AMERICA:African-American borrowers were 3.8 times more likely than whites to be given subprime loans, writes LARA MARLOWE
MORE THAN one million Americans have lost their homes this year alone. Another seven million face foreclosure by 2012. The human and financial cost of the subprime disaster is mind-boggling.
American Casino, a documentary by Irish-born writer and film-maker Andrew Cockburn and his American wife, Leslie, goes a long way towards explaining the origins and effects of the subprime crisis.
As they point out, US taxpayers are paying $12 trillion (€8 trillion) to bail out the banks that created the catastrophe – $42,000 for every American. Personally, I’d rather see my $42,000 go to one of the hapless homeowners interviewed in the Cockburns’ film than to Wall Street.
For example, there is Denzel Mitchell, the high-school teacher shown wandering through his house on the day he files for bankruptcy. There’s a poignant moment when Mitchell picks up a model aircraft and explains that he wanted to decorate his sons’ bedroom on the theme of the Black Tuskegee airmen who fought so heroically in the second World War.
Mitchell’s $135,000 loan originated with the Wall Street giant Goldman Sachs.
Henry Paulson, the former US Treasury secretary who presided over the subprime crisis, owned $600 million in Goldman Sachs shares when he moved to the treasury in 2006.
As Mark Pittman of Bloomberg News points out: “A teeny, teeny, tiny piece of Hank Paulson’s compensation came from a mortgage that Denzel pays.”
At the origin of the subprime crisis is a giant pool of more than $70 trillion in savings worldwide, looking for investments.
Wall Street believed property values never went down, so mortgage-backed securities were a safe investment. Trouble was, by about 2003, everyone who qualified for a prime loan already had one. The banks aggressively peddled higher risk, higher interest subprime loans to America’s working poor.
To reduce risk to themselves, the banks chopped up mortgages and packaged them like sausages into financial products called collateralised debt obligations (CDOs). They also invented credit default swaps (CDSs), a form of insurance on mortgage-backed securities that enabled investors to collect billions of dollars on bets that borrowers would default.
You could apply for a mortgage over the phone or sign the forms on the bonnet of your car in a parking lot.
Brokers fudged applicants’ salaries to meet requirements. The brokers made big money on the transactions; by the time the borrower defaulted, as the brokers knew they would, the loan was somebody else’s problem.
In June 2002, then US president George W Bush spoke of the “home-ownership gap . . . between Anglo America and African-American and Hispanic home ownership”, and set the goal of increasing minority homeowners by at least 5.5 million by 2010.
If rich, white America had set out to indebt and dispossess ethnic minorities, it would have acted no differently.
“Subprime lenders would target minority areas for their products that were bad,” civil rights attorney John Relman says in American Casino.
“It was essentially marketing bad products or poisonous products to minority communities. And they did that because they knew that those areas were particularly vulnerable . . . This is the civil rights issue of the 2000s.”
Suddenly, communities who had previously been denied housing loans were offered the American dream, a home of their own, in exchange for signatures on contracts they couldn’t understand, the size of phone directories. “The practice of literally targeting an area because of its racial make-up for a bad loan product is what we call reverse redlining,” Relman says.
African-American borrowers were 3.8 times more likely than whites to be given subprime loans. In 2006, 61 per cent of subprime borrowers were actually qualified for lower interest prime rates.
Amalene Emily Wade, an African-American pastor in Baltimore, lost the house she grew up in because she could not meet payments on a $28,000 home improvement loan. She now sleeps in a friend’s car.
Payments on Patricia McNair’s $89,000 mortgage rose from an initial $800 a month to $2,000 a month. As a clinical therapist at John Hopkins Medical Centre, McNair spent her days counselling the depressed, then went home to wrestle with the bureaucracy of foreclosure.
She lost her home in March.
“If interest rates had been reasonable, had subprimes not gone up to 12 or 13 per cent, people could have paid,” says Leslie Cockburn, the director of American Casino.
“There used to be laws against usury.”
How did the US government let this happen and why does the US move so slowly towards bank regulation? The banks have from the outset exercised a form of blackmail: if they weren’t bailed out, we’d face a depression of cataclysmic proportions; if their executives weren’t paid a fortune, they’d go elsewhere.
“There are five bank lobbyists for every congressman,” says Michael Greenberger, a professor of law at the University of Maryland.
Financial issues are presented in deliberately obscure terms, so public rage focuses on something we all understand: continuing high salaries and bonuses on Wall Street.
“It’s unAmerican to get paid for failure,” says Greenberger.