November 16, 2007
To the Editor:
The current subprime mortgage crisis threatens millions
of homeowners, the economic stability of entire communities, and the stability
of national and international financial structures [“Bernanke’s Mortgage
Fix Ideas: Modify and Guaranty,” Nov. 9].
In an attempt to prevent similar crises in the future,
Congress is at last debating substantive reforms about the way the mortgage
industry should be regulated. But the current crisis demands bold and
imaginative action immediately to prevent a worse crisis in the home mortgage
and financial markets. Unfortunately, the general response from the lending
industry has been self-protective and grossly inadequate, and the response from
the regulators has been cautious to the point of culpability.
However, one national regulator has issued a call for
action that gets at a significant slice of the problem. FDIC Chairman Sheila C.
Bair has proposed that loan servicers and investors cooperate to freeze the
interest rates of the troublesome 2/28 and 3/27 adjustable-rate mortgages at
their starter (not teaser) rates, which, as the chairman points out, are high
enough to begin with.
These loans, which reset after two or three years, gave
many borrowers a monthly payment they could barely afford in the first place,
let alone when the mortgage rates reset.
The chairman’s proposal further specifies that the loans
that should be restructured in this way are those where the borrowers are
current, live in the home, and have not yet reached their first reset.
Make no mistake about it, this crisis was caused by the
financial services industry with grossly lax underwriting standards and
deceptive marketing. Of course, the servicers and investors will take a hit
from freezing rates. But the hit they will take if they act now is nothing
compared to the hit they will take from a deepening crisis if they choose to do
There are disturbing signs that different sectors of the
industry are putting off tough measures in the hopes that another sector of the
industry will pay a bigger price than them, or that the crisis will
miraculously cure itself. But better a lower interest rate now than as many as
2 million foreclosures over the next several years with downward pressure on
all house prices and a further freezing up of liquidity.
Some companies claim that they have already acted boldly
to restructure loans, but recent Moody’s data show that only 1% of
adjustable-rate loans have been restructured. Moreover, within many financial
services companies there is little communication between collection departments
and workout departments, so they often act at cross-purposes.
Although a number of steps need to be taken to protect
homeowners facing the complex problems of foreclosure, Chairman Bair has
recognized the magnitude of the situation and placed responsibility where it
belongs on financial institutions that lost control of their own products.
While this proposal won’t help some of the homeowners who
have gotten into trouble, it will help a significant number. It is past time
that other public officials and the home mortgage industry join Chairman Bair
in supporting and implementing a solution that begins to recognize the
frightening size of the problem.
Community Reinvestment Association of
Neighborhood Economic Development Advocacy Project