The Nation
Wednesday 20 February 2008
Reverend Jesse Jackson was in New Delhi to mark the sixtieth anniversary of the martyrdom of Mahatma Gandhi but the subprime crisis back home was also on his mind. He phoned and said, "If you look at the analysis on TV, everybody is discussing macroeconomics. CNN, CNBC, MSNBC, none of them go deep in their analysis as to what really happened. The lack of enforcement of civil rights laws, of fair lending laws, drives this economic tsunami. This is not an economic miscalculation - this is the price we pay for not enforcing the law."
Jackson points to the targeting and steering of African-Americans and Latinos who were qualified for prime loans into risky subprime mortgages (defined as 3 percentage points higher than the prevailing rate for long-term Treasury bonds). "Redlining was to not loan to certain areas," he said. "This is what amounts to reverse-redlining - steering black and brown borrowers into subprime who were eligible for prime. That's out and out breaking discrimination laws."
In 2005 and 2006, over 50% of all loans made to African-Americans, and over 40% to Latinos, were subprime - compared to only 19% of white borrowers. Martin Gruenberg, vice chairman of the Federal Deposit Insurance Corporation (FDIC), said at the Rainbow PUSH Coalition's Wall Street Economic Summit in January, "Only one-sixth of this differential could be accounted for by the ability of the borrower." Analysis of Home Mortgage Disclosure Act (HMDA) data shows that African-Americans and Latinos in New York City, Boston, Washington, Philadelphia and other cities were two to three times more likely to have subprime, high-cost loans than white borrowers with similar incomes and loan amounts.
The New York Times has reported on two neighborhoods in the Detroit area - one 97 percent white with a median income of $51,000, another 97 percent African-American with a median income of $49,000. In 2006, 17 percent of the loans made in the white neighborhood were subprime, compared to 70 percent of the loans in the predominately African-American neighborhood. Illinois Attorney General Lisa Madigan recently pointed out on National Public Radio, "…An African-American earning more than $100,000 was more likely than a white person who earned less than $35,000 to be put in a high-cost, [subprime] loan…. Clearly there is discrimination going on." The Times also reported that "… around 90 percent of subprime loans originated between 2004 and 2006 carried exploding adjustable rates. Some 70 percent of subprime loans have prepayment penalties, versus 2 percent of prime loans…. " Those pre-payment penalties made refinancing impossible for hundreds of thousands of people. "Yield-spread premiums" also paid kick-backs to brokers for steering borrowers into high-priced loans.
Officials at the Department of Housing and Urban Development (HUD) point out that there is no uniformity in how loan documents spell out the terms of loans, and some are woefully inadequate. The Times also reported that "many lenders peddled the most abusive and costly loans to unsophisticated, first-time home buyers. Known as 'affordability products,' the mortgages generated big commissions up front and were designed to require refinancing later on - which included yet another round of luscious fees for lenders. With refinancing no longer an option, it is becoming obvious that these loans were designed to fail." Madigan told NPR, "I have had hundreds of people come to our office once they realized that they were in one of these high-cost subprime loans… telling us that they did, in fact, ask 'Is this a fixed-rate loan?' They were told yes, only to find out two or three years later it was an adjustable rate loan. I've had people tell us, you know, 'we told them that our income was only $2,000 a month…' [But] we find when we look at the documents it was written down [by the lender] as $7,000, $9,000 a month. So people were being put into loans in spite of the fact that they were… giving the correct information. And it is all because of the fact that the brokers and the lenders were receiving incentives, in large part because there was just this demand on Wall Street for these mortgage-backed securities."
"Nobody seemed to care because of who was profiting, on the one hand, and who was being exploited on the other," Jackson said. "But now the water is - like the Titanic - the water is up around the deck where the big people hang out. But where did the water come in? The water came in at the bottom of the ship. The poor always pay more for less - for cars, goods and services, insurance, food, banking money. This time, however, it's affecting the whole economy, that's what is different about this. Again, if the government had not allowed the rich to get richer at the expense of the vulnerable you wouldn't have this crisis."
It is now estimated that 2.2 million subprime home loans have already failed or will end in foreclosure - the highest foreclosure rate since the Depression - with a total equity loss of $164 billion. Moreover, neighboring homes to foreclosed properties will see a decline in value of $200 billion. A US Conference of Mayors Report estimates that the foreclosure crisis will reduce home values by an additional $519 billion in 2008, bringing the total forecast of lost equity for the nation's homeowners to $1.2 trillion.
A Democratic Congress hasn't turned a blind eye to these accounts of predatory lending and the lack of regulation that invited it. In the House, both the Subcommittee on Financial Institutions and Credit and the Domestic Policy Subcommittee (chaired by Congressman Dennis Kucinich) have held hearings on predatory lending in the past year. Both Sandra Braunstein, Director of Consumer and Community Affairs at the Federal Reserve, and Chairman Sheila Bair of the FDIC, said on the record that their institutions have used HMDA data to discover patterns of discrimination and passed it along to the Department of Justice for prosecution.
But when Congressman Al Green of Texas asked how many cases had been prosecuted by the Justice Department in the last five years, no one knew the answer. A call to the Justice Department brought this e-mail response, "The Department has used its authority to enforce the Fair Housing Act and the Equal Credit Opportunity Act to bring cases against lenders that targeted certain protected classes of borrowers with predatory or abusive loans: United States v. Delta Funding (2000); United States v. Long Beach Mortgage (1996); Hargraves v. Capital City Mortgage Corp. (2000).
You read that correctly - three cases, the most recent eight years ago. (In contrast, HUD reports that it investigates approximately 480 lending discrimination complaints each year and obtains settlements in nearly 30% of them.) Jackson pointed out, "One of the things that happens when people are against civil rights law, Dr. King would often say, is they either resist it and not pass it… or if they cannot stop it, they pass it but don't enforce it…. When we called Attorney General Mukasey to discuss this matter he said, 'Well, if you get us some information.' The information is out there! You know, I mean he knows what's happening there."
Mayors, State Attorney Generals, and the US Attorney General should sue lenders for predatory practices and to recover lost revenues stemming from a real estate market undermined by subprime mortgages designed to fail. Baltimore is suing, Cleveland and Illinois - led by Illinois Attorney General Madigan - are all pursuing these kinds of lawsuits. (The FBI has also begun investigating the subprime market - but thus far, no mention of any focus on predatory lending.) Jackson believes it is time for a Marshall-like Plan on Mortgages. He pointed to the need for federal intervention and significant restructuring in the Great Depression with the Reconstruction Finance Corporation; and in the 1990's with the Reconstruction Trust Corporation rescuing failing savings and loans. "This crisis is bigger than those," Jackson said. "It's much bigger." He called the recent stimulus package "almost like medical malpractice. If you go into the doctor's office with your right arm broken and you need it reset, but they do surgery on the left arm- you'd call that malpractice!" he laughed. "You ignore the crisis! This stimulus package does not address the impact of these multibillion dollar losses of tax revenues in American cities and suburbs. It completely ignores the source of the crisis. Because if they focus on that area they've got to deal with what happened."
This metastasizing crisis, Jackson argues, needs to be seen as part of the continuing struggle for racial equality. But both journalists and economists have been slow to admit that lack of civil rights enforcement plays a major role in this financial collapse. "That's the whole problem with the popular idea that we're going to 'transcend race," he said. "You can't transcend race, you've got to remedy the race…. Transcendentalism does not lend itself to racial remedy. We all want to get beyond a sore, but you must take the glass out and the inflammation out, and let it heal. Then you get beyond it. The Great Society sought not to transcend it, but to address it, through a plan to lift up the bottom. After slavery, it was Reconstruction. We seek to heal this, not to transcend it."
A few times Jackson mentioned the first chapter of Martin Luther King, Jr.'s book published a year before his death: Where Do We Go From Here - Chaos or Community? It addresses the unfinished business of the civil rights movement, closing the gaps created by structural inequalities - leveling the playingfield. "The first phase… had been a struggle to treat the Negro with a degree of decency, not of equality," King writes. "White America was ready to demand that the Negro should be spared the lash of brutality and coarse degradation, but it had never been truly committed to helping him out of poverty, exploitation or all forms of discrimination…. As the nation passes from opposing extremist behavior to the deeper and more pervasive elements of equality, white America reaffirms its bonds to the status quo…. The practical cost of change for the nation up to this point has been cheap…. The real cost lies ahead."
Jackson sees these same dynamics at play in the subprime crisis. "We do not have the dogs - that symbolism as a war state - but we do have what we call structural inequality. We're free but unequal, free and unequally protected by law. If freedom is the absence of barbarianism, and the absence of indecency, then equality is the presence of justice."
As more and more studies, statistics, shattered lives and shuttered communities are visible, an unavoidable question arises: where is justice?
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This article was co-authored by Greg Kaufmann, a freelance writer residing in his disenfranchised hometown of Washington, DC.
Subprime Is Really SubCRIME: America's Deeper Financial Crisis
By Danny Schechter
AlterNet
Thursday 21 February 2008
Policy proposals are not enough to save the economy. Candidates, take note.
At long last, the Democrats are talking about the economy and the need for serious relief and reforms. The reason is simple. The people are feeling the squeeze.
Reports the Baltimore Sun:
"Since January alone, the public's perception about the state of the economy has plummeted - with just 17 percent calling the nation's economy excellent or good - down from 26 percent last month. The percentage rating the economy poor has grown from 28 to 45 percent."
Hillary Clinton and Barack Obama now have their instant 10-point plans and programs. They have dipped into John Edwards' tool chest for ideas on fighting poverty and listened to policy advisors who have come up with a laundry list of proposals for stop-gap measures from hikes in the minimum wage and middle-class tax cuts. All of these proposals will take time to implement and probably will be forgotten by the time one of them becomes president, if they do.
Meanwhile the economy is collapsing because of crimes and irresponsibility on Wall Street, and no one is really talking about that. An inequality gap and structural crisis compounded by profiteering in high places goes on and is largely ignored.
The media is not investigating the profiteers and, in fact, continues to contribute to the problem by accepting millions for dubious ads for more loans that end up getting more Americans in debt. Prosecutors are not prosecuting wrong doing. No fundamental new regulations and oversight are being proposed.
The candidates don't even seem to know the extent of damage that is being done by the subprime crisis and its assignees. Andrew Abraham reports:
Bank of America delivered a report last night highlighting the current losses of the "credit crisis." According to the report, the meltdown in the U.S. subprime real estate market has led to a global loss of $7.7 trillion in stock market value since October.
Quoting Bank of America's chief market strategist, Joseph Quinlan, the crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is "one of the most vicious in financial history."
That number again: $7.7 TRILLION. That phrase again: "the most vicious," that is, worse than 1929 and all the financial crises since.
Who is responsible for this, and who is being made responsible? Why aren't we talking about these massive losses and the growing debt burden? Why is this issue not on the political agenda save for the efforts of a few advocacy groups on the left and Ron Paul on the right?
It was discouraging when our government's leading critic of these practices got so discouraged that he quit last week. David Walker, the comptroller of the currency had warned back in 2005 (as reported in my film In Debt We Trust):
Continuing on this unsustainable path will gradually erode if not suddenly damage our economy, our standard of living and ultimately our national security.
And guess what? Just two years later, our economy was "suddenly damaged." The damage is "affecting our standard of living," and very few public officials or political candidates are connecting the dots. Why not?
When will we condemn the false prophets of the free market and their misguided policies? When will we indict those who cashed in on our country's misery?
Notes scholar Lionel Tiger:
Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn't pay it back. They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money-reality into new "products" which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens. Not only that, but the overseers of the bitter debacle may lose their jobs for a month but nonetheless fill their wheelbarrows with company money and "severance" when they leave to tide them over until the next corner office becomes available."
And what is to be done about this white-collar crime wave? At long last even shamed executives in the financial industry are joining those of us who long ago charged that subprime is really subcrime. Basil Williams, chief executive officer of Concordia Advisors, a hedge fund, says we need "a safety net for the innocent and a dragnet for the guilty."
Writing in the Record in Bergen County, N.J., he says that the greedy should pay to help the needy:
"The costs can be recouped by going after those who profited handsomely and unfairly from the multitude of transactions that touched the industry, including:
Mortgage brokers who originated loans to those who didn't understand the conditions, couldn't afford them and should not have qualified.Appraisers who overvalued homes, knowing that the higher the value they gave a property, the more business they would reap from a dishonest broker.
Banks and brokerage firms that purchased, packaged and resold the mortgages for huge fees."
He goes on to discuss ratings agencies and more. This is a litany that the candidates and activists should sign on to.
With millions facing foreclosure, we have to expose those responsible and mount a movement for economic justice. It can be done. It should be done. Who is ready to stand up and organize a national mobilization to stop this outrage? Who is ready to fund it?
Who?
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Danny Schechter writes a blog for MediaChannel.org. He is the author of Embedded: Weapons of Mass Deception: How the Media Failed to Cover the War on Iraq (Prometheus).
Democrats Differ on Foreclosure Remedy
By Stephen Braun, Nicholas Riccardi and Maria L. La Ganga
The Los Angeles Times
Thursday 21 February 2008
Obama and Clinton promote their plans to aid homeowners. But economists say neither offers a broad solution.
Hidalgo, Texas - As they race back and forth between Ohio and Texas in advance of their March 4 primary showdown, Barack Obama and Hillary Rodham Clinton are squaring off over who has the answer to the nation's spiraling foreclosure crisis.
Neither presidential rival offers a comprehensive solution, economists say, but that has not inhibited them from touting their populist credentials and tugging at voters' heartstrings.
Hours before he won the Wisconsin primary Tuesday, Obama met with a San Antonio couple trying to save their home, then emphasized his proposal to provide tax credits to struggling homeowners and toughen prosecution of predatory lenders.
Last week, Clinton comforted a Wisconsin woman who had just received her first foreclosure letter. Then Clinton flew on to Ohio, where she promoted her plan for temporary freezes on foreclosures and on adjustable interest rates on sub-prime mortgages.
Officials struggling with the foreclosure issue in both states say the attention is long overdue. "We've been at the epicenter of this disaster for so long we're in the mopping-up phase now," said Jim Rokakis, the treasurer for Cuyahoga County in Ohio, a state wracked with nearly 90,000 repossessions last year - the sixth-highest rate in the nation.
But some economists caution that neither candidate's foreclosure solution deals with the systemic losses still to come in the faltering housing market and banking industry.
"The conundrum for the candidates is that the threat to homeownership is an emotional issue that every voter can relate to. But there's not much they really can do about it," said L. Josh Bivens, an economist with the Economic Policy Institute in Washington.
Obama and Clinton are in basic sync about some economic issues, but their approaches on the foreclosure crisis are markedly different.
Obama's solution has been criticized by Clinton and some economists as too marginal to offer real aid to imperiled homeowners. But Clinton's more populist-tinged plan has also been judged faulty and is undermined by her contradictory Senate stands on a Republican-backed bill that passed in 2005, gutting bankruptcy protections for mortgage-holders.
The main thrusts of Obama's cure-all would give a tax credit to struggling homeowners covering 10% of the interest on their mortgages each year and offer $10 billion in bonds to help the middle-class avoid foreclosures. The Illinois senator also would toughen penalties on lenders who draw unsuspecting buyers into usurious mortgages.
Obama's approach squares in many ways with the philosophy of economists who believe that the home mortgage bubble needs to pop on its own. But it clashes with his sometimes-heated populist rhetoric on the campaign trail.
"We need to restore fairness and balance to our economy so we can put the American dream within the reach of every American," he said Tuesday in San Antonio.
Obama's comment came after he met with Teresa Molina, a local resident who almost abandoned the home she shares with her husband, Edward, after its monthly mortgage costs ballooned.
"We didn't know where we would go, but we'd go together," she told Obama.
There were nearly 150,000 foreclosures in 2007 in Texas. But because house prices are more stable in much of Texas than in Ohio and other struggling regions, the state's repossession rate was 12th in the nation. However, some areas, such as Dallas and north Texas, have been hit hard.
"If you live in one of the trouble spots, it can feel as bad as anywhere," said Jon Hockenyos, president of TXP, an Austin-based economic analysis firm.
Economists question whether Obama's $10-billion "foreclosure prevention fund" would cover the thousands of Americans who already have lost homes and the thousands more who are in danger.
"It's a drop in the bucket," Bivens said. Clinton echoed that skepticism Wednesday, saying that Obama's plan was a "half-hearted attempt. You can't have a real plan to stop foreclosures if all you're helping is the banks."
Obama and his policy aides dismiss the criticism, saying that with a slowing economy and rising healthcare costs, there is only so much funding and legal tinkering that can be done. A major focus, they say, is returning protections to the bankruptcy code that were eliminated by the 2005 bankruptcy act backed by the Bush administration and Republicans in Congress.
The 2005 vote, Rokakis said, "took power away from magistrates and judges to protect people who were declaring bankruptcy to save their houses."
Obama voted against the GOP-backed bill. But Clinton voted for an early version of that measure in 2001, then abstained when the Senate passed it into law in 2005. Her stance has complicated her efforts to portray herself as a champion for distressed homeowners.
In a Congressional Record insert before the 2005 vote, Clinton explained her earlier vote for the measure as an attempt to "hold accountable people driven into bankruptcy because of their own irresponsibility." She insisted that she would have voted against the bill in 2005 but abstained because of "unavoidable circumstances."
Earlier this week, her campaign spokesman, Howard Wolfson, said she was unable to take part in the 2005 opposition because Bill Clinton had just had heart surgery and "she was dealing with his health issues." Obama spokeswoman Jen Psaki countered that "she still hasn't articulated why she supported it the first time."
Now, however, Clinton is an unabashed supporter of aid for threatened homeowners. In Kenosha, Wis. last week, while speaking during a forum at the Brat Stop, a local restaurant, the New York senator was approached by 11-year-old Jade Bailey, who told her: "We're losing our home."
Clinton led the young girl and her mother, Donna, up to a small stage. There she listened as Donna Bailey, a 42-year-old hairdresser, explained how her family has scrounged for money to pay an adjustable-rate mortgage whose payment recently doubled. A foreclosure notice arrived last week.
Clinton's solution is a 90-day moratorium for foreclosures on sub-prime occupied homes, and a five-year rate freeze on sub-prime adjustable rate mortgages. The Bush administration has already responded with a 30-day cooling period on foreclosures; Clinton and her aides insist a longer freeze is essential for stabilizing a precarious situation for homeowners.
But according to some economists and officials grappling with the crisis, her proposal, which also offers a $30-billion foreclosure fund that is triple the size of Obama's, might only prolong the agony for homeowners.
"A 90-day freeze is fine for what it is, but what happens on the 91st day?" Rokakis asked. "Why not a year? Or longer?"
In San Antonio on Tuesday, Obama said that Clinton's foreclosure freeze was potentially "disastrous," rewarding "people who made this problem worse" by benefiting banks that profit from high mortgage rates.
A "blanket freeze," Obama added, might "drive rates through the roof for those trying to buy or refinance. Experts say the value of homes will fall even more, and even more families could face foreclosure."
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Riccardi reported from Hidalgo, La Ganga from San Antonio and Braun from Washington.
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