The Financial Crisis - another look

We All Know the Way Back Home

While Wall Street was bundling subprime mortgages into collateralized debt obligations (CDOs) to spread their risk and collect the lucrative fees, the Federation of Appalachian Housing Enterprises (FAHE) was investing in people one homeowner at a time.  In its last fiscal year, FAHE, a regional non-profit of 45 housing organizations based in Berea, KY, made 159 mortgages valued at $11.3 million to low-income families and those facing predatory lending. 

One of those loans involved a single mother lured by a "teaserâ€ rate into switching from her fixed-rate mortgage to an adjustable-rate mortgage (ARM.)  After 12 months when she wanted to switch back to her original fixed rate, she discovered a hidden prepayment penalty that would have added nearly $8,000 to her loan balance.  Meanwhile, the ARM’s interest hit 16 percent, increasing her monthly payment from $425 to $900.

"We focus on the long term success of the borrower,â€ says Jim King, executive director of FAHE.  "What we offer is predictable and fair, no gimmicks or games.â€

In September FAHE worked with this single parent to refinance her home with a fixed rate and a monthly payment she can afford.

With its clientele the principal target of subprime mortgage lenders, FAHE demonstrates the ethical way of dealing with modest income folks to insure their dignity while developing their community.  It counsels with clients and determines their level of affordability.  Key is personal contact.

"It’s face to face,â€ says King.  "We ask the person do you understand what you are buying.â€

Contrast this honesty with the intricacies of Wall Street.  To expand the securities market, investment bankers encouraged unregulated mortgage brokers to write subprime mortgages, i.e. loans on residential real estate with a high risk of default.  Some of the justification for the subprime market lay with the steadily increasing value of housing, but in the climate of lax regulation many investment bankers simply ignored or hid risks.  

The risky subprime mortgages were then bundled together as CDOs to look like a security, and with the approval of an "independentâ€ rating agency, they were sold with an investment-grade rating.  Investors around the world scooped them up eager to earn a higher return on these supposedly safe investments.  Meanwhile, the risk of the CDOs and default insurance heightened and spread throughout the entire economy.  Soon the amount of default exposure was almost impossible to calculate.

While home mortgages represent the largest troubled asset triggering the current financial crisis, defaults on commercial mortgages, leveraged buyout loans, credit card-backed bonds, student loans and auto loans are also increasing.  As bankers made riskier loans, they fabricated new ways of packaging them.  Eventually, the subprime market collapsed and the house of credit crumbled.

The fallout from the crisis will be long and palpable.  Already $2 trillion has evaporated from pension funds indicating many older Americans will be working longer.  The millennial dream of cutting poverty in half by 2015 appears a diminishing hope, while rising food and fuel prices are increasing poverty and hunger.  More than 70 companies have ceased underwriting student loans, robbing an untold number of middle class kids a chance for a college education.

The bankers and Wall Street cared only about their fees, and not about the likelihood of repayment.

In contrast, the housing specialists at FAHE live the home ownership dream with their clients.  People of faith recognize the FAHE folks, paid far less than Wall Street brokers, collect the psychic income of knowing they are contributing to the real economy, and don’t gamble with the lives of people. 

John Rausch is a member of KFTC from Powell County and the director of the Catholic Committee of Appalachia.