Power deregulation set the stage for the Enron disaster; now bank and lending deregulation have helped bring on a catastrophe in the housing market, threatening growing numbers of people with the loss of their homes and many financial institutions with solvency problems. The story goes back to 1980, when Washington did away with the rights of states to cap the interest on home mortages that gave lenders the first lien. In the ‘90s, as the practice of “securitization” (repackaging and sale to investors) of subprime mortgages heated up, subprime lending accelerated, quadrupling from $35 billion worth of mortgages in 1994 to $140 billion in 2000.
To open a window on the subprime lending scene at its wildest, consider the Washington Post’s description of events at New Century Financial, one of the biggest players on that scene: “The head of a large Wall Street bank’s mortgage group contended that his firm regularly lost out on New Century’s business because its due diligence process was stringent and it had been returning a high number of loans. New Century wanted the bank to ease its standards, and the issue became a source of friction between the companies.” The Post quotes this banker as saying, “The more [loans] you accepted, the better relationship and the better price you would have. The name of the game was definitely volume.” The pressure was internal as well as external; the Post reported that an unnamed New Century employee in Foxboro, Mass. collapsed one day from the strain and had to be hospitalized.
The Federal Reserve Board could have put the brakes on the subprime market; a law called the Home Ownership and Equity Protection Act gives the Fed the power to prohibit “acts or practices in connection with mortgage loans that the board finds to be unfair, deceptive or… associated with abusive lending practices, or that are otherwise not in the interest of the borrower.” But neither the Fed nor Congress used its powers to stop the predatory lending spree that’s now causing trouble from Miami to Hong Kong. After all, the interest lenders squeeze out of unqualified borrowers helps keep politicians in business. In the 2005-6 election cycle, New Century alone gave Republican and Democratic Congresspeople $186,143, including $5,000 to Connecticut Sen. (and presidential candidate) Chris Dodd, chair of the Senate Banking, Housing and Urban Affairs Committee, who has put forward a rather weak proposal to “reform” subprime lending.
