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God On The Mortgage Crisis
by Robert Franco | 2008/01/02 |

When all else fails, pray! A recent Reuters article, Clergy Take on U.S. Mortgage Mess, examines the religious aspect of the mortgage crisis. Foreclosures have become a topic at church services around the country as many church-goers seek advice from their spiritual advisers. Below are a few snippets from the the article and my thoughts on the subject.

While the financial fallout of the mortgage meltdown has been well documented, the moral dimensions have not been widely discussed, religion experts say. They say they are particularly troubled on a moral level by the explosion of subprime mortgages, which allowed lower-income people with weak credit to buy homes based on attractive teaser interest rates that now are resetting to levels they cannot afford.

Though I am not a particularly religious person (at least compared to some), I did complete my undergraduate business degree at a Christian university. Embodied in most of our courses was an underlying theme of good Christian values and moral practices. I found them to be common sense ethical guidelines whether you choose to label them as Christian values, or not. Corporations, through their officers and boards of directors, have to answer to shareholders in their pursuit of profits but I always found it odd that so many people automatically assume that means higher stock prices and more dividends. Why don't they believe that shareholders expect their investment money to be used ethically? Perhaps that is a commentary on the decline of modern society. Do shareholders indirectly support unethical, immoral behavior through their investments? Furthermore, do they expect it?

Answering to shareholders should include strong moral and ethical leadership, as well as profits. Of course, profits are important for the success of a business - but they should not come at the price of integrity.

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Subprime lending is not unethical under Judeo-Christian tradition -- and it can serve a good societal purpose by allowing those who have been down on their luck to get access to capital, said David Miller, executive director of the Center for Faith and Culture at Yale Divinity School.

He and others, though, said that subprime lenders have a duty to charge fair interest and that they also have a moral responsibility not to extend credit to those they know cannot pay it back.

Apparently, this duty and moral responsibility has been vastly ignored by unscrupulous mortgage lenders that seek only incredulous fees and sell the risk off to what are often-times unwary investors. These investments are often packaged in such a way that their financial ratings can be misleading. Mortgages whose borrowers do not have even the slightest ability to repay can be manipulated into higher rated mortgage backed securities or collateralized debt obligations than they should be afforded.

Perhaps this is why we have so many attempts to legislate a requirement that borrowers be vetted for their ability to repay the loan. The loan originators would not dream of making many of these loans if they were not able to sell them on the secondary market. Thus, there must be some adjustment made for their lack of judgment... or lack of concern for the credit worthiness of the borrowers.

"One of the interesting questions that should be asked of subprime mortgage lenders, is, 'would you take this loan out on your own home?" said Gary Moore, a financial adviser in Sarasota, Florida, who writes about religion and investing.

"That's the Golden Rule. But I bet there's not 1 in 100 that did. If more of them just thought about that for a minute, it would have prevented a lot of this."

I usually think about my grandmother in these instances. I wonder how I would feel if she were the borrower. But, the same result is achieved. The real question here is did the lender put their own greedy incentives ahead of the best interest of the borrower.

At the same time, religion experts say that many home-buyers may have acted immorally by living beyond their means and that borrowers are required to try to make good on their debts. They cite a verse in the Book of Psalms that says: "The wicked borrows and does not pay back."

Many who try to defend the current system and cite the free-market economy and capitalism often seem to follow this logic. It is the borrower's fault - they got themselves into this mess and they should be required to deal with it. Why should anyone help them now?

To some extent, the borrowers are to blame, but they are not alone and there is plenty of blame to go around. Many of the borrowers simply are not sophisticated enough to understand the complexities of "creative financing." Yet, those who are in the industry should have known better than to qualify them for loans they could not afford - or loans that would become unaffordable at the first rate increase.

On Chicago's South Side, the Rev. Reginald Williams Jr. at the Trinity United Church of Christ says he has been dismayed by what he sees as the immorality of the housing market's excesses. The church, a primarily black congregation, has a long-standing housing ministry that provides education and advocacy for people at risk of foreclosure,

Lenders who preyed on low-income minorities for high-interest mortgages came up with "a slick way to make money and to really enslave people," said Williams, an associate pastor. "The immorality is further magnified when it's particularly geared at a certain race."

This is logic I find hard to follow - taking advantage of people is somehow more offensive when the victims are minorities? Poor is poor whether you are black, brown, green or purple. It is just a fact in our society that the poor are more desperate to believe the spiel of a slick snake-oil salesman who promises to hold the cure for their lot in life. It makes no difference what the product is - in our case it is a loan that will make their dreams of home-ownership a reality. However, the immoral and unethical mortgage originators who target the poor, fully aware that they will be headed for foreclosure in a year's time, deserve a special place in Hell.

Lessons about debt and financial struggles are found throughout the Bible. There is a biblical prohibition on charging interest on loans -- the making money by lending money -- although today most Jews and Christians view the charging of some interest as acceptable.


In Islamic finance, there is an official prohibition on interest-based borrowing and lending. That has helped investment funds that adhere to Islamic principles to largely avoid the subprime meltdown because they do not hold traditional banking stocks.

The subprime crisis is likely interpreted differently across the spectrum of Muslim thought, said John Voll, a professor of Islamic history at Georgetown University. He said some conservative Muslims might argue that the mess shows that an "interest-based system is not only immoral but doesn't work."

I can't imagine an alternative to the "interest-based" system. Can you? Surely without mortgage lending, home-ownership would be extremely rare. And, without charging interest, there wouldn't much mortgage lending going on. Though I can see the wisdom of the message in dealing with loans to friends, interest is crucial to a commercial lending environment. Reasonable interest is a good thing that allows money and equity to be leveraged and it keeps our economy pumping. However, some of the loans that have been made over the past few years makes me think we need to redraft our usury laws.

In the Bible, there is also mention of loan forgiveness, something particularly timely as the government has brokered a plan with mortgage lenders to give relief to struggling homeowners who took out adjustable rate subprime loans that are set to go up sharply.

In biblical times "every seventh year, you were supposed to forgive any money that hasn't been repaid to you," said Moore, the financial adviser, referring to a passage in Deuteronomy.

There is also a biblical concept of the Jubilee year, in which every 50 years all property should be returned to its original owners. The idea, he said, is to give those who have struggled a fresh start and not be bound forever by their debts.

Well... clearly forgiving all debts every seven years would not work today. The 30-year mortgage has become very common and I doubt many could afford to buy their home with a 7-year amortization. Likewise, the "Jubilee year" that requires all property to be returned to its original owner would run afoul of our strong commitment to property rights of individuals. Not a very good solution to building communities with high levels of home-ownership.

However, we do have a strong belief in our country that allows debtors to obtain a fresh start. In fact, bankruptcy was such an important issue to our founding fathers that they included it among the federal powers in the Constitution. Article 1, Section 8, Clause 4 reads: "To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States."

Some of the legislative responses to the mortgage crisis have centered around changes to the Bankruptcy Code what would allow the bankruptcy judge to modify the terms of mortgages on debtors' primary residences. This can already be done with other types of secured debts, why not extend the principal to include residential mortgages?

As many homeowners face the prospect of losing their homes, it is no wonder many are turning to prayer. I don't think we will see any divine intervention, but at the very least we should be looking at some of these ideals founded on religious principles to help us cope with the aftermath of the crisis. Some of them may provide individual guidance, some may influence corporate culture away from the greedy practices of the past few years, and some of them may help form sound legislation that will prevent another mortgage crisis in the future.

Whether you call it spiritual guidance or just common sense, we need all the wisdom we can get.

Robert A. Franco


Categories: Ethics, Mortgage Industry, Subprime Lending

2340 words | 3530 views | 5 comments | log in or register to post a comment

I'm no Biblical scholar, nor am I "...
I'm no Biblical scholar, nor am I "religious". However, I do love the Lord, and have been studying the Bible my entire life (since birth, thanks to my mother). The Bible talks more about money than it does about faith, love, sex, or just about any other subject except God Himself.

Jesus Christ, during His earthly ministry, devoted a number of His parables to illustrating how we should deal with our finances. He teaches that our money really belongs to God and that we are simply the "managers". He warns us that money has tremendous power and cautions us not to let our things own us, that "no man can serve two masters" (Matt. 6:24).

I agree that we Americans need a healthy dose of common sense when it comes to being good stewards of the resources God has entrusted to us, and the Bible gives us the perfect "study guide".

by Scott Perry | 2008/01/02 | log in or register to post a reply

"Thou shalt not lend upon usury to ...
"Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury." (Deuteronomy 23:19)

In the above passage, "brother" is sometimes translated as countryman or Israelite. This of course gives a wide variety of interpretations as to whom interest should be charged, if at all.

I like Ecclesiastes the best in matters like this since it is grounded in the firm logic and wisdom of a cynic's lifetime empirical conclusions:

"A feast is made for laughter, and wine maketh merry: but money answereth all things." (Ecclesiastes 10:19)

"This only have I found: God made mankind upright, but men have gone in search of many schemes." (Ecclesiastes 7:29)
by David Jenkins | 2008/01/02 | log in or register to post a reply

I did some research on the Islamic ...
I did some research on the Islamic principles of non-interest lending, and they have some pretty creative financing vehicles. According to Wikipedia, instead of making a loan to the buyer, the bank buys the land from the seller and re-sells it to the buyer at a higher price while allowing the buyer to pay in installments.

There are other approaches, such as sale and buyback, profit sharing, safekeeping and joint venture which basically accomplish the same thing. That's how they get away with not calling it interest.

The Wikipedia article, however, doesn't discuss how federal truth-in-lending or financing disclosure laws apply to such arrangements.
by Scott Perry | 2008/01/03 | log in or register to post a reply

That is interesting (no pun intende...
That is interesting (no pun intended). I think that is still a type of financing and our American courts would probably consider it a secured loan and they would apportion interest for tax and other legal purposes. In substance their doesn't seem to be much difference, but whatever floats their boat, I guess. Personally, I would rather pay interest than deed my property to someone with a buy-back agreement.

I think for disclosure purposes, you would have to disclose the difference in purchase price as interest.

Of course, I guess there isn't a foreclosure problem with the Islamic practice - the "lender" already owns the property.
by Robert Franco | 2008/01/03 | log in or register to post a reply

The word "usury", as used in Deuter...
The word "usury", as used in Deuteronomy, is from the Hebrew word nashakh, "to bite" or to vex. According to Mosaic law, the Israelites were prohibited from taking interest from a fellow Jew on the loan of something that was considered a necessity. It also proscribed the taking of interest in a case of dire need in extreme poverty. In the case of strangers, however, it was permissible to loan money at interest.

The practice of mortgaging lands, sometimes at confiscatory rates of interest, began with the Jews during their captivity in Babylon. In Nehemiah Ch. 5, Nehemiah rebuked the nobles and the rulers for mortgaging lands at astronomical interest rates. People were desperate for land and they were raising the prices far more than they said they would (sound familiar?) Nehemiah called this extortion and came down on them hard for the practice.

In the New Testament, however, in Matthew 25:14-30 (the Parable of the Talents), Jesus tells the story of a man who entrusts some money to his servants. Upon his return, the man calls the servant who hid his talent in the ground "wicked and slothful" and that "I should have received mine own with usury." (v. 27) Of course, Jesus was using this parable as a spiritual object lesson, but in terms of trade and business, interest was never forbidden in Scripture, quite the opposite, in fact. The only thing prohibited was extortion and unreasonable interest.
by Scott Perry | 2008/01/04 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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