The Devil's Arithmetic

How greed changed “subprime” into a dirty word and why we should reclaim it as a seed for justice and hope b y J odie S . K ing and B radle y J . K ing

“I hope we have learned from the past few years that identifying the need of low-income people for a home with the need for them to own homes was a mistake. We committed, I think, a great economic and intellectual error, and a social error over the past years by assuming that the goal was to put every American into a home that he or she owned.”

Rep. Barney Frank, D-MA, Financial Services Committee Chairman, speaking at the National Housing Forum, December 2008 PRISM 2009

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The Devil’s Arithmetic

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earing these words from Congressman Frank back in December was like a splash of cold water.There may be some truth in the notion that the seeds of the global subprime mortgage market meltdown were sown in what we all grew up believing was the “American Dream” of homeownership. It is also fair to state that it is unwise to have homeownership by every American as a national imperative. On the other hand, people concerned about social justice should be alarmed by the insinuation that homeownership by low-income people ultimately led to our current economic crisis.

Hope for Homeowners

is a Federal Housing Administration program designed to help struggling homeowners to keep their homes.

• Lenders are required to “write down” the value of the mortgage to a maximum of 90 percent of the home’s new fair appraised value.

• Qualified homeowners must show that they cannot afford their mortgage even though they had been able make at least six full payments on their existing mortgage.

Subprime’s role as agent of social justice Having benefitted as young newlyweds from a Federal Housing Authority (FHA) loan guarantee program (the original source of “subprime” loans), we assert that subprime lending has an honorable history, and its purpose and value have been missing from the recent national discussion.

Without the FHA program, it would have taken many years for us to meet “prime” mortgage standards (20 percent down payment, etc.) to buy our first home.

Subprime lending in the United States began around 1934 with the introduction of FHA loans as an important source of justice and hope for working people. At that time, four out of 10 families were renters, but with FHA loans, homeownership for low-income Americans became possible for the first time. After World War II, FHA programs helped finance military housing and homes for returning veterans and their families. During the next three decades FHA helped spark production of millions of apartments for elderly, handicapped, and other lower-income people. In 1977 the Community Reinvestment Act (CRA) was passed, accomplishing two

• In general, the “bedrock principles” outlined below apply to these refinanced mortgages.

• If you know of someone who could benefit from this excellent program, please share the information that can be found at portal.hud.gov.

significant things. First, it incentivized banks to extend more credit in more communities. Second, it helped people acquire credit who had no credit — these were not people with bad credit but simply lower-income working people who had no credit.

By 2008 statistics had improved to where fewer than four out of 10 Americans were renting their homes. Unfortunately, abuse and misuse of subprime lending throughout the 1980s and ’90s have led to the mortgage crisis that is being experienced in America today. Many families have been forced into foreclosure on their homes; most of those have already or will soon become renters. Are we returning to 1934?

“Bedrock Principles” of subprime lending

Where it went wrong Ironically the current crisis could easily be linked to the success — rather than the failure — of the original idea of providing government guarantees to allow “subprime” borrowers access to home ownership. After many years the financial markets noticed that default rates on FHA-guaranteed loans were extremely low — competitive with typical prime mortgages. In the pursuit of growth and greater profits, lenders began to compete with the FHA programs to take advantage of the newly recognized market for subprime loans.

Again, low-income families proved their willingness and ability to pay their mortgages, motivated by their sense of pride in having their own place and their sense of community. The impressive experience with subprime lending soon

• Ability to pay: The homeowner should have a favorable income-to-debt ratio based on a diligent appraisal of property value.

• Ability/willingness to invest: The homeowner should be able to invest at least some token amount of cash and/or “sweat” equity to indicate commitment.

• No second or third homes: The homeowner should intend to occupy the new home as a primary residence.

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captured the imaginations of brilliant minds on Wall Street, and mortgage-backed securities were born. By “bundling” large numbers of mortgages into one “securitized” package, the financial markets could efficiently trade very low-risk securities on a global basis and thereby raise capital to fund more loans. This was a boon to the financial markets and a perceived “safe haven” for investors. More and more capital flowed into the mortgage market, and no one wanted to notice when it started to go wrong.

As capital accumulated, the demand for properties grew — and the standards for loan qualification dropped. With demand, prices soared.With soaring prices, speculation arose outside the traditional low-income communities that made subprime an initial success. Developers, builders, and speculators were enjoying a bonanza that the financial markets were more than happy to facilitate. So-called “introductory rates” allowed buyers to “afford” ever larger mortgages. A bubble was born, and we all know what happened in late 2008.

come people, investment in stocks is out of reach, leaving homeownership as virtually the only means of access to wealth. According to a 2007 report from the Joint Center for Housing Studies at Harvard University, “In 2004, the top

It didn’t have to be this way Not everyone got caught up in the unfounded housing euphoria that the financial markets helped create. Many small community banks quietly went about their business of making loans to people based on sound credit principles.They required homeowner occupancy (no second homes) and realistic valuations and appraisals. They required at least some equity (just as the original FHA programs do), and owners had to maintain reasonable debt-to-income ratios. The institutions that stuck to these core principals of good lending have survived, and most continue to serve their communities despite the general collapse in home values and higher unemployment.

The sad news is that low-income families have not been insulated from the market collapse. Even those with responsible mortgages had to pay inflated prices for their homes, and many were the first to lose their incomes when the economy went into recession. Blameless, they join the ranks of renters as their hard-earned sense of community evaporates.

Toward a ministry of advocacy urrent federal assistance programs through the C Department of Housing and Urban Development (HUD) are heavily biased toward rental for low-income families.

This arises from a widely held false perception that any assistance to homeowners only helps higher-income families. Evangelicals can advocate directly through their congressional representatives for reforms that would balance these programs to enable homeownership and the opportunity for low-income families to become more financially secure — at little to no additional cost. For example: • Support continuation and expansion of FHA programs to make mortgages available to responsible low-income families.

• Make HUD voucher programs applicable to homeowners as well as renters, and include these in calculation of income-to-debt ratios.

• Allow eligible families to receive an up-front subsidy to augment a down payment — in exchange for a stream of future rental voucher payments.

• Allow access to the Low-Income Housing Tax Credit for homeownership as well as for low-income housing projects, tax credits that currently benefit only the developers of low-income housing rental projects.

Advocacy could also be conducted in partnership with local or national organizations like the National Council of La Raza (NCLR.org) and the National Urban League (NUL.org).

Wealth, the common man, and the poor Most of us don’t think of ourselves as being particularly wealthy in material terms. But most of us are wealthy in the sense that the value of our assets exceeds the value of our liabilities. Our house is worth more than our mortgage. Our retirement plan is worth more than our credit balances.These “comforts” of wealth are what allow us freedom to worship, study, pray, and serve abundantly.Wealth makes us feel empowered to find the best job, to send our children to college, and to engage in our communities.

There are only two key sources of wealth: stocks (or other financial property) and homeownership. For most low-in-

For a more detailed discussion of these and other potential reforms, see Edgar O. Olsen’s excellent report “Promoting Homeownership among Low-Income Households” at the Urban Institute website: Urban.org/ url.cfm?ID=411523.

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The Devil’s Arithmetic We certainly hope not! Property ownership gives access to life — not literal life, of course, but an empowered life of belonging, identity, dignity, and of being a stakeholder in something larger than yourself. Homeownership is profamily, not just in providing stability and a sense of place for your own household but by having stability, the common good is served. Isaiah 65:21-22 promotes a vision of God’s kingdom as a place where his people not only build homes but also live in them, where they not only labor to plant crops but also enjoy the fruits of their labor.

At the founding of our country, a man had no political voice unless he was a landowner.This requirement has changed since then, but the reality has not. Sociologically, community members decide who is admitted to the social circle by how much a person has invested and will invest in the community.

Renters, especially long-term renters, are capable of investing in their neighborhoods, but more often than not they see themselves as transients on their way to somewhere else; and if they invest it is only superficially. Those who are not able to retain possession of their homes or purchase them in the first place are either by choice nonparticipants or are not chosen to participate and are thus excluded in many important ways from the community. How many times have you applied for a job, financial aid for school, or membership in an organization and had to check “Rent or Own” next to your address?

There is dignity in homeownership. The result of exclusion is that a person cannot realize their God-given calling to serve in the life of their community. We are programmed by God to have a need for (and be needed by) a community.

In ancient Israel land was considered a place of hope and was a strong theological symbol freighted with social meanings.

Walter Brueggemann has said, “Land is a central, if not the central theme of biblical faith. Biblical faith is a pursuit of historical belonging that includes a sense of destiny derived from such belonging.” As we know, exile disrupted the promise of God’s faithfulness, bringing deep grief to the Israelites: “By the rivers of Babylon — there we sat down and there we wept when we remembered Zion” (Ps. 137:1). This illustrates that rootlessness is more of a psychological problem than a problem of, in fact, being rootless. You are torn from your world as you know it and lose your place. This is particularly traumatic if you are not emotionally prepared and/or the change happens too quickly.

Who Is Helping?

Habitat for Humanity (Habitat.org) carries its own loans, requiring homeowners to invest a small down payment and “sweat equity,” and to commit to low, monthly, nointerest mortgage payments. Collected Habitat mortgage repayments are placed in a fund that makes loans possible for future homeowners. Outside donations and volunteer labor contribute to the affordability of their homes.

Esperanza USA (Esperanza.us) is a Philadelphia-based community development corporation that serves the Hispanic community. Part of their mission is to provide extensive education and counseling opportunities for prospective homeowners to help them take advantage of federal programs that make homeownership possible.

Opportunity Finance Network (OpportunityFinance.net) consists of private financial intermediaries that invest to benefit low-income people in the US. Their investments generate or maintain many thousands of jobs, businesses, housing units, and community projects. Their goal is to lead the opportunity finance system to scale through capital formation, policy, and capacity development.

The CDFI Coalition (CDFI.org) is the unified national voice of community development financial institutions (CDFIs). They encourage fair access to financial resources for America’s underserved communities by providing credit, capital, and financial services that are often unavailable from mainstream financial institutions.

quartile of the household net wealth distribution held the lion’s share — 87 percent (or $43.6 trillion) — while the bottom quartile of households had nothing. The upper and lower middle quartiles combined held $6.5 trillion, or 13 percent of total household net wealth.” The median net worth of homeowners was $184,000, compared to only $4,000 for renters.1 So it would seem perfectly reasonable to state that without access to homeownership, there is no access to the empowering confidence of wealth.

Community matters Being a part of a community gives us a sense of place where we are not shut out or regarded as strangers. Landmarks, customs, and culture are familiar to us. We can return to the place of our childhood, a place we haven’t visited for 40 years, and we know our way around, know the names in the cemetery.

The case for homeownership So, was the congressman right? Was it a social mistake to envision homeownership for low-income people and families?

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those needing the blessings of Jubilee (see “Hope for Homeowners” sidebar on page 24) in order to keep their current home. If possible, consider investing in community banking to provide credit to low-income people.

Many opportunities exist to help responsible working families achieve the sense of place that builds strong communities for future generations. By supporting programs like Habitat for Humanity and others that allow people to earn all or a portion of their equity “investment” in a home, we can help preserve and create communities.

Jesus came to earth to bring good news to the poor.

That good news includes social empowerment and community engagement. We need to change those basic socioeconomic realities that prevent these ideals from being realized by everyone and make a new one, so that the exile that is currently being felt by so many Americans can be reversed— and hopefully eliminated. n

A woman in our family is involved in a ministry that helps poor women find better jobs; she told us how frustrated she became when one of her clients refused to move 30 minutes away to take a good job. Even though the woman had financial and emotional support with a local church in the new area, she couldn’t bring herself to leave her community and her roots. In communities experiencing extensive layoffs, some workers may choose unemployment rather than leave behind close family ties. We might find this difficult to understand, but clearly this illustrates the importance some people assign to community and their anxiety over adapting to its loss.

What is our response?

The current economic crisis presents a tremendous opportunity for evangelical Christians to minister to low-income communities. As New Jersey Governor Jon Corzine (D) stated at the same National Housing Forum where Congressmen Frank made the comments quoted at the beginning of this article, “The crisis must be addressed one mortgage and one homeowner at a time.” This is just the sort of challenge that many churches may be well positioned to address. We can advocate for returning to the bedrock principles of subprime lending by our national institutions and government (see “Bedrock Principles” sidebar on page 24). We can share our talents to provide counseling to potential homebuyers or

Jodie and Bradley King reside in Media, Pa. Jodie has a masters of theology from Palmer Seminary and speaks, writes, and teaches on public policy and the Christian worldview. Brad is a partner with a management consulting firm with offices in Philadelphia and Washington, DC. Zhu Xiao Di, “Growing Wealth, Inequality, and Housing in the United States” (February 2007) Joint Center for Housing Studies at Harvard University.

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to the simplicity and clarity of the ethics of Christ, can missions possibly continue to be useful to the kingdom of God? The exhortation of Dietrich Bonhoeffer to rescue the usefulness of the church is relevant for mission today: We have been silent witnesses of evil deeds; we have been drenched by many storms; we have learnt the arts of equivocation and pretence; experience has made us suspicious of others and kept us from being truthful and open; intolerable conflicts have worn us and even made us cynical.

Are we still of any use? What we shall need is not geniuses, or cynics, or misanthropes, or clever tacticians, but plain, honest, straightforward people.Will our inward power of resistance be strong enough, and our honesty with ourselves remorseless enough, for us to find our way back to simplicity and straightforwardness?”27 n

Bullets & Bibles continued from page 15. advantage of force and the effort to attract people to Christ through humility, servanthood, and the promise of the gospel. These contradictory impulses cannot be relegated to non-Protestant tradition, for evangelical mission displays the same penchant towards aligning itself with militarism as has Roman Catholicism and Orthodoxy. This conflict reflects the tendency to isolate and emphasize particular aspects of the missio Dei instead of embracing the full implications of the ethics of Christ.

What would have been the effect on post-World War II American missions in Japan had such missions not been launched after the defeat of Japan by the United States with its use of atomic weapons? If contemporary missions would renounce its alignment with militarism, might it be possible for the Islamic community to receive a witness of Christ’s love that it has historically been denied? Today Christian mission must resolutely seek to embrace the ethics of Christ in its praxis. Without such resolute determination to return

(Editor’s note: due to space limitations, the endnotes for this article have been posted at esa-online.org/Endnotes.)

Andrew F. Bush is an associate professor of missions at Eastern University in St. Davids, Pa.

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