Mark Winston Griffith

Four reasons to support foreclosure prevention with tax dollars

One of the central questions posed by commentators on both the ideological left and right is: Should taxpayer dollars go to foreclosure prevention and mortgage relief efforts?

The short answer is yes. However it's a legitimate question that is prompted by one or a combination of different assumptions about the nature of the subprime lending crisis. I will respond to one assumption at a time:

Assumption #1
"People who received subprime mortgage are either greedy, liars or should have known better. They are not worthy of my tax dollars."

This is one of the most widespread and persistent misconceptions about people trapped in subprime loans. Obviously, some of the people who received subprime loans were housing speculators who gambled and lost. They thought they could buy houses for cheap, typically in foreclosure, and then sell those houses at a much higher price with a minimum investment.

But most foreclosure prevention programs are designed for primary residence owners. And in most of these cases, the homeowners are ordinary Americans who were either taken in by shady sales techniques or didn't understand the terms of the loan well enough to know that they couldn't afford it. Ultimately, it is the responsibility of the person underwriting the loan to make sure it is suitable for the borrower. Most subprime originators did not fulfill that responsibility.

Assumption #2
"A bailout of homeowners means a bailout of lenders. I don't want my tax dollars to be used this way."

This is a legitimate concern. However, the purpose of most effective foreclosure prevention plans is to assist the borrower, not the lender. In fact, a bill before Congress that would grant bankruptcy judges the power to modify loans is actually opposed by the mortgage lobby because it would enable homeowners to keep their homes in situations where the lender would rather foreclose on the property. Similarly, the mortgage lobby is not supporting efforts to dedicate federal funds to foreclosure prevention counseling efforts.

Assumption #3
"What about renters? Don't they need help too? I don't want my tax dollars to subsidize middle class people who already have resources."

Another legitimate concern. But think of it this way, you wouldn't think of blocking efforts to help out people who lost their homes to Hurricane Katrina, would you? Just like the federal government's failure to secure the levees and adequately respond to hurricane warnings and human suffering helped create homelessness in New Orleans, the federal government's failure to respond to years of warnings about predatory and reckless subprime lending has allowed people to lose their homes in record numbers.

While obviously some homeowners in danger of losing their home through abusive mortgage practices are affluent, many are ordinary, working class Americans who either are already among the ranks of the working poor, or will fall into that category if they lose their home, their equity and all the other money they invested in that home.

This is not just a homeowner crisis, this is a national crisis. Widespread foreclosures threaten the economy in such a way that renters and low-income people will inevitably feel the pain.

Assumption #4
"People with subprime loans were bad credit risks from the outset. I don't want my tax dollars to bailout people who didn't deserve a loan in the first place."

This is probably the most misguided myth of all. Studies have consistently shown that people of color disproportionately receive subprime loans, even when controlling for income and credit scores. Even the Wall Street Journal found that in 2005 55% of the people who received subprime loans would have actually qualified for prime loans.

Subprime loans represent an American tragedy because, almost by definition, they were abusively priced and marketed. The millions who are facing foreclosure did little to deserve this.

Mark Winston Griffith: Author Bio | Other Posts
Posted at 8:00 AM, Feb 29, 2008 in Economic Opportunity
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