Editorial: Mortgage game fallout

Staff Writer
Mount Shasta Herald

There once was a time when those troubled by dizzying fluctuations on the stock market could take comfort in the knowledge that the value of their biggest investment, their home, was solid and steadily rising. No more.

The jitters that have rocked Wall Street these last few weeks have much to do with the U.S. real estate market. But it's not just that air is coming out of the bubble that has pushed home prices too high, too fast. The current market volatility reflects how dependent the financial world has become on the mortgage industry.

At the risk of oversimplification, think of it this way. Not too many years ago, most people got their mortgages from a bank, and for the next 30 years or so, they sent a check to the bank every month. Today, people borrow money for their homes from a mortgage company, which then sells the mortgage to someone else, often a hedge fund or some other investment company. Mortgages are used to back financial instruments unheard of just a few years ago.

Mortgage companies now have less concern for the borrowers' ability to make monthly payments, since they are selling the mortgage anyway. The incentive for them is to make as many mortgages as they can. That incentive gave birth to subprime mortgages, interest-only mortgages, adjustable rate mortgages and other products that house-hungry but cash-poor families have jumped on.

Rising home prices, cashed out in the form of home equity loans, helped the economy ride out the bursting of the tech bubble in the first part of this decade. But when real estate inflation slowed and interest rates rose, the results were predictable. Foreclosures and bankruptcies are up, mortgage lenders are in trouble, and so are all the companies, mutual funds and individuals who invested in mortgages.

What started with problems with the minority of brokers who deal in subprime mortgages is now growing into a full-fledged credit crunch. There are reports that even borrowers with good credit are having difficulty getting mortgages. A credit crunch can hurt business investment and consumer spending as well as the housing market. Wall Street, which acts on fears as much as facts, has been reacting to the potential for a widening liquidity crisis.

President George W. Bush Thursday offered nothing more than sympathy to homeowners forced into foreclosure when their incomes can't keep up with ballooning mortgage payments. Here in Massachusetts, officials have been more responsive, with Gov. Deval Patrick offering credit counseling for homeowners in trouble and Attorney General Martha Coakley announcing regulations designed to prevent mortgage-holders from being further victimized by foreclosure rescue schemes.

Coakley is also proposing changes to state law that would prohibit some of the deceptive practices that have lured borrowers into mortgages they cannot afford. To the extent that the secondary mortgage market has insulated mortgage lenders from the consequences of their decisions, new regulations are necessary.

Ideally, a national problem should be solved with federal solutions. Until that happens, though, it's good to see Coakley and other state officials stepping up to the plate.