Thursday, September 25, 2008
What to do instead of a bialout
by Larry Geller
There are actually a number of suggestions put forth by a number of organizations that you can find circulating around. Here is one published in the New Labor Forum and posted here. It begins:
This mortgage crisis was preventable. Like most economic problems, it was due to corporate greed. Top executives at major banks, mortgage companies, and rating agencies saw an opportunity to increase corporate income and their own compensation by engaging in risky practices. In the short term, their personal compensation was not connected to corporate performance, so they could get away with irresponsible behavior.
If you scroll way down, there is a proposal that seems reasonable to me:
The entire financial and housing food chain -brokers, appraisers, mortgage companies, bankers, investors, and credit agencies-participated in this greedy shell game. Some of what they did was illegal. But most of it was simply business as usual.
The Job for the Next Congress
So, what to do now?
Washington needs to put a short-term tourniquet on the banking industry to stem the damage, and to get back into the business of protecting consumers, employees, and investors from corporate greed.
First, the federal government should help homeowners who have already lost their homes or are at risk of foreclosure. It should create an agency comparable to the Depression-era's Home Owners' Loan Corporation (HOLC), buy the mortgages, and remake the loans at reasonable rates, backed by federal insurance. Created in 1933, the HOLC helped distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. A modern version of the HOLC would focus on owner-occupied homes, not homes purchased by absentee speculators.
Second, Washington should not bail out any investors or banks, including Bear Stearns and its suitor, JP Morgan, that do not agree to these new ground rules. The Fed brokered the deal between Bear Stearns and JP Morgan without any conditions for the consumers who were ripped off. There will be more Bear Stearns-like failures in the foreseeable future-institutions that the Fed considers "too big to fail." But if the federal government is about to provide hundreds of billions from the Federal Reserve, as well as from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, to prop up Wall Street institutions, it should require the industry to be held accountable for its misdeeds. Specifically, such lenders should agree to underwrite all loans for the full terms of the loan, not just for the initial teaser rate (this should apply to originators and purchasers), eliminate all pre-payment penalties, and recommend loan products that are suitable and in the financial interests of borrowers.
Third, Washington should consolidate the crazy-quilt of federal agencies that oversee banks and financial institutions into one agency. Federal oversight has not kept pace with the dramatic transformation of the financial services industry. Four federal agencies-the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation-have some jurisdiction over mortgage lending. States have jurisdiction over the growing number of non-bank mortgage lenders (which accounted for about 40 percent of new subprime loans) and have no agreed-upon standards for regulating them. States are responsible for regulating the insurance industry (including homeowner insurance), and do so with widely different levels of effectiveness. It is absurd to have so many competing and overlapping agencies involved in regulating these financial services institutions, often at cross purposes.
Fourth, the federal government should be a financial services industry watchdog, not a lapdog. Part of that effort involves supporting (financially and otherwise) initiatives currently being implemented or proposed by several advocacy groups.
The Community Reinvestment Act (CRA), a federal ban on redlining, should be strengthened to sanction institutions that engage in predatory practices and to reward those that engage in responsible lending. The CRA now applies only to federally-chartered depositories (e.g. banks and thrifts). This statute should be expanded to cover credit unions, independent mortgage bankers, insurers, and other entities that now account for well over half of all mortgage loans. The Community Reinvestment Modernization Act of 2007, introduced by Eddie Bernice Johnson (D-TX) and Luis Gutierrez (D-IL) would accomplish this objective. In addition, the Home Mortgage Disclosure Act (HMDA), which facilitates enforcement of the CRA, should be expanded to include pricing information on all loans.
A strong national anti-predatory lending law should also be enacted. Currently 36 states and Washington, D.C., along with 17 other local jurisdictions have such laws, leaving most consumers in other states less protected. Again, this statute should apply to those who originate loans and those who purchase loans and mortgage-backed securities for investment purposes.
As of this writing (May 2008), the Fed had issued proposed regulations and Congress has debated several bills to address the immediate foreclosure problems and mitigate their recurrence, but so far no final regulations have been issued and no legislation has been passed.
Congressman Barney Frank and Senator Chris Dodd (chair of the Senate Banking Committee) introduced legislation to address some but not all of these concerns. In May, the House voted 266-154 in favor of Frank's bill. Although the vote went mostly along partisan lines-all 227 Democrats voted "yes" and 154 Republicans voted "no"-39 Republicans bucked pressure from their party leaders and from the White House and voted "yes." (Thirteen members didn't vote.) Most of the Republicans who supported the bill represent districts that have been particularly hard-hit by the mortgage meltdown. The bill would allow homeowners to shift from subprime mortgages they can no longer afford to federally backed mortgages. It would provide $300 billion in federal loan guarantees to lenders who agree to reduce the outstanding principal on loans. In exchange for a new mortgage, backed by the FHA, homeowners must share profits on a subsequent sale of their home with the government. The bill also includes a one-time $7,500 tax credit for new homeowners to be paid back over 15 years, and $15 billion for states and localities to buy and rehabilitate foreclosed properties.
Frustrated with the delayed federal response, many states have acted on their own. Nine states have created refinance funds to help borrowers avoid foreclosure. Ten have banned or limited pre-payment penalties. Twenty have created consumer counseling programs. Nine require lenders to represent the interests of borrowers. And 14 states have created foreclosure task forces bringing together lenders, consumers, regulators, and other experts to develop solutions.
There is a critical role for state and local governments to play. But an effective, comprehensive solution will require a far more active federal government.