with it. Sure, some of the borrowers used their house an as A.T.M.machine to finance personal consumption (but most used the money to help with soaring college tuitions and medical expenses) –and some argue these borrowers should face the consequences of their no-savings lifestyle. But the real victims of this subprime mortgage crisis are the millions of borrowers who followed the rules, whose only crime was taking out mortgages these lenders told them they could afford. Now they can’t refinance or sell their homes because no one will lend to them or they can’t sell in a housing market that is falling.
The effects are already metastasizing in the economy –with the worst effects of these loans not felt until 2008 or 2009. And with the housing turmoil most severe in some of the most hotly contested political battleground states–Florida–with one foreclosure filing for every 248 households in September, and Ohio, with one foreclosure for every 319 households, according to a survey by RealtyTrac, Inc, a California property-research company, Republicans could face real trouble because they control the White House and the GOP’s presidential candidates have looked clueless and heartless when they deign to address the housing issue. In their first debate focused on the economy, for example, in Michigan –a state which ranked No. 4 in RealtyTrac’s foreclosure rate survey– not a single Republican raised housing concerns. Cutting taxes, they argued, would solve every economic problem.
Though bolder policies are needed, at least the Democratic candidates are seizing on the issue. John Edwards has called for a policy that prohibits many predatory-lending practices and would make it easier for homeowners to save their homes. Hillary Clinton issued a detailed policy paper on subprime lending that would impose restrictions on lenders. Barack Obama argues that we need to address the “root of these problems” and lays out how we could update mortgage rules for the 21st century–enacting the regulatory and disclosure laws the industry has lobbied so hard against in these last years. The implosion of the subprime lending industry, Obama argues, ” is more than a temporary blip in our economic progress. It is a cancer that, given today’s integrated financial markets threatens to spread with devastating impact to our economy as a whole, unless we act to contain it. ” Containment, domestic-style.