Senator Eliot Shapleigh - El Paso, Texas

"Stolen Dreams: Subprime Lending in Texas"

Since the founding of our nation, the American home has been a sacred and protected place.  Owning a home is the American Dream.

However, as early as 1802, Thomas Jefferson cautioned Treasury Secretary Albert Gallatin, "If the American people ever allow private banks to control the issue of their currency… the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."        

Now today, for too many of us, the American Dream is being taken away.  For at least three years, Texas has been a national leader in home foreclosures.  For much longer, Texas has been a leader in subprime mortgage lending. [report].

Here is subprime lending data reported across the nation back in 2002:

Source:  Texas Low Income Housing Information Services, using data from the May 2002, Risk or Race? Racial Disparities and the Subprime Refinance Market, report by the Center for Community Change.

As you can see, back then 7 of the top 10 subprime lending areas were in Texas cities. 

In Jan. 2008, Texas reported 14,698 foreclosure filings, ranking it third in the nation for the month.  The foreclosure filings also represented a 20 percent increase over the previous month.  James J. Saccacio, CEO of RealtyTrac, said in a statement, “[F]or the most part the level of foreclosure activity in Texas has not changed much since the state led the nation for all of 2006.” [press release].

While the subprime mortgage meltdown first afflicted the poorest and least powerful among us—mostly minority and low-income American families purchasing their first homes—massive foreclosures have triggered a global financial crisis.  Today, the Federal Reserve is working with JPMorgan Chase to finance a rescue of Wall Street investment bank Bear Stearns.  Lehman Brothers and Goldman Sachs also face rumors of trouble.  Perhaps most telling, for the first time since the 1930s, the Federal Reserve is offering credit to non-banks caught in the crisis. [article].

These are historic times, for all the wrong reasons.  Now, Americans want answers and they want solutions.  How did this happen?  What can we do?       

The subprime mortgage crisis was driven by greed.  Developers, builders, mortgage lenders and investment banks worked together to use "subprime" and other adjustable rate mortgages (ARM) to increase home sales and generate greater profit.  Ostensibly, the housing market grew through "fair" sales to high-risk borrowers, those with lower income or less credit history than "prime" borrowers. 

Now, American homeowners are defaulting in record numbers under these lending agreements.  Much worse, as evidence of the larger predatory lending problem, Reuters reports that borrowers are turning to payday loans to cover subprime mortgage debt. [article].   

Today, there are questions whether these transactions were "fair" at all.  There is evidence that lenders misled borrowers and overlooked questionable credit applications.  There are allegations that investors were deceived as well—with lawsuits to follow.  Regardless, most agree that government officials should have done more to prevent the estimated 1.5 million home foreclosures in 2007 and the expected 2 million to come in 2008.  According to Glenn Somerville, a Reuters analyst, we are experiencing today a level of homeowner stress that "has not been seen since the Great Depression of the 1930s." [article].           

Like the years following the Great Depression, decisive leadership is needed once again.

In Feb. 2003, I wrote then-Chairman of the Federal Reserve Alan Greenspan on high interest rates and access to capital in El Paso.  That same year I asked Lt. Governor David Dewhurst to make access to capital the focal point of our legislative work.  I wrote in a letter to him on Dec. 17, 2003:

As you know, predatory lending has become one of the most critical policy issues facing the financial services industry, particularly in mortgage lending.  Nearly every federal financial services regulatory agency has publicly denounced predatory lending and called for more effective regulations to address it.  State are implementing an number of initiatives to identify and eliminate predatory financial practices within their borders.  Efforts include: educating consumers, conducting targeted examinations, and enforcing tighter regulation of alternative lenders and subprime lenders. [letters in pdf].

What was the result?  No action.  No solutions. 

In Texas, not only did government officials stand by while a crisis loomed, they rewarded it.  In Dec. 2004, Countrywide Financial was awarded a $20 million grant from Governor Rick Perry's Texas Enterprise Fund to relocate to Dallas.  On its way to becoming the nation’s largest predatory mortgage lender, Countrywide encouraged its sales department to lead potential borrowers to these high-cost and often unfavorable loans, which resulted in a richer commission for the salesman, oversized fees to company affiliates servicing the loans, and soaring stock prices that made the company’s executives among the highest paid in the nation. [article].

On Oct. 16, 2007 I asked Perry to take action to protect Texas homeowners.  In response, his spokesperson said not to worry—"It's the normal ups and downs of business."  His response was not unlike Herbert Hoover's 1930 State of Union Address, "Economic depression can not be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body—the producers and consumers themselves."  By 1932, in the midst of the Great Depression, over 13 million Americans had lost their jobs.

It's no surprise then, that today Texas is third in the nation for foreclosures.   

For too long now, special interests have abandoned Main Street for Wall Street.  Now the American people want real solutions.  Federal and state governments must step in and help working families in the same way they're helping international investment banks.  Long term, we must do more to create a financial system that works.  As I wrote five years ago, we must have more disclosure in financial transactions, cap predatory interest rates, and eliminate deceptive lending practices. 

In Jefferson's letter to Gallatin, he added wisely, "The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." 

With leadership, we will put the American people first and restore the American Dream—so that our children will continue to wake in the warm shelter of home.

Eliot Shapleigh