Death By A Trillion Cuts
Little more than a week ago, Massachusetts Attorney General Martha Coakley was in Washington, D.C., testifying before the U.S. House Financial Services Committee about the state’s prosecution of auction-rate securities fraud.
However, more interesting was written testimony Coakley submitted to the committee regarding the failure of the state’s attempt to get the mortgage industry to rearrange risky, inappropriate home loans voluntarily. The “loan modifications,” as Coakley’s office called them, would have kept homeowners in their homes under affordable, “sustainable” terms.
There is no hiding the fact that even a state that has so far been spared the most severe of the country’s economic pains is being dragged down by the low quality mortgages currently ravaging the world’s credit markets.
Indeed, our current state of affairs is the result of a federal deregulation trend that allowed Wall Street investment banks and other high rollers to dupe investors into feeding the beast created by almost unprecedented, unfettered financial innovation.
Author Charles Morris predicted the current trillion-dollar meltdown with considerable aplomb in his book, “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash,” which was published early this year. In the book, Morris argues that the current crash could be seen coming by 2005 as incentives for loan originators to avoid poor credit were washed away and the millions of inappropriate loans they were writing were being bought and sold and borrowed against at a staggering pace.
Wall Street Intersects Main Street
Wall Street and Alan Greenspan, former Federal Reserve chief and enthusiastic booster of cheap borrowing and the “new paradigm” in American investing, must have known the party wouldn’t last.
We applaud Coakley and Secretary of the Commonwealth William F. Galvin for trying to clean up the mess here at home. But where Coakley and Galvin have successfully pursued outright fraud in the auction-rate securities market, the trail is less well-marked when it comes to the mortgage market.
Coakley said her efforts to convince the mortgage industry to voluntarily rearrange failing loans in Massachusetts have been met with a “chorus of agreement but an absence of meaningful action.” Specifically, Coakley’s office reviewed 144 “loan modification” agreements and found that “virtually none” of the modifications actually reduced monthly payments for state homeowners.
Most Massachusetts banks stayed away from risky mortgage lending. However, they are nevertheless tangled up in this mess. A recent American Bankers Association survey found that 27 percent of the country’s 8,500 banks held preferred shares in Fannie Mae and Freddie Mac, which were taken over by the government, making those shares worthless.
Those banks, the ABA estimates, lost between $10 billion and $15 billion in the takeover. Many of those banks are in Massachusetts, including Medway-based Strata Bank. Strata’s parent company, Service Bancorp Inc., said earlier this month that it would take a $6.5 million hit on its ownership of Fannie and Freddie stock.
Wall Street is more than 175 miles from Worcester, but the meltdown of the nation and globe’s financial markets will no doubt be felt here. It’s vital for our local economy that Coakley’s comments are heard and that the banks that have signed on to the state’s loan modification program take an active role. This housing crisis has caused enough grief. Let Washington worry about Wall Street. Let Central Massachusetts worry about its own and take strong action to help us finally put this sad chapter behind us.
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