nation’s homeownership rate has fallen ... and will plummet further next year.: Mozillo made $270 million in profits selling stocks ...

Wednesday, December 19, 2007 by The American Prospect | The Conservative Origins of the Sub-Prime Mortgage Crisis | Everything you ever wanted to know about the mortgage meltdown but were afraid to ask. | by John Atlas and Peter Dreier
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Make no mistake — it is a crisis. Since 1998, more than 7 million borrowers bought homes with sub-prime loans. One million of those homeowners have already defaulted on their loans. The crisis is likely to get worse. Financial analysts predict that at least a quarter of these people — over 2 million families — will default and face the financial pain and psychological grief of losing their homes over the next few years.

Bush, who once touted his administration’s goal as creating an “ownership society,” may now go down in history as the president on whose watch ownership declined. The nation’s homeownership rate has fallen during the last two years and will plummet further next year. Moreover, Bush’s unwillingness to take bold steps to regulate lenders, brokers, and investors will guarantee that the next president will inherit a much bigger mortgage mess.
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Mortgage brokers, the street hustlers of the lending world, often used mail solicitations and ads that shouted, “Bad Credit? No Problem!” “Zero Percent Down Payment!” to find people who were closed out of homeownership, or homeowners who could be talked into refinancing. They seduced millions of people into signing on the dotted line. Although sub-prime lending has been concentrated in minority and low-income urban areas, it has spread to the middle-class suburbs.

The sub-prime lenders didn’t hold on to these loans. Instead, they sold them — and the risk — to investment banks and investors who considered these high interest rate, sub-prime loans a goldmine. By 2007, the sub-prime business had become a $1.5 trillion global market for investors seeking high returns.

The whole scheme worked as long as borrowers made their monthly mortgage payments. When borrowers couldn’t or wouldn’t keep up the payments on these high-interest loans, what looked like a bonanza for everyone turned into a national foreclosure crisis and an international credit crisis. For millions of families, the American Dream of homeownership has become a nightmare.
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The executives and officers of some mortgage finance companies cashed out before the market crashed. The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007. And the three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006. Paul Krugman reported in The New York Times that last year the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million, respectively.
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Predatory loans sometimes involve a conspiracy between loan agents and unscrupulous home-improvement contractors, as well as appraisers who inflate the value of a house so that families will borrow more than the houses are really worth. Predatory mortgages often include last-minute, hidden second mortgages. Using bait-and-switch tactics, predatory lenders tout low interest rates in ads targeting the elderly and residents of low-income, working-class, and minority neighborhoods, without explaining the actual interest rates or that adjustable-rate mortgages mean that the rates will increase.
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And It All Started with Deregulation

There was a time, not too long ago, when Washington did regulate banks. The Depression triggered the creation of government bank regulations and agencies ...
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In 2000, Edward M. Gramlich, a Federal Reserve Board member, repeatedly warned about sub-prime mortgages and predatory lending, which he said “jeopardize the twin American dreams of owning a home and building wealth.” He tried to get chairman Alan Greenspan to crack down on irrational sub-prime lending by increasing oversight, but his warnings fell on deaf ears, including those in Congress.
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Those who profited handsomely from the sub-prime market and predatory lending, the mortgage bankers and brokers, are working overtime to protect their profits by lobbying in state capitals and in Washington, DC to keep government off their backs. The banking industry, of course, has repeatedly warned that any restrictions on their behavior will close needy people out of the home-buying market. Its lobbyists insisted that the Bush plan be completely voluntary.
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And wouldn’t it be nice to hear the next president tell the American people that, “the era of unregulated so-called free-market banking greed and sleaze is over”?