Five Realities about the Current Financial and Economic Crises
Carr, James H., Lucas-Smith, Katherine, Suffolk University Law Review
It would be difficult to overstate the dire condition of the U.S. economy as inherited by President Barack obama on January 20, 2009. at that time, the economy stood on the precipice of collapse. over the past year and a half, a combination of economic stimulus spending and continued bank bailouts successfully averted a second Great depression and returned the major banks to profitability. But the challenge of laying the foundation for a more promising long-term economic future for america remains largely unaddressed. in fact, despite recent positive GdP and employment data, the foreclosure crisis that initially imploded the credit markets and undermined the economy continues to worsen. and many characteristics of the current recovery are cause for concern.
This paper presents five key points about the recent near collapse of the financial system and the efforts to rein in foreclosures and reinvigorate the economy. it concludes with recommendations to ensure a robust and sustainable economy that serves working americans more effectively and that limits the prospects of a repeat of the financial misconduct that led to the crisis.
I. THE FORECLOSURE CRISIS WAS AVOIDABLE
one of the most dispiriting aspects of the Great recession is that it was largely avoidable. For more than a decade before the recession began, financial institutions increasingly engaged in practices intended to mislead, confuse, and otherwise limit a consumer's ability to judge the value of financial products offered in the market and to make informed decisions. Nowhere was this more evident than in the subprime home mortgage market. (3) Excessive mortgage broker fees, irresponsible loan products, inadequate underwriting, bloated appraisals, abusive prepayment penalties, and fraudulent servicing practices were major aspects of the problem. (4)
over the past couple of years, some have attempted to lay the problems at the doorsteps of low and moderate income and minority households--arguing that public policies to promote homeownership were responsible for the foreclosure crisis. According to the Center for Responsible Lending, less than 10% of subprime loans originated between 1998 and 2006 were for first-time homeownership. (5) The majority of subprime loans originated during that period were for refinancing. Moreover, the current crisis was not, as some argue, a result of pressure on lenders to extend loans to unqualified borrowers due to the Community Reinvestment Act (CRA). The Federal Reserve Board reports that only 6% of high-cost subprime loans made to low and moderate income households were covered by CRA. (6) The majority of subprime loans were originated outside of the CRA regulatory framework.
The potential dangers of and damages caused by abusive subprime lending were documented, discussed, and debated for more than a decade, only to be dismissed by the federal regulatory agencies responsible for protecting the consumer rights of the American public. (7) Organizations such as the National Community Reinvestment Coalition, (8) Center for Community Change, (9) National Consumer Law Center, (10) National Fair Housing Alliance, (11) and Consumer Federation of America, (12) to name a few, published research on the risks of subprime lending and other exotic mortgage products for up to or more than a decade. The Fannie Mae Foundation published two papers in 2001 on various aspects of predatory lending in distressed communities. (13) The peer-reviewed journal Housing Policy Debate devoted an entire special issue to risky, high-cost lending in 2004. (14) And in 2006, the Center for Responsible Lending warned of the impending foreclosure crisis when it estimated that 2.2 million foreclosures would take place in the next eighteen months. (15) In short, this crisis was not only predictable, it was predicted.
Federal regulatory agencies were aware of the problems and had the authority to act. The Federal Reserve, for example, was given authority to regulate reckless, high-cost mortgage loans in 1994, but did not do so until 2008. …