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Bill Brennan calls subprime mortgage lending “the biggest type of fraud” he saw in roughly a quarter of a century as director of the Home Defense Program of the Atlanta Legal Aid Society.
To this day, eight years after the foreclosure crisis that plunged the American economy into a deep recession, he said he couldn’t believe that banks would so willingly risk their reputations to loan money to people who would have difficulty paying it back. The predatory lending that contributed to the undoing of the financial system disproportionately targeted black and Latino families and set them up with risky loans. Institutions even convinced minorities firmly in the middle class to take loans with adjustable rates when they qualified for the standard, 30-year fixed mortgage.
Atlanta was one of several cities in the country that took the brunt of the hit caused by the housing crash. According to Brennan, the housing bubble might have been completely avoidable, but Wall Street firms battled against regulations that could have protected homeowners. (Fault Lines' look at investment firms’ new housing bet, “Wall Street Landlords,” premieres on Al Jazeera America on Saturday, November 8, at 7 pm ET/4 PT.)
Fault Lines sat down with Brennan at his home in Atlanta to discuss one such law that was briefly on the books in Georgia. The Georgia Fair Lending Act went into effect October 1, 2002, and according to the Federal Reserve Bank of Atlanta, it was believed to be “the most restrictive in the country,” imposing harsh penalties on brokers, as well as people who purchased mortgages on secondary markets.
An edited version of the conversation follows:
Fault Lines: How did you start noticing a problem with predatory lending?
Brennan: Homeowners were coming into our legal aid offices all over the city of Atlanta with these loan problems. They were upset with the kind of terms they were finally realizing they had on their loans, and many of them were beginning to face foreclosures on many of these loans.
What year are we talking about?
I guess it was 1991. My understanding is that subprime actually started in the late ‘80s, but we started seeing them around ‘90/‘91.
When the financial crisis began and there was this wave of foreclosures, a lot of people said that they never saw it coming. What would be your response?
We were certainly trying to warn everyone every chance we got that what we were seeing was really horrendous. For one thing, when you’re talking about home ownership, it's such an important subject and it’s part of the fabric of a community for stability and for economic development and for the well being of a whole bunch of folks.
They're being made loans that are abusive and harm them and that also, as time went by, I think lenders ran out of financially eligible borrowers. So they started even more making loans that were unaffordable and making them on purpose to fill these loan pools. So we testified—I testified before the Senate Committee on Aging and the House Financial Services Committee and the Federal Reserve Board held hearings, HUD [Department of Housing and Urban Development] held hearings. We actually tried to have a law passed in the early ‘90s in Georgia.
What kinds of protections to homeowners have in Georgia now and what kind of protections did they have in the late 90s?
Well they have very few protections now.
The idea behind the law was to address the abusive lending practices that we were seeing. After seeing hundreds and hundreds of clients, we began to catalog the abusive lending features and then boil it down to three main categories.
They were charging interest in amounts that did not justify the risk they were proclaiming existed. And the idea behind sub-prime borrowers is they have a lower credit rating or maybe some risk. Fine, charge a little bit extra interest, but not the way they were doing it. We were seeing 12%, up to 29%, if you could imagine. Now interest rates were high at that time, but still not that high, not up to 29%. Second, there were other types of abusive lending practices that were very popular but harmful to the borrowers. And finally they were engaging in discriminatory lending practices. They were targeting minorities. In Georgia, that would mostly be black folks and women and elderly people.
So we tried to have a law that would say that these practices were unacceptable, and there would be consequences for violating the law. The public policy behind it was: Make it expensive for these banks and lenders, and they'll stop doing it.
What happened with this law?
It passed. We started in 2001 and met with the lending industry and thought we had a compromise worked out. But they backed out of it. So in 2002 a group of people got together and went to the General Assembly and passed the strongest anti-predatory lending law in the country. And that sent a message to the industry that many of these lending practices were unacceptable and that there would be consequences if they violated the law. It passed in 2002, went into effect in October of 2002.
What was the reaction to the law passing?
The first thing that happened, which was kind of stunning was that the U.S. Comptroller of the Currency exempted all U.S. banks from coverage by the Georgia law, which involved a whole lot of the loans that we were seeing. The next thing that happened was in the next session of the General Assembly in January, 2003. Bankers were everywhere, bankers and their lobbyists, and mortgage companies and brokers, especially, were swarming around the General Assembly trying to get the law undone.
And the first one that appeared to do something about it was Standard & Poor's. We tried to parse what their interest was. And we realized right away that they were rating these securities that were issues of bundled together subprime mortgage loans. So they had a huge financial interest. And they came to Georgia and said they would not rate any mortgage security pools of any kind, whether subprime or not, until this law was changed. Securitization of mortgages is how the business is run these days, and so that was a big issue.
And that's what happened. It was weakened. There was a huge fight by consumer activists, lawyers, legal services lawyers, elected officials—a whole cadre of well-intentioned people tried to fight back and keep as much of the law in place as possible. But it was very difficult. For one thing, we understood that the industry felt that, if this law was allowed to stay in place in Georgia, it would roll out across the country to other states and that could put an end nationally to these abusive lending practices.
When did the law get weakened?
In March of 2003. From a perspective of many years later, I can say that if that law had stayed in effect in Georgia, and if similar laws had been enacted in other states around the country, we might have not had the financial collapse that we had. Certainly not with the intensity that it occurred. The law had provisions for filing lawsuits against wrongdoers and that could have made a big difference. There could be class-action lawsuits. They would have a tremendous financial adverse effect on any entity violating the law.
Our law allowed for suing the bank that owned the loans, plus the investors. It would get at the heart and soul of the popularity of that type of investment, which was huge on Wall Street
Atlanta Legal Aid Society
In some ways, you were an early whistleblower about this.
We absolutely were. I remember in 2006 the Federal Reserve was holding hearings around the country on subprime mortgages. They came to Atlanta. We brought clients and activists from around the country. The National Consumer Law Center had their attorneys at this hearing. We told the Consumer Chief of the Federal Reserve that at that time the number one problem we were then seeing was lending without regard of the ability to pay. Almost every mortgage of a homeowner brought into our office was a loan that they could absolutely not afford from the day they got it, or it was an adjustable rate mortgage where it starts of at 6 percent and two years later goes up to 12 percent.
I was wondering, how could these banks who rely so much on their reputation for probity and doing the right thing, be involved in this kind of sleazy activity? And so I said that it might affect their stock down the road. In that respect, I think we were whistleblowers. We were saying things like not just how bad it was for the poor homeowners and seniors, but how it could affect the investors on the other side of the equation. And it did.
Was the Georgia law really the very first law of its kind or were there laws in other states that preceded it?
North Carolina passed the first predatory lending law. When we started this process in 2001, we used their law as a model. But our law was a bit different. Our law had more of what we called, “assignee liability” in it. There was an enforcement provision. You could sue whoever ends up owning the mortgage. And since the very nature of how they were doing business was with the securitization process—the loans were put into pools and the loans in those pools were owned by trustee banks and investors would buy these securities. Our law allowed for suing the bank that owned the loans plus the investors. It would get at the heart and soul of the popularity of that type of investment, which was huge on Wall Street.
Some of these same players on Wall Street, particularly the big banks, are now funding this new initiative where private equity firms and hedge funds are buying up these foreclosed homes in bulk and turning them into rental properties. They then charge higher rents in some cases than the previous homeowners were able to pay as mortgage payments and are also then bundling the rental incomes into new securities. What do you make of this?
It reminds me that capitalism works in this way: It finds niches to make money in ways you never dreamed of. Whatever is going on, someone is going to be making money. It’s a shame really that those neighborhoods which have so many foreclosed houses—and in so many instances they're in lower-income neighborhoods and minority neighborhoods, like around Atlanta—those neighborhoods that have suffered from the foreclosure crisis and need to come back economically. They need to be stabilized. And I don't believe these companies and investors buying these houses in bulk and renting them out are helping to re-stabilize neighborhoods that desperately need that.
It’s just, you know, sad. Those houses need to be resold to families that can buy them and move in and worry about their neighborhoods and their communities and churches and schools. I'm certainly not against renters. There's a great need for affordable rental housing. But those houses are assets. They're important for the community.
There's a bigger issue here. And the issue is stability—recovery from the recession and recovery from the huge number of foreclosures. And you don't do that by buying these houses and renting them out and hanging onto them until their value goes up and selling them. I think its not good public policy.
It's not illegal, but I don't think its good public policy. You need to put homeowners back into those homes.
In "Wall Street Landlords," Fault Lines examines investment firms' new bet on housing. The film airs on Al Jazeera America Saturday, November 8, at 7 p.m. Eastern time. It will air again that evening at 10 p.m. Eastern and Sunday, November 9, at 2 a.m. Eastern.