In May, 2006, two years before the subprime mortgage crisis hit the U.S., and by extension (as the U.S. is still the largest economy in the world) globally, my friend Robert Gnaizda, Esq., then general counsel with the Greenlining Institute, and I predicted the coming crisis in an Op-Ed we co-authored in the American Banker newspaper. The subprime mortgage crisis hit with full impact in September, 2008, and the world has not been the same.
Well, another crisis is brewing, but this time the crisis may in fact be triggered by a combination of consumer anger and good intentions. These "good intentions" originate from the genuine interest to protect and serve the public by local, state and federal policy makers, and oddly enough, a good number of my friends in the advocacy and activist community, who of course genuinely believe they are doing the right thing in calling for, amongst other things, "the end to subprime lending." This would be well meaning, but it would also be wrong. Let me explain.
The first crisis, which began as a mortgage crisis, and then morphed into a general credit crisis, then a financial crisis, then an economic crisis, and is at present a global crisis of confidence, was not so much the result of the failure of capitalism and free enterprise, but the failure of greed. As I have said before in the Huffington Post, this crisis is today not so much an economic crisis as it is a crisis of virtues and values. We have lost our storyline.
The crisis was and is not a crisis of subprime lending. Yes, I said what you think I said.
There is absolutely nothing wrong, and in many ways, everything right, with responsible subprime lending. After all, what mutually defines both you and me is that in all likelihood we are both "subprime," or more bluntly put, "less than prime."
If you have less than an 800 credit score in America, you are "less than prime," or subprime. There is no indignity in being "less than prime," no different than there is no indignity in being the receptionist at a company rather than the manager of that receptionist. This category of lending applies to maybe 80% of the mainstream and minority lending market today in America.
The problem is not responsible subprime lending, but irresponsible subprime lending, predatory subprime lending, fraud-based subprime lending, greed-based subprime lending, and massive levels of borrower financial illiteracy. People who asked the lender, but more likely the mortgage broker at the time, "what's the payment," and not "what's the interest rate?" We purchased homes like one would purchase a toaster on payments at Sears, by asking "what's the payment?" It's not all that bright to do it with a $300 purchase, and respectfully, downright un-intelligent to do it for a $300,000 purchase, compound-financed and amortized over 30 years. The first 10 years plus is nothing but pure interest payments, so it MATTERS what you pay.
Today, many are calling for the end to subprime lending, and this would be wrong.
Fact: Responsible subprime lending has done more to lift poor people out of poverty than anything else in the last 50 years.
Myth: Minorities and Community Reinvestment Act (CRA) lending caused this crisis.
Fact: According to Fannie Mae data, middle class, Caucasian white men took out more subprime loans that all minority groups combined.
Myth: Subprime mortgage lending is evil and should be stopped.
Fact: Responsible mortgage subprime lending was and remains a positive step along the path of the overall democratization of capital for the poor and the under-served.
Wells Fargo has already announced that they have stepped out of the subprime lending space, and there are at least two problems with this; #1, the really bad players in this space were mostly unregulated mortgage and finance companies, and many if not most of those players are now out of business. Most of the folks left on the finance field are on the whole ethical and highly regulated, and WE WANT THEM TO LEND AGAIN. Problem #2 is, when we demonize subprime lending overall we make it unattractive for the responsible lenders to step into this place and space, leaving lending to the poor, the under-served, and I predict even possibly the middle class, to "Luigi-the-loan-merchant" and my cousin Boo-Boo the ghettoized financial services provider.
In other words, if we are not careful, loan demand will not go away, just the mainstream loan providers. And then the next shoe to drop, in about a year or so, will be many advocates who demanded that subprime lending cease, will once again be at the door of our government, government regulators, banks and mainstream financial service providers, complaining (rightly so at that point), that "no one is lending" anymore. What we needed was a balanced approach before the crisis, and what we need is a balanced approach now. We treated clients like transactions and not like relationships, and from this all bad things flowed.
My friend and Operation HOPE board member, Richard Hartnack, vice chairman of US Bank, one of the premier community-development bankers in the country, and one (working alongside Richard Davis, CEO of US Bank) who did a good job of making responsible subprime loans during the run-up to the crisis, and then when they did screw up, making it right again with consumers and customers almost immediately, said something profound to me about two years ago;
"John, we have to do three things in this crisis. We must (1) help those who are in the economic soup to get out of the econonomic soup (trouble), without rewarding fraud, speculation and those who just bought too much house, (2) make sure that lending and the provision of credit continues on some reasonable basis for individuals with less than a 800 credit score, and (3) make sure this crisis never happens again."
I agree with Rick 100%, and at Operation HOPE we are working every day on #3, which is why I travel tirelessly across the country and around the world, positioning financial literacy, which we at Operation HOPE call "the language of money," as the new civil rights issue, and the first global silver rights empowerment tool.
I believe that when people know better, they will do better, and that at the end of the day, there will be no mortgage police at your home when you are making the most important financial decision for you and your family. You are going to have to do that. And making financial literacy a new American priority was helped greatly this week when President Obama formalized financial literacy as a key component of his new consumer regulatory agency. This builds upon the Executive Order that Operation HOPE inspired then President Bush to sign in 2008, establishing financial literacy as U.S. federal policy for the first time in American history. I was proud of that day, in 2008, standing with then President Bush as he established the first ever non-partisan U.S. President's Advisory Council on Financial Literacy, and I was even prouder of President Barack Obama this week, as he advanced the cause of financial literacy once again, formalizing it as a function of an operating federal agency with budget and Presidential authority. I thank President Obama and the White House for making sure that Operation HOPE was present for the signing of this incredibly important overhall of the financial services space in America. It is a powerful step in the right direction.
This said, there is something that every American must now do - stop talking down the economy.
Banks (and I am talking about the good guys now, who had no hand in rolling over consumers like toast for breakfast during the subprime crisis) are shaking in their boots, afraid that regulators will write down the value of assets even further today than they did yesterday, as values continue to retreat, and thereafter requiring them to put aside additional capital against those assets, and loans already on their books. The result, are banks that are sitting on mountains of cash, afraid to lend it out to you and me for fear that they may need it themselves. Adding to this perfect storm, are some advocates calling for, in effect, a retreat from lending to the poor, the under-served and the middle class too, by calling for an end to "subprime lending."
We need faith, confidence, entrepreneurship and opportunity to return again to America, as 'fear is the ultimate prosperity killer," and "the most dangerous person in the world is the person with no hope." But this will not happen as long as banks are afraid to lend, and we continue to tell them and policy makers, effectively, "not to."
Bad guys made mistakes, fine. Make the bad guys pay, fine the good guys who got it wrong but still want to do it right, and then let's all move on.
We would be wise to listen once again to the words of Dr. Martin Luther King, Jr, who said in 1968, in the run up to the launch of his Poor People's Campaign, which was his last great movement and involved the empowerment of all people, and not just black people (there are more poor whites in America still, than poor anyone else), when he said "you cannot legislate goodness, and you cannot pass a law to force people to respect you. The only way to achieve social justice, in a capitalist country, is economic parity."
Let's get on with completing the work that Dr. King began in 1968, by not calling for something as unhelpful as the end of capitalism, but rather to finally make capitalism and free enterprise relevant to the poor. To make capitalism and free enterprise finally work for the poor.
Quoting my personal hero and mentor and HOPE global spokesman Ambassador Andrew Young, a senior aide to Dr. King in the movement, "to live in a system of free enterprise, and yet not to understand the rules of free enterprise, is the very definition of slavery." I continued, " to not understand the language of money (financial literacy), and to not have a bank account, in the 21st century, is slavery."
The first rule of civil rights empowerment and financial literacy, should be for us all to stop talking down the economy, figure out what we want the future of capitalism to look like for our children, and our children's childen, and then to do something about it. Anything less is akin to re-arranging the deck chairs on the Titanic. The band may be playing, but the ship we are all on is sinking. Not good.
John Hope Bryant is an entrepreneur, the founder, chairman and CEO of Operation HOPE, former vice chairman, U.S. President's Advisory Council on Financial Literacy, financial literacy advisor to the World Economic Forum Global Agenda Council, a Young Global Leaders for the World Economic Forum, internationally recognized public speaker and author of LOVE LEADERSHIP; A New Way to Lead in a Fear-Based World (Jossey-Bass), which debuted in August, 2009, as the Amazon.com #1 Hottest New Book (for Leadership), on the CEO Reads Top 10 Business Best Seller List, and was published in November, 2009 in digital audio book format on Audible.com, iTunes and other audio book retailers . Love Leadership was listed amongst the Top 25 Business Books for Inc. Magazine/CEO Read for 9 month after its release.