Banks and Their Buddies Learned Little to Nothing from the Great Recession

New Orleans     When we can muster up the attention span to read past the latest Mueller investigation activity and the Trump tantrums, we can see what Congress is doing to try to make life easier for the banks and gut Dodd-Frank requirements that force them to pay more attention in class rather than going the “greed is good” route.  It turns out that there is little relief in revisiting the lessons our old friends, the banks, have learned from their reckless behavior that led to the real estate bubble and the Great Recession only a long decade ago.

Of course, they certainly learned to be careful in dealing with the subprime lending market and its exorbitant and often predatory interest rates.  Wrong!  They only learned that they shouldn’t lend in their own names and through direct subsidiaries, but instead should supply nonbank middlemen with billions so that they can take the first fall when that bubble crashes.  The Wall Street Journal calculates that between 2010 and 2017, yes within 2 years of the meltdown and their repeated mea culpas to politicians and customers, they jumped in hard and collectively have made $345 billion in loans to such companies.  Many of these subprime loans are not in real estate, but in auto financing and similar areas that are even more unstable, if that’s possible.   Don’t for a minute think that this is just something the smaller fry are feeding on, because the big fish are goring on these loans.  Major bank loans to nonbank financial companies that loan money to subprime borrowers include Wells Fargo at $81.1 billion, Citigroup at $30.5 billion, Bank of America at $30.2 billion, JP Morgan Chase at $28.1 billion, Goldman Sachs at $22.2 billion and Morgan Stanley at $16.3 billion.

That’s not all that banks and their buddies haven’t learned.  On the wild right there are still pundits and posers who claim that loose credit standards, ACORN and the Community Reinvestment Act triggered the real estate meltdown and the recession, rather than their own activity.  Two researchers from the Urban Institute, which is the real estate industry and developers own think tank, in a working paper plainly state that the blame game is misplaced.

we … show that First-Time-Home-Buyers have similar loan performance as that of repeat buyers. This evidence indicates that the expansion of lending to include more marginal borrowers may not be the main cause of the financial crisis. Instead, the poor performance of the cash out refinances and refinances more generally, are more important contributing factors.

They put the shoe firmly on the foot of cash out refi’s that were popular for hordes of speculators and investors trying to take money out of properties as the bubble got bigger and then being caught short in their ability to pay as the market became overloaded and crashed.  In plain language speculators, big and small, with the help of bank’s emphasis on refinancing, were a much larger factor.

When banks won’t even admit to themselves what their role was in the crisis, how can they learn the lessons to avoid the next disaster?  Playing button-button on subprime loans and having their lobbyists dissemble in Congressional hallways about where the blame really lies are both signs of more meltdowns to come by the refusal to learn the lessons of the last one.

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Cities and Neighborhoods Catch a Break in Beating Banks

New Orleans   In a rare surprise over the dozen years that conservative US Supreme Court Chief Justice John Roberts has run the nation’s highest court, he joined the four more liberal justices on an issue, delivering a 5-3 vote. Even more shocking the decision was a slap in the face to big banks, in this case Bank of America and Wells Fargo, on a complaint brought by the City of Miami. The court ruled that Miami had standing to sue and to further pursue its claims concerning the discriminatory lending practices of these banks and their allegation that such practices led to decreased property values in neighborhoods, and therefore reduced property tax revenue to the city as well as increasing blight in the community.

This is big, really big, because it powerfully opens the door to a broader interpretation of the Fair Housing Act and its prohibitions against racial discrimination in preventing different standards between one neighborhood and another in cases like redlining, but it also speaks to differing and discriminatory standards in mortgage lending because of income as well, which was at the heart of broker driven exploitation that fueled abuse and outright fraud in the subprime market. There can’t really be too much doubt that Bank of America and Wells Fargo didn’t pause to even take a breath in lower income neighborhoods as they altered their supervision and standards willy-nilly to drive volume on refinancing as well as new purchases much as often as new purchases. Wells Fargo has already become poster child for not supervising its sales staff, but neither does the record of Bank of America and Wells improve when examining the way that they mishandled mortgages underwater during the Great Recession, exacerbating foreclosures.

There’s settled evidence that property values decrease when homes are abandoned in communities, and foreclosures in Miami and other cities led to increased abandonment. The scandalous disregard that big banks showed in refusing to modify the mortgage terms to prevent foreclosures as well as paying little attention to managing and maintaining the properties where they were foreclosing directly lowered values in those properties and whole neighborhoods. Miami has the lead role in proving this now that the Supreme Court has sent the case back down to Atlanta and the 11th Circuit Court of Appeals, and clearly the odds are still stacked against the city and favor the banks, but the door is open and common knowledge and a drive-by to any lower income community establishes the facts on the ground.

The banks are hoping they can prove that they were just one of many crooks, and not the ones pulling the trigger to rob the neighborhoods of their value. In criminal courts this might be a case where the banks might not get a sentence for murder, but they would definitely do time for manslaughter, because there is no doubt that they hurt these communities and the people who live there, whether they were driving the getaway car, acting as the lookout, or holding the gun.

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