Consumers need a strong Financial Protection Bureau

It is shocking that in the wake of a deep economic crisis brought on by irresponsible financial practices, Congress would stymie the Consumer Financial Protection Bureau by not approving a director. President Obama was right to insist that the American public be protected by making a recess appointment of Richard Cordray. Cordray has excellent credentials.

An unchecked financial industry played a key role in bringing on the Great Recession—the worst economic downturn the country has seen since the depression of the 1930s. This American Life documented the anything-goes attitude in the financial industry prior to the recession. The show reported that “to make a mortgage-backed security, you needed mortgages. Lots of them.” People making securities “needed to buy up as many mortgages as possible.” They threw all standards and requirements out of the window. Mortgage loans were made to anyone, even 23 dead people in Ohio.

This American Life cited the experience of Mike Garner, a bartender who was made into a banker overnight to feed mortgages to Wall Street:

Mike Garner’s bank did not care all that much how risky these mortgages were. This was a new era. Banks did not have to hold on to these mortgages for 30 years like they used to. They didn’t have to wait and see if they’d be paid back. Banks like Garner’s would just own the mortgages for a month or two. And then they sold them on to Wall Street. And then Wall Street would sell them on to the global pool of money.

“The actual guys cruising strip malls all across Nevada buying mortgages from brokers– their commission depended on selling more loans,” so they too encouraged the recklessness. At every step in the process of producing mortgage-backed securities people were making a lot of money . . . until the bubble burst.

And then, millions of homeowners were stuck with loans they could not afford, loans that would lead them to foreclosure.

Although it has been going on for years, the foreclosure crisis is probably less than half over according to a recent analysis by the Center for Responsible Lending. CRL finds that of mortgage loans made from 2004 to 2008, 2.7 million have ended in foreclosure. But another 3.6 million homes remain at risk of foreclosure. These foreclosures hurt not only the person owning the loan but the entire community. The neighboring homeowners experience declining property values. The cities obtain less in tax revenue to provide city services.

Most foreclosed homes were owned by whites—1.5 million in CRL’s analysis—but the research also suggests that Latinos and African Americans were targeted when brokers and banks began their desperate search for more and more mortgages. Latinos and African Americans were more likely to end up with mortgage loans that were very profitable to the financial services industry but more expensive and risky for the consumer.

Among borrowers with good credit scores (FICO scores of 660 or higher), Latinos and blacks were more than three times as likely as whites to be given a higher-rate subprime loan. They were two to three times as likely as whites to be saddled with a prepayment penalty. Latinos were nearly twice as likely as whites to be given an adjustable rate mortgage. Thus, even Latinos and blacks with good credit ratings found themselves in bad loans.

These bad loans that were disproportionately sold to Latinos and blacks may help explain why we have seen such a dramatic loss of wealth among these groups since the start of the recession. For most Americans, their home is their main source of wealth. Latinos and blacks were more likely to be given loans that would end in foreclosures, loans that would dramatically reduce their level of wealth.

The figure shows that 5.1 percent of loans made to whites from 2004 to 2008 ended in foreclosure. For African Americans, the rate of foreclosure is 9.8 percent. For Latinos, it is 11.9 percent, more than double the white rate. Further, an additional 13.7 percent of loans to Latinos are seriously delinquent—delinquent for more than 60 days or in the foreclosure process. Among African Americans, 14.2 percent of loans are in this situation, as opposed to 6.8 percent of loans to whites.

Mortgages are only one type of financial product. There are many other products and services where there have been reports of abuses. The Consumer Financial Protection Bureau was created to protect consumers from these dangers. We are currently struggling to recover from the ravages of a financial meltdown fueled by abusive lending.  In appointing Cordray, the president did the right thing.