Corporate profiteering at heart of foreclosure crisis

Maximizing corporate profits remains as a driving factor in the housing crisis according to Congressional testimony and news reports today.

Testifying before Congress on the foreclosure crisis, Keith S. Ernst, of the Center for Responsible Lending, stressed that the problem didn't start with the working people who took out the loans, but the business practices of the big banks and mortgage companies: “Our empirical research shows that the leading cause of the problem was the characteristics of the market and mortgage products sold, rather than the characteristics of the borrowers who received those products.”

These same practices are now frustrating Obama administration efforts to address the crisis according to a lead article in the Washington Post, pointing to the banking industry’s reluctance to renegotiate loan terms because foreclosure is more profitable.

“Policymakers,” writes the Post, “often say it's a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.”

Standard loaning practices only help a slim margin of the over 1.5 million people who have received foreclosure notices since the beginning of the year, with only 200,000 having renegotiated terms. Such procedures are calibrated to assist only those who fall at least two months in arrears and who might barely manage to continue payments by means of assistance.

Curiously, “those who are most determined to meet their obligations are often unlikely candidates for loan modifications.” The Post continues, “These are the people who will get a second job, borrow from their family to keep up,” explained Paul S. Willen, a senior economist at the Federal Reserve Bank of Boston and an author of its report. 'From a cold-blooded profit-maximizing standpoint, these are the people the banks will help the least.'

While sub-prime loans sparked the crisis, standard mortgages are now a growing if not the main source of new foreclosures. The foreclosure rate is now a staggering “400 percent, four times the historical average and the highest it has ever been since the Great Depression,” testified Dr. Susan M. Watcher from the Wharton Business School, at today’s hearing.

Watcher warned that falling house prices and growing unemployment is fueling a mutually reinforcing crisis: “As average home prices fall, for more and more households, the amount for which they could sell their homes is less than what they owe on their mortgages. A loss of a job, illness, sudden sharp increases in required mortgage payments will force owners to sell and will force foreclosure, since homes cannot be sold for the amount of the mortgage due.”

Interestingly, Watcher raises the need for possible “non-cyclical” remedies. She said, “The financial system that triggered the crisis encouraged the production and securitization of uneconomic loans which eventually brought the system down. Is a less pro-cyclical financial system an achievable goal?”

Keith S. Ernst called for the passage of H.R. 3126 to create a Consumer Financial Protection Agency as the chief means of addressing corporate profiteering. The banking industry is lobbying hard against the bill.

Carolyn Maloney, chaired today’s hearing.