Had the central bank stepped in earlier, it might
have prevented the current subprime-mortgage meltdown by curbing
lax lending standards, Federal Reserve’s chief bank supervisor,
Roger T. Cole told a Senate hearing last week. “Given what we
know now, yes, we could have done more, sooner,” he said. There’s
a little problem with that; there were numerous warnings.
Ralph Nader says he raised, with then Federal Reserve
Chair Alan Greenspan, the need to curb what had become known as
predatory lending in the late 90s, and the then Fed chair agreed
that "enough was enough”. “Unfortunately, the Federal Reserve
has taken only small steps to curb the practices,” Nader wrote
a couple of years later in Counterpunch. “Not only the
Federal Reserve, but the Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Office of Thrift Supervision
need to place a priority on ending this outrageous gouging of
innocent low, moderate and middle income families.”
Near
the end of 2003, Nader observed that subprime
lenders had been visiting state legislators around the nation
saying: “enact protections for borrowers and you will trigger
a quick and certain reduction of credit for thousands of low,
moderate and middle income borrowers.” In fact, he reported, experts
had agreed that regulations on loose lending had not, in fact,
reduced credit availability in the states (i.e. North Carolina)
where they had been imposed.
At the time, the consumer advocate noted, in Georgia,
lenders were launching new attacks on that state's Fair Lending
Law, threatening to leave the state if the law wasn’t repealed.
Among those he named were Ameriquest (subsidiary of ACC General),
New Century Financial Corporation, Fremont General Corp. and Option
One (owned by H&R Block).
Here’s what has followed:
- Last year, ACC announced it was cutting about
a third of its 11,000 person workforce.
- This May, the Orange County Register reported
the company was getting rid of nearly half of its remaining
employees. The company cited the “very challenging non-prime
market” for the cuts.
- Last year, ACC agreed to pay $325 million in a
settlement over claims of deceptive lending practices. “The
cuts come amid turmoil in the subprime lending area, the Associated
Press reported. “Lenders who specialize in making risky,
higher-interest mortgages to people with blemished credit records
have been tightening their lending policies as their own financing
has dried up and defaults have increased.”
- New Century, the country’s the second-biggest
sub-prime mortgage lender, is (at the time of this writing)
expected to declare bankruptcy) any day now. Meanwhile, New
Century is under investigation by the Securities and Exchange
Commission, concerning what is thought to be suspicious trading
in the company’s stock and accounting errors. The New York Stock
Exchange has suspended its stock listings.
- Fremont, a major home lender to people with weak
credit, disclosed last week that it planned to leave the subprime
mortgage business and agreed to a cease-and-desist order with
federal regulators related to improper lending practices. Santa
Monica, Ca. – based Fremont has announced it is getting out
of the subprime home loan business and federal bank regulators
have ordered the company to tighten its loan policies to avoid
future losses from defaults by borrowers. The Federal Deposit
Insurance Corp. found the bank was selling mortgages ''in a
way that substantially increased the likelihood of borrower
default or other loss to the bank.''
- And, H&R Block Inc., which recently announced
over 15 million dollars in mortgage-related losses, said last
week that due to “market conditions” it was having trouble selling
off Option One.
“Subprime borrowers with blemished credit histories
are regarded as high risk and, as a result, predatory lenders
take advantage of their vulnerability and weak bargaining position,
charging them inflated interest rates and loan points, attaching
costly ‘add-ons’ like credit insurance, luring them into repeated,
fee-ridden refinancings, and unaffordable repayment plans,” Nader
wrote nearly five years ago. “Some of the predatory interest rates
range up to eight percent above the average subprime rates. The
end result is often bankruptcies and foreclosures.” While a few
states were taking action to curb risky lending, he added, “Congress,
in contrast, has been paralyzed by massive campaign funds from
the entire range of financial interests, including predatory lenders.
There have been some brave statements for the fast buck, deceptive
operators range from the established international giants like
Citigroup to the back alley loan sharks which are equally adept
at separating the poor and the near poor from their hard-earned
money.”
So, the current crisis in mortgage lending has been
brewing for some time. Why has it come to a head now? Because
some of the biggest lenders just couldn’t control their greed.
In 2006, subprime loans totaled about $625 billion,
or about 20 percent of all mortgages, up from $120 billion and
5 percent in 2001
"Wall Street wanted the mortgage brokers to
keep making loans even though they were riskier and riskier,"
Ira Rheingold, executive director of the National Association
of Consumer Advocates told the Christian Science Monitor.
"They didn't care that ... people were getting loans they
couldn't afford because there was so much money to be made."
“The warning flags have been flying for months, but
with every five-point rise in the Dow index being wildly celebrated
as another glorious new record, another gushing multiple orgasm
in the fabulous orgy of US market capitalism, the US media ignored
the story that it should have told in favor of the one it wanted
to tell,” observed Julian Delasantellis, management consultant,
private investor and professor of international business in Washington
State.
“We financial professionals in the US stood by and
silently watched while risky mortgage loans were made to people
with bad credit,” wrote Janet Tavakoli, president, of Chicago-based
Tavakoli Structured Finance, wrote in a March 19 letter to the
Financial Times:
“Most of the consequences will fall on struggling
minorities who thought they were being given the opportunity to
create financial security, but instead they rode a Trojan horse
loan to financial ruin.”
“We are witnessing the fall of the predators as US
mortgage brokers implode. These thinly-capitalized Wall Street-funded
operations sent financial snipers to Main Street.”
“Our behavior in the subprime market reveals aggressive
arrogance,” Tavakoli wrote. “We acted as if we, the financially
and technologically superior, were leading the forces of good
against the empire of evil, the financially and technologically
inferior, thus justifying our financial sleight of hand. We adopted
a very dangerous posture for leaders in finance.”
The situation at New Century and Ameriquest is talking
a heavy toll on Irvine, Ca, the city were the two firms are headquartered.
House and condominium prices have plummeted and commercial rental
vacancies are increasing rapidly. Upscale restaurants are in trouble.
One automobile dealer told Bloomberg News that people from
the mortgage business aren’t buying luxury cars these days. Instead,
they're putting their Porsches up for sale.
One has to feel some empathy for the loan makers
but not much. Up until the beginning of the meltdown they were
riding high and giddy with success. After talking with one former
executive at New Century the Los Angeles Times reported
that “that driving a red convertible Ferrari to work at a company
that provided home loans to people with low incomes and weak credit
might have appeared ostentatious, he now acknowledges. But, he
says, that was nothing compared with the private jets that executives
at other companies had.” “You just lost touch with reality after
a while because that’s just how people were living,” he said “We
made so much money you couldn’t believe it. And you didn’t have
to do anything. You just had to show up.”
One Countrywide Financial executive took in over
$270 million in profits from sales of stock and the exercise of
stock options from 2004 to the start of this year.
Meanwhile, in the shadow of this unseemly wealth
appropriation, millions of moderate and low income people were
going into hock up to their eyeballs. They were lured into taking
out subprime loans accompanied by tricky attachments (in the industry
they call them “innovations”) like no-money-down, adjustable rates,
“teaser rates”, or loans equal to the value of the property being
mortgaged. Now the chickens have come home to roost – tragically
for many. Defaults and foreclosures are on the rise and expected
to only increase in the months ahead. Insecurity has gripped working
class homeowners from one end of the country to the other. African
American, Latino and Asian homeowners are being affected disproportionately.
Over 50 per cent of loans made to African Americans in 2005 were
subprime and 80 per cent of these subprime involved adjustable
rates. “It’s the ugly geographic pattern that we’ve seen before,”
Paul Collier, director of litigation for Harvard Law School’s
clinical program, told the Financial Times. “Subprime lending
is narrowly focused on neighborhoods of color.”
The worrying thing about all this that, while great
concern has been expressed over what the situation might mean
for the larger economy, up until recently, little concern has
been expressed for the human pain and insecurity it has occasioned
– let alone any proposals to provide relief for those affected.
That appears to have changed a bit. Senator Christopher Dodd (D.
Conn,), chair of the Senate Banking Committee, has raised the
possibility of Federal assistance to the victims of predatory
loan practices, saying, "As Chairman, I will use all the
powers and tools at my disposal to keep families, victimized by
predatory loans, in their homes and ensure that America's dream
of home ownership remains alive.”
Dodd’s suggestion that help from Washington might
be possible drew a positive response from the New York Times,
which noted that “Relief would be a cost-effective, humane response
to homeowners trapped by complex, unmanageable — and, in a growing
number of cases, seemingly predatory — loans. Time and resources
to renegotiate those loans or sell an unaffordable property could
save many families and communities from calamity.” But the Los
Angeles Times wasted no time dinging that idea, suggesting
that “(P)roviding forbearance is a job for lenders, not taxpayers.
Lenders got very creative when they learned they could profit
by unleashing a flood of easy credit. If they want to remain solvent
and keep Wall Street happy, they'll have to be equally creative
when it comes to refinancing sub-prime mortgages.” Fat chance
of that happening, I would say.
A story on the subject last Friday in the L.A. paper
began with the sentence: “Borrowers, don't hold your breath for
a bailout”, adding that “the modest federal and state aid proposals
advanced so far suggest that most people struggling with onerous
loan payments are unlikely to get government assistance.” It went
on, “The Bush Administration has ruled out a blanket program to
help homeowners stave off foreclosure, reasoning that it's ‘not
an appropriate role for the federal government,’ White House spokesman
Tony Fratto said.”
Meanwhile, I got a call last week from the “Home
Loan Help Center” offering me a one percent mortgage, which is
weird as I don’t own a house. When I asked the guy on the other
end of the line where he was located, he replied: “Las Vegas.”
Fitting.
BC Editorial Board member Carl
Bloice is a writer in San Francisco, a member of the National
Coordinating Committee of the Committees of Correspondence for
Democracy and Socialism and formerly worked for a healthcare union.
Click
here to contact Mr. Bloice. |