How did we get into this foreclosure mess?

I have lived through three foreclosure crises, although I missed the big one during the Depression, when in 1933 the country was facing 1,000 foreclosures a day. In the 1980s, the problem was fed by the savings and loan scandals; in the late 1990s, the scourge known as "flipping" was to blame. The present crisis is the result, in great part, of the explosion of subprime mortgages.

We hear daily about the crisis, but what has been lacking is a satisfactory explanation of how we got into this mess.


In 1934, Congress established the Federal Housing Administration as an insurer of mortgages. Over three-quarters of a century, the FHA has insured 34 million mortgages, helping to fuel a rise in the national rate of homeownership from 40 percent in 1934 to just under 70 percent today.

Until seven years ago, Baltimore was very much an FHA town, with the agency controlling 42 percent of the city market, compared with 30 percent nationwide. Many who bought FHA-insured loans will remember how each FHA loan was sent manually to the Department of Housing and Urban Development's office in the Mercantile Bank & Trust Building to be scrutinized by FHA loan officers.


There was very little fraud and abuse in this system.

Another reason the system worked well was that much of the lending in Baltimore used to be organized around communities of immigrants - largely Eastern European - who knew each other, lived in the same neighborhoods and went to church together. The old country's lending "clubs" became building associations and savings and loans that represented the beginning of homeownership loan programs in America.

East Baltimore institutions such as St. Casimir's S&L; and Bohemian S&L; were at the forefront of this movement, and there was a communal aspect to the process. The community would come together to help a newly married couple buy a house - but if the couple was so much as one month late with their mortgage payment, they would have to hear their names read by the pastor at Sunday services.

The level of trust in those days was high, and so were the standards. Many of those lending organizations still exist, and they have never lowered their standards, but they have become a much smaller part of the overall lending picture.

Given that background, how did we come to this pass? How was America's lending industry allowed to undermine one of the most successful U.S. efforts to strengthen the country's neighborhoods and homebuyers?

The decline began when the FHA experienced massive layoffs in the early 1980s; federal spending cuts hit housing programs more than all other programs combined. The lending and real estate industries lobbied Congress to pass legislation to allow lenders to approve clients for FHA-insured loans. This led to a huge number of new lenders - not all of them upstanding ones.

An additional major change occurred in 1994 when Congress, again pressured by lenders, allowed lenders to choose their own appraisers. Until then, the FHA chose the appraiser for each specific loan.

These changes opened the door for abuse by a new generation of lenders, and the results were predictable. The number of FHA lenders in Baltimore grew from 58 in 1994 to 107 in 1998, and the number of FHA loans grew from 2,153 to 3,821. The granting of licenses to originate loans had become, as one lending professional observed, "very lenient." The annual number of foreclosures filed in Baltimore grew from 1,900 in 1996 to more than 5,000 by 1999. In April 1999, the FHA declared a three-month moratorium on its foreclosures in Baltimore to take a deeper look at 500 borrowers who had just lost their homes.


What the agency found is that foreclosures in older cities such as Baltimore posed a serious problem for those residents losing their homes and for the neighborhoods where the foreclosures were occurring. As a result, the FHA instituted "Neighborhood Watch" programs to track lenders and appraisers who seemed to be involved in a disproportionate number of foreclosures.

That move proved futile, however, because by 2001, the FHA was pretty much out of business in Baltimore. Its market share of loans dropped from 42 percent in 1998 to less than 3 percent in 2002, replaced by a host of untested new loan products: adjustable-rate mortgages with low interest rates that would spike in a couple of years, interest-only loans, and what became known as "liar" loans, where the borrower simply stated his income and job status.

Borrowers sign contracts with mortgage brokers and with real estate agents. Yet these are the very parties who, in the current crisis, have led them astray, focused on filling their own pockets and disregarded the duty of good faith and fair dealing implicit in every contract.

As a result of all this, the Baltimore housing market in some sense has collapsed. There are signs, however, that the FHA is making a comeback. From Jan. 1 to March 18, the agency approved 70 new lenders in Maryland to offer FHA-insured loans.

Let us hope the FHA and the lending community will have learned from the past and will support once again a system based on trust and fairness and commitments that until recently have guided Baltimore, Maryland and the nation throughout its history.

Vincent P. Quayle is the executive director of the St. Ambrose Housing Aid Center in Baltimore. His e-mail is