The mortgage of the future

Source: Business Week

Easy-to-get, overly complicated home loans inflated a bubble that popped disastrously. Though we’re still in the middle of the crisis, it’s time to devise a safer housing finance system so this won’t happen again.


Samuel Perez has a steady job running trains for the New York City subway system on the No. 4 line. His wife, Rosemarie, earns a reliable paycheck as a unionized school bus driver in the Bronx. In 2003 they bought a semi-attached, two-story house in unfashionable western Staten Island for $246,000—as cheap as New York City real estate gets. With two children and a foster child at home, they’re not big spenders. “We haven’t taken a vacation in years,” Rosemarie says.

If you’ve paid any attention to the U.S. housing market over the past four years, you probably know where this is headed.

One financial hiccup—in 2009, Rosemarie lost her previous job as a real estate agent—and the Perezes fell behind on their payments. They say they’ve since tried to get current on the mortgage, but the bank that services it, Wachovia Mortgage, has refused to accept any payment, trying instead to get them to sell the house and move out. The bank filed a foreclosure notice in 2010, which it has since tried to withdraw without explanation. The Perezes think they have a better shot at getting a fair deal if their case stays in court, so they’re opposing the bank’s effort to withdraw the notice. They don’t know where they’ll be living in a year.

The Perezes’ mortgage is typical of the boom era’s excesses, a Pick-a-Payment loan that allowed borrowers to pay less than the full interest due. It came from World Savings Bank, which was later acquired by Wachovia Mortgage, now part of Wells Fargo Bank (WFC). The couple mistakenly believed that because they were making 26 payments a year rather than 24, they were paying off the loan on an accelerated schedule. Instead, unpaid interest was getting added to the principal; they were getting deeper in debt. (Wachovia Mortgage’s lawyer on the Perezes’ foreclosure case did not respond to a request for comment.)

“What’s sad is that I didn’t educate myself,” Rosemarie says on a rainy Thursday evening at the dinner table, having just made the long commute home from her bus route. “I was so naive. I just thought, ‘Everybody does it. It has to be right.’ ” She adds: “We thought we were going to be happy here. I feel like we really failed.”

Every foreclosure story is someone’s tragedy; when there are hundreds of thousands, they’re a macroeconomic disaster. There’s widespread agreement that what’s happening to families like the Perezes mustn’t happen again—and heated disagreement over how exactly to prevent its happening. The White House, Congress, bankers, and assorted policy wonks are at odds on how to build a safer mortgage system. Low-income Americans don’t want lending standards so tough that they’re locked out of owning a home. Bankers fear restrictions that would kill their profits. Conservatives want government out of the mortgage market altogether, while liberals say that would spell the demise of affordable long-term fixed-rate loans.

The sooner America figures out a new mortgage finance system, the sooner lenders and borrowers alike will have the confidence to go ahead and make long-term commitments. So although housing is still deep in the hole, it’s time to take a page from Franklin D. Roosevelt’s playbook and plan for the peace while the war is still on.


Because the pain of the housing mess is still throbbing—foreclosures have pushed neighborhoods into dereliction; pension and mutual funds have taken big losses on mortgage-backed securities; taxpayers have pumped more than $150 billion into Fannie Mae (FNMA) and Freddie Mac (FMCC) —it’s easy to forget that this isn’t the first time toxic mortgages have poisoned the economy. The housing bubble of the 1920s that gave way to the Great Depression of the 1930s was inflated with toxic air, too.

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