The mid-March collapse of the nation's second-largest subprime mortgage lender caused a panic in the financial markets and sparked calls for regulating the high-interest predatory loans given to those with bad credit. But much of the damage has already been done, with millions of homeowners facing foreclosure at the hands of an industry allowed to run wild.
As its business has exploded--last year subprime loans grew into a $600 billion industry, more than triple the 2002 volume and accounting for one-fifth of all mortgages--the predatory mortgage industry has done its best to make sure Congress wouldn't rein it in, spreading its largesse to Democrats and Republicans: Nearly half of House Financial Services Committee members, including chairman Barney Frank, have received money from New Century Financial Corp., the subprime lender that recently collapsed. Democratic presidential candidates Hillary Clinton and Chris Dodd, head of the Senate Banking Committee, have been some of the largest beneficiaries of the mortgage banking industry, whose dollars have provided a strong incentive for Congress to sit tight and hope the subprime bubble wouldn't burst.
But it has. According to the Center for Responsible Lending, one out of five subprime mortgages inked in the past two years will end in foreclosure. The losses are staggering: It is estimated that homeowners will collectively be out $164 billion, with millions of families stripped of their most valuable asset.
This was not an unavoidable tragedy. Subprime mortgages prey on the poor, the uninformed and minorities. They offer high-credit-risk clients homeownership at interest rates well above the going rate--above what many can pay. Common sense suggests mortgages shouldn't be sold to those who can't afford them, certainly not in such massive numbers. On March 13 Representative Frank acknowledged as much, saying that "we plan to legislate to restrict those kinds of mortgages going forward."
Such legislation, however, has existed from nearly the beginning of the subprime-lending boom. While millions of homeowners were being mortgaged into ruin, the bills have sat dormant. Part of the reason for that--not surprisingly--might be the money. New Century, for example, which is nearing bankruptcy and under criminal investigation, has profited immensely from the subprime boom; insiders there made $103 million from selling stock. The company has given nearly $700,000 in campaign contributions to legislators since 2004.
And all any of New Century's Congressional patrons had to do was insure that legislation helping consumers didn't gain traction. While it would not necessarily have been a cure-all, it would have gone a long way toward providing safeguards for those targeted by subprime lenders. The most popular legislation, the Prohibit Predatory Lending Act, with nearly seventy co-sponsors, would have required that a borrower receive counseling, would have set limits on fees and prohibited balloon payments, "teaser" rates and lending without taking into account whether the loan could be repaid. It would also have prohibited mandatory arbitration, which most subprime lenders require and which leaves little room for borrowers to seek redress. Representatives Brad Miller and Mel Watt, both North Carolina Democrats, introduced this legislation in 2005 along with Barney Frank, who as ranking committee member failed to gain widespread support for the bill, a version of which is expected to be introduced this year.
Representative Stephanie Tubbs Jones, whose home state of Ohio has among the highest foreclosure rates in the nation, introduced the Predatory Mortgage Lending Practices Reduction Act in 2005, which contained many of the same safeguards. It would also have provided grants for predatory lending education and given the Department of Housing and Urban Development, the Federal Reserve and the Federal Trade Commission the ability to define and take action against "unfair or deceptive" lending practices. Tubbs Jones is a member of the Congressional Black Caucus, which has strongly supported these measures, since blacks are nearly three times as likely to take out subprime loans. (Representative Dennis Kucinich, also a supporter of Tubbs Jones's bill, opened subprime hearings after the New Century collapse.)
Both bills died after being referred to financial services subcommittees, whose current and former heads have received money from New Century: Representative Paul Kanjorski has seen $42,095; Spencer Bachus, $31,743; and Richard Baker, $7,000.
New Century did take the lead in pushing for some legislation--the Responsible Lending Act, which would have hurt consumers by narrowing the definition of subprime mortgages and pre-empting stricter state laws. The bill's patron saint was Bob Ney, the Ohio Representative now serving a thirty-month federal prison sentence for corruption. New Century has spent more than $1.6 million lobbying in the past three years, and over time has contributed to the campaigns of nearly 60 percent of those who co-sponsored Ney's bill, including $49,300 to Ney himself.
With Democrats in control of Congress, the prospects for meaningful subprime legislation may have improved, but don't hold your breath. When the collapse became front-page news, prominent Democrats, including Hillary Clinton, jumped on the bandwagon calling for Congressional action, but it may be difficult for them to withstand the blandishments of the lobbyists. Mortgage bankers gave 40 percent of their $6.6 million in contributions to Democrats in 2006, before the party gained power, and eleven of the top twenty recipients were Democrats, including the top recipient, Clinton, who took in $108,100. Senator Dodd joined Barney Frank in a vague call for legislation but added that he is "a strong advocate of subprime lending." New Century has given Dodd $15,000 since 2003, and Frank ranked ninth on the list of mortgage banking contributions, with $54,550 in 2006.
Congress now has a decision to make: Should those thousands of dollars be in their pockets, or in those of the millions losing their homes?