“Yes, as through this world I’ve wandered I’veseen lots of funny men;Some will rob you with a six-gun,And some with a fountain pen.”— Woody Guthrie, Pretty Boy

Floyd the OutlawLOWDOWNEdited by Jim Hightower and Phil l ip Frazer ◆ Vol. 9 No. 8 ◆ August 2007

The

NE OF THE MOST DRAMATIC STORIES from the New Testament is of the time thatJesus encountered money changers in the temple. Enraged by their usury andsacrilege, he went on a tear—overturning their tables, physically driving themout, and chastising them for converting the temple into a “den of robbers.”

The Bible doesn’t say where these bloodsucking lenders went, but now weknow: They have re-emerged in recent years to set up their tables right here in America,working a dark alley of homeowner financing called the “subprime mortgage market.”

OThe what? Don’t be deterred by the finance industry’s jargon (which

is intended to numb your brain and keep regular folks from even tryingto figure out what’s going on). At its core, this is a classically simplestory of banker greed and outright sleaze. And the astonishing part isthat nearly all of the rank injustice perpetrated by today’s moneychangers is considered legal and is practiced by supposedly reputablefinancial firms.

“Subprime market” is just another way of saying modest-incomepeople—including the working poor who dream of owning a homeand retirees on meager pensions who might need to refinance thehouse they have. With little cash and poor credit ratings, these people had not been deemed desirable customers for conventionalmortgages, known as “prime,” and were mostly ignored…until themid-1990s.

That’s when avaricious mortgage hucksters and high-finance manip-ulators looked upon this broad pool of needy, vulnerable castoffs andsuddenly shouted, “Eureka, GOLD!” With interest rates remarkablylow, housing prices seemingly on a nonstop rise, and (this is the BigOne) practically no regulation of this low-income market, the moneychangers promptly began to devise clever, Enronian schemes to enticesuch “subprime” borrowers into high-interest, high-fee loans. Nevermind that these families really could not afford (and mostly did notunderstand) the level of debt being piled on their backs. That was amatter for mañana. Today was for raking in profits from the poor.

The subprime schemes are run through an intricate, intertwined sys-tem of loan brokers, mortgage lenders, Wall Street trusts, hedge funds,offshore tax havens, and other predators. To entrap borrowers, theindustry created an arsenal of arcane financial devices and maneuversknown by such exotic names as “exploding ARMs,” YSPs, teaser rates,low-doc mortgages, loan flipping, and equity stripping. Ultimately,these schemes are scams, extracting high payments from the families,sucking out any equity they might build up, and stealing their homes.

This is one of those economic stories, like the savings-and-loanscam of the 1980s, that are usually buried back in the business sec-

tion of newspapers. But, just as withthe S&L collapse, this debacle isgrowing too big to contain, and allof us need to be paying attention.The built-in traps of the sub-prime mortgage market havealready taken the homes ofmore than a million people injust the past year, and the dan-gers are quickly rising for millionsmore. This collapse in homeowner-ship for the working poor has begunseeping into the rest of the economy,causing thousands of job losses, shak-ing the soundness and reputations of some major Wall Street firms,and slowly—ever so sloooowly—forcing lackadaisical bank regulatorsand clueless politicians out of their laissez-faire stupor.

How it works

You might have seen some of the come-ons: “Bad Credit? No Problem!”“Zero % Down Payment!” “Creative Financing!” “No DocumentationNeeded!” “Quick and Easy Money!”

The key to building the subprime market is hustle and flimflam—trying to rush anxious, uninformed people into signing on the dottedline for what they’re assured is the deal of a lifetime. Of course, themortgage industry casts its work in a noble light, asserting that itsprimary purpose is to help extend the joys of homeownership to themasses. But an examination of key players reveals little altruism.

BROKERS. These are independent, local operators who troll for bor-rowers in your town and mine, using flyers, doorbells, phone calls,personal contacts, websites, late-night TV ads, data banks, and everymeans imaginable to get low-wage renters to sit still for a home-loansales pitch or to find vulnerable homeowners who can be talked into

The subprime mortgage disaster

Loan sharks wreak havoc on MainStreet and Wall Street

NEW GROUNDS FORLEAVING IRAQReady for your month-

long vacation? You do getall of August off...don’t you?

Well, one group planningto enjoy R&R for the entiretyof August is the very groupthat most needs to stay onthe job and—how shall Iput this?—GET SOME-THING DONE! I’m talkingabout the Iraqi parliament,which has announced thatits members are going tovacate the capital andchill out during August.

Excuse me? Isn’t there awar rampaging over there?Aren’t these the squabblingsectarian leaders whohaven’t been able to cometo a political consensus and muster a security forceto run their own country?Don’t we suffer militarydeaths and casualtiesevery day in THEIR civilwar? Aren’t U.S. taxpayersdumping $10 billion a monthinto the morass of Iraq?

And now the Iraqi legisla-tors are taking a month off?

If their summer abdica-tion of responsibility is notgrounds for voting to with-draw our troops, what is? I agree with RepublicanSen. Gordon Smith, whosays, “This is a fight that istheirs, not ours.”

Yet Bush PR flack TonySnow tried to rationalizethe Iraqi leaders’ aban-donment of duty by saying,“Well, it’s 130 degrees inBaghdad in August.” Youwant hot, Tony? Go strapon the war gear that oursoldiers have to wear. Will they be given Augustoff to chill out?

Bush’s excuse for keep-ing them in Iraq’s civil waris that if we leave, chaoswill follow. Hello! Iraq ischaos! It’s not worth thelife of another U.S. soldierto try to fix what Iraq’s so-called “leaders” clearlyfeel no urgency to fix forthemselves. Besides, thesame “chaos” excuse was used to prolong theVietnam War. We left, andwhat happened? Not

taking out a refinancing loan.Brokers don’t actually make the

loans, service them, or have anystake in whether the deals workout. Rather, they are simply “find-ers” who are paid an upfront feeby the mortgage lenders for everyborrower they deliver. And 71% ofall subprime mortgages comethrough them.

The pretense is that the brokeris the borrower’s trusted advisor inthe shark-infested waters of bank-ing. Au contraire, Bubba. In moststates, agents have no legal respon-sibility to represent a buyer’s bestinterest. And, in fact, they don’t, forthe system gives brokers lucrativeincentives to deceive borrowers.

Through a common practicecalled “steering,” unsuspectingfamilies are guided into the mostexpensive, riskiest subprime loans.For doing this dirty job, brokers arepaid cash bonuses called “yieldspread premiums” (YSPs)—thoughyou would call them by their morecommon name: kickbacks. TheCenter for Responsible Lendingreports that these YSP payoffs,averaging $1,850 per loan, areadded to about 90% of all subprimeloans. That’s right, struggling familiesare silently assessed an extra feefor being secretly steered into aloan with higher interest rates andworse terms than they’re entitledto get. They’re literally being robbedby their bankers.

LENDERS. These are the brand-name players you might recognize.They include nonbank lenders—forexample, New Century Financial,Ameriquest, Option One,Countrywide, and Ownit MortgageSolutions—that sprang up to tapinto the new subprime gold rush,and several of them are now bank-rupt or under investigation. Manybig banking firms, including WellsFargo, Lehman Brothers, andCitigroup, also joined the free-for-all by setting up their own sub-prime subsidiaries,

Brokers are on the front lines,but the lenders are the ones whoinvented the scams that are bleed-ing borrowers. Only a decade ago,subprime loans were a mere frac-tion of the home-loan market.Today, these financial instruments

are an $800 billion business—about 20% of all housing loans.

How did the subprime marketmushroom? The lenders—again,they are not subject to regulation—drastically and deceptively lowerednormal banking standards to drawin low-income borrowers. As onebroker says, “The culture around allthese subprime lenders has been,’Hey, bring it to us. We’ll make ithappen.’” If a borrower can pay lit-tle or nothing down, recently had a bankruptcy, and doesn’t have theincome to keep up payments, thebankers say, “That’s OK. Bring usthat loan.”

Rather than do due diligence,lenders cavalierly offer “low-doc”and “stated income” loans—i.e.,they make little or no effort to doc-ument an applicant’s ability to takeon this burden, instead acceptingalmost anyone’s word about havingthe income to meet monthly pay-ments. “You could be dead and geta loan,” says one broker.

The loans themselves aredoozies, filled with numerous andnasty provisions that set unwittingborrowers up for failure. These are

tucked into 20-page loan agree-ments written in legal gibberish. A friendly, reassuring, always-smiling loan agent flips through the pages saying, “It’s simple, just sign here…and here…andhere.” Among the nasties are:

■ TEASERS. Subprime interestrates are loudly advertised to be only 7% or so, with onlysmall-type notice that these are “adjustable rate mortgages”(ARMs). This means that theinterest rate will explode to11% or more after a couple ofyears—causing the families’monthly payments to jump byhalf or more. Over 90% of sub-prime loans contain ARMs.

■ BLOATED APPRAISALS. Subprimelenders are notorious for pres-suring appraisers to inflate thevalue of a house, thus causingthe borrower to take out a biggerloan than the house is worth.

■ HIDE-THE-ESCROW. In conven-tional loans, the borrower’sproperty taxes and mortgageinsurance premiums are figureddirectly into the monthly loanpayments, with these moniesset aside in an escrow account.For subprime loans, however,lenders often don’t includethese costly items in the mort-gage, thus making the loansappear more affordable thanthey really are. This leads toborrower shock (and sometimes

DoSomething!■ ACORN

www.acorn.orgwww.acornhousing.org866-67-ACORN

■ Center for ResponsibleLendingwww.responsiblelending.org919-313-8500

■ Consumer Federation of Americawww.consumerfed.org202-387-6121

For information and action, these researchand organizing groups are first rate:

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2 Hightower Lowdown August 2007

default) when the tax and insur-ance bills arrive separately inthe mailbox. At this point, ever-helpful lenders offer to refinancethe loan—thus collecting addi-tional fees.

■ EXCESSIVE FEES. On conven-tional mortgages, various lenderfees typically total less than 1%of the loan amount. By contrast,subprime borrowers commonlyare hit with fees (hidden inmortgage payments) totalingmore than 5%.

■ PREPAYMENT PENALTIES.Obviously, it’s in a borrower’sinterest to get out of an abusivesubprime loan as soon as possibleand to refinance on better terms.But—Gotcha!—more than 70% of

these loans carry a penalty fee ofseveral thousand dollars for pay-ing off the loan early. In theprime market, only about 2% ofloans contain such punishment.

WALL STREET. None of the abovewould be happening (and certainlynot on such a massive scale) if thefast-and-easy money crowd on WallStreet hadn’t seen a chance tomake a killing on lowly subprimers.Lured by the flow of sky-high inter-est rates being charged to theseborrowers (and abetted by the lackof government regulation in thismarket), Bear Stearns, LehmanBrothers, Merrill Lynch, GoldmanSachs, and other giants lumberedinto the action.

They set up special investment

units within their banks to buy theserisky mortgages from the lenders.Then the Wall Street behemothsconsolidated this bulk debt, lever-aged it into complex IOUs called“mortgage-backed securities,” andsold these packages to wealthyspeculators around the world. ThisRube Goldberg financial mecha-nism has shoved hundreds of bil-lions of dollars of capital into thesubprime market, fueling lenders’enthusiasm for making even moreof these shaky loans.

What a system! Lenders mis-lead borrowers, collect fat feesfrom them, then shift the risk ofany bad loans to Wall Street. TheWall Street repackagers then trans-fer the bad-loan risk to their richinvestors, drawing even fatter fees.These investor elites get phenome-nal yields on the IOUs, then planttheir profits in tax-free havens likethe Cayman Islands.

It’s a brilliant Ponzi scheme…as long as all those Mr. and Ms.Subprimes keep putting their littledabs of cash into it every month.Oops! There’s the rub.

The bustMr. and Ms. Subprime live on

the economic edge, with little margin for financial downturns. Inthe last couple of years, three badstorms hit them. First, falling wagescombined with growing inflation(fueled by rising prices for gasoline,utilities, health care, etc.) to squeezetheir meager household finances tothe breaking point. Second, theiradjustable-rate mortgages beganexploding; someone who was pay-ing $1,000 a month at the start of a$150,000 loan had to pay $1,400 amonth two years later.

Third, housing prices (which thewhole system claimed would onlyrise and rise and rise) began tum-bling, making it impossible for these

chaos but –golf! Yes,seven golf resorts are now strung along the Ho Chi Minh Trail…andAmericans are invited to play.

COUNTRY-OF-ORIGINLABELINGMost consumers assume

that since the USA is thegreatest food producer inthe world, the steaks, veg-gies, and other foods webuy at the supermarketcome out of America’s owngood soil. But chances aregood that they come fromChina, Eastern Europe, orother countries where U.S.processors and grocerychains can get food on thecheap. With the recentexposés of contaminatedfoods from China, however,we’re learning that “cheap”imports can come at aheavy price. Shouldn’t therebe a law to label meats andproduce so we shopperscan know where the foodwe’re buying comes from?

There is! It’s called COOL (Country-Of-OriginLabeling), and it waspassed five years ago.Don’t bother checkingyour supermarket labels,though, because corporatelobbyists and the Bushiteshave quietly prevented theimplementation of COOL.

Lobbying groups like theAmerican Meat Instituteand giant retailers such asWal-Mart don’t want us toknow that they are sellingus stuff from places withlittle food-safety regula-tion. So these lobbyists andretailers have thrown cam-paign money at Congresscritters to get them to stallthe law. Rep. Henry Bonilla,who was key to sidetrack-ing COOL, took more than$368,000 from the meatindustry alone.

The food importers alsostacked Bush’s AgricultureDepartment with formerfood-company executives,including the deputyundersecretary, whoshould have overseen the

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August 2007 Hightower Lowdown 3

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LOAN SHARKS WREAKHAVOC ON MAIN STREET

AND WALL STREET

2 New grounds for leaving Iraq

3 Country-of-origin labeling

4 Suing the worm- poop people

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labeling program.Representative Rosa

DeLauro is working to freeCOOL from the lobbyists’chokehold. She’s at 202-225-3661.

SUING THE WORM-POOP PEOPLECorporate execs are

always whining that theyare besieged with lawsuits,but guess what group doesmore suing than anyoneelse? Corporations!

Consider Scotts Miracle-Gro, a multi-billion-dollarglobal chemical corpora-tion that is suing a tinyupstart firm namedTerraCycle. This enterpris-ing small company is thesort of business that oughtto be celebrated, not sued.A maker of all-natural gar-den products, TerraCycle’sbest seller is an eco-friendly plant food madeof—are you ready?—liqui-fied worm poop. Started in 2003 by a 25-year-oldcollege dropout, the com-pany feeds organic scrapsto worms. The resultingwaste is then brewed intoa compost tea that is putinto recycled soda bottlescollected by school groupsand charities.

Scotts, which makessynthetic plant food andcontrols some 60 percentof America’s lawn and gar-den market, has unleasheda pack of corporate lawyersto sue TerraCycle becauseits recycled packages havegreen and yellow labels, thevery colors used by Scotts.

Anyone who looks at the two products canimmediately see the differ-ence, starting with the bigwords “Worm Poop”on TerraCycle’s label.There’s a clue! As for thegreen and yellow, no cor-poration can own colors,and many garden-carecompanies go for greenand yellow.

To learn seven ways youcan help TerraCycle sur-vive this attempt to drivethem bankrupt, go towww.suedbyscotts.com.

borrowers to refinance or sell theirhomes to avoid financial foreclosure.

When home sales were booming,George W declared this proved thathis push for economic deregulationwas creating a glorious new “owner-ship society.” He was so enthusedthat he even designated June asNational Home Ownership Month.But his laissez-faire “success” turnsout to be a house of cards. As onemarket analyst says, ”The gain inhome ownership over the last fouror five years is almost entirely dueto looser lending standards [for sub-prime mortgages].”

Those cards are now crashingdown. In the first half of this year,home foreclosures are up by 41%.Today, a record number of subprimeborrowers have fallen behind in theirmonthly payments and face eviction(once you fall 90 days behind,lenders typically proceed with fore-closure). More than $2.28 trillionworth of ARMs are scheduled toexplode to their higher interest ratesbetween now and 2009. Two millionfamilies are expected to have thewrenching experience of losingtheir homes, as well as losing allthe money they invested in them.

All of this is working its way upthe economic chain. More than 80lenders have gone out of businessin the past six months, thousands ofjobs are being cut, and hundreds ofthousands of houses are beingdumped on an already-saturatedmarket (causing a further decline inprices, which makes other subprimehomeowners even more vulnerableto foreclosure, which dumps morehouses onto the market…and thedownward spiral continues).

Wall Street big shots are beingstung as well. Bear Stearns, forexample, has had to scramble tokeep its two subprime hedge fundsfrom imploding, bailing out one of

them with a panic infusion of $1.6billion. Analysts estimate that thesefunds are holding more than $200billion worth of subprime loans thatare in danger of default.

Regulatory shameThis abuse of vulnerable families

and the resulting economic messwould not have happened withoutthe hands-off regulatory ideologythat has infected our government.There are no less than five financialagencies at the federal level thatcould have protected people, yetthe subprime surge was allowed toproceed on the fantasy that thefinancial players would police them-selves. The Federal Reserve Board,for example, has direct authorityunder the Home Ownership andEquity Protection Act to “prohibitacts or practices in connection withmortgage loans that the Board findsto be unfair, deceptive or…associ-ated with abusive lending practices,or that are otherwise not in theinterest of the borrower.” The Fedsimply ignored this law.

Finally, with the entire subprimesystem crashing around them, theregulators issued “guidelines” onJune 29 requiring banks to stopsome of the worst abuses, includingprepayment penalties. But the new

rules still allow many of the preda-tory practices and—worst of all—donot apply to the nonbank lendersthat make a large share of subprimeloans. In addition, the guidelines donot directly address the role of WallStreet in pushing such loans.

The subprime industry disingen-uously asserts that any attempt toregulate it only hurts the poor peo-ple who receive these mortgages,for they have nowhere else to turnfor homeowner financing. Whatself-serving hogwash! There couldbe subprime loans—from public, ifnot private, sources—structuredand administered without deceit.Rather than target lower-incomefamilies as suckers to be had, pack-aging their dreams into investmentplaythings for speculators and taxdodgers, let’s view these folks asassets to the larger community andrealize that homes for them areinvestments in the common good.

And while we’re at it, let’s rec-ognize that the need for “subprime”mortgages is driven by our low-wage/no-benefit economy and byour country’s growing scarcity ofaffordable housing. It’s not merelya low-income mortgage systemthat must be fixed—our leaders’pursuit of a low-income Americamust be stopped.

Ethics, Schmethics

THE WALL STREET JOURNAL reports that when Lehman Brothers firstconsidered jumping into the subprime waters, it sent an executive to

California to check out a possible partnership with First Alliance, one of thebig lenders. In a withering memo, the executive reported back that FirstAlliance was a financial “sweat shop” specializing in “high-pressure sales,”targeting “people who are in a weak state.” He added that the lender’semployees leave their “ethics at the door.”

The Lehman high-ups’ response: Great! Noting that First Alliance was notbreaking any laws, the Wall Street giant invested half a billion bucks in theCalifornia company’s sleazy subprime operation.

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