To the Teacher:
Americans everywhere are feeling the effects of the housing bust that followed the housing boom, though many more personally and keenly than others. Economists and financial experts have differing analyses of what happened and why, though there is general agreement that easy credit, subprime mortgages and their securitization, lax or even no government regulation, and unfair, at times fraudulent, lending practices played significant roles.
Below are some suggestions for student inquiries into this issue and introductory snapshots of Americans who are experiencing the effects of the housing bust. Following that are two student readings on (1) what fueled the housing boom, the warnings that were ignored, the financial collapse that followed, and the government bailout of banks that caused the crisis, and (2) the impact on those facing foreclosure, the financial industry's political clout with lawmakers, which has kept many of those facing foreclosure from getting help they need, and recent investigations that uncovered predatory lending practices. Discussion questions follow the reading. See the introduction for suggestions for further inquiry.
See the high school section of TeachableMoment for earlier sets of materials on the financial and economic crises.
For discussion and later inquiries
- Ask students what they know about the housing boom and bust.
- What questions do they have? How might these questions be answered?
- These questions may be answered in the readings; others may be useful later for student inquiries. Make a note of what students are misinformed about; this too might be useful for future inquiries.
Introduction:
The human face of foreclosure
"Bad economy puts more people on streets"
"The tears begin and her voice trembles as Ruth Martinez remembers the first few days of her new world...Her husband had lost his job, and the stress drove them apart. Then Martinez was evicted. Suddenly, her car was her home. And she was afraid to ask for help...
"Rudy Salinas finds them in cars, under bridges, in abandoned homes, and even in protected trenches artfully dug by the military veterans who put survival skills learned in Iraq and Afghanistan to use in America's inner cities...
"In my eight years of doing this I have never come across as many people who've told us they have never been homeless before," said Salinas, the director of community outreach for People Assisting the Homeless in Los Angeles. (www.cnn.com, 5/8/09)
"It's a little scary"
"On Bainbridge Street in the predominantly black Bedford-Stuyvesant section of Brooklyn...a visitor can identify homes in jeopardy by the cracked stoops, broken windowsills and tilting chimneys. Alexia Billiart, 33, who is black, and her husband, who is white, moved a year ago...into a handsome row house in Bedford-Stuyvesant.
"Across the street, two foreclosed homes have fallen vacant, and a nearby apartment building stands broken and padlocked...'We figured we'd move here and participate in the rebirth of this block,' said Ms. Billiart, who works for a financial planning firm. 'It seems to be going backward; it's a little scary.'" ("Minorities Hit Hardest as New York Foreclosures Rise," New York Times, 5/16/09)
"Children of foreclosure falling behind in school"
"Some of the people hit hardest by this bad economy are the youngest...These are the children whose families have had to move, sometimes more than once. The youngsters are pulled out of school, often leaving their friends behind without even saying goodbye.
"Nine-year-old Kenia, who is in the fourth grade at Fairview Elementary School in Modesto, California, said that is what happened to her. She is new to the school, having moved to the area just a few months ago. She said it is really hard and she misses her friends." (www.cnn.com, 2/27/09)
"Renters, too, can face the hit of foreclosure"
"Losing a home to foreclosure can be devastating. Typically, homeowners come to mind when we think of foreclosure. But the fact is, many foreclosed properties are places that renters call home, too. Recently, a father of five from Clackamas County called a Legal Aid office. His landlord owns all the houses on the street, and every one is in foreclosure-many of them are sitting vacant.
"The father wants to continue paying rent, but the landlord's bank won't accept his payment and is pushing him to move out. 'What should I do?' he asked the Legal Aid office. Unfortunately, there's no good answer under Oregon law." (www.oregonlive.com, 5/5/09)
Student Reading 1:
"Bad banking decisions" and who made them
The housing boom
"What should I do?" is a question on the lips of millions of Americans on the brink of foreclosure or homeless because of foreclosure. They are victims of a housing boom that began early in the new century and then collapsed.
Low interest rates and easy-to-pay mortgages stimulated a demand for houses, especially among people who had never owned one. Many had financial problems that stood in the way: limited incomes, debt, poor credit histories, inability to make a down payment.
But none of these problems prevented them from getting a "subprime" mortgage, or low, adjustable rate mortgage. An adjustable rate mortgage might require people to pay no more than interest on the mortgage for two years. Then the "adjustable" part would kick in — sharply rising payments. Too many buyers did not understand what they were getting into. Some mortgage brokers helped them not understand. Some were crooks.
Rumpelstiltskin spun straw into gold. Financial wizards at major banks and investment houses spun subprime mortgages into packages called "securities." They sold these securities to investors around the world. Essentially they were selling investors the promise of the new homebuyers' future mortgage payments-but they often misrepresented the risky nature of those mortgages.
For awhile, everyone was making money on this explosion of subprime mortgages. Most of the lenders of hundreds of billions of dollars for sub-prime mortgages were giant banks—JPMorgan Chase, Citigroup, Bank of America, Wells Fargo.
A study by the Center for Public Integrity called "Who's Behind the Meltdown" documents how lawmakers "essentially ignored repeated warnings that high-cost loans represented a systemic risk to the American economy." (www.publicintegrity.org, 5/6/09) Treasury Secretary Timothy Geithner, who was head of the New York Federal Reserve during the housing bubble and was in a position to warn of its consequences, now says, "The financial crisis was caused in large part by significant gaps in the oversight of the markets." (5/13/09)
A major reason for the lack of oversight was that beginning in the 1980s, banks spent nearly $370 billion lobbying Congress successfully to weaken oversight and regulation of their behavior. (www.pbs.org/moyers/journal, 5/8/09)
For a while, large numbers of house buyers kept pumping up prices. Financial wizards and ordinary homebuyers shared the delusion that prices would keep rising indefinitely. Even homebuyers who couldn't really afford their mortgage found that they could sell their home after awhile for significantly more than they had paid for it—so they kept on buying, and bankers kept on selling, risky mortgages.
Alan Greenspan, who was Federal Reserve chairman at the time, later admitted in congressional testimony that he was "shocked" at how "mistaken" he had been in believing that "the self-interests of ...banks and others" would ensure their "protecting their own shareholders and their...firms." He and Congress should have required oversight and regulation to prevent "systemic risk to the American economy."
The Bust
Beginning in 2007, the first signs of serious trouble appeared. In an overstuffed housing market, prices fell. Homeowners with sub-prime mortgages could not make rising payments, could not borrow money on declining home values, and could not sell their homes. Home foreclosures mounted.
Banks began to founder under the weight of mortgage-backed securities whose value was sinking and which they could not sell. By the fall of 2008, the Bush administration's Treasury Secretary Henry Paulsen announced that financial collapse was imminent. The banks of America were "too big to fail." A Troubled Asset Relief Program (TARP) was essential to keep them from drowning under the weight of the sinking value of sub-prime securities nobody would buy. Billions in taxpayer money was essential to bail them out.
TARP bailout money
Citigroup: $45 billion
Bank of America: $45 billion
Wells Fargo: $25 billion
Additional billions went to such other big financial institutions as Goldman Sachs, Morgan Stanley, MetLife, and GMAC. And then, recently, tens of billions more to Citigroup, Bank of America and Wells Fargo after regulators finished examining their books.
"The mega-banks that funded the subprime industry were not victims of an unforeseen financial collapse, as they have sometimes portrayed themselves. These banks were deliberate enablers that bankrolled the type of lending that's now threatening the financial system," said Bill Buzenberg, Executive Director of the Center for Public Integrity
The banks made nearly 7.2 million subprime loans from 2005 through 2007, a period marking the peak and collapse of the subprime boom, the Center's analysis reported. "The banks...made huge profits while their executives collected handsome bonuses until the bottom fell out of the real estate market." During the peak, "At least 21 of the top 25 subprime lenders were financed by banks that received bailout money-through direct ownership, credit agreements, or huge purchases of loans for securitization."
No bailout for homeowners
The worst sufferers are not the mega-banks. They are families being pushed out of their homes or in imminent danger of losing them through foreclosures. They are millions of other Americans who had nothing to do with the housing boom, but lost jobs, health insurance and pensions in the severe recession that came when the boom went bust.
"Why is it in this country, in America, that we can find hundreds of billions of taxpayers' dollars from hard-working people all over the United States to come to the rescue of bad banking decisions, rotten investments, mortgages that were fraudulent on their face, but can't summon the political will to do something about 8 million families in America who are going to face foreclosure? That is where we are."-Senator Richard Durbin (IL, D) (www.pbs.org/moyers/journal, 5/8/09)
For discussion
1. What questions do students have about the reading? How might they be answered?
2. What fueled the housing boom? Why were banks willing to lend to buyers who might not be able to pay their debts after a couple of years?
3. What happened to the regulations banks had been required to observe earlier and why?
4. Why has the government pumped billions into bank bailouts to prevent them from collapsing?
5. The mega-banks were not "victims of an unforeseen financial collapse....These
banks were deliberate enablers" of the kind of lending "now threatening the financial system," according to the Center for Public Integrity. Do you agree? Why or why not?
6. What does Senator Durbin think about the bailout? Do you agree? Why or why not?
Student Reading 2:
The Senate, mega-banks, rising foreclosures
Banking power and "the sanctity of contracts"
"The banks-hard to believe in a time when we're facing a banking crisis...that many of the banks created-are still the most powerful lobby on Capitol Hill. And they frankly own the place."-Senator Durbin, an Illinois Democrat, in a radio interview, 4/27/09.
The senator was upset and angry because the Senate was about to vote down his plan to help homeowners facing foreclosure if their mortgage institution would not. The plan would have allowed bankruptcy judges to qualify the homeowners for a mortgage at a lower interest rate or even at a lower principal that would reduce it to fair market value. This kind of help is available today for wealthy people who want to buy vacation homes, farms or ranches, according to Durbin.
"The people who brought this crisis to us are the ones that are dictating policy," Senator Durbin charged in an interview with Bill Moyers on PBS. "The banking industry...fought me all the way...Some won't even sit at the table. The American Bankers Association walked away." So did other bankers and credit unions. "Meanwhile they were working feverishly in the halls of the Senate, going office to office, trying to convince people to vote against Durbin's bill...They're pretty convincing. They're pretty powerful."
Moyers asked, "What did the lobbyists say when you said to them, 'Look, rich people...can get their mortgages renegotiated, but ordinary people can't.'"
"Well," he responded, "they argue about the "sanctity of the contract...and I have to tell you that it is a little hard to swallow when we're dealing with a banking industry that has entered into so many bad contracts, creating these rotten portfolios of mortgage securities"-banks that have since turned to taxpayers to "bail them out with hundreds of billions of dollars."
"And I have to say that the group I was trying to help, the people facing mortgage foreclosure, don't have that kind of political clout. ...I really was trying to speak for some of those people against some pretty powerful political forces."
Who opposed the Durbin bill—and why?
Durbin had offered the same plan to the Senate a year ago, when there were two million homes in foreclosure. There are now an estimated eight million foreclosures.
This time around, the Senate voted down Durbin's plan by 51-45. The majority included 12 of Durbin's fellow Democrats.
The Senate did approve a bill for federal help to prevent some mortgage foreclosures. It also gives renters a 90-day notice before eviction. But foreclosures continue to rise, contributing to deteriorating neighborhoods in America's towns and cities like one in Bedford-Stuyvesant where the Billiards live.
Durbin told Bill Moyers that there were several reasons why senators voted against his bill. Some, he said, agree with the banks. Others don't have much of a mortgage crisis in their states. And some "don't want to give this last break to somebody facing foreclosure, thinking some of these people got into this mess on their own and they shouldn't be rescued."
And, as Durbin suggested, the other reason is the power that lobbyists from the banking industry wield over Congress. Banks contribute significant sums to senators' political campaigns. For example, Senator Evan Bayh of Indiana was one of the Democratic senators voting against Dick Durbin's bill to help homeowners. Senator Bayh has received from Goldman Sachs $123,000 to support his reelection campaign. (www.opensecrets.org)
Senator Durbin told Moyers, "If you want to get to the heart of this, it's the way we finance our campaigns for the United States Senate and the House of Representatives. It's time for us to move to public financing, for the good of the country."
Investigations and continuing foreclosures
On May 11, Massachusetts Attorney General Martha Coakley criticized predatory lending by Wall Street firms in a continuing investigation of "the deceptive marketing of unfair loans and the companies that facilitated the sale of those loans." One of those companies, Goldman Sachs, agreed to pay as much as $60 million to end the Massachusetts investigation into whether it helped promote unfair home loans in the state. According to the New York Times, the agreement "requires Goldman to reduce the principal on first mortgages by up to 30 percent and on second mortgages by up to 50 percent." ("Goldman Pays to End State Inquiry Into Loans," New York Times 5/12/09)
Eleven other lenders, including four financial firms that received bank bailouts, have made payments "to settle claims of widespread lending abuses," according to the study by the Center for Public Integrity.
"Homeownership rates have fallen more steeply for most minorities than for whites," according to a study by the nonpartisan Pew Hispanic Center. "Through both boom and bust, Hispanics and blacks have been far more likely than whites to receive higher-priced loans and carry higher debt relative to their incomes." (www.pewhispanic.org, 5/12/09)
The New York Times reports that in recent months, banks have "regained financial footing as well as a bit of their old swagger" and are "racing to pay back billions of taxpayer dollars." They "are eager to extricate themselves from heightened government oversight, including restrictions on their employees' compensation." ("U.S. Weighs How to Let Banks Give Money Back," New York Times, 5/20/09)
Meanwhile an estimated 290,000 - 341,000 new foreclosure were filed in March alone. The Times reports that Obama's plan to "keep struggling Americans in their homes now relies on lenders to voluntarily rework bad loans...Even if lenders do agree to modify loans, many Americans will still be in trouble. That's because nearly 14 million homeowners are 'under water'—they owe more on their mortgages than their homes are worth." (Gretchen Morgenson, "A Reality Check on Mortgage Modification, New York Times, 4/25/09)
For discussion
1. What questions do students have about the reading? How might they be answered?
2. Speaking of the banks and their influence on the Senate, Senator Durbin said, "they own the place"? Why?
3. What legislation did Senator Durbin want the Senate to pass to help people whose homes were being foreclosed?
4. Why did the Senate turn down his proposal?
5. What connection might there be between political campaign financing and the failure of Durbin's legislation? Do senators like Evan Bayh have a conflict of interest? Why or why not?
6. What evidence is there that bank fraud fueled the housing boom and bust?
7. Why do you think homeownership rates fell more sharply for blacks and Latinos than for whites? And why do you think Latinos and blacks "have been far more likely than whites to receive higher-priced loans"? If you don't know, how do you think you might find out?
8. Why do many of the big banks want to give their bailout money back?
9. What does it mean to be "under water" on a mortgage? How is it possible to owe more on one's home than it is worth?
This lesson was written for TeachableMoment.Org, a project of Morningside Center for Teaching Social Responsibility. We welcome your comments. Please email them to: lmcclure@morningsidecenter.org.