Why the Economy Went South
A reformed Wall Streeter explains where Congress went wrong on lending. Plus, a timeline of the mortgage crisis.
Below, five ways Wall Street and Washington set us up for the crash.
Newt Gingrich and Home Ownership
There were myriad calls in the early '90s to usher in banking controls on the precipice of the GOP "contract with America" revolution. In response, the House battled for the Home Ownership and Equity Protection Act of 1994 to cap the most outrageous predatory loans.
HOEPA's passage had dire consequences. First, it left a huge gap between the most egregious rates and fees a lender could charge and the next most egregious. If lenders didn't want to hit the new caps, they could still extend loans with rates and fees just beneath the HOEPA triggers. Since they would make less money off of each loan due to reduced rates and fees, they'd have to find more borrowers to make the same profits.
Voila, the quiet birth of subprime lending.
Florida and the "Rodash Fix"
At the same time the legislative battle to constrain interest rates and loan fees was being waged in Washington, another fight, over loan transparency, was being fought throughout the cities of America. It began in Miami, Florida.
Miami resident Martha Rodash had just received some good news in March 1994; the 11th District Federal Court of Appeals in Florida had awarded her the right to rescind on her mortgage, a major upset for the two big lenders she was facing. Little did she know that her victory would help pave the way for the subprime loan bubble.
Rodash wasn't some deadbeat trying to get out of her payments. She wasn't even a victim of predatory lending. But when stricken with multiple sclerosis, she refinanced her home in order to seek a cure. The treatments failed, and she was soon forced to quit her job. Ultimately, she defaulted on her loan.
Charles Baird of Legal Aid came to her defense. He built his case on a fee misstatement in Rodash's Truth in Lending disclosure sheet. "We didn't wipe out her debt," Baird told me about the victory, "but we did void her mortgage interest and take the lien off her house."
Her consumer victory inspired more than 40 class action suits across the country, and had the national lending industry up in arms.
In 1995, Congress passed a major amendment to the 1968 Truth in Lending Act. That 1995 amendment became known as the "Rodash fix" and had the effect of making certain fees, previously grounds for successful litigation, mute.
Phil Gramm and the "Enron Loophole"
As the late 1990's stock market boom headed into the new millennium, there were some renewed legislative attempts to rein in the banking industry. Notably, in April 2000, Rep. John LaFalce (D-N.Y.) and Sen. Paul Sarbanes (D-Md.) introduced the Predatory Lending Consumer Protection Act of 2000.
The act would have brought down HOEPA triggers and ensured that everyone in the chain had an interest in homeowners' ability to repay loans. Sarbanes and Senate staffer Jonathan Miller worked feverishly to line up cosponsors.
The industry attacked the bill and its backers and won. What passed instead was Texas Sen. Phil Gramm's Commodity Futures Modernization Act of 2000. The act ushered in tremendous growth of unregulated commodity trades through its "Enron Loophole," which allowed companies to trade energy and other commodity futures on unregulated exchanges.
Sarbanes' Sorrow
Meanwhile, Sarbanes and LaFalce soldiered on for the cause of averting lending disaster through instilling appropriate regulation. Three months later, the duo reintroduced the Predatory Lending Consumer Protection Act of 2001. It died, like its predecessor.
Down but not out, Sarbanes and LaFalce tried to pass the 2002 Act the following May. It failed again.
Two years later, the Office of Federal Housing Enterprise Oversight's chief economist, Patrick Lawler, said, "There is no evidence here of prices topping out. On the contrary, house price inflation continues to accelerate, as some areas that have experienced relatively slow appreciation are picking up steam."
Indeed, subprime loan volumes rose from 5 percent of the overall mortgage market in 2001 to 15 percent in 2006. Home equity loans ballooned simultaneously. Then, those adjustable rates kicked in, and yes, prices did top out. Borrower mortgage payments soared by 25 to 30 percent, just as housing values were faltering. Foreclosures ramped up. And consumer protections were simultaneously chucked. On April 15, 2005, Charles Grassley (R-Iowa) passed the 2005 Bankruptcy Abuse and Consumer Protection Act, which worsened the quietly growing housing crisis for consumers. The act took away the ability of borrowers facing bankruptcy to negotiate down the principal of their primary home mortgages with their creditors—meaning they had no way to avoid foreclosure, even if they wanted to.
After the Bust
The finance community's theory is Darwinian: Little people who take bad risks deserve the consequences. Companies that take bad risks are a welcome addition to the fallen competitor list.
Current congressional packages tend to offer temporary financial solutions to long-term regulatory dilemmas. Yet even if we Band-Aid housing, the gear-up in commodities beats on. Wall Street will continue to battle for fewer restrictions under the political guise of American global competition, while Americans bear the brunt of the consequences.
Research support for this article was provided by the Nation Institute Investigative Fund. For more dates and events related to the lending crisis, click here.
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"The finance community's theory is Darwinian: Little people who take bad risks deserve the consequences. Companies that take bad risks are a welcome addition to the fallen competitor list."
While Wall Streets publicly stated theory my be Darwinian, they're actions are anything but.Let the little guy sink but have your buddies in Washington bail out the big financial institutions.
The subprime confidence trick is simply fraud. Why don't we start arresting the crooks involved and charge them with criminal activity? If we can pardon phone companies retroactively we can also jail lenders retroactively for their much worse crimes.
Two words: low wages. The policies of wage suppression resulting in working people taking on more and more debt to keep up their standard of living.
Now that that party's over, we need to focus of policies to increase wages: pro-union rules, banning outsourcing, tariffs, criminalizing the hiring of illegal workers.
Washington must burn and traitors must hang. None of these laments about voting for better policy mean crap to those people, who do you think controls those people in office? Who do you really think influences governments decision making process, the voter, HA
It is easy to blame the government and big business for the housing and mortgage crash but I think the problem is not them but us. I was in the real estate business for two years and was stunned by the greed--not the agents so much as the people selling their homes. I would tell people what their house was worth based on the latest prices but people would always want more. They would actively seek out real estate agents who would promise to sell their homes for the greatest amount regardless of what they were really woth. No one cared about getting what their home was worth, they wanted to get more than it was worth. Their greed drove the price of homes way above what they should have been. The buyers were happy to pay the price because they assumed they could do the same thing later on. Oh well, the bubble burst and now no one can unload their house for the price they bought it for.
I am very confused.I had to put 20% on my first(1978) and second house(1996).I worked in very hostile environments on and off since 1994( because the jobs seemed to be leaving.)People always bitching about how little money they had.Nothing but crappy low wage jobs.
I was barely making it. I went back to school to get a better job.That did not work.One person harassing me because someone is foreclosing on some man in her families house back in 2001.Coworkers running people off jobs because they want fun friends to work with.The bosses seemed to be making a lot of money NO ONE ELSE WAS. so I did not see how anyone who lived and worked through the last couple of years nothing but job loss ,outplacement,changing Global economy .Could feel confident to keep buying houses and younger people giving older people such a hard time.Tried to warn them about prices being too high---Older homes need new owners and they can be fixed up.STOP BUILDING OUT AND NEW,Fix the older areas.Too many people flipping and making houses cost too much.Only where are the JOBS? Jobs that pay better and environments are not like HELL.
Where are the jobs for people WHO DID NOTHING WRONG and need work???????
There is a missing 'http://' in the HTML code for the 'click here' link at the bottom of the page which causes the link to fail.
Part of the problem with transnational trade agreements is allowing investment protection and capital movement across borders, while locking in labour, free movement of money without free movement of poeple. So-called "illegal workers" (really just people who need jobs) need to be welcomed and worked with. The suggestion of Chris Manes, can only make things worse. By locking workers into countries with worse wages and working conditions, while at the same time allowing easy capital flight, it creates easy leverage for business in this country to threaten american working people.
It is highly disturbing to hear people using the term "illegal workers." They are only "illegal" in the lowest and most base sense of positive law: and of course, arguably the laws criminalizing free movement of labour across national borders are in fact themselves illegal, just as it would be illegal to have a law forcing refugees back to their countries.
capitalism has to self destruct
just as communism did
best kept secret in america
we borrow from communists, socialists and kings to keep our capitalism afloat
oh and stole all of social security money
america is toast but denial is bigger
prefer to blame politicans than look at capitalist system as self destructive
typical human response: blame people not system
Peter's comment on free corporate capital and fettered nationalized if you will labor really needs to be read by people concerned with globalization and economic development not to mention social justice fairness and equality.
Let's not forget credit card Reform and bandrupcy reform.
Both of these acts ensure that the consumers forced to rely on their credit cards to survive will never find a legitimate way to get out of their debt, and become wage slaves forever.
what was the effect of the repeal of the \\glass-stegel(sp) new deal legislation on the ability of wall street to comodify the mortgage debt and unload it into the stock market ?
next, the republicans will bring back debtors prisons and outsource the contracts to build them.
Somehow we think this is a national problem while foreign investors own huge chunks of the companies responsible for this outrage. Change must be global as the global markets control the world economy, including our own. The thinking on Wall Street is international not national.
Phil Gramm led the passing of the Enron loophole and the repeal of Glass-Steagall. Clinton signed both of them, unfortunately. BTW, Nomi Prince seems to be among the few people around Wall Street who support the reinstatement of Glass-Steagall. I'm curious if there are representatives in Congress who would support that. Our financial system is badly broken and it is necessary to prop it up with Glass-Steagall again - at least until a broader legal framework is developed.
this could be interesting but it explains far to little for the average guy to understand what she is talking about. MOPEA triggers?
Tom Waits once sang: If there is one thing you can say about mankind - there is nothing kind about man...
In all of mankind's endeavors you need "checks and balances" regardless of the governing system in place, Capitalism not-with-standing. Capitalism is better than Communism because it more truly represents the human necessity to almost always do what is in your own self-interest. When this is carried out to market principles that fail to rout-out the worst of our own greed, the system fails. Regulation is needed, since the markets will NOT self-regulate - that much should be clear to anyone seeing what has happened though the crisis illuminated above. This is quite a revealing experience we are going through. Someone once also said, "Experience is what you get when you didn't get what you you expected." The true test of the United States and our currect market situation is whether we will learn from these mistakes.
Excellent article.
