Author Katz: Tough to Say When Foreclosures Will Crest

ALYSSA KATZ: Yes, that is a very difficult to answer question. The official projection from the Mortgage Bankers Association and other institutions is middle of 2010. And that's all based on certain assumptions about unemployment, home prices, adjustments on adjustable rate mortgages.

But it really depends on how much further into the doldrums the economy descends. If borrowers continue to lose jobs and hours at work, then it's going to be very difficult for them to make payments. There's no clear answer outside of a crystal ball, but the best projections are middle of next year.

PAUL SOLMAN: I take it you do not have a crystal ball with you!

ALYSSA KATZ: Not with me today.

PAUL SOLMAN: A lot of people wrote in like Joseph Hitzel did of Glen Gardner, N.J.: "Did anyone ask that woman [in the Oct. 15 segment, Making Sense of the Foreclosure Crisis] who bought a home for over $600,000 and worked in an eye-care facility how she could possibly pay back that mortgage?

ALYSSA KATZ: Somebody did ask her and then sold her a lie. This is the mortgage company that sold her the house, set her up with an attorney, set her up with an appraiser -- it was what was known as a one-stop shop -- so that there was no kind of check and balance on the process for applying for a mortgage.

This mortgage company told her that her monthly payments would be much, much lower than what she actually ended up paying. Nobody asked her at that point if she could pay it back; all she continued to hear was the message that buying a home was a good investment.

PAUL SOLMAN: And let's face it, when I interviewed you in 2006, most experts were saying home prices have never gone down as a whole in the United States ever!

ALYSSA KATZ: Right.

PAUL SOLMAN: And when I was interviewing [the woman in that segment], I put myself in her shoes and I thought: "Gosh, I remember when I got mortgages how relieved I was. I'm so pleased that they're willing to give me the money."

ALYSSA KATZ: Well exactly. You see business people who have a nice office, and are wearing suits and seem like they know what they're doing. And you have to remember that in a neighborhood like Jamaica, Queens, where we were for that segment, they have suffered with this legacy of discrimination. Of banks saying: "No, we will not lend here." And so when history seemed to reverse itself and suddenly financial institutions were willing to make loans, well, there must have been a good reason!

I cannot understand how news analysis that purports to explain the mortgage crisis fails to make any mention of the role of the Community Reinvestment Act of 1977, passed under Carter, in greatly expanding the number of borrowers who were at great risk of default.

ALYSSA KATZ: The question actually includes a misstatement of fact, with all due respect to Mr. Cushing. The Community Reinvestment Act (CRA) was specifically applied to depository institutions, to banks that are federally regulated. It simply asks them to meet the credit need of the communities in which they hold deposits. And what it did do, in huge numbers, is make sure that borrowers who might not have qualified for mortgages previously -- because of outright discrimination on the part of institutions -- that institutions would have to play fair and make responsible loans in those communities.

Now the thing you have to know about the CRA is those mortgages overwhelmingly have performed very, very well. A number of studies have looked at the question of whether CRA had anything to do with causing the credit crisis and promoting foreclosures. What they found again and again is that mortgages made by financial institutions covered by the CRA have performed really well and had foreclosure rates that are tiny fractions of non-CRA loans.

The other thing to remember is you have to think of the subprime industry as a shadow banking industry. It existed almost entirely outside the reach of the Community Reinvestment Act and federal banking regulations. The firms doing this lending were not depository institutions. They simply existed to create, sell, and package for sale subprime loans in very large numbers.

PAUL SOLMAN: Rebecca Jacobsen asks: Why do individual foreclosed homeowners see their foreclosure as a personal failure instead of a systemic problem?

ALYSSA KATZ: That's a really good question. I think people in foreclosure see it as a personal failure because this country sees home ownership as a personal achievement, and some sort of mark that one has become a full citizen. It's this idea of individual aspiration to acquire property. And it's supported by the government as really the most aggressive social welfare program that this country has. A huge amount of federal spending goes into the home interest deduction, and now we have the homebuyer tax credit, FHA mortgage insurance -- there's just an enormous amount of support for homeowners.

So, many people think: This is my achievement, I have achieved the American Dream by buying a home. But the flip side is that we then see it as individual failure when one isn't able to hold onto the home.

ALYSSA KATZ: Now that's a really good question. In theory, that would be great, because there is really no question that fraud and violations of lending laws like the Truth in Lending Act and so on are pervasive. And yet there's this very practical question of how you identify who exactly would be protected under such a moratorium. How would you decide who had actually been a victim of fraud or predatory lending?

More deeply, the issue is that the investors and investment banks that finance these mortgages are the financial institutions that Treasury has been bailing out with TARP. It's their near collapse that has been so devastating to the economy. So, who gets to stay in the lifeboat?

You don't hear a lot about it because it's politically inconvenient. And when we say investors, remember those investors are our pension funds, they are institutions of higher education, they are cities. Putting a moratorium would be a devastating blow to the financial system and that's really why we haven't had one.

PAUL SOLMAN: Last question. Mark, in a comment on the Business Desk: If homeownership is not realistic for all Americans, how many are we talking about? And how do we take homeownership out of the myth of the American dream?

ALYSSA KATZ: I think we have to step back and ask what the American dream is and where we lose the script. Because in my mind, the American dream is about households having a stable economic footing. For not just the last 80 years, but really even before that too, we've had generous government support for land and property ownership as being a way to make that American dream possible. But at some point in recent history, property ownership went from being a wealth builder to a wealth destroyer.

So I think the question is not really about whether home ownership is realistic for all Americans -- and clearly some people are going to always be too poor to own any substantial amount of property and that's a deeper economic question.

It's more about how homeowners at any income level can count on owning property as an asset that will appreciate and provide that stable economic foundation, and how the banking system and regulations can be set up to promote that. And we had that pretty much from 1934 until 1983. As I write in the book, deregulation of the banking system and the introduction of mortgage-backed securities and subprime lending changed the equation and made home ownership a proposition for losing wealth more than it was for building it.

PAUL SOLMAN: Great. Alyssa Katz, thank you very much. Anyone who wants to understand the history of housing in America should get a copy of the book.