Stopping the Creepy Creditors"I don't believe in a government that protects us from ourselves," Ronald Reagan said. I do. And my position seems the more attractive one these days. As congressional reformers turn the spotlight on widespread and abusive lending practices, only one decent option is left us: to stop them, even if unsophisticated people want to sign on the dotted line. Hearings were recently held on some of the more inventive credit-card schemes. Among the hairy specimens was a small-print item called "universal default." That lets credit-card companies hike their interest rate if a borrower is behind on her electric bill or book club payment. We've since moved into the wild kingdom of subprime mortgages — designed for people with low incomes and spotty credit histories. The hook is a low teaser rate that eventually explodes into very high interest charges. When mortgage-holders default on their payments, the man comes to take the house away. That's if they're lucky. They're unlucky if the recent real-estate downturn left them with a bigger mortgage than their house is worth. In that case, they lose the house and still owe money. The rate of foreclosures has just hit an all-time high, with delinquent subprime mortgages leading the way. Helping to nudge mortgages off the cliff are falling house values, payment shock when the teaser period ends and rising interest rates. The bad news is that about 20 percent of the new mortgages last year were subprime. And if you add in "exotic" mortgages, the share of risky home loans is more like 40 percent. (The exotics include the "liar loan," where applicants state their annual income and don't have to present documentation. Another is the "stretch loan," in which borrowers agree to spend more than 50 percent of their gross income to make monthly payments.) Conservatives from the School of Tough Luck, Sucker defend such lending practices.
What the mortgage companies are really up to is "redlining" in reverse. They swarm into minority communities and aggressively push creepy mortgages that are sometimes bigger than the houses are even worth, according to Harvard University's Joint Center for Housing Studies. There's also evidence that blacks and Hispanics with decent incomes and credit ratings — and who could qualify for cheaper traditional loans — are being herded into subprime mortgages. In the meantime, a ton of money has been made with these things. The bottom may fall out, but the mortgage companies and the investment bankers who ultimately provide the money have already walked off with big bags of loot. No one's doing people any favors by luring them into debt that they can't pay back. Those who cannot afford a traditional mortgage probably shouldn't be borrowing the money. Blame this in part on the cult of homeownership, which the lending industry relentlessly flogs. There's no disgrace in renting, and home ownership is generally not the road to riches that real-estate interests make it to be. The subprime story is turning into another classic American financial scandal. The second biggest issuer of these mortgages, New Century Financial Corp., is now on the rocks and being investigated by the Feds. This has made the stock market really nervous, and fear is spreading that the subprime debacle could further depress housing prices. Yes, government should protect vulnerable Americans from nasty lenders. And considering the potential fallout from the subprime crisis, it would be protecting just about everyone else, as well. To find out more about Froma Harrop, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com. COPYRIGHT 2007 THE PROVIDENCE JOURNAL CO. DISTRIBUTED BY CREATORS SYNDICATE
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