(This editorial originally appeared in The News &Observer of Raleigh.)
Carpenters’ hammers are poised in mid-swing. America’s homebuilding boom is on hold, and ‘‘subprime’’ loans are a prime cause. These are loans made to homebuyers with below-average credit ratings. Many of the borrowers are first-timers, renters buying into the dream of owning their own homes. Such loans often start with easy-to-afford ‘‘teaser’’ rates that, once they adjust to rising interest rates, quickly become unaffordable. Lump-sum payments loom.
Subprime lending helped fuel a housing boom, but now defaults and bankruptcies threaten the stability of homebuilding and the broader U.S. economy. Although there are other factors in the slowdown — no boom lasts forever — this is a blow to the industry and to families sweating out mortgage payments.
In North Carolina, which has an above-average rate of mortgage defaults, bills in the General Assembly seek to protect homeowners from abusive lending practices and make the foreclosure process fairer. Meanwhile, Congress is considering reforms to the system and assistance to beleaguered borrowers.
Changes and some help are warranted. Consumer protection has been vanishingly thin for subprime borrowers, and it’s in the public interest to encourage homeownership. Traditionally that has meant subsidized mortgages for veterans and others; today it could include help with refinancing poorly structured loans. Some advocate a temporary moratorium on foreclosures, or funds might go to groups that help struggling borrowers.
Yes, we know — those buyers signed on the dotted line (and put their initials on umpteen-million others). Individual responsibility for major financial decisions is vital. But consider the larger forces at work here.
Subprime lending is an enticing affair. Come-ons abound, and many first-timers struggle to understand the normal lending process — let alone the implications of ‘‘liar loans,’’ in which borrowers are asked about their income but rarely have it verified. The Charlotte Observer found that high-risk loans and foreclosures in the Charlotte area are concentrated in new entry-priced subdivisions with homes valued under $150,000.
And as detailed in a McClatchy News Service overview last week, warning flags were flying nationwide. ‘‘Anyone looking to point a finger of blame for the meltdown,’’ the article noted, ‘‘may need more than two hands.’’ The Bush administration, touting an ‘‘ownership society,’’ kept out of the way. Federal agencies issued warnings about risky loan terms but failed to act. Nor did Congress.
With home prices soaring, investment banks bought up mortgage-issuing finance companies that specialized in the subprime market and were not subject to federal banking supervision. Some of these ‘‘non-bank’’ outfits now face bankruptcy. (A downside of aiding borrowers is that it could mean compensation for buccaneering lenders.)
Yet the importance of state or federal action is clear. Those who would leave homebuyers to the mercy of the market and their own mistakes should consider that when the Charlotte paper profiled one ‘‘hard-hit Concord subdivision’’ it found that 18 percent of the 406 homes had foreclosed. That lowered property values for everyone. Even owners with conventional mortgages had trouble refinancing a loan or selling a home. Their prospects, too, had become subprime.