Crisis looms for entire economy: Newsday

Congress must focus on rising mortgage defaults to prevent a slip in confidence leading to collapse

BY PETER MORRIS

Peter Morris is chairman of the PRM Realty Group, with offices in New York and Chicago.

March 20, 2007

If Washington doesn't address the rapidly building multi-trillion-dollar crisis in residential mortgage defaults, its paralysis will help trigger a national economic recession that could touch every homeowner.

The crisis has been building for months - if not years. Experts agree it is a result of banks and other lenders' granting home loans to people who were not truly able to afford the payments. Now, with the national economy in a slide, the number of mortgage defaults is rising at an alarming rate.

On Long Island the situation is especially critical. A recent study reflected that the number of mortgage foreclosures in Nassau and Suffolk rose by 75 percent in the past two years.

Before we engage in the usual finger-pointing over how we got into this mess, let's agree on an aggressive course of action to mitigate it. Our nation must recognize there will be economic pain if the problem goes unaddressed; there will be residential foreclosures and billions of dollars in write-offs as auditors discover that many of these mortgages can never be fully paid down. Many families will find that they may have to consolidate their living space if they hope to hold on to at least one viable residential dwelling.

The nation must ensure that the mortgage market remains viable, liquid and stable. The response should include a government restructuring of a portion of the multi-trillion mortgage debt through federal and state underwriting.

The private sector shouldn't be allowed to walk away, either. Hedge funds and Wall Street, which made an incalculable profit from these flawed mortgages, should be compelled to put some of those dollars into a public-private fund designed to cushion the mortgage market and ensure liquidity.

A tough oversight program should be put into place that prevents "liar loans" from being sold to millions of unwary consumers who can't spot the hidden fees or balloon payments that make pay-down impossible. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, is leading a drive for legislation discouraging abusive lending practices. It would, among other things, give borrowers and others the ability to sue the Wall Street firms that package abusive mortgages and sell them as mortgage-backed securities.

Another remedy - placing a review board under the auspices of an existing federal agency, such as the Department of Housing and Urban Development - would create and enforce specific underwriting standards for the mortgage industry to ensure that brokers can't issue substandard mortgages with impunity. And using an existing agency prevents the birth of a new bureaucracy.

We also need to create a Washington-based insurance program for many of those precarious mortgage holders. That way, when they do go belly up, the nation can prevent a slide in confidence that triggers a total mortgage market collapse and/or hobbles the stock market.

What our economy could learn from this experience is that protection from future mortgage bloodbaths means having real equity in the dwelling being covered by a mortgage and a regulatory apparatus to review and verify that what you see is what you get.

Whether the fault of this mortgage crisis lay in the lenders' laissez-faire attitude or the distractions of presidential politics and a nation at war, the potential destabilization of our economy must occupy the political epicenter of our national debate. We need aggressive policies that create public-private risk-sharing and regulators who will unmask and prevent the unbridled greed that got us into this fix.

Congress must realize that we are on the abyss of an enormous economic crisis. Capitol Hill has the means, the opportunity and the motive to prevent a mortgage market collapse if it acts decisively.

The failure to act could do as much strategic damage to the United States as a terrorist attack, more lasting harm than a hacker taking down the Internet and more sustained pain to every American family than the collapse of Social Security.

We won't be focused on a war against terror anymore or which state is red or blue. America will be reeling from the effects of a self-inflicted depression that would cripple our nation and give comfort to our political enemies and our economic rivals.

Copyright 2007 Newsday Inc.