Help is on the Way to Remedy Mortgage Crisis

December 18, 2007

Caveat emptor has always been an integral concept in free market economies. It’s a Latin phrase expressing the understanding that consumers are sophisticated adults capable of engaging successfully in commerce. But the concept of buyer beware is predicated on truth and transparency amid the transaction, and is rendered impotent when fraud or misrepresentation strips buyers of their ability to utilize their skills and savvy as consumers. Unfortunately, fraud has played a significant role in the mortgage problems our nation now faces.

By now, we all know the magnitude of the mortgage crisis nationally, but Ohio continues to be among the states hit hardest, recently ranking #1 in the nation in its percentage of houses in foreclosure. Ohio’s foreclosure rate is as much a symptom of the state’s anemic economic health as it is a cause of it. But statistics and rankings cannot begin to convey the impact of the mortgage crisis on a human level; there is no means of quantifying the fear, anxiety, and devastation which results when a family loses its claim on homeownership. From a humanitarian or economic standpoint, America’s housing predicament cannot be tolerated.

Earlier this month, the U.S. Treasury Department and Department of Housing and Urban Development (HUD) announced a nationwide collaborative effort with lenders, loan servicers, and mortgage counselors to help struggling homeowners. This HOPE NOW Alliance will be offering the opportunity for more than one million borrowers with adjustable rate mortgages to refinance their existing loan into a new private mortgage, move into a Federal Housing Administration FHASecure loan, or freeze their current interest rate for five years. The HOPE NOW Alliance has embarked upon a massive effort to contact borrowers who are behind on their payments, hoping to reach impacted families before their financial problems become insurmountable. If you have questions about the program or to see if you might qualify, you should call the Alliance’s toll-free hotline at 1-888-995-HOPE.

The causes of the spike in foreclosure rates have been well-documented. Most who file for foreclosure still do so amid job loss, major illness, or divorce. For these Americans, the federal government must aggressively offer financial and credit counseling, and intervene early to help them avoid losing their homes. But a significant number of foreclosures stem from people who were victims of an overly aggressive subprime industry, or in many cases, predatory lenders.

Buyers cannot beware when fraudulent lenders misinform the borrower or manipulate them through aggressive sales tactics. Predatory lending is not solely responsible for the myriad problems facing the mortgage industry and housing market, but it has contributed mightily to the plight. The FBI reports that mortgage fraud has risen 237% in the past five years, and according to the Treasury Department, mortgage fraud has increased more than 1400% since 1997. Predatory lending is, by definition, pernicious, and we must enhance regulators’ and law enforcement’s abilities to prevent it and increase the punishment for those who engage in it.

Predatory lenders must be given no quarter, but it is important that in our efforts to crack down on them, that we do not exacerbate the housing slump by restraining liquidity for future loans. Significant overhaul and regulation of the subprime industry will have a broad impact on the housing market, and could dry up credit to Americans who desperately need it.

Recognizing the dexterity needed in crafting legislation that will not adversely impact the housing market, last month, the House passed the Mortgage Reform and Anti-Predatory Lending Act -- bipartisan legislation that responds to the spike in foreclosures by combating abusive lending practices and improving oversight of the mortgage industry. The bill calls for licensing and registration of mortgage originators, brokers and bank loan officers. It sets a minimum standard for all mortgages, requiring that borrowers must have a reasonable ability to repay. Also, the bill attaches limited liability to secondary market securitizers who package and sell interest in home mortgage loans outside of these standards. The answer to America’s mortgage industry woes is consumer education, clear disclosure, and better regulation of mortgage brokers; this legislation will keep our housing markets strong, while helping ensure that the interests of homebuyers are being protected both at the point of sale and in the future.

Moreover, the market is already correcting itself. Lenders are tightening credit, requiring larger down payments, and ending some of their more creative and complicated financing mechanisms. The industry is reverting to more conservative lending requirements it adhered to prior to the housing boom – a trend that should be welcomed by lawmakers.

The drums have been beating loudly for the federal government to remedy the mortgage crisis, and the massive desire to help impacted families could have prompted an economy-killing overreaction. I am pleased to report that lawmakers have thus far responded appropriately and pragmatically, by remaining mindful of another Latin phrase, one warning of the dangers of wielding an overly-aggressive regulatory hand: primum non nocere (first do no harm).

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