A Fighting Chance (51 page)

3 | Bailing Out the Wrong People

one entry: “Submit reports”:
The Congressional Oversight Panel (COP) was charged with putting out “regular reports” on the actions taken by the Treasury secretary, the impact of those actions on the financial sector, the extent to which those actions contributed to market transparency, and the effectiveness of those actions on foreclosure mitigation and costs and benefits to the taxpayer. In carrying out its oversight duties, COP could engage “experts and consultants,” “hold hearings,” “take testimony,” “receive evidence,” “obtain official data,” and receive and consider “reports required to be submitted [to it].” See Section 125, Emergency Economic Stabilization Act of 2008, Government Printing Office, Public Law 110–343—October 3, 2008.

more bankruptcy research:
The number of people filing for bankruptcy dropped sharply in the wake of the 2005 amendments to the Bankruptcy Code, so the goal of the 2007 Consumer Bankruptcy Project was to understand who was filing now and to compare our findings to the findings that had emerged from similar studies in 1981, 1991, and 2001. The 2007 study examined a nationwide random sample of households in bankruptcy across the United States. We drew on questionnaires, interviews, and court records—in total amounting to almost a thousand pieces of information for each debtor—to sketch a detailed picture of the debtors in bankruptcy. The data were gathered under strict confidentiality requirements typical of human-subjects research protections at American universities. All data analysis was done using anonymous numerical identifiers for the study participants. When referencing individuals, names and specific identifiers have been changed to preserve anonymity.

We found that those who filed in 2007 were very much like those who had filed in 2001. This suggested that the 2005 amendments, which led to a huge reduction in the number of bankruptcies, had not cut out the more prosperous debtors or the ones who could somehow better manage their debts, or that the new law had otherwise curbed “abuse.” Instead, the data suggested that the impact of the amendments was to squeeze struggling families across the board.

“prepayment penalties”:
For example, “[There is] a new breed of dangerous mortgages—such as loans with introductory ‘teaser’ rates that reset after a few years to much higher rates; loans that did not require income verification; and loans with prepayment penalties that locked borrowers into high rates or risky terms. These loans were often made with scant underwriting and marketed without regard for whether they were suitable for the borrowers.” M. William Sermons, “The State of Lending in America.”

“The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created.” Mara Der Hovanesian, “Nightmare Mortgages,”
Bloomberg Businessweek
, September 10, 2006. See also, “… lenders are seeing a rapid rise in defaults on a type of mortgage that gives consumers with good credit several different monthly-payment options. These mortgages, which are sometimes known as ‘pick-a-pay’ or payment-option mortgages but are generically called option adjustable-rate mortgages, are turning out, in some cases, to be even more caustic than subprime loans, in part because the loan balance and the monthly payments on some loans is growing even as home prices are falling.” Ruth Simon, “Defaults Rising Rapidly for ‘Pick-a-Pay’ Option Mortgages,”
Wall Street Journal
, April 30, 2008. See also Kat Aaron, “Predatory Lending: A Decade of Warnings,” Center for Public Integrity, May 6, 2009.

For more on how wide ranging the sales and purchase of these new mortgage products became, and what gave rise to the growth, see “The Financial Crisis Inquiry Report,” The Financial Crisis Inquiry Commission, US Government Printing Office, January 2011, 34, 68, 85, 425.

most deceptive products:
“Approximately one quarter of all Latino and African American borrowers have lost their home to foreclosure or are seriously delinquent, compared to just under 12 percent for white borrowers.” See Debbie Grunstein Bocian, Wei Li, Carolina Reid, and Roberto G. Quercia, “Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures,” Center for Responsible Lending, November 2011.

According to another study, African American and Latino borrowers were 30 percent more likely to be steered into higher-cost subprime loans than similarly situated white borrowers. Debbie Grunstein Bocian, Keith S. Ernst, and Wei Li, “Race, Ethnicity and Subprime Home Loan Pricing,”
Journal of Economics and Business
60 (2008): 110–24.

See also Sara Miller Llana, “Loans to Minorities Rise, but at a Price: The 30-Day Past-Due Rate for Subprime Mortgages Rose from 5.4 Percent to 7.1 Percent During 2005,”
Christian Science Monitor
, March 24, 2006.

Many giant banks settled mortgage bias lawsuits. See, for example, “Financial Fraud Enforcement Task Force Announces Settlement with AIG Subsidiaries to Resolve Allegations of Lending Discrimination,” The United States Department of Justice, March 4, 2010,
http://www.justice.gov/opa/pr/2010/March/10-crt-226.html
.

“Justice Department Reaches $21 Million Settlement to Resolve Allegations of Lending Discrimination by Suntrust Mortgage: Borrowers Were Charged Higher Fees Based on Their Race or National Origin in 2005–2009 Before the Company Implemented New Policies,” The United States Department of Justice, May 31, 2012,
http://www.justice.gov/opa/pr/2012/May/12-crt-695.html
.

Charlie Savage, “Wells Fargo Will Settle Mortgage Bias Charges,”
New York Times
, July 13, 2012.

Charlie Savage, “Countrywide Will Settle a Bias Suit,”
New York Times
, December 21, 2011.

pursued seniors like Flora:
For example, “Equity-rich, cash poor, elderly homeowners are an attractive target for unscrupulous mortgage lenders. Many elderly homeowners are on fixed or limited incomes, yet need access to credit to pay for home repairs, medical care, property or municipal taxes, and other expenses. The equity they have amassed in their home may be their primary or only financial asset. Predatory lenders seek to capitalize on elders’ need for cash by offering “easy” credit and loans packed with high interest rates, excessive fees and costs, credit insurance, balloon payments and other outrageous terms.” “Helping Elderly Homeowners Victimized by Predatory Mortgage Loans,” National Consumer Law Center, 2008,
http://www.nclc.org/images/pdf/older_consumers/consumer_concerns/cc_elderly_victimized_predatory_mortgage.pdf
.

urged Americans to “tap” their home equity:
See Ruth Simon, “Home-Equity Loans Hit Record Levels,”
Wall Street Journal
, January 20, 2005.

Although these loans often erode the family’s primary foundation for developing financial stability, and they increase the risk of foreclosure, pundits and industry leaders nonetheless have widely encouraged people to take out these loans. For example, former chairman of the Federal Reserve Alan Greenspan discussed the many benefits of homeowners tapping their home equity and the subsequent boost to the economy. See, for example, “Remarks by Chairman Alan Greenspan,” March 4, 2003,
http://www.federalreserve.gov/boarddocs/speeches/2003/20030304/
; also Alan Greenspan and James Kennedy, “Sources and Uses of Equity Extracted from Homes,” The Federal Reserve Board, March 2007.

One advertising agency concocted the slogan “Live Richly” for Citi, which was designed to encourage people to take out home equity loans. See Louise Story, “Home Equity Frenzy Was a Bank Ad Come True,”
New York Times
, August 14, 2008. In my own work, I tried to discourage borrowers from putting their most important asset at risk by engaging in these types of loans. In
The Two-Income Trap
we argued, “Refinancing their homes to pay down other bills is the single biggest mistake made by homeowners in trouble” (168). In
All Your Worth
we noted that according to the data at the time, one in eleven families bet their house and lost, as they ended up in foreclosure. Elizabeth Warren and Amelia Warren Tyagi,
All Your Worth: The Ultimate Lifetime Money Plan
(2005), 150. Sadly, the odds only worsened in the years that followed.

home prices caught fire:
“Seventy-one metro areas, accounting for 39 percent of all single family housing value, were deemed to be extremely over-valued.…” “House Prices in America,” Global Insight/National City, June 2006. See also Martin Wolk, “Housing ‘Bubblettes’ May Be Rising,”
NBC News
, February 14, 2005.

speculators jumped into the game:
“Real Estate Speculation Raises Prices, Concerns,” Associated Press, June 20, 2005. Also Paul Krugman, “Running Out of Bubbles,”
New York Times
, May 27, 2005.

more than their homes were worth:
Jonathan Stempel, “One in Five Homeowners with Mortgages Under Water,” Reuters, October 31, 2008.

most valuable asset:
“Owning a home has long been the most accessible way to build wealth in the United States.… The wealth acquired through homeownership has been a key source of economic mobility and financial security in this country for decades.” The loss of middle-class wealth due to the housing crash has been dramatic.” M. William Sermons, “The State of Lending in America.” “Many families have experienced a precipitous loss of wealth because of the housing crash, which was sparked by high-risk subprime mortgages … [there has been] a loss of wealth by households of all races and unprecedented wealth disparities between white households and African-American or Hispanic households.… The impact of these economic circumstances has been devastating for the typical American household.” “… the Pew Research Center used different data sources and found much larger declines from 2005 to 2009 in net worth for African-American (53% decline) and Hispanic (66% decline) households relative to white households (16% decline).” M. William Sermons, “The State of Lending in America.” See also Ylan Q. Mui, “Americans Saw Wealth Plummet 40 Percent from 2007 to 2010, Federal Reserve Says,”
Washington Post
, June 11, 2012. See also Jesse Bricker, Arthur B. Kennickell, Kevin B. Moore, and John Sabelhaus, “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,”
Federal Reserve Bulletin
98, no 2 (June 2012). Binyamin Appelbaum, “Family Net Worth Drops to Level of Early ’90s, Fed Says,”
New York Times
, June 11, 2012.

committed
a whopping $172 billion:
TARP was passed on October 3, 2008. Within a month of TARP’s passage, Treasury had pledged $172 billion to a total of fifty-four banks. See David Goldman, “Where the Bailouts Stand,”
CNNMoney
, November 12, 2008.

In the month of October, Treasury had disbursed $115 billion to eight top Wall Street institutions, including, among others, Bank of America, Goldman Sachs, JPMorgan, and Citigroup. See “Bailout Events for October 2008,”
ProPublica
, October 2008,
http://projects.propublica.org/bailout/events/list/2008/10
. By November 21, Treasury had given an additional $36.5 billion to large and medium-sized banks, including, among others, U.S. Bancorp and Capital One, and had committed at least $20.5 billion more to helping out the banks. See “Bailout Events for November 2008,”
ProPublica,
November 2008,
http://projects.propublica.org/bailout/events/list/2008/11
.

halls of Treasury as “Citi-weekend”
: On November 24, 2008, Treasury struck a deal with Citi whereby it would invest $20 billion in Citi preferred stock and guarantee $306 billion of its assets. See Dan Wilchins and Jonathan Stempel, “Citigroup Gets Massive Government Bailout,” Reuters, November 24, 2008.

In her excellent book,
Bull by the Horns,
Sheila Bair, the chair of FDIC, notes that she wasn’t notified by Treasury and the Fed of the impending Citi bailout until Friday, November 21, the same day that we met with Kashkari. For more discussion, see Sheila Bair,
Bull by the Horns
(2012), 121–29.

According to a SIGTARP document entitled “Extraordinary Financial Assistance Provided to Citigroup,” Federal officials referred to November 21–23, 2008, as “Citi Weekend.” See Special Inspector General for the Troubled Asset Relief Program, “Extraordinary Financial Assistance Provided to Citigroup, Inc.,” January 13, 2011,
http://www.sigtarp.gov/Audit%20Reports/Extraordinary%20Financial%20Assistance%20Provided%20to%20Citigroup,%20Inc.pdf
. The
New York Times
reported that Citigroup executives and board members “held several calls with Henry M. Paulson” on Friday, November 21. Andrew Ross Sorkin and Louise Story, “Shares Falling, Citigroup Talks to Government,”
New York Times
, November 22, 2008.