Predatory Lending and the Devouring of the American Dream

Abstract

What is the value of the American Dream? How will the worth of that dream be altered after absorbing hundreds of billions of dollars in losses incurred from the subprime mortgage crisis, along with the accompanying rising unemployment, global stock market declines, and forecast recession? And in what ways has the term predatory lending shaped perceptions and attitudes of the subprime mortgage crisis, giving rise to images of large, avaricious institutions gobbling up not only American homeowners, but the American Dream itself? Subprime mortgages are home loans made at higher rates of interest to borrowers who represent higher credit risks and have lower credit scores (Retsinas and Belsky, Building Assets 138). Ten years ago, few Americans had heard of subprime mortgages or predatory lending, but by 2008, a survey of economists had identified the effects of the mortgage crisis as the number one threat to the U.S. economy, greater than that of terrorism or conflict in the Middle East (Crutsinger AlO). The roots of the subprime mortgage crisis are tangled with the housing boom of the 1990s. As Edward Gramlich, economics professor and former member of the Board of Governors of the Federal Reserve, explains in Subprime Mortgages: America's Latest Boom and Bust, a number of factors combined to increase the number of loans made to borrowers who had previously been considered poor credit risks: changing federal government laws and policies changed mortgage practices and actively sought to increase homeownership opportunities for minorities and immigrants (including legislation such as the Depository Institutions Deregulatory and Monetary Control Act of 1980 and the Community Reinvestment Act); technological changes in the loan application and approval process expedited the awarding of mortgages; the number of institutions offering securitization of mortgages increased dramatically; and the American economy had been relatively free of recession and inflation since the early 1980s, causing housing values to rise with the economy (4-5). Gramlich's analysis indicates the rapid rise of the subprime loan industry: ... in 1994, subprime mortgage originations were $35 billion, less than 5 percent of total mortgage originations. By 2005, subprime mortgage originations had risen to $625 billion, 20 percent of total originations .... a whopping 26 percent annual rate of increase over the whole decade. From being essentially nonexistent in 1994, subprime mortgages are now 7 percent of the total mortgage stock. (6) As a result of the increase in subprime loans, total homeownership rates in the United States also rose, and the increase in homeownership was particularly sharp among minorities and those from lower-income levels. As Gramlich notes, From 1994 to 2005, the overall ownership rate rose from 64 to 69 percent. The rate for blacks rose from 42 to 49 percent .... The rate for Hispanics went from 42 to 50 percent . . . The rate for households indicating more than one race rose from 52 to 60 percent __ The rate for homeowners in the lowest tenth of the income distribution rose from 39 to 43 percent, in the second tenth from 45 to 49 percent. (3-4) With the dramatic increase in homeownership and in subprime lending, a tipping point was reached. The rate of defaults on subprime home loans was greater than that of prime mortgages, a fact that perhaps should not have been unexpected in loans made to those with less favorable credit histories, but by 2006, the defaults on subprime loans occurred in numbers that created a cascading effect of foreclosures and bankruptcies, not only affecting individual home loans, but the financial stability of the lending organizations themselves (Bajaj and Creswell Cl). Initially estimated at over $150 billion in 2006 (House-Layton 1), the global costs of the subprime mortgage crisis have continually been revised upward. In March of 2008, USB Securities estimated that the global costs would reach $600 billion (Hamilton Cl), but by October 2008, the International Monetary Fund was predicting that the global costs would double that figure before the crisis had ended (Banyard 18). …