Mortgage meltdown

How Fed inaction fueled the subprime crisis

By Joseph Rosenbloom
July 12, 2009
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When Ned Gramlich was a Federal Reserve Board governor a decade ago, he became alarmed about the proliferation of subprime mortgages in the US banking system. According to Gramlich, he urged Alan Greenspan, then the Federal Reserve chairman, to crack down on the practice.

Similar recommendations emanated from the General Accounting Office and a Clinton administration task force on predatory lending.

Before the mess in the financial markets transmogrified into a monster, Greenspan might have intervened. Under a law that Congress passed in the early 1990s, the Federal Reserve had the power to oversee banks like Citigroup and HSBC that were writing the subprime loans. But Greenspan rebuffed appeals to act, saying it would be a “huge effort’’ and might have undermined “the desired availability of subprime credits,’’ as recounted in Alyssa Katz’s “Our Lot: How Real Estate Came to Own Us.’’

That the Federal Reserve chairman so badly booted his responsibility at a critical juncture strikes a jarring historical chord in the backdrop of today’s deliberations over how to safeguard the nation’s financial system. Expanding the power of the Federal Reserve is a centerpiece of President Obama’s plan to prevent another financial meltdown.

Greenspan’s failure, which points to a lack of enforcement rather than power, is but one of the many revealing anecdotes that Katz relates in “Our Lot,’’ her densely documented and cleanly written account of the nation’s real estate collapse. A writer for magazines such as Mother Jones and the Nation, Katz teaches journalism at New York University.

Though replete with informative background and vivid descriptions of the carnage that the housing crisis has wreaked on communities from Cleveland to Sacramento, her book lacks an overarching theme to distinguish it from other recently published books on the subject. Her story line parallels that of the widely accepted narrative of the financial breakdown. She blames Greenspan’s post-9/11 easy-money policy and banking deregulation. The latter was a bipartisan blunder for which both the Clinton and George W. Bush administrations were responsible, as Katz amply demonstrates.

There’s scattered material in “Our Lot’’ for the proposition that the real estate lobby was another root cause of the crisis by fiercely opposing regulation.

What one might call the finance-real estate complex constitutes the “most generous lobby in Washington,’’ she notes. Its spending to pressure public officials has amounted to almost $2 billion over the past decade.

Katz unearths examples of the lobby’s outsize influence in shaping government policy. Real estate interests, moreover, funded research by Harvard’s Center for Housing Studies, which published papers in the 1990s applauding homeownership as a boon to low-income neighborhoods.

The virtue of promoting home ownership for low-income people and minorities as a force for their social and economic betterment became an axiom of US public policy. Katz illustrates how lenders increasingly financed mortgages for amounts perilously close to or even greater than the value of the underlying properties.

And they wrote those loans for ever less creditworthy borrowers on ever more onerous terms, while collecting lavish fees in pursuit of ever greater profits.

The rush into promiscuously financed real estate lifted housing prices and camouflaged the risks. But once the housing bubble burst, the perversion of the home-ownership ethos became apparent. As Katz says, the upshot was to unleash a force that did not “counter the emergence of the wealth gap’’ in America but, rather, helped “to pry it open’’ all the more.

There is a contrastingly bright side to the wealth gap: upwardly mobile “relos.’’ They are the subject of “Next Stop, Reloville: Life Inside America’s Rootless Professional Class.’’ Relos are people who are mobile not only because they are moving up the income ladder but, lured by higher-paying jobs, also frequently relocate from one part of the country - or world - to another.

Peter Kilborn, a former reporter for The New York Times, discovered the word relo in 2004 while researching a story in Alpharetta, Ga. To do more research, he returned to Alpharetta and visited several other mostly obscure Sun Belt or Midwest locales that have become Relovilles - that is, magnets where relos alight like migratory ducks.

Despite Kilborn’s meticulously attributed and balanced observations, some readers might dismiss his book as so much pop sociology. That may be, but his look into a little noted and consequential trend in American life is revealing.

Since the 1970s, as the American economy has expanded and corporations have ventured increasingly overseas, relos have emerged as a fast-growing class of about 10 million people, or 3 percent of the American people, according to Kilborn. The typical relo is a public university graduate from the Midwest with a willingness to relocate himself and his family repeatedly to accept a promotion within a company or a more lucrative offer from a new employer.

“They inflate the American Dream and put it on wheels,’’ Kilborn writes.

Yet in some respects their lives are uncommonly bleak. They must contend with the stresses that serial relocations impose on marriages and children and forego proximity to members of their extended family.

Relos tend not to stay in any place long enough to bond with a community or participate in civic affairs. “It’s hard to commit,’’ says David Carroll, a middle manager with cell-phone provider AT&T Mobility. “Before you’re in [a new place], you’re thinking about exit strategies,’’ Carroll says. “You don’t want to put up a lot of pictures. You’re going to have to fill the holes in the walls.’’

If financial breakdown and mortgage foreclosures have jolted the social stability of American communities, the rise of the upwardly bound relo class may not be helping to rectify the problem. Relos buy and sell houses at a dizzying pace, propping up real-estate prices. But they’re doing little to enrich the communal life of the places where they roost.

Joseph Rosenbloom is a senior correspondent for The American Prospect.

OUR LOT: How Real Estate Came to Own Us By Alyssa Katz

Bloomsbury, 288 pp., $26

NEXT STOP, RELOVILLE: Life Inside America’s New Rootless Professional Class By Peter T. Kilborn

Times, 272 pp., illustrated, $26

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