Debacle Threatens American Dream

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If you want to understand the causes of the subprime mortgage crisis, consider the case of Delores King.

Delores King is 71 years old and has owned her home on the South Side of Chicago for 37 years, through seven presidents, through retirement and into her second career as a foster grandparent to grade-school children.

Several years ago, Ms. King was the victim of an identify theft scam. After the scam put her $3,000 in debt, she tried to do the right thing by paying it off. She jumped at a telemarketer’s offer of a quick mortgage loan, and within a few weeks she had signed the papers for an adjustable-rate mortgage with a “teaser” interest rate of 1.45 percent. Even after the teaser rate expired, the mortgage broker assured her, she’d never have to pay more than $800 a month.

But he didn’t tell her that the rate was set to explode. He didn’t tell her that, on her income, she’d never be able to pay off the interest. He didn’t tell her that, two years later, her mortgage would reach $1,488.

Delores King’s monthly Social Security check is $950. And even with a part-time job and help from friends and family, there was no way she could meet her mortgage payments.

Fortunately, Ms. King received help to save her home. But the threat to her home is far from a unique case. Like Ms. King, millions of homeowners were told they could afford subprime loans — loans that brokers, lenders and investors knew, or should have known, they could not repay. Like Ms. King, more than 2 million Americans have been brought to the brink of foreclosure, and beyond.

America’s foreclosure rates are the highest since national record-keeping began decades ago. Home prices declined last year and look to do so again this year; some say that such a two-year decline has not happened since the Great Depression.

Even those who aren’t losing their homes are losing equity, which they need to pay off bills, send their kids to college and make other investments in an effort to create and secure a prosperous life. For 70 percent of the American people, their homes are the largest financial assets they will ever own, a key to long-term security. When the value of that asset drops or is wiped out, the impact on homeowners, families and communities can be devastating. Indeed, the Center for Responsible Lending has estimated that home equity will drop by $200 billion nationwide in the next several years.

In his State of the Union address, President Bush spoke of “concern about our economic future.” But many millions of Americans have more than mere “concern.” They are deeply worried that our nation’s economy has entered a period that threatens to undermine what so many have worked to build.

The proposed economic stimulus package may provide some short-term benefits for our economy. However, it’s essential that we take long-term steps to confront the underlying problem that brought us to this point in the first place. We must respond with far-reaching measures that put our markets back on a sound footing and give deserving homeowners a decent shot at keeping their homes.

After ignoring the severity of the foreclosure crisis for months, the Bush administration announced in December an effort to encourage lenders and loan servicers to refinance at-risk mortgages. That effort may have been well-intended, but it has proved inadequate to the task at hand.