If the political leaders and policy makers of this generation can take some credit for being able to prevent a second depression, the depth and scope of the foreclosure crisis nonetheless means that millions of Americans have experienced in their own lives a great depression from which a full recovery must be an elusive and perhaps even a lifelong project. The faces of this depression can be found in community meetings around the nation. Sheila Bair, who headed the FDIC during the nadir of the Great Recession, looked out at the following scene during one of her many meetings out in the field with borrowers and creditors:
I will never forget participating in a foreclosure prevention meeting in Los Angeles. . . . We arrived a little before 9:00 AM and saw people lined up outside the building, notwithstanding the stifling heat and humidity, waiting to talk with a [loan] servicer. . . . I saw families with young children, elderly people, working people in their denims or uniforms. . . . I saw fear, confusion and exhaustion in their faces. They were caught in mortgages they could not afford, dealing with a complex loan-serving process they could not understand. There were no flippers or speculators in that room, just people terrified about losing their homes.
Bair, 69
As a member of the George W. Bush Administration, Bair worked unsuccessfully to encourage loan modification (and simplification) in preference to foreclosure on a wide scale. Instead, in a move continued under the Obama administration, an often cumbersome and time-consuming loan-by-loan approach won out (Bair 62–71).
Who was a typical victim of these adjustable rate mortgages? Among this group was a nurse whose situation can stand in for many more. She was working a double shift to support her family and pay an escalating mortgage payment. She had signed up for a 2/28 mortgage at a very low teaser rate, encouraged by assurances that she would be able to get into a low fixed rate before the two-year term of the teaser rate expired. That lower rate never came, and the best she could receive from her mortgage servicer was another two-year extension of the teaser rate. Even after Bair intervened with the president of Litton Loan Servicing to get the five year extension promised by the Treasury Department’s Hope Now program, the terms could not be adjusted because triple-A investors opposed “systematic loan modification. . . . They just didn’t want to give up on those . . . higher rates” (Bair 70).
To fully address the mortgage crisis would have meant that lenders shared more fully in absorbing the costs of the financial burden that they had done so much to create. It also would have required the mortgage relief program—inserted into the legislation at the last minute in order to gain the votes of certain members of Congress—to total more than 5 percent of the $700 billion Troubled Asset Relief Program (TARP) (Bair 131–32).
Under the Obama administration effort, the Home Affordable Mortgage Program, a “permanent modification” lasted only five years, leaving a significant risk that the homeowner would eventually redefault. In addition, the lenders who made the program work were often among the same people who had enticed consumers into dubious arrangements in the first place. Finally, lenders had the ultimate leverage of knowing that participation in the program was strictly voluntary, sweetened with incentives to modify interest rates only, which again risked exposing the homeowner to the risk of redefault (U.S. Congressional Oversight Panel, April 14, 2010, Oversight Report 19, 41; U.S. Congressional Oversight Panel, March 16, 2011, Oversight Report 68–95).
These unequally weighted negotiations between lender and homeowner ignored how these bad loans had originated. Lenders chased quick and unregulated profit, knowingly approaching customers who had, by their own admission, a “lack of funds . . . lack of knowledge . . . and less than stellar credit.”
When my husband and I did our home search, we believed that these responsible lenders were probably doing us a favor. We were then introduced to a real estate agent who said she would take care of everything. We were so excited that someone was going to give us a chance. . . . When we finally found [a house] we liked, the agent said that the seller and the lender would do all sorts of things to give us a home. It was as though everyone was doing us a favor.
U.S. Congress Joint Economic Committee, 17
Furthermore, a broker from Countrywide brushed away this borrower’s concerns about the long-term affordability of the arrangements with promises that a lower rate could be renegotiated in the near future.
Was George Bailey on the scene? Not at first, but his spirit did arrive in the form of a local non-profit agency, ESOP (Empowering and Strengthening Ohio’s People), which guided this constituent through extended negotiations with Countrywide before finally successfully matching her to a local lender willing to give this longtime resident and homeowner with a mortgage at a fixed rate of 7.2 percent (Joint Economic Committee 18–19).
