Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.
The Justice of Responsible Lending
Rachel Hope Anderson
July 22, 2011
by Rachel Hope Anderson
America’s ongoing economic difficulties point to the importance of a robust economy to the whole country. An improved economy, we hope, will benefit families struggling with unemployment and foreclosures. However, the fact that America’s prosperity has historically benefited low to moderate income families was neither an accident nor an outcome of economic growth on its own. It was also linked to choices and structures that gave average households tools to build wealth.
Here are three examples: Federal deposit insurance helped make banking safe for households by protecting depositors against bank runs and market-wide turbulence. Government guarantees encouraged and backed the creation of affordable, fixed-rate 30-year mortgages. Without this product, homeownership would not be the widely available vehicle for asset-building that it has been for the past 70 years. The laws and tax benefits associated with IRAs, 401(k)s, and pensions helped workers establish savings for retirement.
Each of these policies established mechanisms for modest-income Americans to draw on hard-earned income to build assets. The importance of these mechanisms is visible as much in their absence as their presence. African Americans, for example, face a wealth gap that exceeds the gap in earnings between white and African American households. This disparity is due, in part, to historic barriers in access to homeownership such as racially discriminatory real estate covenants and redlining, the refusal to lend or invest in minority communities.
Our nation’s recent economic history reveals the impact on household well-being when the structures for wealth-building are present but their integrity has eroded.
Throughout the 1990s and 2000s, shoddy, subprime mortgage lending practices became widespread across the market. Fueled by Wall Street securitization that separated mortgage origination from repayment and by broker compensation that favored high cost terms, lenders offered mortgages that set borrowers up to fail, with minimal-to-no underwriting and terms such as pre-payment penalties and artificially low introductory interest rates. When millions of households did, in fact, default on their mortgages, the whole market suffered. Homeowners at risk of foreclosure and their neighbors have lost massive amounts of home equity. To date, 7.5 million households have entered the foreclosure process resulting in billions in lost wealth.
In order for the desired economic recovery to help low and modest-income households, families must have access to appropriate structures for wealth building and re-building. This is particularly true when it comes to credit, which can open a household to risks of unmanageable debt loads and abusive credit terms. Indeed, it may be the dual nature of debt in creating both opportunity and vulnerability that explains its special treatment in Scripture and Christian tradition.
In the wake of the economic crisis, Congress and the Federal Reserve took steps to clean up the abusive terms and lax underwriting that marked the subprime mortgage market. But similar patterns of kick-backs, mark-ups and poorly underwritten loans affect other credit products such as auto lending and student loans. And household asset levels continue to lag both as a result of loss of home equity and relatively anemic savings. For households with incomes less than $100,000, more than a third have no savings at all or savings of less than $1000. Nearly half have savings of less than $5000. The majority of low-wage workers lack access to a pension or 401k that has become the new form of retirement savings for Americans.
Wealth, though not Biblically understood as a goal in itself, is important in Christian thinking as a blessing and gift that comes with the responsibility to steward and share. If we are working for economic recovery for the sake of creating wealth that modest and low-income households can participate in, then it is important to equip these households with the tools to build wealth. And we must make sure that these tools—be they homeownership or our banking system or a retirement savings mechanism—are imbued with an integrity worthy of the trust that households place in them.
—Rachel Hope Anderson works at the Center for Responsible Lending.
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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”