The sub-prime mortgage meltdown in August was due largely to two things: our affordable housing crisis, which leads desperate people to do desperate things, and broken trust. Trust was broken between borrowers and lenders, and investors feared that they could no longer trust the assessment of risk made by credit rating agencies. With slowing home sales and two million adjustable rate mortgages resetting soon at higher interest rates, we have had but a taste of what awaits us. ARM increases will not peak, in fact, until the first half of 2008. All of us who have IRAs, pensions, or any hope of buying a home someday have a stake in averting a national catastrophe.

The Long Island Council of Churches offers seminars to protect people from predatory lenders and mortgage brokers as each year has brought new options for buying a home that nearly everyone should avoid. While none of us involved in this project pretends to be an expert at all aspects of borrowing and lending, we have learned a few things about what it will take to restore trust between all the players in these complex deals: and buying a home is the most complicated purchase most of us will ever make.

First, we must take sin seriously. The doctrine of sin says, more or less, that things tend to get loused up and that you and I, whom the Almighty intended to be a blessing to the world, louse things up, too, sometimes do bad things. Most appraisers, realtors, inspectors, and brokers are decent people, but buyers need protection from those who are not. Some borrowers are scoundrels, too, of course, and those who lie about their income to get a loan deserve the trouble they find.

Credit unions and "depository banks" (commercial banks and savings banks) have plenty of government oversight but "mortgage banks" should have the same level of regulation. Most borrowers cannot tell the difference between these institutions-which leaves them vulnerable to being ripped off. Mortgage brokers should be licensed, required to pass stringent tests, and held to a rigorous code of conduct-as New York State has begun to do, under the aegis of the national Conference of State Banking Supervisors. Appraisers should be regulated and governed by a clear code of conduct, too: as an honest appraiser explained, lenders now can reward appraisers who help put borrowers into homes, whether or not these are wise purchases.

Second, we need greater transparency and accountability in secondary mortgage markets. Credit risk rating agencies have given bundles of dubious mortgages higher marks than they deserved. Fitch, Moody's, and S&P actively advise investment banks, hedge fund managers, fund companies, and public pension managers how to get a good rating rather than neutrally analyzing risk in bonds they are rating. These agencies are paid by those they rate and insist they have no obligation to verify information they receive. Imagine your child being graded by a math teacher paid by the students. Now imagine the teacher claiming no responsibility to check their math. The Securities and Exchange Commission should require credit rating agencies to regularly review and re-rate debt-backed investments. If they don't, Congress should. This, admittedly, is closing the barn door after the horse is out - but that is better than buying more horses and leaving it open.

Third, local, state and federal government need to provide greater help for homeowners who can work out late mortgages with some counseling or assistance, as Senator Schumer has proposed, in the face of White House opposition. I am conservative enough to think that people who invested blindly or deliberately misstated their assets to get no-verification "liar loans" should get hurt. As President Bush said on August 31, "It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford." Free markets are supposed to punish the reckless. But innocent people suffer when markets are rigged. Collusion between predatory lenders, lawyers, and realtors has saddled buyers with deals that should be illegal. Even some reputable banks and brokers aggressively peddled Negative Amortization Adjustable Rate Mortgages and "Option" ARMs that have left borrowers owing more than they borrowed, a bad idea for nearly all homebuyers. As one mortgage broker said recently, "All of these things happened because the system was too lax!"

Adjustable rate mortgages and sub-prime loans are not necessarily bad. They have helped many people who could not afford fixed-rate "prime" loans, which is itself a result of our region's and our nation's affordable housing crisis. But the terms of these mortgages were often not disclosed clearly and lenders often claimed it would be easy to refinance when payments rose. An ARM often looked like a reasonable risk to borrowers who should have avoided them, and the collapse of the sub-prime market has made it difficult to refinance, even for those who made payments faithfully. Moody's estimates that 30% of the ARMs made last year will go into foreclosure, with more than two million families at risk of losing their homes. In the past, most borrowers who fell behind had suffered some sort of temporary setback, such as illness, a death in the family, or loss of income, but now most of the clients flooding the offices of mortgage default prevention counselors are delinquent in their payments because they got the wrong loan in the first place.

President Bush took a good step in proposing that the Federal Home Administration guarantee refinancing for 80,000 more low-income and moderate-income Americans who have good credit histories and did not get a sub-prime loan. He also asked Congress to change the tax code so that debt forgiven by a lender will not saddle the homeowner with higher taxes, but more must be done. Bankruptcy judges should be allowed to restructure mortgages, just like every other form of secured debt. The House has passed legislation that would address these tax liability and bankruptcy issues. Likewise, SONYMA's "Keep the Dream" program will provide help to New York homeowners with ARMs or interest-only loans who face rapidly escalating payments.

To their credit, Nassau and Suffolk Counties have established foreclosure prevention hotlines. To their shame, regulators and legislators have been slow to prohibit deceptive lending practices and "foreclosure rescue specialists" who steal the homes of those in default, though New York State's Home Equity Theft Prevention Act now offers some protection. The Banking Department has already received more complaints from Suffolk County than from anywhere else in the state.

More needs to be done. Many predatory loans, for example, carry severe pre-payment penalties that prevent re-financing. Two million mortgages will re-set this year at higher interest rates, raising monthly payments an average of 25%. Senator Clinton has proposed an end to pre-payment penalties, which would help many who find themselves in financial trouble through no fault of their own.

All these steps can help restore the trust needed to take out a mortgage, make a loan, or invest in mortgages. If regulators fail to act, legislators must - before more people end up at our soup kitchens and emergency food pantries and on the doorstep of your congregation.

Shalom/Salaam/Shanti/Pax,
Tom

A WORD OR TWO OF THANKS
Sara C. Weiss, Director of Development