Fixing the damage to the American dream

There is nothing that characterizes the American dream better than owning your own home.
Unfortunately, instead of strengthening homeownership as part of the American dream, we’ve allowed it to turn into the American nightmare. As a result, we’ve deeply damaged the foundations of Main Street and Wall Street.

On Main Street, we abused the most important instrument for homeownership: the full amortizing mortgage. Amortizing loans set a fixed interest rate and payment schedule for home mortgages, in most cases for 30 years. But recently we’ve allowed tricky mortgages to replace amortizing loans and undermine the integrity of the system. These lending tricks, such as teaser loans whose low initial rates explode into unaffordable payments, began driving the nation into economic turmoil. We then deepened the crisis by making a second mistake: allowing brokers to receive huge bonus payments for steering unsuspecting homeowners into these tricky, more expensive mortgages. In fact, a study for The Wall Street Journal found that 61 percent of the subprime loans originated in 2006 went to families who qualified for prime loans.

These loans have done tremendous damage. An estimated 20,000 Oregon families and 2 million families nationwide will lose their homes to foreclosure this year. Moreover, the slicing and dicing of these loans and their resale to financial institutions throughout the world poisoned those institutions and froze lending. The result is a vicious vortex that’s destroying millions of jobs.

How did we let this happen? This fiasco is the consequence of colossal regulatory failure. Federal regulators failed to police abusive practices and actually opened loopholes that created giant unregulated financial markets.

In addition, federal regulators crippled the ability of states to reform lending practices by banning restraints on federally chartered banks. This ban also deflated efforts to regulate the practices of state-chartered lenders since such regulations would have created an unfair playing field.

As the former attorney general of North Carolina said, we “took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West.”

The time has come for us to assess and repair the damage.

First, we need to support aggressive efforts to enable families trapped in subprime mortgages to negotiate modifications that will make their payments more affordable. President Barack Obama has taken steps in the right direction on this front. We need to monitor the progress and help ensure success.

Second, if mortgage modifications fail, we need to support the ability of bankruptcy judges to adjust the terms of loans. Bankruptcy judges currently have the power to adjust loan terms for yachts and vacation homes. It’s time to allow the same lifeline for family homes.

We also need to end deceptive and abusive mortgage practices. We need to make sure that teaser loans, triple-option loans and secret steering payments never again haunt American families.
Finally, we need to restore common-sense regulation of Wall Street.

As we prepare to craft mortgage and housing policies that will strengthen families, we ought to consider the advice of President Franklin Roosevelt, since he steered us out of the nation’s last enormous housing crisis. In a 1932 radio address, Roosevelt declared, “Here should be the objective of government itself, to provide at least as much assistance to the little fellow as it is now giving to large banks and corporations.”