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mortgage lenders didn’t allow it. But today the game is different. It has become routine for lenders to issue unmanageable mortgages. The best evidence comes from the mortgage industry itself. Fannie Mae, the quasi-governmental agency that underwrites a huge fraction of home mortgage lending in the United States, advises families that “monthly housing expenses should not represent more than 25 to 28 percent of gross monthly income.”31 Accordingly, anyone whose housing costs exceed 40 percent of their earnings would be considered “house poor,” spending so much on housing that they jeopardize their overall financial security.32 But the label is misleading. Many of the “house poor” are not poor at all. They are middle-class families that overextended themselves in a desperate effort to find a home in the midst of a fearsome bidding war. Over the past generation, at the same time that millions of households sent a second earner into the workforce, the proportion of middle-class families that would be classified as house poor or near-poor has quadrupled.33

The down payment—once a critical device for screening potential borrowers—has virtually disappeared. In the mid-1970s, first-time home buyers put down, on average, 18 percent of the purchase price in order to get a mortgage.34 Today, that figure has shrunk to just 3 percent.35 While a small down payment may sound appealing to those of us who remember scrimping and saving before we could purchase our first home, it has a more ominous side. The family that can’t come up with a down payment pays higher points and fees, and many are forced by their lenders to purchase additional credit insurance. These families get mortgages they couldn’t have gotten a generation ago, but they pay a lot more for them. More important, families that don’t make a down payment are more likely to lose their homes, which is why traditional lenders required the 20 percent down payment in the first place. According to one study, families that make a down payment of less than 5 percent of the purchase price are fifteen to twenty times more likely to default than those who put down 20 percent or more.36 The obvious solution would be to reimpose some standards in the mortgage market, but deregulation continues to reign supreme. Even as defaults are rising, President Bush argues that the federal government should work to reduce families’ down payments even further—with no thought about how those low down payments may cost millions of families their chance at staying in their homes.37

As regulatory control over interest rates collapsed, a new industry was born: the “subprime” mortgage lender. Subprime lenders specialize in issuing high-interest mortgages to families with spotty credit who are unlikely to qualify for traditional, low-cost “prime” mortgages. In the early days of deregulation, subprime mortgage lending was unheard of. But by the mid-1990s, banking giants such as Chase Manhattan and Citibank, fat with profits from credit card lending, were looking for new markets to tap.38 They applied the same principles to home mortgage lending that had profited their credit card divisions so handsomely: Charge high interest rates and sell, sell, sell.

To give a sense of just how expensive subprime mortgages are, consider this: In 2001, when standard mortgage loans were in the 6.5 percent range, Citibank’s average mortgage rate (which included both subprime and traditional mortgages) was 15.6 percent.39 To put that in perspective, a family buying a $175,000 home with a subprime loan at 15.6 percent would pay an extra $420,000 during the 30-year life of the mortgage—that is, over and above the payments due on a prime mortgage. Had the family gotten a traditional mortgage instead, they would have been able to put two children through college, purchase half a dozen new cars, and put enough aside for a comfortable retirement.

Citibank and other subprime lenders typically defend their business practices by arguing that they are helping more families own their own homes.40 But this is little more than public relations