By James Penrice

Digging out of the housing crisis

Some Catholic observers say domino effect started with failure to protect society's vulnerable

Once the concern only of borrowers and lenders directly affected by default, a record number of home foreclosures has torn the financial fabric of the nation and is threatening the global economy as well.

The Federal Reserve and U.S. President George W. Bush have issued regulatory proposals to tighten future lending practices. But that doesn't solve the current mess. Some legislators are so steamed that they're calling for more aggressive action such as holding Wall Street firms liable and giving other regulators equal consumer-protection authority to the U.S. central bank.

What's clear is lenders have already backed away from the so-called subprime mortgages -- which are more expensive loans offered to people who don't qualify for normal financing -- that sparked the financial disaster. In 2005, at the peak of the housing market, subprime loans accounted for 20 percent, or $625 billion, of all home mortgages that year. This year subprime lending is expected to account for only 2 percent.

The federal government's new proposals are aimed especially at eliminating unfair or deceptive lending practices. Some subprime lenders took advantage of clients -- by giving them incomplete or misleading information, or by lending without ascertaining their ability to pay -- in hopes of profiting from their poor credit. And some borrowers, blindly banking on continued hefty increases in property values, took on loans they could not afford.

But with property values dropping and some mortgages' interest rates adjusting upward, an increasing number of borrowers are going into default on loans.

According to RealtyTrac.com, there were 201,950 foreclosure filings in November, up 68 percent over the previous year. Analysts predict 2 million home foreclosures by the middle of 2009, assuming there's no significant restructuring of loans.

Because of the damage it has done to the credit market, the defaults have put pressure on the entire economy, not only here but abroad.

Wall Street banks and their investors already have written off at least $40 billion in subprime-related investments. Some worst-case scenarios say banks could end up declaring as much as $200 billion in losses related to the mortgage market.

Bail out

"Clearly this crisis has grown to these proportions because someone was asleep at the switch," said Jean Beil, senior vice president for programs at Catholic Charities USA.

"We would hope that the government would persuade the mortgage industry to turn some of those profits around to provide these unfortunate home buyers some time and assistance to seek counseling and find solutions to the crisis," Beil said.

As a counseling agency for the U.S. Department of Housing and Urban Development, Catholic Charities received a $1 million federal grant in November to help an estimated 32,000 families across the country with comprehensive housing advice, from how to purchase a home to how to keep it if they are facing foreclosure.

Complicating factors

Despite recent government steps to address the crisis, long-term reform will be hampered by a disparity in mortgage lending regulation around the country, said Thomas Shellabarger, a policy adviser to the U.S. Conference of Catholic Bishops.

While there are some federal statutes -- such as the Truth in Lending Act -- mortgage lending is one area of finance where the federal government has not been deeply involved.

"Banks and other higher financial institutions are regulated by the federal government, but mortgage lenders are not," Shellabarger said. "Some states regulate mortgage lending. Among those who do, there are differences as to what is regulated."

Any federal attempt to regulate the mortgage industry will have to resolve the issue of state versus federal jurisdiction as well as sort through multiple levels of state regulation in an effort to bring about federal uniformity, Shellabarger said.

Alexia Kelley, executive director of Catholics in Alliance for the Common Good, said the government cannot shirk from its duty as guarantor of the common good to put stronger measures in place to protect society's poor and vulnerable.

The mortgage crisis "has its roots in practices that exploit the poor and vulnerable, particularly the elderly, Latinos and African-Americans," she said. "Predatory lending has been around for 15 years or more, but now everyone is hurting. People's investment portfolios are threatened."

"It proves the theology and reality that when one suffers, all suffer," Kelley said.

Modest proposals

In December, President Bush and the Federal Reserve announced separate initiatives to respond to the mortgage crisis. Congress may also take some steps in 2008.

Bush said his plan would help some 1.2 million borrowers, will be run by the private sector and would not use government funding. The plan:

• Freezes the interest rates on certain subprime loans for five years. The freeze is available only to homeowners who have not fallen behind on their payments at the lower introductory rates, who are living in the homes, who would not be able to afford the higher, reset rate, and who ask for the freeze.
• Gives the Federal Housing Administration greater flexibility to offer refinancing to homeowners who have good credit histories.

The Federal Reserve proposals:

• Prohibit lending that does not consider a borrower's ability to repay from sources other than the home's value.
• Prohibit loans that rely on unverified income or assets.
• Restrict prepayment penalties, and require that penalties expire at least 60 days before any possible rate increase.
• Require escrow accounts for the payment of property taxes and homeowners insurance.

James Penrice writes from Michigan.