May 2007 traded for more than $50 a share dropped to $1.02 a share—a 98 percent plunge. Citigroup’s primary problem was that it had full exposure on both sides of the subprime debacle: Through CitiFinancial, it was one of the country’s leading subprime mortgage originators and on the investment banking side its people had aggressively pursued a derivative product called a collateralized debt obligation that was based on underlying portfolios of mortgages. Citigroup wrote off tens of billions of dollars in bad mortgages and a new CEO split the company in two: those units they would keep and those they would sell once there was money back in the system. This second category included any number of divisions (insurance, the brokerage business) that Sandy Weill had brought to Citigroup. Citi would cut 110,000 jobs (around one-third of its workforce) and sell off $350 billion in assets by the start of 2010.
Yet there was little joy inside the Center for Responsible Lending over the demise of the predatory subprime lender. The value of real estate in the United States had shrunk by $1 trillion in a matter of months, and there was more bad news coming as the rates would reset on all those explodable ARMs written in 2006 and early 2007. There was another new foreclosure every thirteen seconds through the early months of 2009, the Mortgage Bankers Association reported, and while the Obama administration promised help, it was slow in coming. Under its $75 billion Home Affordable Modification Program, created in March 2009, the government announced that it would pay mortgage companies $1,000 for each loan they modified and then another $1,000 a year for up to three years. But as 2009 was coming to a close, the institutions controlling these loans had renegotiated the home loans for only a tiny fraction of the 4 million eligible homeowners—66,000 in ten months. The CRL estimated that homeowners in neighborhoods with a high ratio of subprime loans saw the collective worth of their homes drop $500 billion in value because of nearby foreclosures.
“In the last twenty-five years, the United States made tremendous progress integrating poor families into the middle class, largely through home ownership,” Martin Eakes told me. “But now we’ll lose about half of that progress because of subprime abuses that were permitted to continue despite the best efforts of a lot of people. The subprime lenders have basically destroyed the communities that we were targeting. It’s a tragedy.” Compounding that tragedy, Eakes said, were the likes of Rush Limbaugh, Dick Cheney, and editorial writers for the
“If the extremists succeed in putting forward this view, then we’ll lose all hope for the next generation,” Eakes said. Equally disconcerting were those blaming the poor for the financial woes facing both Fannie Mae and Freddie Mac. Fannie and Freddie both played a big role in helping to cause the Great Recession of 2008. In September of that year, the federal government felt obliged to announce a $200 billion rescue of the two government-sponsored mortgage finance companies. But its true motivation for buying up all those home mortgages and either holding them in a portfolio or reselling them to Wall Street investors seemed less about helping those of modest means purchase a home—a large portion of those subprime loans, after all, involved middle-class and upper-middle-class borrowers—and more about profits and remaining relevant. Both Fannie and Freddie had gone public in 1989 and the seemingly unquenchable appetite for subprime loans in the 2000s seemed primarily about justifying the hefty salaries and even bigger bonuses the executives paid themselves.
There was at least one subprime lender still in business: Self-Help. Its own loan portfolio was performing blessedly well despite the global financial meltdown. By September 2009, roughly 4 percent of the country’s prime borrowers were delinquent on their mortgage payments compared to 20 percent of subprime borrowers. At Self-Help, that figure was 8 percent. The mortgages Self-Help bought on the secondary market it created in the mid-1990s were also faring much better than the typical subprime loan, in no small part because of the standards the organization used when evaluating a portfolio. Self-Help, Eakes said, would only buy portfolios where the points and fees were in line with conventional loans and would avoid writing mortgages that included onerous terms, such as a prepayment penalty. “We’ve always been about creating sustainable loans,” Eakes said.
There are still people, and not just Allan Jones, who blame Eakes and Self-Help at least in part for the subprime meltdown. Self-Help, after all, created the first subprime market and it was Self-Help who pushed Wachovia so hard to enter subprime lending (the bank ultimately hit bottom because of subprime). One problem with that argument is that Self-Help ended up being dwarfed by the larger subprime market. Over fifteen years, Self-Help bought $6 billion worth of subprime loans on the open market—or what Ameriquest, Countrywide, or Household Finance wrote individually in two months in 2005. “We were just a flea on this giant elephant,” Eakes said. Self-Help’s David Beck also disputed the notion that Self-Help’s secondary market served as a kind of gateway drug, giving established banks a taste for subprime. “The dirty little secret about subprime was already out there,” Beck said. “We didn’t have to give banks any idea of the obscene profits they could be making because they already knew.”
Despite its successes, Self-Help’s allies weren’t universal in their praise of the group. “They told me when we were fighting to save the Georgia Fair Lending Act, ‘We’ll negotiate to one iota of something just to be able to say we have a victory,’” Bill Brennan said of the role the CRL played in Georgia after the defeat of Roy Barnes. “We ended up dropping out of negotiations way before them. To be honest about it, we were appalled they were continuing to negotiate long after the bill had been gutted beyond recognition.”
Vincent Fort was even harsher in his assessment of CRL. “I’m down here dealing with people every day talking about foreclosures and predatory lending,” Fort said, “but here this group flies in here, they’ve received tens of millions of dollars from some predatory lenders, and they’re working on a bill with Republicans that’s a total piece of shit because they want to go back and say ‘We’ve accomplished this.’ I wasn’t very happy with the CRL.”
Then there’s the perspective of those who are part of a group that
Loftin is a good friend and I’ve been hearing about his group since the early 1990s, when he took over as its executive director. Technically, Homewise is not a subprime lender. His group focuses on potential homeowners with blemished credit scores but rather than put them in loans with a higher interest rate, Homewise provides prospective homebuyers financial counseling and also helps them get into the habit of setting aside some savings each month. (The Home Ownership Center of Greater Dayton, Beth Deutscher’s group, has the same approach as Homewise.) Typically it takes six months to a year for the serious homebuyer to boost his or her credit score and also scrape together the 2 percent down payment his organization wants to see before making a loan. “If customers build a savings habit to save that money on a modest income,” Loftin told
Loftin thinks the world of Martin Eakes. I’ve heard him describe Eakes as having a rare moral clarity in a jaded world and he expresses great admiration for Eakes’s effectiveness, his creativity, and his integrity. He’ll hear Eakes speak and he’ll feel invigorated. “He has this ability to remind us why we do what we do,” he said. The two have often been featured speakers at the same conferences and usually find themselves on the same side of an issue. The exception is the use of subprime loans. Through the subprime boom, Loftin watched as more than a few nonprofits embraced such loans. Colleagues confessed to him that they were moving into subprime because that’s where the action was and boasted about the fees they were earning writing those loans. He saw groups he had respected profoundly lose their way as they accepted money from Ameriquest, Citigroup, and other large lenders.
