Abstract
The real estate and mortgage finance (REMF) industry has considerable political power. This power stems from its use of targeted campaign contributions and lobbying efforts, and manifests itself as politically structured markets that extract rents from consumers. REMF has used this power not just to structure markets in its favor, but also to escape the normal regulatory limits on criminal and quasi-criminal behavior. Consumers and regulators alike are unlikely to set limits on the REMF, because both normal collective-action dynamics and deep pockets favor finance. This situation is, however, also self-destructive for REMF, as the subprime mortgage financial crisis shows.
About the author
Herman Schwartz is Professor of Politics at the University of Virginia and author of In the Dominions of Debt (Ithaca: Cornell University Press, 1989), States vs. Markets (Basingstoke: Palgrave, 2009) and most recently of Subprime Nation: American Power, Global Capital, and the Housing Bubble (Ithaca: Cornell University Press, 2009), plus over 50 articles and chapters. Website: http://www.people.virginia.edu/~hms2f.
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Nolan McCarty, Keith T. Poole, Thomas Romer, and Howard Rosenthal, “Political Fortunes: On Finance and Its Regulation,” Daedelus Fall 2010; Simon Johnson and James Kwak, 13 Bankers (New York, NY: Vintage 2011).
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See Herman Schwartz, “Housing, the Welfare State, and the Global Financial Crisis: What is the Connection?” Politics and Society 40 (2012), 33–56, for a full analysis.
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See Kenneth Snowden, “Long-Run Impacts of Responses to the Mortgage Crisis of the 1930s in the US” unpublished paper, UNC Greensboro, 2010, for a history of the HOLC.
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All data in this paragraph are author calculations from World Federation of Exchanges, http://www. world-exchanges.org/statistics; IMF, Global Financial Stability Report, September 2003; OECD, Economic Outlook, # 80, December 2006.
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See the comparisons in Herman Schwartz and Leonard Seabrooke, eds., The Politics of Housing Booms and Busts (New York: Palgrave, 2009).
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Fannie Mae’s criteria for “conforming” or “prime” mortgages stipulated a 10% down payment, a credit score over 620, housing related payments lower than 28% of gross household income, and total debt payments at lower than 34% of gross household income. Historically, this produced default rates of around 0.5% of all loans.
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Federal Reserve Database (FRED), http://research.stlouisfed.org/fred2/series/CPN3M?cid=120; S. Chomsisengphet and A. Pennington-Cross, “Evolution of the Subprime Market,” Federal Reserve Bank of St.Louis Review, 88 (2006), 37–8.
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Matt Taibbi, Griftopia, provides a survey of potentially fraudulent behavior by various arms of the finance industry in the 2000s. See David Dayen, “Wall Street Wins Again,” Salon, February 13, 2013, http://www.salon.com/2013/02/13/wall_street_wins_again/ on the mortgage fraud taskforce.
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Gretchen Morgenson, “Audit Uncovers Extensive Flaws in Foreclosures,” New York Times, February 15, 2012, http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html notes that in 6% of foreclosures in San Francisco county, title had been simultaneously assigned to two different lenders.
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Tomasz Piskorski, Amit Seru, and James Witkin, “Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market,” at http://ssrn.com/abstract=2215422.
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See John Weaver, The Great Land Rush and the Making of the Modern World 1650–1900 (Montreal: McGill-Queens University Press, 2003) for a comprehensive survey of these new legal apparatuses.
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Gretchen Morgenson, “Mortgage Registry Muddles Foreclosures,” New York Times, September 1, 2012, http://www.nytimes.com/2012/09/02/business/fair-game-mortgage-registry-muddles-foreclosures.html.
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See the survey of titling in Massachussetts by McDonnell Property Analytics, “Forensic Examination of the Essex Southern District Registry,” at http://www.salemdeeds.com/pdf/Audit.pdf.
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Gretchen Morgenson, “Audit Uncovers Extensive Flaws in Foreclosures” New York Times, February 15, 2012, http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html. See also “FDIC’s Bair: Millions of Foreclosures could be ‘Infected,’” Wall Street Journalhttp://blogs.wsj.com/developments/2011/05/12/fdics-bair-millions-of-foreclosures-could-be-infected/.
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John Ligon and William Beach, “Housing Market without Fannie Mae and Freddie Mac,” Heritage Foundation, January 8, 2013, http://www.heritage.org/research/reports/2013/01/a-housing-market-free-of-fannie-mae-freddie-mac.
©2013 by Walter de Gruyter Berlin Boston
