Georgia’s greed aided meltdown

Over the last decade, attorney William Brennan and other grassroots consumer advocates came to the State Capitol more than a dozen times to warn Georgia legislators that the flourishing, free-wheeling subprime mortgage market posed a threat not only to borrowers but to the state.

“We told them that loans were being made to people who couldn’t afford them and couldn’t pay and that there would be a crisis bigger than the savings and loan scandal if this kept up,” says Brennan, director of Atlanta Legal Aid’s Home Defense Program and an expert on mortgage fraud. “They would laugh at us and say the free market will take care of it.”

With the demise of Bear Stearns, the Lehman Brothers bankruptcy and the proposed $700 billion Wall Street bailout, no one is laughing now. And a dwindling few still believe that the free market can be trusted to avert certain recession.

While Georgia wouldn’t have escaped the nation’s economic free-fall, its housing market wouldn’t be so battered had the state clamped down on greed-driven lending. Instead, the General Assembly gutted a strong predatory lending bill after lobbying by mortgage companies and banks, some of which have since disappeared under the weight of bad debts and foolhardy risks.

Georgia has consistently bowed to banking interests and fought any real borrower protections. In 2002, consumer advocates — alarmed over a surge in convoluted and costly loans to unqualified borrowers — turned to then-Gov. Roy Barnes, who, as a private attorney, had won a $115 million class-action lawsuit against Fleet Finance alleging predatory lending practices. With Barnes’ help, advocates overcame 10 years of legislative defeats and enacted one of the nation’s toughest predatory lending laws.

The law allowed for legal claims for damages not just against the original lenders or mortgage brokers but against all those up the lending chain, including Wall Street investors who bought mortgage-backed securities. Unlike in the past, banks didn’t hold onto loans; they sold them off to Wall Street where they were bundled with thousands of other mortgages and sold to investors.

As long as the housing market remained superheated, those investments soared. In fact, they performed so well that when mortgage brokers exhausted the ranks of eligible borrowers, they went after ineligible borrowers to satisfy investor demand. The loan pools were so large and so profitable that they believed a few bad loans could be absorbed.

A myth gaining traction on talk radio is that the Community Reinvestment Act — enacted 31 years ago — is somehow to blame for today’s Wall Street meltdown. But government pressure to lend to poor people didn’t cause lenders to make cold calls to hundreds of homeowners or to team up with home repair firms and persuade elderly property owners to refinance their homes to patch their roofs. It was greed.

A hungry and growing band of mortgage brokers circled borrowers with complicated loans offering payments that started low but quickly escalated, saddling homeowners with payments they couldn’t afford. Along with subprime loans, brokers hawked interest-only and negative-amortization loans. They offered no-money-down, no-documentation, no-job loans, anything to cinch the deal and entice their prey to the closing table.

But when interest rates adjusted higher and housing values plummeted, many of those borrowers lost their homes to foreclosure, lowering the value of entire neighborhoods.

Georgia’s predatory lending law would have outlawed some of those abusive loans, but it never got the chance. One of Sonny Perdue’s first acts as governor was to move to dismantle the law. In doing so, he followed the advice of companies such as Atlanta-based HomeBanc Mortgage Corp., which claimed the law’s liability measures forced it to increase the cost of home loans.

At the time, HomeBanc blamed the increase on the New York investment bank Bear Stearns, which demanded a half-percentage-point premium for its loans because of higher liability risks supposedly associated with buying loans governed by Georgia’s predatory lending law.

With Georgia now ranking third in the nation for mortgage loan delinquencies and 10th for foreclosures, neither HomeBanc nor Bear Stearns is around to advise the governor on what to do next. Both companies became early casualties of the real estate slump and the collapse of mortgage-backed securities.

At one of the more raucous hearings on the predatory lending law, a crowd of young mortgage brokers jeered during Brennan’s testimony about the urgent need to clamp down on subprime loans. One broker commented that Brennan worked for Legal Aid because “he couldn’t get a job in the real world.”

Brennan still has his job. That condescending broker probably doesn’t.

— Maureen Downey, for the editorial board (mdowney@ajc.com)