Take Back the American Dream: Explaining the Housing Collapse and What We Need to Do Next

As a result of the massive housing crisis, we’ve seen $15 trillion in lost wealth, millions of underwater homeowners, a deep recession and a loss of faith in our institutions. What went wrong, and what we do about it, is a major focus of progressive activists and advocates like those at this week’s Take Back the American Dream conference.

Heather McGhee, the vice president of the advocacy group Demos, noted that everyone knows about the lost wealth, the evictions, the irresponsibility in the financial sector, but no sense that what anyone did to bring about this crisis was anything more than bad business judgement. What’s the story behind the crisis and why haven’t we seen more action?

Damon Silvers, policy director for the AFL-CIO, said that the crisis was preventable, because it was about improper banking practices on a large scale. We’re having the same conversation he tried to start in 2007, Silvers said; for years, regulators were asleep as private mortgage companies pumped up an enormous asset bubble. There was an illusion of prosperity based on real estate prices and personal debt; the U.S. home market is the largest market for anything in the world, and, Silvers said, the huge bubble created an opportunity for people dubious ethics to create securities that they sold to investors as having high credit quality. The people who were lent money on unfair terms couldn’t pay them back, and a collapse in housing prices and in employment began to have the same impact on more stable mortgages. Now, Silvers said, 14 million households have underwater loans, with hundreds of thousands of foreclosures ongoing. Silvers compared it to a mass version of a “pump and dump” securities scam – except the bank made money on the transfers and securitization, not really on owning anything risky.

“The economic consequences are really really severe,” Silvers said, noting that by some estimates, the costs imposed on the world economy by the massive housing collapse in the US market run in the trillions. “We went through this in the great depression and it was understood that we would never let it happen again.

Silvers said the solution was clear: renegotiate mortgages so that people are paying based on what their house is really worth now. “Underwater loans are not worth their face value,” he said. “These loans have to be written down. The question that faces us is how do you make that happen?”

In theory, he said, you investigate, you find out whether illegal acts were done and by whom, and you impose legal remedies and penalties.

Those remedies should have come out of the settlement between the big banks and the state attorney general, but it fell short. Tracy van Slyke, co-director of New Bottom Line, fought to get a fair settlement, with principal reductions, restitution for people who were foreclosed on, and jail time for people who broke the law. The settlement ended up being a bad deal for principal reduction, but left the door open to criminal penalties. Van Slyke said that the administration has not done enough to rein in the banks and fix the problem, but the fight is still ongoing, with activists across the country putting direct pressure on administration and on banks. “We have to make sure that this election season, this becomes one of the major issues,” she said.

McGhee noted that in commercial real estate, contracts like this get renegotiated all the time. Why aren’t the banks doing that for homeowners who are underwater, she asked?

According to Cailtin Kline, a former trader now active with Occupy the SEC, it’s because of the new structure of the housing market. “Mortgages used to be fairly simple,” she said: the bank would be invested in you and your home, they would loan you the money and you would pay them back. Everyone had the same incentives. But the new wave of securitization changes that. Instead of holding loans to maturity and having an interest in you paying sustainably, they package and cut up mortgages into securities and sell chunks to investors. Now you’re writing a check to a “servicer” who may not be the company you bought your mortgage from, and they have no stake in you or in the investors who own fractions of you and your neighbors’ mortgages. The servicer decides whether you get to restructure or modify your mortgage; they make their money on fees – they have no interest in keeping you in the house in the long term. Sometimes these servicers are owned by the originating bank, and sometimes not.

We’re primarily talking about a few of the very biggest banks when we talk about these problems: Citibank, Wells Fargo, Bank of America, and JP Morgan Chase. These institutions control a majority of the financial assets and are the biggest players in this issue, Silvers said. They are drawing on servicers as a major part of their income, and they have tons of assets priced based on these loans – which is to say, overpriced. Their perceived health and those their stock price depends on that income and those false asset values, Silvers said. they have two incentives, therefore, to hold off principal reductions.

We could have restructured the banks – as we did after the great depression, as we did with the S&Ls in the 1990s – in 2009, Silvers said, but the banks won the public relations battle over the nature of restructuring–and so they were left with the same size and power.

We have a longtime system of property law with some basic foundational rules, Silvers said. Somewhere along the way, the big banks and mortgage services decided they didn’t have to worry about these rules. This is the situation that gave rise to the 50-state negotiations over mortgage fraud. The settlement doesn’t fix that – it settles some government claims but doesn’t settle personal claims, like when a servicer trying to foreclose on you doesn’t hold the title. all those personal claims are still an open question that can be raised in court.

But there’s a path to take on bad banking behavior directly. “We are outfunded, we are out-resourced, but we are not out-peopled,” van Slyke said. “Move Your Money,” Occupy Our Homes, and shareholder meeting protests are a means of activism that express what kind of economy we want to have. In particular, responsible banking ordinances at the local level are having an impact. Banks are seeing these measures pass city councils and local governing bodies, and that’s making them pay attention. “The banks do not want to see city and county governments divesting.”

There are thousands of people getting engaged, van Slyke said, and we need to pull back the shame that isolates homeowners who are facing and turn our focus on bad-actor financial institutions.

One big challenge is that the false narrative of “responsible homeowners” versus “irresponsible homeowners” divides people, makes it seem like people who are underwater are at fault, and suggests that principal reduction is only for bad actors. That’s a powerful story, and one we need to counter loudly.

Silvers agreed, saying that all homeowners got hurt by this. the story of “irresponsible homeowners” ignores the truth of how big banks abused the process, inflated housing values. “Principal write downs are not simply for people who can’t pay,” he said. People bought properties in a cooked market, on mortgages that were structured by people who misled them, and even if they’re making payments, they should have access to principal reduction.

The effect of all of this on our economy has been huge, McGhee said, and makes solving it urgent. “The longer this waits, the harder it will be to create fair relief for everyone, and we need this, from a macroeconomic standpoint, to get our economy moving again.”

Silvers identified four key effects that foreclosure and forced short sales have on families that are affected: a lower credit rating, the loss of their down payment, the social and emotional dislocation of losing a home and the loss of the value of the home for future sale. But there are bigger economic effects, Silvers said. “It’s not just what happens to the original family. Dumping 300,000 houses a month on the market through forced sales is a constant downward pressure on the housing market and it affects all of the neighboring communities.” We’ve papered over some real weaknesses in our economy and shaky solvency in our banking system by not making a big move towards principal reductions, he said. “A dysfunctional housing market is killing our economy‚Ķour financial system is not doing what it’s supposed to do, which is to provide a conduit for productive investment.”

“There’s complete amnesia” at the federal level, Kline said. Regulators and politicians don’t seem to remember that people are angry at the banks and their misconduct. “That voice needs to be heard,” Kline said, and we need to let our leaders know that there’s loud public support for fixing this.