By Sally Duros
Public relations debris is piling up from the perfect storm of subprime lending.
– Bear Stearns Cos., the largest mortgage lender, launched a 50-person team called “the Mod Squad” to spend an unlimited time on the phone with troubled borrowers. That should help the 1.5 million beleaguered borrowers. . .
– Wells Fargo & Co., the second-largest mortgage lender, is offering a credit card that cuts your home loan by $25 for every
$25,000 spent. Now people can move their debt around so they won’t have to immediately change their lifestyles.
– My favorite — Yahoo! Foreclosure information and more! Where you can learn about the The Top 10 Foreclosure Cities! Gotta love those exclamation points!!
Lenders’ efforts to manipulate public sentiment won’t stop anyone from asking the key question: who will get bailed?
“Well, we won’t be bailing out the homeowner, because we blame them,” says John R. Logan, a professor of Sociology at Brown
University, who with Harvey L. Molotch, co-authored the book, Urban Fortunes: The Political Economy of Place, due out in a new edition this summer.
“The mortgage industry as a whole is pretty central to our financial system,” Logan says. “It won’t be too long before we find
out who we’ll be bailing out or why.”
“In the S&L crisis, many institutions went broke, and the government picked up the bill,” Logan says. “Now we will have the
correction where many people will lose their homes. It’s not clear who will pick up the bill.”
As you’re learning through all the media streams, most mortgages these days are not backed by the deposits of a bank. The lenders instead sell on fee and then package their loans for Wall Street to buy. More than 40 of these lenders have halted operations, gone bankrupt or sought buyers since the start of 2006.
“We now have a class of intermediaries who can make money on the sale no matter how it turns out for the buyer,” Logan says.
That reminded me of the e-mail that landed like a torpedo in my in-box two weeks ago.
The subject line said: It’s much worse than you can imagine. The “it” is the act of a bank buying a portfolio of mortgages
originated in an economically disadvantaged ZIP code and counting that purchase as “credit” toward its lending in that community. The “worse” is the volume and rapidity of this buying and selling.
This e-mail came from an attorney who asked not to be identified. He called and we talked.
“Your article understated by a magnitude of 1,000 what is going on,” he said. “The CRA portfolios are transferred for exactly one day. The banks that receive those are able to count those on their record. You pay a fee for a one-day transaction.”
“It is a complete and total end-run of the statute,” he said. “And what I find astonishing is that regulators know it.”
As a refresher, the CRA was created in 1977 as a federal antidote to redlining. What we have learned is that there is a very popular, healthy market in trading portfolios of mortgages to get CRA credits. No muss, no fuss actual lending is necessary. Without the CRA credit, theoretically, at least, the banks could be shut down.
“If you assume that the statute has some purpose to it, why would the regulators allow this?” the caller asked.
“The way to fix it is to tell the banks to meet this requirement,” the caller said. “You have to generate the mortgage. Then they have to invest their own time and effort. Obviously it will require more time,” he said.
That makes old-fashioned sense.
Done that way, our nation wouldn’t have been able to celebrate such dramatic homeownership gains.
But it would also mean that long-suffering Chicago neighborhood with historically low homeownership might not currently be seeing five to ten times the city average of foreclosures: in 2006 in Englewood, foreclosures were 67 per 1,000 units; in Washington Park, 98 per 1,000; and in Woodlawn 53 per 1,000, according to Record Information Services.
In the long-run, the CRA might be a footnote on this disastrous-to-some food chain of big fish eating little fish that
has been the 2000-2006 real estate market. But to me it feels like an engine. I sense similarities to the dotcom IPO fiasco, where Wall Street passed the risk off on the chumps who were trying to play with the big guys on the stock market — except in this case
the chumps were aspiring homeowners. That’s cruel.
Which brings me back to the blame game.
“How much of the blame should be borne by those who took out the loans? Certainly some,” Logan said. On the other hand, Logan said, “It would be a surprising change if we created a system of subsidizing mortgage loans to less affluent people on terms that are realistic to them.”
To learn more about how all this affects Chicago, visit my blog at