Subprime Mortgages: A Case of Back to the Future
by B.B. Robinson, Ph.D. (bio)
Are you living "the American Dream"? More importantly, are you able to pay for it?
According to Census Bureau figures, almost 70 percent of American households owned their own homes in late 2005. Almost half of black households were included in this group.
But there is an unsettling problem related to this positive news. Among these homeowners, more than half of them also earned less than the median household income. With housing prices skyrocketing, this has forced many to rely on "subprime" lenders.
Subprime mortgages may initially seem like a blessing because they allow those with poor credit to get home loans. The problem is that, because a lender is considered to be making a risky investment, these loans often come with initially low interest rates that later adjust to a much higher level.
This is a serious problem because when those interest rates rise, borrowers often have trouble making payments on the loan. In March, fears about increasing subprime mortgage foreclosures caused a stock market tumble. In April, the largest independent subprime lender - New Century - filed for bankruptcy under the strain of delinquent loans.
It begs the question - why enter into such an agreement in the first place?
Homeownership - something that creates equity and financial stability - was advertised at the beginning of all of this as something within everyone's reach. The government promoted homeownership. Lenders were eager to make seemingly spectacular deals. Everybody seemed to play the game of getting into homes or getting money out of homes they already owned while the getting was good.
Until recently, he consequences for borrowing more than one could pay back were not that great. Filing for bankruptcy was relatively easy and there wasn't a great stigma attached to over-borrowing. Defaulting on a loan or filing for bankruptcy was simply no big deal.
It's not that easy anymore, however. Congress recently reformed bankruptcy laws, requiring people who are considering bankruptcy to first attend credit counseling. In some cases, bankruptcy filers will be forced to pay back more of their debt than in the past. And the since the new law is more complicated, hiring a bankruptcy attorney will be more expensive.
This makes the present subprime loan crisis all the more daunting. Those who have bad loans will find their options limited. Many of the overextended are experiencing foreclosures. Some may be able to refinance their loans with an amenable lender but still face spending the rest of their lives paying off the bad debt. The worst-case scenarios include homelessness and poverty.
Some are laying the blame on "predatory lenders" and calling on Congress to act. And surely, some lenders do take advantage of the less fortunate, including some black-on-black abuse. These predatory lenders and their accomplices are more interested in their broker's fees than in ensuring that borrowers can meet their financial obligations. To the extent possible, they should be prosecuted under the law.
But the crux of the problem is not only predatory lenders, it is the lack of personal responsibility. Too many people found subprime loans too tempting. Why should a lack of money keep anyone from having an SUV, Xbox 360, the latest fashions and a large house? Buy it on credit and worry about it later.
What is needed is an effort to educate potential subprime borrowers concerning the pitfalls of subprime loans. The effort needs to go further, though, and educate prospective borrowers on how to be financially responsible. The must learn to manage their finances, to save, and know when to defer large expenditures.
Federal intervention must be prudent in this case. If Congress tries to relieve those subprime borrowers of the burdens of their bad decisions, it might only further fuel the irresponsibility that led to the problem in the first place.
What the government can do is monitor the evolution and application of lending practices. It can also work with or in addition to social organizations and lending institutions to educate prospective borrowers about what kind of loans are the best for them.
If we do not embark on an effort to educate potential subprime borrowers, the situation will likely worsen. It could come to resemble the 1880s, when southern Whites used laws, rules and financial instruments to wrest valuable property from and to virtually re-enslave unsuspecting black Americans during Reconstruction. This time, however, we will have ourselves to blame.
# # #
B.B. Robinson, Ph.D. is a member of the national advisory council of the black leadership network Project 21. You can visit his website at www.blackeconomics.org. Comments may be sent to Project21@nationalcenter.org.
Published by The National Center for Public Policy Research. Reprints
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