The images of the foreclosure crisis are startling: families forced out of their homes, bank executives begging Congress for bailouts, government officials scrambling to put the nation’s financial system back together. Such disarray, however, arises from a very simple moment – when a hopeful family sits down with a loan officer at their local bank. In that moment, the collective fates of the family, the bank and national financial system are sealed. For better or worse, the outcome of the meeting determines the fates of all involved. The family can embark on a path of either independence and homeownership or ruin and dislocation. The bank can either invest in the community or partake in its unraveling. The national financial system can either enjoy growth founded on an “ownership society” or tailspin into stagnation. From Main Street to Wall Street, every level of society is impacted by this seemingly simple meeting, and for that reason, it must be done right.
In order to prevent foreclosures, we must make changes on both sides of the home loan transaction. Both borrowers and lenders must reform their ways. The reforms that need to be made, however, are quite different for borrowers and lenders. Some borrowers, yearning for a home, may overlook their financial shortcomings and accept a mortgage that they cannot fulfill in hopes that a fortuitous future will solve their problems. They need to have a clear understanding of basic financial management and how to borrow within their means. Lenders, on the other hand, are driven by profit. The foreclosure crisis, from the lending side, was born of overzealous loan officers bending professional and ethical standards to make questionable loans in the interest of making an extra dollar. Lenders’ behavior depends on the incentives – the rules of the game – as laid down by the federal government. It is healthy for them to pursue profit, but they must be confined to do so in socially beneficial ways.
In order to reduce the rate of foreclosure, borrowers need to be better-educated loan consumers. They need to know how much is reasonable for them to borrow and what steps they need to take in order to successfully pay off their mortgage. While financial management is complex and not everyone has the time or wherewithal to become an expert, there are a few simple steps that the federal government can take to help make the financial system safer for everyone. They are two simple programs: a borrower education course and a mortgage guide website.
A federally-sponsored borrower education course could prepare borrowers to confront the complexities of the home loan process with confidence. Held in community centers or social service offices, the courses would teach tenets of financial management, including basic accounting and budgeting as well as debt control. The course would enable potential borrowers to know how much is reasonable for them to go into debt, how to manage their mortgage...