We need to find long-term solutions to the economic crisis and help its victims
The Austin-American Statesman
March 26, 2008
Amid all the concern about the effect of the nation's subprime mortgage crisis on investors and the larger economy, the devastation in poor communities has been largely overlooked. A recent study by Bread for the World Institute, "Home Ownership, Subprime Loans, and Poverty," reveals the staggering scope of the problem. Our country's poorest areas are the epicenter of the subprime mortgage crisis, and the government must pay special attention to these areas.
Last year, 1,285,873 properties nationwide were subjected to foreclosure filings, up by 75 percent from 2006. An additional two million families are projected to lose their homes to foreclosure by the end of 2008.
In the country's poor areas, the percentage of all mortgage loans that are considered subprime soars. In Texas, subprime loans make up 16.7 percent of all home mortgage loans. But in 30 counties with poverty rates well above the state average, subprime loans account for more than 50 percent of mortgages.
Some counties are rural, others urban. Culberson, TX, is a small rural county with a population of just over 2,000 people and a poverty rate of 26.2 percent. Subprime loans make up 82 percent of all mortgage loans there. Much larger El Paso, population 750,000, has a subprime mortgage rate of 40 percent.
From Maine to California, the pattern repeats. Nationwide, perhaps the most reliable predictor of high subprime lending activity is whether there's a pocket of poverty.
For most families – including poor families — owning a home is part of the American dream. But low-income families often cannot qualify for mortgages at the prime rate. Despite their drawbacks, subprime mortgages have allowed borrowers with weaker credit to purchase homes.
In many cases, borrowers knowingly accepted the reduction in home equity, which is considerable: over the course of a 30-year mortgage on a home loan of $107,500, for example, a 13-percent subprime loan will cost the borrower $184,977 more than the same loan at a 7-percent prime rate.
But for a long time, home equity seemed like a solid return on investment for lower-income families. With wages stagnant, and the costs of health, food, and energy all rising, buying a home gave many families their best chance to make a better life.
Since 2004, 90 percent of subprime loans have had adjustable interest rates. The people who assumed such loans took a chance, and some clearly used poor judgment. Some did not understand what could happen to their mortgage payments if interest rates rose, and some unscrupulous lenders took advantage of borrowers' lack of experience.
When families lose their homes to foreclosure, many will simply be forced out on the street. Most have already cut back on their living costs and exhausted any savings in an effort to prevent foreclosure. With their credit ratings ruined, they may not qualify for rental housing. The result will be deeper poverty and hunger.
The underlying principle behind the Bible's condemnation of "usury" was that financial obligations, as important as they are, are less important than basic human needs. For example, a lender couldn't take a poor man's coat to guarantee a debt, because the poor man's need for warmth took priority.
We need dramatic action to help millions of hard-pressed families. One essential step is to strengthen national safety nets, such as the Food Stamp Program. We also need to find long-term solutions. One idea is to strengthen nonprofit organizations that lend to low-income families at low interest rates. Congress should also take a fresh look at regulations on potentially usurious practices that have become widespread in low-income communities. While ultimate responsibility still rests with borrowers, the absence of adequate regulation allowed many lenders to run amuck and helped create this crisis.
Rev. David Beckmann, an economist and Lutheran pastor, is president of Bread for the World Institute.
Washington, DC
