Déjà vu: Holder deal risks another mortgage crisis

NEW YORK – In the new $13 billion JP Morgan Chase subprime loan deal with the Justice Department, Attorney General Eric Holder appears to have designed a multi-million dollar, backdoor kickback for activist groups like the disgraced community organizer ACORN.

Critics say the Obama administration has learned nothing from the mortgage meltdown in 2008-2009, which was prompted by the default of subprime loans packaged into financial instruments.

Instead, the administration is engineering a strategy to revive the subprime mortgage market by forcing banks to fund left-wing community organizing groups that would once again place low-income families into mortgages they can't afford.

As Investor’s Business Daily pointed out in an editorial Tuesday, “Annex 2” of the JPMorgan settlement agreement, announced Nov. 19, mandates that “JPMorgan fork over any unclaimed or unpaid damages to a nonprofit group that finances Acorn clones and other shakedown groups.”

“Annex 2” specifies that JPMorgan pay out $4 billion in “consumer relief” to aid consumers harmed by its packaging of subprime loans into securities that were sold to institutional investors at the height of the housing boom.

JPMorgan has agreed to make payments under the Making Home Affordable Program and the Home Affordable Modification Program, two Obama administration programs designed to get low-income families into home mortgages. The programs assist low-income families with mortgage loan forgiveness, loan modification agreement payments and targeted mortgage obligations to “relieve urban blight.”

However, if by Dec. 31, 2017, JPMorgan has not paid out the full $4 billion, then the Holder Justice Department will require the bank to pay “liquidated damages in the amount of the shortfall to NeighborWorks America, a government-funding organization that supports a network of left-leaning community organizers the IBD editorial characterized as “operating in the same vein as Acorn.”

The payments to NeighborWorks America could provide the group with hundreds of millions of dollars to utilize in various programs to get low-income families into home mortgages.

IBD pointed out that in 2011 alone, NeighborWorks America provided $35 billion in “affordable housing grants” to 115 ACORN-like groups, “with recipients including the radical Affordable Housing Alliance, which pressures banks to make high-risk loans in low-income neighborhoods.”

IBD concluded Holder’s backdoor kickback to leftist groups seeking to get low-income families into risky mortgages funds all over again the problem that led to the subprime mortgage crisis in 2008.

The IBD editorial said:

In effect, lenders are bankrolling the same parasites that bled them for the risky loans that caused the mortgage crisis. Infused with new cash, they can ramp back up their shakedown campaign, repeating the cycle of dangerous political lending that wrecked the economy.

Advertisement - story continues below

Under the dubious deal, JPMorgan is also obligated to donate foreclosed homes to these "nonprofits" while offering home loans to "low to moderate income borrowers" in areas hit "hardest" by subprime foreclosures.

The consent order refers JPMorgan to a HUD map of "targeted" areas such as Detroit, Cleveland, Atlanta, Miami, Washington, D.C. and Chicago. In announcing the deal, Holder alleged JPMorgan "misled investors" in securities backed by subprime mortgages. Yet, oddly, the deal aids only deadbeat borrowers — not investors.

Like other recent bank shakedowns, the JPMorgan deal is really an anti-poverty program benefiting Democrat strongholds hit hardest by subprime foreclosures.

IBD calculates the “off-budget welfare program” engineered by Holder’s Justice Department and underwritten by large U.S. banks such as JPMorgan Chase, Bank of America, Wells Fargo, and Citibank, now totals “$86 billion and climbing," amounting to “a fraud, using Wall Street to finance a social agenda.”

Déjà vu

Providing home mortgages to homebuyers unable to pay mortgages when interest rates rose across the economy was the crux of the subprime mortgage market. It expanded from the rationale of providing low-income families with “affordable housing” to the point at which income verification was considered a minor detail in a housing market in which rising home values had become the norm.

The Community Reinvestment Act, or CRA, was signed into law by President Jimmy Carter in 1977 with the goal of forcing banks to provide credit to businesses and homeowners with poor credit.

The CRA carried out a social agenda of stopping banks from “red-lining” inner-city areas, a practice of refusing to lend in places where the risk of default was high.

Even though lending to those with poor credit is inherently risky, the Carter administration was intent on forcing banks to accept a social responsibility to provide credit to homeowners and businesses in low-income neighborhoods.

The CRA became super-charged during the Clinton administration with a set of new rules that allowed subprime mortgages to be securitized.

Federal Reserve Chairman Ben Bernanke, in a speech to the Community Affairs Research Conference in Washington, D.C., on March 30, 2007, noted a 1992 law passed during the Clinton administration expanded the CRA market by requiring the government-sponsored enterprises Fannie Mae and Freddie Mac to securitize “affordable housing loans,” a euphemism widely understood to mean low-income housing loans.

In the early months of 2007, before the mortgage bubble burst, subprime mortgages constituted as much as 65 percent of all loans packaged into mortgage-backed securities.

One of the lead subprime mortgage writers was Countrywide Financial Corporation, which in 2006 financed approximately 20 percent of all mortgages in the United States.

Bubble built on subprime success

Headed by Angelo Mozilo, Countrywide pioneered in providing undocumented loans in which mortgage applicants were not required to provide any loan documentation or down payments.

To keep the monthly payments low for the first year or more of the loan, the unregulated subprime market developed a whole set of unorthodox mortgages, such as “interest-only” loans in which no principle payments were required or “balloon” loans in which what amounted to a down payment was postponed.

As CNBC reported in a Special Report first broadcast Feb. 12, 2009, titled “House of Cards”, the best mortgage customer at the height of the mortgage bubble became “anyone with a pulse.”

CNBC quoted Wall Street mortgage banker Michael Francis, who enlisted lenders on the West Coast to supply him with mortgages to package into mortgage-backed securities bonds.

“We removed the litmus test,” Francis told CNBC. “No income, no asset. Not verifying income … breathe on a mirror and if there’s fog you sort of get a loan.”

Even the credit agencies played along. CNBC interviewed Ann Rutledge, who rated securities for Moody’s.

When home prices surged, no borrowers defaulted, and riskier Triple-B rated securities made from subprime mortgages began to look as good as the safe Triple-As, she explained.

“Eventually the market gets smart and says, 'Let’s lower the requirements for Triple-A,” Rutledge said.

The credit rating agencies had an incentive to award a mortgage-backed security the best possible ratings, CNBC noted, because the agencies were paid for their appraisals by the very investment banks that issued the mortgage-backed securities.

Bubble burst

The mortgage bubble was destined to burst when Federal Reserve Chairman Alan Greenspan and the Fed began raising interest rates late in 2004.

When Ben Bernanke succeeded Greenspan as Fed chairman on Feb. 1, 2006, he continued Greenspan’s policy of tightening credit.

Fed fund rates, at 4.29 percent when Bernanke took over, rose to 5.25 percent in August 2006, when rates stayed at or near that plateau for almost a year.

By August 2007, Bernanke and the Fed realized the mortgage bubble had burst and the economy was entering a recession.

At that point, Bernanke and the Fed began lowering rates, dropping Fed funds rates from the plateau of 5.25 percent in August 2006 to 4.24 percent by the end of 2006 and to nearly zero by the end of 2007. Still, the move to drop rates was too little and too late. Unfortunately, the damage had already been done.

Subprime mortgages written during the building of the mortgage bubble could not withstand higher rates.

The wave of foreclosures that started in the subprime market eventually spread to the mortgage market as a whole, triggering not just a meltdown of the housing market, but also a general collapse of the economy that led to the massive recession that plagued the end of George W. Bush’s second term as president.