As news of the growing financial crisis and impending wave of mass foreclosures became too dire to ignore, the Bush Administration briefly roused itself from its lame-duck slumber to announce... well, not much. The Administration's plan is an entirely voluntary arrangement among the major mortgage servicers, whose primary aim seems to be salvaging investor value. It excludes hundreds of thousands of homeowners whose rates have reset, or who have missed payments or have credit scores too good to qualify. With millions huddled on roofs amid rising water, the Administration has very politely asked the bankers if they wouldn't mind sparing a couple extra life rafts.
And the water is still rising. Home prices are falling, 2.2 million households are hurtling toward foreclosure and Wall Street is caught in a credit crunch. A recession seems imminent.
The numbers splashed across the financial pages aren't just digits in a spreadsheet somewhere. Through the alchemy of modern finance, each mortgage-backed security represents front yards and driveways, sofas and cribs, pots and pans, the hierarchy of stuff and place that makes home home. Hundreds of thousands of families now find their destiny yoked to capital markets through mechanisms so complex even experts seem bewildered.
The financial press is smugly convinced that borrowers brought this on themselves. But that's just not true. A recent study found that in 2005, fully 55 percent of those who got subprime loans had good enough credit to qualify for less expensive prime loans. So which is more likely: that these people walked into their local mortgage lender and said, "We would like to be screwed, please," or that lenders took it on themselves to use obfuscation to do just that?
Indeed, as the facts dribble out, the whole sordid mess takes on the stench of go-to-jail fraud. The New York Times has reported that leading financial houses like Goldman Sachs and Deutsche Bank saw the trouble coming from mortgage securities and started reducing their exposure, all the while continuing to sell the same products to customers now taking the hit. Bush's crew can't be trusted to aggressively investigate these practices, but New York Attorney General Andrew Cuomo's inquiry bears close watching.
The top priority right now is keeping people in their homes: Congress must pass legislation allowing bankruptcy judges to readjust mortgage terms; families too far underwater to avoid foreclosure should be allowed to stay in their homes as renters. If the crisis continues to grow, the government should step in to purchase securities from banks at a discounted rate and then provide refinancing and workouts for distressed homeowners. The terms for offering an underserving Wall Street an opportunity to move dubious paper off its balance sheet should be nothing less than the long overdue re-regulation of the entire financial sector: the revival of usury laws, the restoration of the Glass-Steagall Act and an end to the outrageous conflicts of interest that facilitated this debacle.
The Rev. Jesse Jackson made the case for a citizens' bailout during a recent visit to the Nation offices days before leading a march on Wall Street December 10. But while several helpful proposals--changes to bankruptcy law, most notably--have been introduced by Democrats in Congress, debtors have little sway in Washington. On their own, none of the imperiled homeowners have the luxury of being, in Wall Street parlance, "too big to fail." Together, though, they are. The question is, will anyone find the political will to save them?