The Forgotten Fore Closure Crisis

The economic meltdown of 2008 grew out of a foreclosure crisis, as Wall Street banks drove lenders to make loans that were then securitized and sold around the world, in an unregulated slew of credit products. This inflated a housing bubble that, when it burst, severely damaged an already weak economy, sent millions of homeowners into foreclosure, and put millions more out of work, leading to even more foreclosures as unemployed workers began to miss mortgage payments. Many homeowners who were able to stay in their homesnow find themselves underwater -- owing more on their mortgage than their home is currently worth. But so far, the foreclosure prevention efforts undertaken by Congress and the Obama administration, while well-intentioned, have failed to produce widespread results. This not only hurts homeowners but undermines economic recovery. Proposals for a variety of more aggressive, and potentially more effective, measures have so far not been taken up, as the programs unveiled have often lagged behind the heart of the problem. According to analysts at Morgan Stanley, "Without more intervention, the housing market will continue its 'slow motion' adjustment that will continue to inhibit economic growth and drag down consumer spending." "It's certainly a weight on the economy," said Mark Zandi, chief economist at Moody's Economy.com. "Nothing works all that well in the economy when house prices are falling." 

Report: Wall Street Firms Drove The Subprime Crisis, Fueled Drop In Lending Standards

The Center for Public Integrity (CPI) released an extensive report today that shows how complicit Wall Street firms were in fueling the subprime mortgage crisis. According to CPI, “at least 21 of the top 25 subprime lenders were financed by banks that received bailout money — through direct ownership, credit agreements, or huge purchases of loans for securitization.”

This, in itself, is not all that surprising. We wouldn’t be in our current situation if the big, systemically important firms hadn’t mucked around in the subprime world. But later in the report, CPI shows how this mass underwriting and securitizing caused a ton of trouble:

Unlike traditional mortgage lenders, who make their money as borrowers repay the loan, many subprime lenders made their money up front, thanks to closing costs and brokers fees that could total over $10,000. If the borrower defaulted on the loan down the line, the lender had already made thousands of dollars on the deal. And increasingly, lenders were selling their loans to Wall Street, so they wouldn’t be left holding the deed in the event of a foreclosure. In a financial version of hot potato, they could make bad loans and just pass them along.

Thanks to securitization, the subprime lenders didn’t actually care about mortgage defaults, because they were so far removed from the original mortgage by the time a borrower stopped paying. But the Wall Street firms would also turn right around, sell the loans to institutional investors, and use the money raised to buy more subprime loans, in a vicious cycle of buying, selling, and lending. Thus, we had this phenomenon:

In 1994, the median loan after adjusting for inflation was $120,000…The median income of borrowers was $73,000. That’s a loan-to-income ratio of 1.65. So borrowers were taking out loans that amounted to 165 percent of their salary…By 2005, the peak of the subprime lending boom, the median loan grew to $183,000 while borrowers’ median income remained roughly the same. That amounts to a loan-to-income ratio of 2.46. That meant the typical loan amounted to 246 percent of annual income.

Of course, there were many factors contributing to this rise in percentage of income devoted to housing, including some non-quantifiable societal trends. But the fact remains that lenders and investors alike risked less and less on a loan, which helped push standards lower and lower.

So what to do? The House Financial Services committee has passed a bill that “would require lenders, bond investors and others involved in the repackaging of home loans into securities to retain a minimum of 5 percent credit risk,” which will move the the full House and the Senate. At least this would prevent all of the risk from being passed down the line, and make lenders care (somewhat) if a borrower defaults. This can’t be the last step taken to rein in Wall Street, but its certainly a good place to start.

The Food Bubble: How Wall Street Starved Millions and Got Away With It

LOOKING OUT FOR WALL STREET:

"To appease these Republicans, the conference committee yesterday agreed to eliminate the bank tax and "bring an early end to the Troubled Asset Relief Program," which would free up about $11 billion to pay for the bill. Every single Republican on the committee voted against this measure, instead opting to add to the deficit and put taxpayers on the hook for the legislation" 

On Friday, the conference committee reconciling the House and Senate versions of financial regulatory reform legislation approved final language (along a party-line vote) after a marathon 20-hour negotiating session. Lawmakers made a flurry of changes, including the addition of an exemption to the Volcker rule -- a ban on banks trading for their own benefit with federally insured dollars -- added at the behest of Sen. Scott Brown (R-MA), and a weakening of Sen. Blanche Lincoln's (D-AR) provision requiring banks to spin-off their derivatives trading desks. However, the final bill retained Lincoln's language requiring exchanges and clearinghouses for derivatives, as well as a provision that compels banks to hold more capital against losses. Unfortunately, Republicans decided they were not yet done making changes. Yesterday, negotiators had to briefly reopen conference proceedings "after Senate Republicans who had supported an earlier version of the measure threatened to block final approval unless Democrats removed a proposed tax on big banks and hedge funds." Maine GOP Sens. Susan Collins and Olympia Snowe had announced that they would be joining Brown -- whose campaign received heavy support from Wall Street -- in voting against the reform bill because it imposes a $19 billion fee on the biggest financial firms to cover the cost of the law's implementation. But as Mother Jones' Kevin Drum noted, the bank fee is "not there to punish banks or to create a slush fund for new spending. It's there solely to make the bill deficit neutral." Rep. Barney Frank (D-MA) challenged the Republican hold-outs to find some other way to pay for the bill. "Do they want to add to the deficit?" he asked, calling these peacocks out on their deficit hypocrisy. "Is there another way? What's their other way?" To appease these Republicans, the conference committee yesterday agreed to eliminate the bank tax and "bring an early end to the Troubled Asset Relief Program," which would free up about $11 billion to pay for the bill. Every single Republican on the committee voted against this measure, instead opting to add to the deficit and put taxpayers on the hook for the legislation.