Hillary Clinton: It's the mortgage lending industry, stupid

Campaigning on the economy in New Hampshire, the senator from New York delivers a major speech on the housing mess.

Published August 7, 2007 6:52PM (EDT)

Hillary Clinton, in Derry, N.H., talking about Americans faced with a "dream of homeownership [that] has turned into a nightmare of escalating payments and threatening letters."

Now, there are those who will tell you -- they tell me this -- "Well, that's just the way the market works, Hillary. Nothing we can do about it." Or they'll say, "Buyer beware. People just need to be more careful." Well, now, that's easy to say when it's not your home being taken away.

I don't think unscrupulous mortgage brokers should be part of how our markets work. I don't think families should be lured into buying homes they can't afford so brokers and mortgage companies can make a bigger profit. I don't think people should have to be on the lookout for unfair clauses buried on Page 700 of the fine print. And I don't think it's right that so many hard-working, responsible families across this country are losing their most precious possession and their most valuable asset.

Shades of 1992! If there is a clear and apparent economic issue to campaign on during the summer of 2007, it's undoubtedly the mortgage lending mess, spreading like an oil slick across both the "real economy" and Wall Street. Clinton deftly seized the moment Tuesday morning: Her speech offered a solid summary of how the mortgage lending industry zoomed out of control during the housing boom, and offered some explicit proposals on how to fix it.

She plugged in some up-to-date statistics: 165,000 foreclosures in the U.S. in June, an 87 percent increase over the same month a year ago. She noted that some "4,000 New Hampshire households with subprime mortgage loans -- that's 20 percent of all the subprime mortgages in the entire state -- will experience a jump in their monthly payments of between 50 and 100 percent." She even made a glancing reference to the current credit crisis seizing Wall Street, observing that "the entire stock market is feeling the effects" of the "risky loans [that] have been packaged and resold around the world."

And in a display of wonkish detail that reminded me nostalgically of her husband, she even lambasted the injustice of mortgage loan prepayment penalties.

The way many high-risk, non-traditional mortgages work is that you pay a low rate for a number of years -- which is probably why you took the mortgage in the first place -- then, once that time period is up, the rates skyrocketed. Then you are faced with this increasing rate.

Now, what many people didn't know and what seems to me to be so perverse is that, when you first get that new notice that your rate has doubled -- which is going to happen to a lot of people in New Hampshire in the next year, because of the mortgages they already have -- a lot of people say, "Oh, my goodness, let's try to start paying down the mortgage as fast as we can." I mean, that's kind of part of the American ethos, you know, pay down the mortgage, get out of debt. What people don't realize is that if you try to pay your mortgage early while you still have the low rate, the lender slaps a huge prepayment penalty on you.

So lenders are actually discouraging people from being responsible and paying off their mortgages early, because they want to increase their profits. So it's not surprising that loans with prepayment penalties have a 52 percent greater risk of default than those without.

(Defenders of prepayment penalties will argue that the commitment not to pay off the loan early is what permits the lender to offer the low rate in the first place. Critics counter that the penalties are a way of preventing borrowers from refinancing their mortgage at an even lower rate offered by a competitor. But expecting that level of detail in a campaign address, even from a Clinton, is probably unwise.)

Clinton's proposals to fix the mess include eliminating prepayment penalties, tightening regulatory supervision of mortgage brokers, expanding federal government support for homeowners facing foreclosure, and boosting funding for affordable housing.

The mortgage lending industry is already screaming. But it'll get little sympathy from anyone who has paid attention to how gloriously it's mucked up its own business. Sure, Clinton's proposals embody a a classic Democratic approach, a big government solution that will cost money. But her speech was also a pragmatic reaction to what is actually happening in the U.S. economy right now. If I were a voter in New Hampshire, facing an option-ARM mortgage about to reset, I'd probably be taking Hillary Clinton pretty seriously right now.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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2008 Elections Globalization Hillary Rodham Clinton How The World Works Stock Market U.s. Economy