The Mortgage Crisis and its ‘Ugly Geographic Pattern’

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lenders were launching new attacks on that state’s Fair Lending Law, threatening to leave the state if the law wasn’t repealed.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



  * 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.


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