Homeownership is a significant part of the American dream.  For many, it is a great source of pride as well as a major step to accumulate wealth and savings.  Over the past two decades, a record number of Americans have achieved this goal.
Unfortunately, millions now face the threat of having their dream turn into a nightmare.

We are seeing an alarming and troubling rise in foreclosures.  As a result, many families — especially black and Latino families — are losing their homes or are at risk. This development has a devastating impact on the affected families. But more broadly, foreclosures hurt neighborhoods, communities and the national economy.

What is causing the increase in foreclosures, and what can we do to stem the tide?

A disproportionate amount of higher-priced subprime lending is concentrated in the minority population and in minority neighborhoods. According to the 2005 Home Mortgage Disclosure Act data, 52 percent of African Americans and 40 percent of Latinos are in high-cost, subprime loans as compared to 19 percent of white families. Research by Freddie Mac shows many of these families could have qualified for a better, more affordable loan but were instead steered into a subprime loan by a lender or broker eager to make a bigger profit.

I believe that increasing financial literacy would decrease foreclosures, so I applaud efforts by government, nonprofits and the private sector to educate consumers. For example, hybrid adjustable rate mortgages and other subprime loans may be appropriate for some but are not right for everyone. Latino families are hard hit by this problem. More than 20 percent of Latinos lack enough information in their file to develop a credit score. Although they can show they pay their rent and bills on time, they are passed over for the most affordable products. Instead, too many families are pushed into loans that are easier to process and earn a higher profit.  Lending abuse in the market has become a very serious problem.

The subprime market has seen significantly higher levels of foreclosure and default than the prime market, and the rates of foreclosure and default are rising. Minorities are particularly vulnerable. For Hispanics, almost 20 percent who received high-interest, subprime loans are likely to go into foreclosure. This means unless we do something to intervene, one in 12 Latino homeowners will face foreclosure in the coming years.  And the Center for Responsible Lending predicts subprime mortgages originated from 1998 through the third quarter of 2006 will wipe out $164 billion in homeownership wealth for 2.2 million American families.

In my district in California, the Neighborhood Housing Services of the Inland Empire reports that the foreclosure rate is now three times higher than it was just a year ago. One of every 315 homes in the Inland Empire is currently in default and has started the foreclosure process.

By no means am I advocating that we get rid of subprime lending, which has empowered a number of borrowers to get into their first home, including roughly 85 percent of Latino families. Over the past 10 years, minority homeownership rates have improved, and the growth rate for Hispanics has outpaced other groups. Subprime lending has contributed greatly to this achievement.

But we need an efficient system where families are properly matched to the home financing tools they can afford and that meet their financial goals. We need to put an end to abusive practices and overly relaxed lending standards. Loans designed to put families on a path of endless refinances defeat the purpose of homeownership. Lenders and brokers must underwrite borrowers for loans that build wealth and forward the financial goals of their borrowers. This means underwriting to the fully indexed rate, not just the teaser rate. And explaining the terms of these loans in plain English so that borrowers understand how much they are paying each month even after the rates adjust. It’s time we put unscrupulous lenders who are steering minority families into unsuitable loans out of business.

As the chairman of the Congressional Hispanic Caucus and as a member of the House Financial Services Committee, I want to help increase opportunities for Americans to buy a home.  Let us also work to protect hard-working families who are facing foreclosures and keep them in their homes.

Baca is a member of the House Financial Services Committee.

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