The real moral hazard at stake

 

By Tim Lilienthal, Bank Accountability Campaign Coordinator for PICO National Network,

Last summer, Ray Mercado and his wife began to struggle to keep up with their mortgage payments on their home in Orlando, Florida. Like responsible homeowners, they reached out to their bank, J.P. Morgan Chase. Ray – a disabled veteran – estimates that he has spoken to 37 different bank representatives in his quest to get help. A barrier to negotiating an affordable payment: their home is worth $100,000 less than what they bought it for just four years ago.

Ray’s story is all too common. Since 2006, the nation’s largest Wall Street banks have foreclosed on over 10 million homes across the United States, according to Realty Trac. Many of these foreclosed homeowners received a mortgage modification and yet lost their home anyway. Why? Because most modifications only reduce interest, not the principal, and so the modified payment is oftentimes still unaffordable.

CoreLogic, which tracks negative-equity rates, estimates that 23 percent of mortgage-holders across the nation owe more on their loans than their homes are worth. Another four percent are on the verge of falling “underwater.”

Big Wall Street banks like Bank of America, Wells Fargo, and J.P. Morgan Chase fueled the meteoric rise in housing prices, making billions of dollars along the way and paying out large bonuses to its top executives. But when this bubble inevitably went bust – due to the banks’ reckless lending – they left homeowners and taxpayers to pick up the tab for the resulting foreclosures and billions in negative equity.

These banks enjoyed all of the upsides of the boom while facing little of the consequences of the bust. But any talk about making the banks reduce even a modest amount of this negative equity has been met with arguments from Wall Street CEOs that we need to ensure “fairness” in the modification process and warnings about “moral hazard.”

As a network of faith-based community improvement organizations, PICO believes that the Wall Street banks have no ground whatsoever on which to talk seriously about fairness and morals – after all, the bailout was nothing but a massive moral hazard that taught the banks that they can take all the risks they want and taxpayers will have their back.

Not only is their argument deeply hypocritical, it’s also wrong. The big banks say that if we begin to help some homeowners reduce their mortgages then suddenly an onslaught of people will default in order to get help. While this possibility may exist in the world of economic theory, it falls flat in the real world that the rest of us inhabit.

PICO organizers and faith leaders are out in the community everyday ministering to struggling families. We see families doing everything they can to keep paying their mortgages. They are afraid to stop making their payments because they know very well that there is no guarantee that they wouldn’t lose their homes. Forcing banks to begin helping a targeted set of responsible homeowners reduce their debt will do nothing to change this.

By letting the banks hide behind this argument, our nation’s leaders are at risk of a grave moral hazard themselves: they are making responsible homeowners like the Mercados continue to bear the full brunt of the cost of the housing bubble and bust, while letting the big Wall Street banks that fueled and profited from this crisis continue to avoid paying their fair share.

Instead of allowing the big bank CEOs to raise false warnings about moral hazards that don’t really exist, we need the Administration, Members of Congress, governors, state Attorneys General, and state and local legislators nationwide to be sounding the alarm of what will happen to the economy if we continue to allow such crippling levels of negative equity to persist.

Housing is one of the engines that drives our economy.  Yet, with 23 percent of mortgage holders underwater, and with foreclosures continuing to drive down housing values across the country, the housing market is less like an engine and more like a noose around the neck of our economy.   Everyone has a stake in getting the housing market going again.

This is especially true for Latino and African-American homeowners, who are losing their homes at disproportionate rates. The National Council of La Raza estimates that one in six Latino and one in nine African American homeowners are in imminent danger of losing their homes or have already lost their homes to foreclosure. This crisis is pushing more and more Americans of all races and ethnicities out of the middle class every day.

While Wall Street has so far been successful in using its massive lobbying operation and billions in campaign contributions to keep politicians at all levels of government relatively silent on these issues, more and more Americans are starting to see through this and ask just who their elected officials work for: them or Wall Street?

Over the last six months, PICO has teamed up with allies at National People’s Action, Alliance for a Just Society, IAF Southeast, Alliance of Californians for Community Empowerment and many other grassroots organizations to make sure that the state Attorneys General side with families and communities and not Wall Street as they negotiate a settlement to the big bank foreclosure fraud scandal that erupted last fall. We have met face-to-face with leaders of the investigation, held countless prayer vigils, rallies and actions and generated dozens of news stories about why the AGs need to negotiate a strong settlement that includes principal reduction.

The AG settlement is just the beginning of a longer fight that will play out over the coming years in which more and more elected officials from all levels will have to choose between standing with ordinary Americans or Wall Street. The big banks have legions of high-priced lawyers, marketing experts and lobbyists fighting to ensure that they don’t have to pay for the consequences of their actions. The Mercados and their neighbors only have themselves and their elected leaders to stand up and fight for them. With the 2024 election on the horizon, we all must get clear about which side, when push comes to shove, our elected officials ultimately stand.