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The great bailout: U of M expert on mortgage crisis says Paulson plan is ‘reverse criminal action’

Posted by smeddum on September 24, 2008

The great bailout: U of M expert on mortgage crisis says Paulson plan is ‘reverse criminal action’
By MOLLY PRIESMEYER 9/23/08 12:27 PM Minesota independent

For some consumer-rights advocates, the great Wall Street bailout is starting to look like a heist for the ages. Prentiss Cox, a professor of law at the U of M and former assistant attorney general, calls Treasury Secretary Henry Paulson’s bill “outrageous.” Wall Street was the cause of the problem, he says. “And now they want a bailout completely on their terms? It serves the very wealthy and completely ignores the homeowners victimized by this. It is appalling.”

Indeed, as Congress scrambles to shore up the mess on Wall Street with more than a trillion dollars in bailouts, many homeowners are still drowning in debt due to the nefarious lending practices that created the crisis in the first place. Not only will they be saddled with the increasing deficit and footing the bill for the trillion-dollar-plus Wall Street bailout, they’re stuck with bills they can’t pay and facing foreclosure and bankruptcy because of the shady lending practices that brought on the bailout.

Here in Minnesota, home prices in some areas have plummeted by more than 20 percent. Nationwide, prices have dropped 18.4 percent since July 2006, according to the Standard & Poor’s/Case-Shiller 20-city index. And while Treasury Secretary Henry Paulson claims a “housing rebound” is around the corner, Minnesota’s housing market appears to be facing a long stretch of trouble.

For one thing, the Joint Economic Committee estimates that Minnesota will see another 27,871 foreclosures by the end of 2009. That’s due in part to the fact that 57,000 Minnesotans, or approximately 25 percent of those who still have Adjustable Rate Mortgages, will see their rates increase in the next year. Add to that the problem of declining home prices—which some experts predict could fall as much as another 25 percent in the next three years—negative equity, and more homes being dumped on the market, and that rebound looks more like a deep puncture.

In fact, the Center for Responsible Lending estimates that 8,000 families each day are going into foreclosure, and that over the next five years, about 1 in 8 mortgages in the U.S. will go into foreclosure. That’s 6.5 million foreclosures. And while the Bush Administration’s plan offers a handout to those responsible, it has yet to address the serious issues facing homeowners who were victims of egregious lending and grab-and-go greed.

“This is just absurd,” Cox says of the current bailout plan. “It’s like a reverse criminal action where you give restitution to the criminals and put the victims in jail.” Cox talks to MnIndy about how we got here and why the bailout needs to change.

MnIndy: With the Bush Administration’s current plan, it’s as if no one wants to discuss how the crisis happened and instead only wants a quick-fix cover-up. You know, there’s “no time for the blame game” kind of philosophy. So how did we get here? And who is responsible?

Prentiss Cox: The fact that we are spending a substantial part of the next generation’s income on this bailout is astounding. The people who were really responsible for this catastrophe are for the most part left wealthy, and in the case of Wall Street, feel the right to shape the terms of the bailout. Wall Street was one of the parties responsible for the problem. So it takes amazing shamelessness for Wall Street to demand that it has this bailout without any other restrictions or any help for homeowners who were victimized.

We got here in a fairly direct manner. First, we had massively irresponsible and unfair lending primarily by unregulated institutions. That lending was funded and to a large part shaped by Wall Street. And those Wall Street investment firms knew early on what they were dealing with. In the first major predatory lending case against a company called First Alliance Mortgage Company, Lehman Bros., who’s now in the news, had a memo saying, “If we want to deal with this company we have to check our morals at the door.” And that was over ten years ago. So Wall Street knew what they were dealing with when they were dealing with these subprime mortgage companies, and they financed them anyway.

Prentiss Cox
Then, there was a second wave that started around 2003 and 2004. In that wave, Wall Street flooded the market with massive amounts of money and helped shape the terms of the kinds of loans that would be made. And that lending spread far beyond the stand-alone subprime companies and became standard industry lending practice. It’s really that second wave that led to the scope of the catastrophe that we’re dealing with now.

MnIndy: So we’re talking here about the Alt-As and no-doc loans that still have to shake out of the market.

Cox: It allowed loans to be made without adequate underwriting for quick fees. The primary attributes were, number one, lending to homeowners with no down payment; number two, lending to homeowners with teaser rates that would explode even if the interest rates were stable; And number three, encouraging homeowners to use stated income. The worst borrowers encouraged borrowers to make up specific stories that you would see over and over again in loan documents.

Fourth, there were loans that trapped homeowners with pre-payment penalties and high fees that ate away substantial amounts of equity. And fifth, there was lots of fraud, including fraudulent appraisals. All of this was undergirded by the belief that home prices would continue to escalate and cover up all the sins.

So that’s how we got here. Wall Street firms funded it all. And banks and other major institutions also made and bought a substantial amount of these loans so that the pain is spread fairly large and wide.

MnIndy: We know this has been going on for years. And then finally, last August of 2007, we saw the height of the foreclosure crisis hitting homeowners. Why did it take so long for the Bush administration to finally call this a serious problem?

Cox: This was a disaster before it was a crisis. And what I mean by that is families and homeowners were being negatively affected by these unfair and imprudent loan products before the financial collapse. The reason we didn’t hear about it is because we treated them as individual tragedies. The homeowners were either able to sell their homes because of the rapidly appreciating prices or refinance into an even worse and riskier loan.
So the housing appreciation allowed a cover for the risky loans and made them appear better products than they were. So when the housing values started to fall everything went into reverse.

MnIndy: Regardless of the Wall Street bailout, homeowners still have falling home prices to contend with. Yet Paulson says a “housing rebound” will ensure that taxpayers won’t be stuck with the nearly trillion dollar bailout package for Wall Street. Is that even feasible that taxpayers won’t be stuck with it given that a rebound looks dubious?

Cox: I think it’s really unclear. I think that anyone who thinks they know the answers to this has a crystal ball I don’t have. Of course the Treasury Secretary is going to say that we can expect a rebound because he is trying to get the biggest bailout in U.S. history by a fairly wide margin, and he wants it done with almost no strings or regulations. And most importantly, he wants it done in a way that harms homeowners. He calls that a “clean” bill. Anyone who wants to do anything to help the victims is complicating the “clean” bill.

But I don’t think that it’s realistic to say that we will recoup the money. There’s a chance it could happen, it happened in Sweden when that market faced a collapse in the early nineties. But there’s a key difference here: They drove a much stronger bargain with the collapsed industries. This is simply a “we’re giving all this money to Wall Street and trust us” bill. This isn’t a thought-out policy. This is a “we have such a good track record with these things, trust us,” which gives one pause.

MnIndy: What can homeowners expect from the bailout? The Democrats’ bankruptcy provisions aside, under Paulson’s plan, is there any chance the bailout could affect homeowners positively, like opening up more loans and allowing them to refinance? Or are we just talking about a bailout for the investors who caused the crisis and leaving homeowners and taxpayers footing the bill once again?

Cox: That’s the real question. Look, this is outrageous. I mean, is it necessary to do a $700 billion bailout? Probably. We probably needed to do all of these bailouts. They tried to contain it. It wasn’t containable. So they probably need to do an incredibly bold stroke like this in order to restore the market, pull out the assets, and deal with them rationally. While it’s unbelievable that we got to this place, given that we’re here, a bailout seems to be a rational policy choice.

What makes my jaw drop is we’re doing this in a way that completely ignores any possible assistance for homeowners who were victimized by this. And in fact, just to rub salt into the wounds, the bill probably will result in limiting existing defenses to foreclosure and protections that individual homeowners have under existing law when they default on their mortgage, because it’s a federalization and federal law would preempt many of those protections and wipe out those defenses, as sometimes happens when the FDIC takes over an institution.

So that is incredible. This is just absurd. This is like a reverse criminal action where you give restitution to the criminals and put the victims in jail. I have been astounded from day one that so many people are so comfortable basically socializing business risk to a degree never seen before in our country while at the same time completely ignoring any help, I mean any help, for homeowners.

MnIndy: You mentioned earlier that home declines were seen as an individual crisis and not necessarily a systemic problem. Is it a type of thinking that foreclosures and home-price declines are individual cases, or “individual responsibilities,” part of the reason homeowners are being ignored the victims in this case?

Cox: It’s that homeowners don’t rate. They don’t rate a thought or a mention here. When you do try to help, like we did with the Foreclosure Deferment Bill last year, which is looking pretty darn good at this point, you get these ridiculous lines like, ‘We don’t want to interfere in the market.’ Take a step back, folks! We’re giving a trillion dollars to these institutions that caused these problems.

We’re socializing our financial system. We’re socializing the wealthiest and largest players in our financial system to an unbelievable degree. But we don’t want to help the homeowners and families who were victimized by these loans. It boggles the mind. It truly boggles the mind that people can hold those principles together in their mind and not cringe.

MnIndy: It goes back to the decades’-old idea of the “invisible hand” of the market that’s been at the center of discussions about the foreclosure crisis from the beginning. Let it work itself out, except when it affects Wall Street. How much of this is about politics and clinging to a philosophy than addressing the reality of the situation?

Cox: It absolutely has become about that. If you’re truly a real free marketer, how can you suddenly support all these bailouts? It’s comfortable for me to support both, because I don’t believe markets have much capacity to exist outside of reasonable public control and limits. So for me, subsidizing the markets was a result of our terrible thinking over the last 25 years. I would use the word “childish” thinking about the ability of financial markets to police themselves.

So it doesn’t surprise me that we need to do this. But the idea that we need to enact socialism for business risk, but believing basic government protections–even when they don’t cost money to the public–for homeowners who were caught in this disaster is somehow an affront to the free market and availability of credit is a ludicrous and contradictory position. It speaks not well of our politics that people can hold that position without having to defend themselves from questions about the obviously discordant nature of their views.

MnIndy: Out of this, too, it seems it’s only fueled the same political rhetoric and denial. But a clear analysis and call for action beyond the market crisis seems to still be missing.

Cox: It’s become out of control. McCain’s people have this rhetoric about greed on Wall Street and firing the SEC commissioner? Why don’t they jut fire the Idaho health-department commissioner? It’d be the same thing. It is not how we got into this mess. It is just absurd rhetoric. And, again, we have a poverty of political discourse that a comment like that that isn’t met with howls of incredulity. It’s an absurd statement. And underlying it is a total lack of a policy that will deal with this in any way that will actually help people.

And Obama’s plan is timid. It’s been timid since the beginning. It’s a little more of a step in the right direction. But it never grasped the magnitude of the problem or the need for strong public control over the process to protect the most number of homeowners. All of which is entirely doable. It’s simply a matter of political will. And I really hope that Democrats finally get a backbone and put in provisions that will actually help homeowners.

MnIndy: What is it that the candidates—and especially the Paulson bailout—is missing? Are we talking simply about a provision that would help homeowners in bankruptcy? Are we talking about allowing homeowners facing foreclosure to refinance? What about those facing negative equity?

Cox: If we’re talking about a national solution, helping homeowners means enforced loan modification. That’s number one. So we just have to take the people who are in trouble or in default on their mortgages, and we have to rewrite these loans in a way that’s fair. You can’t save everybody. You can’t save more than half the people at most.

But these risky loans a huge part of the part of the problem. And you’ve saved a lot of homeowners, you’ve prevented properties from being dumped on the market. The homeowners aren’t going to get a bail out. No matter how you do it, they will still pay for their mortgage. But they might get some balancing of the leverage, so that homeowners have something to come to the table with that will allow them to survive.

The second thing that should happen is preserving and creating more rights for homeowners who were victims of the worst kinds of lending to allow them to recoup their losses. And the third thing, and most important in the long run, is effective regulatory structure. These kinds of things are happening not only with mortgages, but the underlying causes that drove refinancing and the crisis, which is consumer debt in America and they way we don’t regulate consumer debt.

We’ve lost critical years since this crisis started. In the year and a half since we’ve been deep in it, we have done zero, in capital letters, ZERO, to force lenders to force lenders to enter in to reasonable accommodations with homeowners. We have press release after press release after press release about voluntary measures, none of which have done anything to end the problem. They’re just a lot of press releases. And homeowners are still the real victims in all of this.

3 Responses to “The great bailout: U of M expert on mortgage crisis says Paulson plan is ‘reverse criminal action’”

  1. A look into Barack Obama’s past might shed some light on the crisis
    Barack Obama joined Trinity United Church of Christ more than 20 years ago and considered the church pastor, Rev. Jeremiah Wright as his mentor. Rev. Wright married Obama and his wife Michelle, baptized their two daughters and is credited by Obama for the title of his book, “The Audacity of Hope.” In his sermons, Rev. Wright repeated denunciations of the U.S and blurted out statements like “The government gives them the drugs, builds bigger prisons, passes a three-strike law and then wants us to sing “God Bless America.” No, no, no, God damn America, that’s in the Bible for killing innocent people,” he said in a 2003 sermon. “God damn America for treating our citizens as less than human. God damn America for as long as she acts like she is God and she is supreme.”
    Looking at Obama’s ties to Rev. Wright, and his connections to a terrorist bomber, William Ayers, both men who would like nothing more than to destroy this country causes many people to second guess Obama’s intentions for change. If you have not heard about William Ayers, you can read about him in the U.S. News, Michael Barone’s column-Obama Needs to Explain His Ties to William Ayers. “In my U.S. News column, I make a brief reference to the unrepentant Weather Underground terrorist bomber William Ayers and his connections to Barack Obama. They were closer than Obama implied when George Stephanopoulos asked him about Ayers in the April 16 debate—the last debate Obama allowed during the primary season. To get an idea of how close they were, check out Tom Maguire’s Just One Minute blog and Steve Diamond’s Global Labor and Politics. The Obama-Ayers relationship is also mentioned in David Freddoso’s The Case Against Barack Obama: The Unlikely Rise and Unexamined Agenda of the Media’s Favorite Candidate.”

    Lets examine Obama’s connection with an accused political fixer Antoin “Tony” Rezko. The following is on explanation by Brian Ross and Rhonda Schwartz from ABC News. “In sharp contrast to his tough talk about ethics reform in government, Sen. Barack Obama, D-Ill., approached a well-known Illinois political fixer under active federal investigation, Antoin “Tony” Rezko, for “advice” as he sought to find a way to buy a house shortly after being elected to the United States Senate. Rezko had been widely reported to be under investigation by the U.S. attorney and the FBI at the time Obama contacted him and has since been indicted on corruption charges by a federal grand jury in a case that prosecutors say involves bribes, kickbacks and “efforts to illegally obtain millions of dollars.”
    Because Barack Obama was a dependable ally of subsidized developers in the Legislature, his friend and fund-raiser Rezko depended on him to get things done such as cosponsoring a bill in 2001 allowing developers to pocket half of the proceeds from selling state tax credits to others. Obama admitted that his decision to involve Rezko was “a bone-headed mistake.” What he failed to mention is that he has a closet full of bone-headed mistakes such as Peter Wallsten pointed out in the Los Angeles Times on
    January 24, 2008.
    “Barack Obama angered fellow Democrats in the Illinois Senate when he voted to strip millions of dollars from a child welfare office on Chicago’s West Side. But Obama had a ready explanation: He goofed.

    “I was not aware that I had voted no,” he said that day in June 2002, asking that the record be changed to reflect that he “intended to vote yes.”
    That was not the only misfire for the former civil rights attorney first elected to the state Senate in 1996. During his eight years in state office, Obama cast more than 4,000 votes. Of those, according to transcripts of the proceedings in Springfield, he hit the wrong button at least six times.”

    Now comes the big question, what exactly does a community organizer do?
    One thing Barack Obama did as a community organizer was pressure banks to make bad loans. In Barack Obama’s youthful community organizing days he joined a group called ACORN. Using the Community Reinvestment Act which was designed to encourage banks to make loans to high-risk borrowers, ACORN started abusing the law by forcing banks to make hundreds of millions of dollars in ‘subprime’ loans to minorities with bad or no credit. Using charges of racism and threats to use CRA to block business expansions have enabled ACORN to extract hundreds of millions of dollars in loans and contributions from America’s financial institutions.
    Other things that ACORN did as community organizers were agitate for higher minimum wages, attempt to thwart school reform, try to unionize welfare recipients who are obliged to work in exchange for benefits and organize voter registration drives. In 2006 for example, their voter registration drive in Washington produced 1,800 new voters of which 1,794 names submitted were fake. The secretary of state called it the “worst case of election fraud in our state’s history.”
    If you like to know more, watch these two videos.


  2. Thursday morning I turned on the news and heard that ACORN is under investigation for voter fraud in a number of states. Since I learned not to trust what the media tells us, I decided to have a look what the bloggers had to say. On a sight called A Look Into Barack Obama’s Past – Obamamania – Zimbio website I found the following comment that made me think.
    A concerned citizen
    Oct-6-08 7:48pm [Edit]
    Those two videos paint a very clear picture. As the terrorists have promised, they will destroy this country from with in. ….. …….. …….

    Back to my point. By allowing the voter fraud to go on, makes this great country look like a third world dictatorship. We are supposed to send an example to the rest of the world how honest elections are held and not allow the media to distort the facts. Please people, wake up and tell the media no more. Boycott all the products advertised on publications like the Newsweek, Time magazine and other propaganda machines like the New York Times. Also do the same with CNN and other communist propaganda news sources. Even the Fox News network is starting to sway the viewer decision. After Thursday’s presidential debate, watching Chris Wallace interview a communist from Saint Louis made me sick. Even bad journalists should realize that when you ask a communist or a skin head to give you their views, you can pretty much expect what they are going to say.
    I certainly had enough of all of the $

  3. Questioning the American Bolshevik views
    1. Is wealth redistribution taking money from stockholders and redistributing it to those who don’t pay taxes?
    2. Is it more important to make sure that illegal votes are not disenfranchised or making sure that groups like ACORN do not nullify honest votes.
    3. Would premature U.S. withdrawal from Iraq grand jihadists a victory and make all of our accomplishments, money spent and lives lost a big waist?
    4. Can this country afford to grant socialist Democrats total control of the government and allow them to sacrifice our safety by cutting the military budget by 25%?
    Now comes the big question. How do we stop socialism from ruining our lives?
    The answer is simple. Don’t vote American Bolsheviks into power and boycott the socialist propaganda media into bankruptcy.


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