In the Academy Award-winning film, “The Big Short,” Mark Baum, a character based on real-life investor Steve Eisman said: “In a few years, people are going to be doing what they always do when the economy tanks. They will be blaming immigrants and poor people.”
For the mortgage industry, the blame started as soon as the Bush administration came to Capitol Hill to warn that if Congress did not act immediately, the world’s financial system would collapse and what would follow would make the Great Depression seem like a hiccup.
{mosads}One September day in 2008, the industry’s lobbyists and friends in Congress argued that subprime mortgages were a triumph of unfettered capitalism and made the dream of homeownership possible for millions.
The next day, the same people, with no apparent embarrassment, said that liberals bullied innocent lenders to give foolish mortgages to low-income and minority borrowers.
The Wall Street plutocrats behind the argument went to all the right schools and belong to all the right clubs. They are no one’s idea of deplorables. But to shift blame from themselves, where blame belonged, plutocrats willingly fomented racial and class divisions, a common tactic of “one-percenters” for generations.
None of it was true, but after a decade of relentless repetition, the industry’s allies in Congress think they have enough cover to weaken the mortgage rules enacted after the crisis.
Tuesday, the House will vote on legislation, S. 2155, that assumes Congress acted a decade ago to protect the financial system from foolish mortgages, not to protect homeowners from predation. That’s not how I remember it.
The financial crisis was not a “perfect storm” of unforeseeable economic events, precipitated largely by mortgages that with the benefit of hindsight the industry should not have made. The crisis was the result of blameworthy conduct on Wall Street, which designed and directed the entire sleazy subprime mortgage system.
The subprime mortgages that led to the financial crisis were entirely predatory. The target borrowers were homeowners who had equity in their home and needed to borrow against their equity.
Subprime mortgages were designed to trap homeowners in a cycle of refinancing, with each new mortgage loaded with fees and kickbacks that stripped homeowners of more of their life’s savings.
Subprime lending targeted communities of color, where many homeowners understandably did not trust traditional banks and to their regret often did trust mortgage brokers who looked like them. As a result, the foreclosure crisis was an extinction event for much of the African-American and Latino middle class.
But the legislation before Congress exempts the vast majority of lenders from required disclosure of the kinds of loans they make in different communities, which will effectively allow lenders to hide discriminatory practices.
A clear majority of homeowners who got subprime mortgages in the decade before the crisis qualified for cheaper prime mortgages. But the legislation before Congress will hobble the rules to prevent lenders or brokers from “steering” trusting homeowners into more expensive mortgages, especially for manufactured homes.
Exemption from disclosure requirements and relaxation of rules to prevent steering to higher-cost loans is a deadly combination that will allow lenders to return to the predatory practices of the last decade.
Many of the changes relax or repeal the rules for community banks, rather than the too-big-to-fail banks that were bailed out a decade ago. Regulators should make sensible exceptions for community banks, as should Congress.
I authored the amendment to the Dodd-Frank Act to limit examination of smaller banks and credit unions to reduce compliance costs. I got some grief from my usual allies at the time, but I thought then and think now that the different examination rules made sense and do not expose borrowers to predation.
But a patchwork of different rules for different lenders will inevitably cause confusion and worse. Community banks generally were not guilty of the worst lending practices in the last decade, but if they are excused from important rules that apply to every other lender, then they will be the next time.
Every crooked lender in America will want to own or control a community bank. That’s likely not a bug but a feature: The legislation also enables more bank consolidation, so the real beneficiaries of the indulgences supposedly given community banks will often not be the community banks, and certainly not their customers, but the large lenders that will swallow community banks.
No bank of any size should make loans with predatory, equity-stripping terms like the subprime mortgages of the last decade. Some rules should apply to all lenders, without exception.
Wall Street is not worried about another financial crisis. Why should they be? They enjoyed fabulous profits followed by a taxpayer bailout to protect them from losses, while millions of innocent families fell out of the middle class.
They enjoyed immunity from prosecution for criminal misconduct. And they never lost the uncritical support of much of the political establishment, which Wall Street now assumes will enact less-than-sweeping reforms after any future crisis and relax any troublesome new rules as soon as public anger cools just a bit.
Now is the time for the rest of us to worry.
Brad Miller is the former U.S. representative for North Carolina’s 13th congressional district, serving from 2003 to 2013 as a Democrat. He is of counsel to Guttman, Buschner & Brook PLLC, a Washington, D.C.-based law firm that focuses on whistleblower and employment litigation and corporate governance.