With Wall Street’s demand for mortgages unending and some loan producers managing to book up to 70 loans per day, the system didn’t just crash. It was brought down.
But we’ve also been made to understand that subprime lenders and their Wall Street funders didn’t act alone. Instead, they were aided by the avarice of the American people, who were not victims of the crash so much as accomplices in it. Respondents to aRasmussen poll done during the throes of the crisis overwhelmingly blamed “individuals who borrowed more than they could afford” (54 percent) over Wall Street (25 percent). To this day, the view is widespread and bipartisan: Main Street was an essential cause of the meltdown. The enemy was us.
“It all goes back to the increase in the tolerance for debt,” David Brooks wrote a couple of years ago. …
One of so many instances in which Brooks has been flat wrong on the facts without professional consequence. But I digress.
Is that not the truth?
Actually: No, it’s not. The notion that American consumers share the blame for the mortgage crisis is a lie. And it is one of the most pernicious out there.
Everyone-Is-To-Blame (or EITB, for brevity’s sake) has done much to mute the public outcry essential for sweeping efforts to respond to the financial catastrophe. To the extent that Dodd-Frank fell short of the root-and-branch reform that followed the last great crash in 1929, EITB is to blame. The fact that banks too big to fail before the crisis have been allowed to grow to twice their pre-bubble sizes can be traced to a nagging sense that they didn’t act alone. And if you wonder why, six years after the fact, no significant Wall Street figure has been criminally prosecuted, I would suggest that EITB has muddied perceptions just enough to allow the administration to sidestep the necessary legal mobilization. If everyone is to blame, then criminal indictments of individual executives can be framed as exercises in scapegoating.
Everyone-is-to-blame did its worst damage to the Home Affordable Modification Program, or HAMP, an effort rolled out in the immediate aftermath of the crisis to reduce borrowers’ monthly payments through refinancing or principal write-downs. It was the mere idea of HAMP that set off Rick Santelli on his 2009 rant about “losers’ mortgages” and their “extra bathroom,” sparking the Tea Party revolt. The prospect of helping delinquent borrowers, while others paid theirs on time, unleashed a flood ofressentiment that filled the Congressional Record with denunciations of “irresponsible” actors who “lied” only to wind up in line for “gift equity,” and “tax-payer subsidized windfall.” Wisconsin Representative Jim Sensenbrenner introduced the concept of “happy-go-lucky borrowers” and “cagey borrowers.” Jim Bunning, then Kentucky’s junior senator, felt compelled to warn against helping homeowners “who made bad decisions.” The outpouring tapped into a sentiment powerful enough to silence even some liberals and turned hamp into a political disaster for the Obama administration. Left adrift, the program went from a potential lifeline for borrowers to a fee-machine for servicers and a Kafkaesque nightmare for those it was supposed to help.
As an agent of obfuscation, EITB is a gift that keeps on giving. In October, The Washington Post’s editorial board objected to a $13 billion mortgage-era civil settlement with J.P. Morgan largely because it unfairly singled out the bank, when, in fact, “everyone, from Wall Street to Main Street to Washington, acted on widely held economic beliefs that turned out not to be true.” A forthcoming book by Bob Ivry, a Polk Award–winning investigative reporter for Bloomberg News (and, full disclosure, a friend), eloquently inveighs against big banks and their Washington lackeys, but also includes this assertion: “In the years leading up to the Great Bubble-Burst of 2008, everybody got a chance to cash in. … If you wanted to buy a place to live, you could get more house than you ever dreamed. You could use your rising home equity for the Disney vacation, the power boat, the fourth bedroom or the college education.” …
True. But that’s not the same thing as mortgage fraud, which, though not trivial, was an incredibly small part of the total problem:
In 2010, an FBI report drawing on figures from the consultancy Corelogic put total fraudulent mortgages during the peak boom year of 2006 at more than $25 billion. Twenty-five billion dollars is obviously not nothing. But here again, teasing those mortgages out of that year’s crisis-related write-downs of $2.7 trillion from U.S.-originated assets leaves our infamous “cagey” borrowers to blame for only a tiny share of the damage, especially since not all of the fraudulent mortgages were their fault. The ratio looks roughly something like this:
Yes, some of our cab drivers, shoeshine boys, and other fellow citizens tricked a lender into helping them take a flyer on the housing market. But the combined share of the blame for bad mortgages that can be placed on the public sits—and I’m really rounding up here—in the high single digits, and not the much larger, fuzzier numbers in our heads.
The fact is that defrauding a bank that actually cares about the quality of a loan is actually rather difficult, no matter how aggressive or deceitful the borrower. Lenders, on the other hand, can lie with relative ease about all sorts of things, and mountains of evidence show they did so on a widespread basis. For starters, it’s lenders who establish the loan-to-value ratio for a property: how much money the buyer is borrowing versus the house’s estimated worth. Banks didn’t used to let you take out a mortgage too close to the home’s total cost. But play with those numbers and, voilà, a rejected loan application turns into an accepted one. Leading up to the crash, some banks’ representations about loan-to-value ratios were off by as much as 40 percentage points.
Then there was the apparent rampant corruption of appraisals, which also have nothing whatsoever to do with borrowers. Before the bubble popped, appraisers’ groups collected 11,000 signatures on a petition decrying pressure by banks to arrive at “dishonest” or inflated valuations.
And that’s to say nothing of lenders misleading borrowers directly—a practice that the Financial Crisis Inquiry Commission, the Levin-Coburn report, and lawsuits by attorneys general around the country have all found was very much systemic. Mortgage brokers forged borrowers’ signatures and altered documents; Ameriquest (those guys again!) had its own “art department,” as it was known internally, for precisely that function. Oh, and remember those 137,000 instances of “suspicious activity” about possible borrower misdeeds? For the sake of perspective, Citigroup settled a Federal Trade Commission case alleging sales deception that involved two million clients in a single year. That’s what we call wholesale, and it was happening before the mortgage era even really got started.
Today, there’s a big and growing body of documentation about what happened as the financial system became incentivized to sell as many loans as possible on the most burdensome possible terms: Millions—and millions—of borrowers were sold subprime despite qualifying for better.
Perhaps the most astonishing and unappreciated finding comes from The Wall Street Journal, which back in December 2007 published a study of more than $2.5 trillion in subprime loans dating to 2000 (that is to say, most of the subprime loans of the era). The story, by my former colleagues Rick Brooks* and Ruth Simon, painted the picture of a world gone upside-down: During the worst years of the frenzy, more than half the subprime loans issued went to borrowers who had credit scores “high enough to often qualify for conventional loans with far better terms.” In 2006, the figure hit 61 percent. Along with its article, the Journal illustrated the alarming trend line with a version of the following graphic:
It goes without saying that no one would voluntarily eschew a prime loan for subprime—subprime is called that for a reason, carrying higher, often escalating rates; pre-payment penalties that “shut the backdoor” by precluding refinancing; and other burdens tacked on for good measure. The Journal concluded that its analysis “raises pointed questions about the practices of major mortgage lenders.” That’s putting it mildly!
He goes on to suggest some reasons why Everybody Is To Blame is such a popular world view. But what he keeps coming back to, what we must keep coming back to, is that it is wrong. If you actually look at the numbers — you know, like bankers are supposed to do — you consistently find that the overwhelming majority of the financial damage was caused by the banks, often through unethical and sometimes even illegal means.
Even so, today, we refuse to punish those responsible. If there’s Blame to be laid at the feet of Everybody, this is it. Charlie Pierce is fond of saying that for all Occupy Wall Street’s many foibles, gaffes and mistakes, it at least got people shouting at the right buildings — i.e., corporations rather than government, and the big banks in particular. Unfortunately, some of the country’s top journalists and pundits still get it wrong, and they and the lawmakers on the take form a daisy chain that keeps anything substantive from happening, not only to punish those who were responsible last time but also to do what it takes keep something like this from happening again.
It’s not Everybody’s fault. Everybody is NOT to Blame. The banks and their executives and boards are to blame. And part of citizenship in a constitutional republic is to hold them to account.
*Disclosure: Rick Brooks worked with me at the N&R in the early 1990s.