Article also written by Christy Rogers
The U.S. Securities and Exchange Commission (SEC) securities fraud case against Goldman Sachs seems to indicate that Wall Streeters care more about their own paychecks than that of their investors -- a practice that Michael Lewis brought home not only recently with The Big Short, but over 20 years ago with Liar's Poker. While this is maddening on its face, the SEC suit also indicated that some people were successfully manipulating an entire system without much oversight, and fooling sophisticated investors and analysts along the way.
So while we would never pound the table for increased financial illiteracy for consumers, we think that the SEC probe against Goldman illustrates that the call for consumer financial literacy as the answer to financial predation is too individualistic and too simplistic. Very financially literate people and institutions lost a lot of money, and there are nowadays a lot of moving parts of the financial system to keep track of. Being able to read the fine print on your mortgage doesn't mean you know that a hedge fund giant just bet the house against you.
Second, we appreciate the call for increased regulation as a result of this expose, and we agree that consumers need to be better protected - a robust and well-resourced consumer protection agency would be a great start. But new regulations need to be carefully considered because some of the mechanisms for oversight against financial predation were already in place, but not utilized.
Although the subprime story is long and fairly complex, much of it boils down to this: the private market rapidly expanded in terms of both bringing in new mortgage customers and converting their mortgages into investment vehicles, and the government fell asleep at the wheel with oversight of both of these functions.
This isn't news: Secretary Timothy Geithner's written testimony before the House Committee on Financial Services in March indicated that the current administration is aware that the regulation and enforcement of existing law is lacking. This indicates that a critical piece of the solution is the intent and resources to enforce regulations. This is particularly true with respect to the laws that forbid discrimination in housing and encourage the affirmative promotion of open housing and fair credit.
What we hear less about, despite the fact that racially disparate lending is at the very heart of the financial crisis, is that independent mortgage brokers initially targeted poorly underwritten loans destined for the securities markets to underserved Black and Latino neighborhoods. And we're guessing, but we don't yet have the data to prove, that loans were bundled, rated and priced in a potentially discriminatory way as well.
This disproportionate racial impact is what Title VIII (Title VIII of the Civil Rights Act of 1968 is referred to broadly as the "Fair Housing Act") laws and regulations were designed to prevent. The later Fair Housing Act amendments and corresponding HUD regulations actually forbid discrimination in the secondary mortgage market, including in the securitization of mortgages - a point little known, even in the fair housing community. Interestingly, these amendments were put in place with this kind of racial sensitivity during the first Bush administration.
But there has been virtually no mention of this during this crisis, despite the fact that communities of color suffered the brunt of the early subprime and predatory lending crisis, and have subsequently watched entire neighborhoods fall into vacancy and abandonment. Fair housing expert Henry Korman notes that if we want to see fair housing enforced at all levels, we need "meaningful reporting structures...there will be no real impact ...until HUD, the Department of Justice, FHFA, and the SEC contribute resources to a meaningful and comprehensive enforcement strategy."
The federal government did a largely successful job of expanding sustainable homeownership while building a secure white middle class in the decades before and after World War II with reasonable mortgage products. What they didn't do well then, and what various agencies have been only fitfully and anemically trying to do since, is open the doors of middle class security through homeownership to non-whites as well.
The Community Reinvestment Act (CRA) encouraged banks to lend responsibly in areas of need, and many banks accordingly developed an expertise in balancing sound lending practices with a mandate to extend credit. But the CRA only covered a thin slice of regulated lenders, and it didn't have the reach to stop widespread discrimination in prime lending.
The last thirty years have seen rising productivity but flat wages for most American workers. As incomes stagnated and medical and education expenses skyrocketed, people in neighborhoods with few prime credit options found themselves swarmed by unregulated mortgage brokers, payday lenders, and check cashing shops .
Many people don't know that most subprime loans during the boom years were refinance loans, not new mortgages - indicating that even successful homeowners needed better access to credit. Many of these predatory refinance loans failed, and millions of people are now facing foreclosure. Therefore, there is still an appropriate role for the government to ensure that the credit needs (and not just mortgage credit) of communities of color, low-income, and rural areas are met in an appropriate and sustainable way.
In our view, the experiment of letting a deregulated private market meet the needs of underserved communities has been run - and resulted in a world-wide recession. Until the government does a better job of encouraging sustainable and appropriate banking services and credit options to neighborhoods of color, and until they step up enforcement of existing anti-discrimination laws, this crisis is not anywhere near over.
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