Obama's aggressive stance on subprime lending
by Max Fletcher, Wed Aug 29, 2007 at 06:51:27 PM EDT
Today, in an opinion piece in the Financial Times entitled Fine unscrupulous lenders, Barack Obama introduced his plan to solve the financial crisis brought on by the meltdown in the subprime mortgage sector. Obama started out with a rebuke of subprime industry practices, along with a stearn warning about the potential consequences of the present crisis. He also indicted the lobbying culture in Washington as complicit in the problem:
The implosion of the subprime lending industry is more than a temporary blip in our economic progress. It is a cancer that, given today's integrated financial markets, threatens to spread with devastating impact to housing and to our economy as a whole, unless we act to contain it.
It is also a parable about how an excess of lobbying and influence can defeat common sense rules of the road, placing both consumers and our nation's economic well-being at risk.
In his diary at DailyKos today, Jerome a Paris praises Obama for his strong stance on the issue:
The intro pulls no punches, and is very heartening to me - not because it's good news that a "devastating" financial crisis is likely, but because it is, as far as I can tell, the first acknowledgement by a senior politician anywhere of the gravity of what's unfolding.
If you read my diaries, you may have noted that I personally think that the financial crisis will be massive, and I also note how important it is that Democrats put the blame properly where it belongs, i.e. in the feudalistic, class warfare economic policies of the right, which use massive debt (borne by the poor) to hide the capture of an increasingly large share of the economic pie by the ultra rich.
The first step is to not deny the economic realities, and to speak up against that wall of debt, and it is good to see Obama making that step clearly.
The introductory paragraphs set the tone for a strong set of proposals to alleviate the crisis. Perhaps most prominently, Obama calls for fines to be levied against predatory subprime lenders in order to rescue homeowners facing foreclosure after receiving loans they could not afford.
We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners - at least until this crisis passes - is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.
The second part of Obama's plan involves tighter regulation of the lending industry. Here, Obama returns to an old theme, arguing that it will take a reining in of the lobbying industry in order to achieve a reining in of the lending industry.
But we also know that Washington played a role. At a time when non-bank lenders were offering new kinds of mortgage, the federal government should have made sure it was all being done on the level. Instead, our government failed to provide the regulatory scrutiny that could have prevented this crisis.
While predatory lenders were driving low-income families into financial ruin, 10 of the country's largest mortgage lenders were spending more than $185 million lobbying Washington to let them get away with it.
I think we also have to recognise what will happen if we reward the mortgage industry's lobbying: they will keep using the same kinds of deceptive practices to make a quick buck, no matter what the consequences to home buyers and their communities. Rather than correct what they are doing wrong, these companies will know that if things go badly, they can always lobby Washington to let them off the hook.
If we are serious about stopping this crisis and preventing much larger turmoil in US housing markets, Washington needs to stop acting like an industry advocate and start acting like a public advocate.
Beyond reining in lobbyist power in Washington, Obama offers a specific plan to bring more regulation to the industry and help borrowers avoid taking out loans that will almost inevitably lead to foreclosure.
The rules currently governing mortgages were written in the 20th century to make borrowing easier to understand for borrowers. We need to update these rules for the 21st century and enact the regulatory and disclosure laws that the mortgage industry has been lobbying against.
That is why I have proposed a Home Score system that would create a simplified, standardised metric for home mortgages - rather like the annual percentage rate (APR), the effective interest rate a borrower ends up paying on a loan - allowing prospective home buyers easily to compare various mortgage products so they can find out whether they can afford to make the payments.
Obama's proposal is indeed an aggressive plan to save affected families from financial ruin, penalize predatory subprime lenders, and bring sensible regulation to the industry, and was described as "radical" by the very publication that carried his piece.
The proposal is among the most radical yet from a leading Democrat and comes as Washington tries to respond to a growing wave of foreclosures and a crisis in credit markets..
It also comes amid greater discussion in Washington on whether the mortgage industry - including credit rating agencies involved in rating mortgage-related securities - should be more tightly regulated to prevent a repeat of the crisis
While many commentators, including some liberals, have been cool to a "bailout" for people they argue were unwise to enter a contract they could not fulfill, it seems that we could treat victims of subprime lending at least as well as the corporate counterparts who have made questionable financial decisions in recent years.
Obama's article today was the latest in a series of bold progressive policy roll-outs from his campaign, and was perhaps another step toward setting himself apart from Senator Clinton as the campaign enters the post-Labor Day homestretch. The two differed on the issue in the Des Moines debate earlier this month:
There were mixed responses to a question about the mortgage crisis. Clinton said that there needed to be protections for people facing foreclosures but that the answers weren't easy, and she declined to offer any. Richardson said there needed to be tougher government regulation of the credit industry. Obama used the question to take an indirect swipe at Clinton over her defense of paid lobbyists.
"The reason that we haven't had tougher regulation in part goes back to the issue of lobbying," he said. "This is where special interests have been driving the agenda."
Clinton's plan, introduced earlier this month, lacks the teeth of the Obama plan in that it doesn't propose fines on predatory behavior. While it will be difficult to compare the specifics of the candidates' mortgage industry reform plans until Obama's is up on his website, this does represent yet another divergence in philosophy between the top two candidates. Obviously, that is something Obama will need to continue to pursue as he tries to catch Clinton in the polls.
Obama's mortgage plan is a strong progressive policy that holds predatory lenders accountable while saving thousands of families from financial ruin. The issue of subprime lending is one that has, comparatively, not been as widely discussed on liberal blogs. I have to confess to only a rudimentary knowledge of the details of the crisis garnered only from recent newspaper articles on the subject and a meager amount of research. If anyone else with more expertise or a better understanding of the issue would care to leave a comment, I'd be very interested to hear what you have to say. If you're quite lost over what is going on with the subprime lending "meltdown,"here is a brief explanation.