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The sub-prime lending market does not need to go but it does need regulating

Abstract : Regulation and negotiation are the two keys to averting the current real estate meltdown from ever happening again says Jeff Adams.

The great American Dream is to own your own home and start building your wealth and it is so deeply rooted to the heart of our economy that it has become, without exaggeration, the engine that drives the world.

Take the sub-prime mortgage sector for instance. At the last count the exposure of banks and money institutions around the world in the sub-prime mortgage market amounted to $1 trillion. That’s right, $1 trillion!

When that kind of money is involved you begin to appreciate that not everything on the plate is going to be kosher and this is exactly what has happened in the sub-prime mortgage lending market. The backlash, in terms of foreclosures across the country has been so harsh that many critics have called for sub-prime mortgages to be abandoned altogether and the sector to be curtailed and that would be a mistake.

Before you think that this is the case of yet another real estate expert defending a lucrative corner of the market let’s examine what the sub-prime mortgage sector was set up to do: Sub-prime mortgages were traditionally set up so that those less privileged than ourselves were able to realise the great American Dream and own their first home.

In many parts of the country, from inner city sectors to city-edge neighbourhoods it has worked beautifully. Single mums, low-income families and less-privileged youths have managed to achieve what would, under different circumstances, have seemed impossible.

Now, it’s true that the sub-prime mortgage sector grew a little too fast for its own good. In the heady rush to make sales, clinch commissions and claim bonuses many a lender failed to adequately supervise the process or provide the due diligence required even for this level of lending.

The result is we now face a spate of foreclosures that look set to blight many of the same areas they had helped to regenerate. This is a good argument for two things: 1. Tighter policing of lending procedures in the sub-prime mortgage lending sector and 2. A look at setting nation-wide standards in the way lenders deal with those borrowers who fall into arrears.

The first will give us sub-prime mortgages which actually do what we want them to do: help those who need help acquire a home and start building their great American Dream. The second will stop foreclosures which are a knee-jerk reaction to arrears and get both lenders and borrowers back to the negotiating table.

If we succeed in carrying out these two reforms the chances are that the great American Dream will be alive and well for a long time to come.