I am happy to see the consensus of no blank check emerging, because as someone who has watched the destruction that Wall Street has wrought for 12-15 years, the idea that we are writing a check to the financial services industry is stunning. Why? Let’s take a trip down memory lane, and look at the story of Philadelphia, and its battle with subprime lenders over the past 15 years.
In the early 1990s Wall Street starts really getting into the securitization of subprime debt, creating a huge pool of money for subprime lenders, that was, at best, little supervised. At worst, it was money given to loan sharks on the street, who aggressively marketed shockingly bad loans to people who had no need for them, and made them go promptly in foreclosure. In 1993, Wall Street had about 20 billion dollars in securitized subprime loans. They were only getting started.
By 1995, Philly had about 2,500 foreclosures per year. One of the worst lenders of the time went by the name of United Companies Lending, securitized and packaged by... Lehman Brothers. UC Lending was one of the worst of the worst predatory lenders. We are talking about mortgage brokers looking to see who had equity in their home, and then going to those homes, ripping that equity out with predatory loans that resulted in scores of foreclosures. Amid all their foreclosures and lawsuits, UC Lending closed its doors in 1999. (Lehman Brothers felt so chagrined, that instead of only securitizing those subprime loans, they went out and bought their own subprime lender.)
By 1998, Wall Street was securitizing 150 billion dollars in subprime loans. The loans were so bad that by 2000, Philadelphia had over 5,000 foreclosures per year, and 6,300 by 2002. Think about that for a second: In a single American city, there were over 500 mortgage foreclosures every single month.
In 2001, in response to this disaster, Philadelphia banded together and passed a progressive law that was aimed directly at predatory lending. It was a law that went after certain products, mandated counseling, and in effect said it was illegal to make someone a loan that made zero financial sense to them. (For example, if you were an elderly woman in a neighborhood with low home values, and you have a fixed income of 600 dollars a month, taking out a balloon loan, or one that had a payment of 400 or 500 a month would not have cut it.)
In response to the law, the financial services industry (the group now lobbying to get 700 million golden parachutes) thanked the City of Philadelphia for saving the industry from itself. The industry said that they always knew they were making bad loans and that the whole practice was unsustainable, but they couldn’t stop themselves.
Jusssst kidding. Instead, the financial services industry went to Harrisburg and spread enough money around (including to Philly’s own reps) to kill Philadelphia’s predatory lending bill before it ever took effect. Just like that, the law was gone, and Philadelphia’s government was powerless to protect its own citizens. They still tried to help, including educating consumers, convening predatory lending task force meetings and the like. But in the main, there was not a ton they could do.
After the law was killed in 2001, foreclosures went up again, to about 6,300 in both 2002 and 2003. From there, they tailed slightly for the next couple of years, but never again went below 5,000. That, "my friends," was the new stasis for Philly and lots of other cities: massive amounts of foreclosures, every single year. The pain was felt everywhere. Applications to HEMAP, Pennsylvania’s emergency mortgage assistance program climbed and climbed.
The destruction the subprime predators wrought on Philly is clear. This is a map (click here for a larger version) of Philadelphia foreclosures, laid on top of the race of each neighborhood, from 2000-2003. Each dot is a foreclosure.
The black blobs are because there are so many foreclosures that it is hard to tell them apart. (The darker the underlying color, the greater proportion of minorities.) What is especially tough for long time Philadelphians to see is that Philly, despite its deep problems, always boasted an above average rate of minority homeownership. Those loans struck especially hard right at one of the things we were most proud of.
In 2004, Philadelphia advocates got a local judge and the Sheriff to temporarily halt foreclosures. But that only lasted for a short time, and in 2006 and 2007, foreclosures started climbing again, with foreclosures in 2007 virtually the same in 2002 and 2003. And, yes, foreclosures for the first half of 2008 were even higher.
Meanwhile, by 2006, Wall Street was securitizing over 600 billion dollars in subprime loans. And besides subprime lending, Wall Street was spreading other pieces of financial wonder: payday loans, rapid refunds, and for profit debt management.
This year, with its ability to pass any lending legislation killed by financial services lobbying in Harrisburg, Philadelphia advocates, lawmakers and judges once again tried to do something. They said that if a bank wanted to foreclose on a homeowner, they had to go through a significant mediation process. Thus far, the process has been as successful as it could have been, and it is clear that people’s homes have been saved. However, the program is about as far from the root of the problem- giving bad loans to those who cannot afford them- as you can get.
Philadelphia is a largely poor city. It is not a place that can afford to spare funds quickly. Yet, because of the destruction being wrought, the City simply had to act, and spend more public funds and energy on its foreclosure problems. Think of it as a sadistic, unfunded mandate from Washington, Harrisburg, and Wall Street.
However, I would like to call your attention to the newest maps in Philly, of foreclosures from 2004-2007. (Click here for a bigger version.)
Do you see any real difference from those 2000-2003 foreclosures? You shouldn’t, because there really isn’t much of a change at all. There were 23,700 foreclosures in the first period, and 22,100 in the second. In other words, while the crisis that Philadelphia and other cities has felt is very real, it is also far from new. The story is the same in Baltimore, where foreclosures were actually noticeably worse in the beginning of the decade than now.
So, why now? Because after institution after institution has become involved, the Wall Street house of cards has finally fallen.
But, as we are told that we need a solution right now, let's keep in mind the 50,000 foreclosure victims in Philadelphia this decade, and their counterparts around the country.
Let’s keep in mind the advocates that have been screaming and pleading about this for years.
Let’s keep in mind city governments who have done everything in their power to try and stop this plague.
Let's keep in mind an industry that not only resisted regulation, but actively killed it.
And then, only after we keep that all in mind, let’s think about how to proceed.