FBI Investigates Mortgage Meltdown
MICHEL MARTIN, host:
I'm Michel Martin, and this is TELL ME MORE from NPR News.
I want to start by apologizing for my voice. I've still got a little bit of the laryngitis that kept me off the air Friday. I hope it's not too distracting. And, of course, I want to thank my colleague Lynn Neary for stepping in on very short notice.
Today, we're going to tell you about the new PBS documentary, "Prince Among Slaves." It tells the remarkable story of an African prince who was sold into slavery in 1788 and lived to regain his freedom nearly 40 years later. It premieres tonight. We're also going to tell you about the dark side of NFL glory for some former players. That's a bit later.
But first, the FBI is investigating mortgage fraud and other violations in connection with the home loans made to borrowers with less-than-perfect credit. The agency is probing 14 companies, including mortgage lenders and investment banks for possible accounting fraud, insider trading and other issues connected to subprime mortgage lending. The subprime crisis, of course, is being blamed for a record foreclosure rate, for turmoil in financial markets around the world, and for depriving minority communities, in particular, of hard-earned wealth.
Joining us to talk more about all of this is Wade Henderson. He's the president and CEO of the Leadership Conference on Civil Rights - he was kind enough to join me here in the studio - and Illinois' attorney general, Lisa Madigan. Thank you both so much for joining us today.
Mr. WADE HENDERSON (CEO, Leadership Conference on Civil Rights): Thank you.
Attorney General LISA MADIGAN (Illinois): Thank you, Michel.
MARTIN: Attorney General Madigan, how bad is the problem in your state?
Attorney General MADIGAN: The problem is horrendous, and it's not just in the state of Illinois. But the numbers are startling. So the numbers for last year just came in, and we see a 25 percent increase in foreclosures over 2006, with over 90,000 homes set to foreclose or are in foreclosure this past year. And that was up from about 72,000 the year before, where we'd already seen a substantial jump.
When you look at the numbers nationwide, it reveals a really chilling picture. Over 2.2 million homes will end up in foreclosure. So 2.2 million families will be displaced from their homes and really, you know, lose the piece of the American dream that they'd struggled so hard to achieve.
MARTIN: Mr. Henderson, advocates have been saying that the subprime issue is a particular problem for minority communities. Why would that be?
Mr. HENDERSON: Well, that's right, Michel. As you know, home ownership is the bedrock of the American dream, but for many Americans, that dream has become a nightmare. And for African-Americans and Latinos and other persons of color, the issue has taken on a stark reminder of the disparities that exist in American life, and particularly in gaining access to credit.
Roughly 30 percent more African-Americans and Latinos hold subprime loans than their white borrowers, even taking into account their credit history. So, in other words, individuals with similar histories, in fact, are treated differently by the system. And, in fact, it's because of a combination of fraud, rapacious greed and negligent oversight on the part of the federal government and the institutions looking at the banking industry.
MARTIN: Attorney General Madigan, do you agree with that?
Attorney General MADIGAN: I do. Numbers, again, are just horrific. And there have been some reports done recently that actually show that an African-American person earning more than $100,000 was more likely than a white person who earned less that $35,000 to be put into a high-cost loan. So probably some form of subprime loan. So clearly, there is discrimination going on. There has been steering going on. People who should've qualified for prime loans were put into these very risky subprime loans.
And ultimately, you know, we've seen it across the board. People were put into loans that they didn't understand, they couldn't afford, and then because of prepayment penalties, oftentimes they were unable to refinance. They were unable to get out of them. And it has had a much more devastating impact on the African-American and Latino communities than it has had on the white communities.
MARTIN: When we've talked to industry representatives about this, they say that this is either bad bets, this is either overly aggressive business practices, but this is not an intention to target particular communities. And they also say it's not in the industry's interest to foreclose on these loans, because then they're left with, as we can see, sort of losses that they then can't make up.
So what was the motivation here, Wade? And I'd also like to hear from you, attorney general, on this.
Mr. HENDERSON: Well, some of what you've said, Michel, is true. But at the same time, the industry does not take into account incentives that encourage lenders to put borrowers into higher-cost loans than in many instances they're required to take.
For example, there's something called a yield-spread premium that brokers will get, which is an additional incentive, financial incentive, for putting a lender in - or rather a borrower in a loan that is higher than he or she might otherwise pay. And that…
MARTIN: Because the profit's higher.
Mr. HENDERSON: Because the profit is higher. So there is a financial incentive, if you will, to steer some borrowers into higher-cost loans than they require.
MARTIN: And is it your view, Wade Henderson, that minorities were targeted for these loans, that this an intentional effort - on the part of some lenders, at least - to target minorities for these kinds of loans?
Mr. HENDERSON: Well, certainly on the part of some lenders. I mean, I don't want to indict the entire industry, but certainly, I think evidence will suggest that some lenders preyed on individuals in the African-American and Latino community. And let the buyer beware seemed to be the standard that was applied, even to the most important and complex transactions in an individual's life.
MARTIN: But do you - but what about that, though? I mean, people would argue that, you know, adults have to be mindful of the contracts they're signing. There are people who would say, look, it's your responsibility to beware of the terms.
Mr. HENDERSON: Well, they're right. But there's another problem. You know, conventional lenders - that is, banks - have frequently ignored their fiduciary responsibility to lend money and invest in communities with good credit and that, in fact, deserve those services. That, essentially, has abandoned many inner-city neighborhoods to high-cost lenders who might otherwise be distributed more evenly throughout society.
So I think this is a more sophisticated problem. There's a problem on the part of the conventional lenders. There are problems on the part of the federal regulators. But there's also clear evidence that there has been some fraud, some rapacious greed and some real targeting of inner-city communities because they've been easy prey for some of these high-cost lenders.
MARTIN: Attorney General?
Attorney General MADIGAN: You know, I would have to agree with Wade. Greed has fueled the vast majority of this. And so, you know, you asked the question about, well, shouldn't borrowers, you know, be aware of what they're doing? I have had hundreds of people come to our office once they realized that they were in one of these high-cost subprime loans, telling us, you know, that they did, in fact, ask. They asked the question, is this a fixed-rate loan? They were told yes, only to find out two or three years later it was, in fact, an adjustable rate loan.
I've had people tell us, you know, we told them that our income was only $2,000 a month, when, in fact, we find when we look at the documents it was written down as 7,000, $9,000 a month. So people were being put into loans in spite of the fact that they were being, you know, they were asking the questions, they were giving the correct information. And it is all because of the fact that the brokers and the lenders were receiving incentives, in large part because there was just this demand on Wall Street for these mortgage-backed securities.
And once the lender - once the borrower packages that loan, sells that loan, they receive an enormous amount of money. It gets moved on. They don't bear any responsibility on the back end when this loan goes into default and ultimately into foreclosure. So we've seen some real problems with the origination of these loans. And we know it's not just because people, you know, didn't ask the right questions, didn't provide the information. Oftentimes, they did, and the people who were putting the documents together were really defrauding them.
MARTIN: If you're just joining us, I'm talking about the mortgage crisis and allegations of predatory lending practices with Illinois' attorney general, Lisa Madigan, and Wade Henderson, president of the Leadership Council on Civil Rights.
Attorney General, I understand that you attended Reverend Jesse Jackson's 11th Annual Wall Street Project's recent meetings, that you sat on a panel about this issue. Now, Reverend Jackson has said that, clearly, there's a regulatory problem here, that if you have a problem which is that widespread, there has to have been a regulatory failure somewhere. If so, where was it? Who should be held accountable for this?
Attorney General MADIGAN: Well, you know, again, they're really three areas to look at. There is a lot of blame - and legitimate blame, I think - being put on the feds and on the Federal Reserve in part, saying that they kept interest rates very low for a long period of time that drove this housing bubble, really. And then there's a lot of blame on the brokers and on the lenders, where there really was very lax regulation. And so nobody was paying attention when it was relatively well-known for a number of years that the lending standards had decreased, that they weren't actually looking at documentation. People were being put into stated income loans and things of that nature.
And then Wall Street. Again, you mentioned earlier that, you know, the FBI is now looking at a whole series of lenders. They're looking at what happened in terms of the securitization of these mortgages.
And so there's blame at various stages. But in terms of what Reverend Jackson is calling for, he's really looking at some form of like a Marshall Plan for people who are trapped in these loans. As I said, we're estimating over two million home owners will ultimately lose their homes. It is a crisis that obviously impacts the families who lose their homes, but it really will also have an impact on the communities where those homes are. Once you have a foreclosed home, you have a situation where all the other homes in that community decrease in value by about 1 percent. You erode the tax base. And so there has to be help. We have to find a way to restructure these loans…
Attorney General MADIGAN: …which is very doable, and make sure that people can stay in their homes and maintain their community.
MARTIN: Wade Henderson, last word for you.
Mr. HENDERSON: Yeah…
MARTIN: What policy prescriptions are you interested in? Because clearly, even if law enforcement does proceed down this road, that's a long process. It doesn't necessarily mean that there's any relief for the home owner. What are you looking for? We have about a minute left.
Mr. HENDERSON: Michel, two things are done - are needed. First, I think the Federal Reserve does deserve its share - a significant share - of the blame. And I think simply banning prepayment penalties that the attorney general has spoke about and yield-spread premiums would make a significant difference in future market transactions. For those who are facing foreclosure now, I think the most immediate need is to provide them relief in the event that they are forced into bankruptcy.
While I do think loan - voluntary loan modification programs like the Hope Now Alliance play very important roles, the truth is they're woefully inadequate. So people who face bankruptcy need relief. There is a bill that Congressman John Conyers and Steve Chabot, both Democrat and Republican in the House, and Senator Dick Durbin from Illinois have introduced to provide relief to those facing bankruptcy and Chapter 13. And we think that's the most significant and immediate step that Congress needs to take.
MARTIN: Attorney General, 30 seconds to you. Any further relief you think is required beyond sort of the criminal justice probe that we're talking about?
Attorney General MADIGAN: You made a great point, and obviously the wheels of justice turn slowly, and oftentimes too slowly for people. What we suggest is that people who are in subprime loans immediately contact either a HUD housing counselor or they contact an attorney general's office so that we can try to work on a modification. They have been very slow, but we've been pushing servicers to make sure that those are taking place, because we don't want to see people displaced. And yes, there are a lot of good ideas on Capitol Hill, but sometimes that process moves almost as fast as litigation.
MARTIN: All right. Thank you so much. Illinois Attorney General Lisa Madigan joined us from her office. Wade Henderson, president of the Leadership Council on Civil Rights joined us here in the studio in Washington. Thank you both so much for speaking with us today.
Attorney General MADIGAN: Thank you.
Mr. HENDERSON: Thank you.
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