December 27, 2007


We’ll never get out of the current mortgage crisis so long as Americans remain in denial about the depth and breadth of the problem and insist on chalking the whole mess up to the irresponsibility of borrowers who are now getting what they deserve.

Throughout this year, as I’ve sounded increasingly dire warnings about an unprecedented wave of foreclosures, some readers have sent me “let them eat cake” letters suggesting the government do little or nothing to help struggling homeowners.

“It in turn is Mr. Doe’s responsibility to the bank, himself and to his family to make his mortgage payment. If he doesn’t, well then too bad for him,” writes Robert McMahon.

Reader Lucius Vorenus echoes the sentiment. “If you don’t have the cash or make enough, then you shouldn’t have gotten a mortgage,” he writes. “It’s called self-management and self-restraint.”

“What the government should do is prosecute any lenders who broke the law,” writes Steve Becker of East Meadow, L.I. “As far as those facing foreclosure – too bad!”

That punitive, Puritan part of the American character stretches all the way up to the Bush administration – which moved at a snail’s pace in recognizing the mortgage crisis and in rolling out a too little, too late rescue package that extends limited relief to borrowers who aren’t behind on their mortgages.

The insistence on letting overburdened borrowers face financial ruin is shortsighted and irresponsible. Yes, some of those who took out loans should have known they were overextending themselves – and there are no free-lunch solutions to the mess we’re in. But an as-yet-unknown number of people were swindled by brokers, bankers and appraisers who created what New York Attorney General Andrew Cuomo described in one case as “a system designed to rip off homeowners and investors alike.”

And no matter who’s to blame, damage from the collapse of the mortgage market will reach millions of Americans who never touched a subprime loan. The foreclosure wave will throw hundreds of thousands of properties on the market at more or less the same time, leading to an expected 30% plunge in home values in the coming months.

One study by the Woodstock Institute, a Chicago-based think tank, found that a single foreclosure on a block can immediately lower the value of nearby homes by $139,000.

Communities will also see a decline in revenues as foreclosed homes sit vacant, unsold and untaxed. That means less money for schools, which are primarily financed by property taxes.

Nationally as of this October, an estimated 130,000 jobs in finance had gone up in smoke, the biggest hit to Wall Street jobs since 2001. That will translate into harder times at local car dealerships, restaurants, retail stores, charities and other places the well-to-do spend their bonuses.

And nobody has a handle on the biggest joker in the deck: the coming losses to be suffered by pension funds and 401(k) retirement plans that bought bonds backed by mortgages that are now going bad.

People expecting to sit untouched while their “lazy, irresponsible” neighbors get a comeuppance are in for a surprise: Nearly everyone’s home values, school districts and retirement funds are going to get hammered.

President Bush’s plan is like putting a Band-Aid on a broken leg. America needs to go back to first principles and rethink the homeownership system.

That means giving far greater money and support to community development financial institutions – credit unions and loan funds that have always catered to low-income borrowers without incurring massive losses. The Clinton administration began a pilot program in the early 1990s that Congress should revisit and expand.

But above all, we need national leaders to tell Americans the blunt truth: The mortgage crisis isn’t just the borrowers’ problem, it’s everybody’s problem.

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