As we go to press, a sense of urgency about the nation’s housing catastrophe seems finally to have trickled up to Congress, which is making a rare bipartisan push before the July 4 recess to pass a relief measure aimed at homeowners. It’s about time. As early as 2003, reality-inclined economists sounded the alarm over the hyperinflated housing bubble’s impending burst. But it wasn’t until Wall Street took a hit last year–threatening a worldwide financial meltdown–that the government swung into action, and then only to bail out the lenders and banks that got us into this mess. Meanwhile, more than 1.1 million homes are in foreclosure, and housing prices have taken a 15.3 percent tumble over the past year–the worst drop in history–sticking almost 9 million Americans with homes worth less than their mortgages. In cities like Detroit and Las Vegas, whole neighborhoods are ghost towns, with more houses boarded up than occupied.
Yet free market ideologues have stymied relief efforts by claiming that to rescue homeowners would be to reward speculators who lied on their mortgage applications to make a fast buck. No equivalent amount of tough love was offered to the really reckless speculators–the bankers who bundled subprime loans and traditional mortgages into securities and traded them to third-party investors on the deregulated global market. This quest to maximize paper profits drove the mortgage industry to make shoddy loans to first-time buyers as well as longtime homeowners, who were lured into exploding-interest-rate mortgages they couldn’t afford or did not need. What happened, in short, was not consumer error but systemic market fraud and failure.
The people suffering most from this scheme’s collapse are not members of the investor class but folks who believed that homeownership would be their ticket to middle-class stability, as it had been for the previous generation. As Kai Wright’s article “The Subprime Swindle,” on page 11, reveals, the gutting of the American dream of homeownership has disproportionately devastated minorities; the total loss of wealth for people of color due to the subprime crisis could reach $213 billion, including $92 billion for African-Americans and $98 billion for Latinos. And, because minority wealth is so dependent on home equity, the crush of foreclosures represents not just the immediate loss of homes but the razing of wealth and opportunity for generations to come.
For Americans who have already had their meager economic security eviscerated, Congress’s awakening is too late, and for those on the cusp, it is still too little. The pending legislation, which Bush has threatened to veto, creates a refinancing system that is voluntary for lenders and hamstrung by large borrower’s fees and red tape. It does nothing to reform the securities market, opting instead for borrower counseling and stricter disclosure requirements. But such tinkering around the edges will not fix this disaster. What is needed is a massive federal program, akin to the Resolution Trust Corporation but designed to aid debtors instead of creditors, to keep low-income Americans in their homes. Houses in default could be placed into federal receivership in which owners would make payments equivalent to rent without accruing equity. When the market settles, these mortgages could be renegotiated at fair rates, or the homes could be turned into public housing. Finally, lenders must be held accountable for the loans they make, not just now in the ensuing sell-off but permanently, by extending liability throughout the chain so that everyone who issues or holds a mortgage has a reason to make sure that the housing market is built on a strong foundation.
