Blame Wall Street for mortgage crisis
The Bush administration’s latest salvo to reform the mortgage industry does little to clamp down on lax underwriting. More importantly, it does not dissuade Wall Street from scrutinizing bad loans and coating them with a layer of legitimacy by brandishing ill-gotten, investment-grade ratings.
To understand why we are in this conundrum and how to fix it, flash back to 1988 and the Atlanta Mortgage Consortium. It was formed by nine Atlanta banks in response to news reports that lenders were redlining black neighborhoods and charging borrowers higher rates.
The banks contributed funds to a lending pool that targeted loan applicants whose income was at or below 80 percent of the area’s medium income. Many also had atrocious credit and little-to-no savings.
I was the only mortgage banker on the consortium’s advisory council. Most of the others were community activists and believed that everyone was entitled to own a home regardless of their ability to make mortgage payments. As a result, the advisory council’s activists continuously bickered with the bankers and eventually got them to lower their underwriting benchmarks.
The consortium recognized “sweat equity” as down payments and winked at the dismal credit reports. But to bolster its chances for success, the consortium enlisted the help of community groups to counsel new homeowners on their responsibilities and to quickly intervene when payments were late or missed.
Even with these safeguards, delinquencies and foreclosures rose into the double digits. Nevertheless, the banks were committed to stay the course. However, a surprising phenomenon emerged — subprime lending.
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Blame Wall Street for mortgage crisis
Herald Tribune
