Monday, April 27, 2009

TODAY’S MORTGAGE CRISIS A REPLAY OF THE SCANDAL-RIDDEN 1970S

Thanks to an aggressive $1-trillion effort by the Federal Reserve Board to push home-loan interest rates lower, a thick-skinned America appears to be weathering the Wall Street bailouts and dire condition of the U.S. economy.

The home-refinance market is hotter than a pistol, and mortgage rates in the mid-4-percent range and the $8,000 first-time purchaser tax credit is starting to lure buyers into a budding spring housing market.

However, we still have to deal with the all-encompassing greed that got the nation into the subprime mortgage debacle, which critics say really started back in 1999, when Fannie Mae Corp. began easing the credit requirements on loans it purchased from banks and other lenders in a move designed to help increase homeownership among minorities and low-income consumers.

Today, tens of thousands of these loans are headed into foreclosure nationwide because moderate income borrowers cannot afford to pay the escalating interest charges, and cannot refinance because home values are not appreciating.

All this recent experience seems to indicate that everyone may dream about the American Dream of homeownership, but not everyone has the credit score, income and job security to step across the threshold of a new home. Unfortunately, the recent subprime mess was fueled by easy mortgage deals that no one could refuse. With that in mind, it is surprising that no one seems to recall the great U.S. Department of Housing and Urban Development (HUD) scandal of the 1970s and the tidal wave of Federal Housing Administration-insured (FHA) loans that washed through blighted neighborhoods in Chicago and other major U.S. cities shattering the dream of homeownership.

“The FHA scandal at HUD was about illegal and spectacular profits; about corruption on every government level,” wrote author and former Chicago Sun-Times reporter Brian D. Boyer in his 1973 book, “Cities Destroyed For Cash.”

At that time, Austin neighborhood community activist Gail Cincotta battled blockbusting and panic peddling in Chicago and was pitted against more than 300 fly-by-night realty companies and unscrupulous mortgage brokers who used the lure of easy to obtain Section 235 and 236 FHA mortgages mandated by the Housing Act of 1968, born during President Lyndon Johnson’s “Great Society.” Back in the early 1970s, the only mortgages being made in the inner city were FHA loans, Cincotta said.

“The realty agents were coming in and using FHA to move people from old ghettos to the new ghetto. What we saw was a whole economic thing, almost like a conspiracy. Some people were making a hell of a lot of money off the racial change,” said Cincotta in Boyer’s book.

The first step is when the banks and the savings and loans refuse to give mortgages or loans for rehabilitation and repairs on the homes, Cincotta said. The second step is when the speculators come in to panic–peddle.

Speculators would buy a home for $7,500 from a white family and resell it to a black family for $14,500 even though it was riddled with building-code violations, Cincotta said. And, the people who bought the houses were so poor they could not get conventional financing, so they got approved for FHA loans with minimal down payments sometimes as low as $200.

“Congress had every good intention when they passed the Housing Act of 1968,” John Waner, head of the FHA’s Chicago office in the 1970s. “They meant well, but the FHA wasn’t geared up for it. And they should have taught the buyer about value.”

The 1999 Fannie Mae action, which began as a pilot program initiated by the Clinton Administration, involved 24 banks in 15 housing markets nationwide. The program encouraged lenders to extend home mortgages to individuals whose credit was generally not good enough to qualify for conventional loans.

By 2004, Congress demanded that Fannie Mae help steer more loans to low-income borrowers. Lenders were threatening to sell loans directly to Wall Street unless the organization bought a bigger slice of their riskiest loans. Fannie Mae complied, and experts say that decision nearly destroyed the company and threatened to drag down the housing market and the economy because it introduced a rash of risky subprime loans to the marketplace.

So it was déjà-vu all over again.