BILL MOYERS: Welcome to the Journal .
Once again we're closing the barn door after the horse is out and gone. In Washington, the Federal Reserve has finally acted to stop some of the predatory lending that exploited people's need for money. And like Rip Van Winkle, Congress is finally waking up from a long doze under the warm sun of free market economics. But it's waking to a nightmare.
"This is a really perilous moment." That's how one top financier and former treasury official described our economic crisis on the NewsHour this week. "Our banking system," he said, "is in worse shape than at any point since the 1930s. We've never seen such large losses so fast."
As he was speaking, California's big IndyMac Bank went down with a crash, the second worst collapse in US History. It sent thousands of depositors out looking for their money. The FDIC, the Federal Deposit Insurance Corporation, took over as reports circulated that the FBI is investigating IndyMac for mortgage fraud. Analysts are predicting that as many as 150 of the 7,500 banks in America may fail over the next 18 months and one analyst even said that number might double over the next 3 years.
At a press conference President Bush acknowledged the peril and then tried to assure us it's all going to come out okay.
PRESIDENT BUSH: My hope is that people take a deep breath and realize that their deposits are protected by our government. I think the system basically is sound, I truly do. And I understand there's a lot of nervousness. But the economy is growing, productivity is high, trade is up, people are working. It's not as good as we'd like and to the extent that we find weakness, we'll move.
BILL MOYERS: Yet confidence in our financial system has been sinking like the Titanic — so even as in one breath the president said he didn't like government bailouts, in the next he ordered up a massive federal bailout. He told Congress to cough up public money to buy the slumping stocks of Fannie Mae and Freddie Mac. Don't let those down-home names fool you. Those two huge institutions finance about half the country's twelve trillion dollars of mortgage debt. And they were about to go belly up.
But not everyone thinks the government should be using your taxes to bail them out, especially with no conditions attached. Listen to this exchange between Treasury Secretary Henry Paulson and Senator Jim Bunning of Kentucky:
SENATOR JIM BUNNING (R-KY) : Where is the money going to come from, if you have to put it up?
HENRY PAULSON: Well, obviously, it would come from the government. But I would say —
SENATOR JIM BUNNING (R-KY) : And who is the government?
HENRY PAULSON: The taxpayer. And I'm, what I'm looking to do is the same thing you are, Senator, to minimize the cost to that taxpayer. And I think the surest way to do that is —
SENATOR JIM BUNNING (R-KY) : Secretary Paulson, I know you're very sincere in your proposal.
HENRY PAULSON: Yes.
SENATOR JIM BUNNING (R-KY) : But, come January, you will be gone.
HENRY PAULSON: Right.
SENATOR JIM BUNNING (R-KY) : And the rest of us will be sitting at this table — or at least most of us — and we all have to be responsible to the taxpayer for what we have done. And I don't think this is a responsible —
HENRY PAULSON: Then, Senator, you will vote against it, in all your wisdom.
SENATOR JIM BUNNING (R-KY) : I do everything I can to stop it.
BILL MOYERS: Meanwhile, the Feds' clamp-down on predatory lending has come too late for millions of Americans who have already lost their homes. The pain for them is real. They're hurting badly, and so are their communities. You can see the whole picture in one neighborhood in Cleveland, Ohio. Producer Peter Meryash and correspondent Rick Karr take us there.
RICK KARR: There's a cancer eating away at a neighborhood in Cleveland called Slavic Village. On block after block, homes sit empty, boarded up, stripped bare. But things were different just a few years ago.
BARBARA ANDERSON: There was a time when each and every one of the houses on the neighborhood was up and standing, and looking pristine. The yards were well manicured. You could hear laughter. You could hear neighbors calling out to each other from across the street. At that time, there were a lot of gardens in the backyards, and people were very proud of their gardens, and they would pick the tomatoes, or they'd pick the peppers, and they would share it with neighbors. You would see people sitting on porches, reading newspapers and laughing and talking, listening to their music.
RICK KARR: But that was before the sub-prime mortgage crisis started to destroy Slavic Village in the first half of the decade. Since then, longtime resident Barbara Anderson says there have been more than half a dozen foreclosures just on her block. This house went after the man who owned it was admitted to a nursing home and his wife couldn't keep up the payments. There used to be a home on this empty lot until it was foreclosed, condemned and leveled. And the family that lived here came home one day to find that a Sheriff's bailiff had put their possessions out on the street after their bank foreclosed. Anderson, who runs a community organization that's trying to fight the neighborhood's decline, says it's like a horror story.
BARBARA ANDERSON: You could almost see the fangs, just gouging the actual lifeblood out of the neighborhood as more and more houses became boarded up, and more and more houses became to be stripped. So, the house now next door to it, the house on the other side of it, and now those houses began to eat away at other houses. So, each time it looked like one house had actually infected the house next door to it, and it had taken on that same Dracula kind of look. And it was infecting even more houses.
RICK KARR: That infection spread to more than a thousand houses in the neighborhood. At one point last year, there were more foreclosures in Slavic Village's zip code than in any other in the country. Tony Brancatelli represents the neighborhood on Cleveland's City Council.
TONY BRANCATELLI: I was born and raised in this neighborhood. And it's, you know, seeing what's been happening in the families has been very heartbreaking. Seeing what's been happening to our housing stock has been very heartbreaking. And so it's tough to wake up every morning and see that we're averaging two foreclosures a day in this neighborhood. That is just unheard of.
RICK KARR: Here's what happened: The kinds of people who lived in Slavic Village were prime candidates for sub-prime loans; many of them were retired, so they'd already paid off most of their old mortgages but they were living on fixed incomes, so they didn't have enough cash on hand to repair regular wear and tear on their homes.
BARBARA ANDERSON: And their homes were now showing signs of neglect. They needed a roof, they needed their porches repaired but their money was all tied up in the equity of their home. And that's what they needed to tap into in order to make any repairs.
RICK KARR: So they did what Americans have done for decades — they tapped into that equity by re-mortgaging their homes. But the rules of the game had changed: Mortgage brokers and unscrupulous lenders were practically beating down Clevelanders' front doors, offering loans that were too good to be true.
JIM ROKAKIS: Back in the old days when there was no sheriff in town, people would rob the banks. Well, here we are in modern day era. And there's no sheriff in town. The banks were robbing the people.
RICK KARR: Cuyahoga County treasurer Jim Rokakis has been following the crisis for close to a decade and trying to clean up the mess. He said the loans on offer weren't like anything that borrowers had ever encountered before.
JIM ROKAKIS: You'd tell them, "I don't have any money." "No problem, we don't, you don't require a down payment." Or, "I have a horrible credit score." "No problem, we're not gonna let that get in the way." "But I don't even have a job." "No problem. We're not gonna document your income." I mean, it really, in some cases, was that extreme. And it gets worse. I've sat in on probably 100 counseling sessions, people facing foreclosure. I'd say the majority of people fit the criteria of not having enough income, didn't come in with a down payment, had a bad credit score. Most of them got cash back at the close. How's that for an incentive?
RICK KARR: Rokakis says the new loans were a bad deal for borrowers. Their terms could be confusing, with shifting interest rates and so-called "balloon payments." Homeowners got smacked with higher monthly costs, unexpected fees and tax bills and stiff penalties if they fell behind. Once the banks foreclosed and homeowners moved out, the buildings just sat empty. All that the neighbors could do was watch them crumble.
JIM ROKAKIS: And the real victim here is the person that lives on that block, that person who pays their taxes, plays by the rules, has done nothing to deserve what they're facing today, which is a devastated neighborhood, with their most valuable asset, their home, now worth virtually nothing. That's the victim.
RICK KARR: But there are a lot of victims of the mortgage crisis, who've been hurt through no fault of their own. Renters, for one. Many lost their homes because even though they'd been paying their rent, their landlords hadn't been paying their mortgages. More than a third of all foreclosures nationwide are on apartment buildings or houses where renters lived. In Cleveland, that's affected thousands of individuals and families. Aretha Robinson-Kelly ended up in one of Cleveland's homeless shelters after a bank foreclosed on this building where she'd been renting an apartment on the city's East Side.
ARETHA ROBINSON-KELLY: We were there for like five years and just all of a sudden, like a couple months ago, a bailiff came out and said, "Did you guys know this building was in foreclosure?" And I said no. And we were still paying rent and the water got shut off. And basically I wind up here in the shelter; my husband and I.
RICK KARR: Robinson-Kelly didn't just lose her home; she says she also lost four or five thousand dollars, her security deposit, pre-paid rent, and almost everything she owned.
ARETHA ROBINSON-KELLY: We had two days to move. And I didn't have money to rent a truck. I just took things that I could. So I lost everything.
MIKE PIEPSNY: Renters are almost seen as collateral damage. There's no resources to help these people.
RICK KARR: Mike Piepsny runs the Cleveland Tenants Organization, which advocates for renters' rights. He says the group's been busier than ever.
MIKE PIEPSNY: Over the past year and a half, we've noticed a significant increase in renters calling, saying, you know, that somebody's been looking at my house, I just received notice, someone knocked on my door and said, "We have to be out in 30 days." And we're getting about 100 to 200 calls a month now from renters that are faithfully paying their rent and they're caught up in the foreclosure crisis. However you look at the problem, 30 days to get your belongings, find a new place, come up with security deposit, and get your life back in order, it's just not enough time.
RICK KARR: Most renters who lose their homes move in with relatives or friends. But an increasing number are ending up in Cleveland's crowded homeless shelters.
BRIAN DAVIS: In Cleveland now, we have so many people who are entering the shelters that it's nearly impossible to accommodate an intact family: Mom and dad and kids. So, it's almost 100 percent likely that you will have to split up your family. Moms will go to one shelter. Dad will go to another shelter. And even sometimes they have to give kids to relatives, because we just don't have enough space in our shelter system.
RICK KARR: Brian Davis, who runs the Northeast Ohio Coalition for the Homeless, says that for families, in particular, the transition to life in shelters can be devastating.
BRIAN DAVIS: Everything that you do that we take for granted every day is extremely complicated, once you become homeless, and once you don't have a stable place to rest your head. For many people, it's a real struggle to get up every day and try to face this insurmountable problem of, "Where am I gonna live tomorrow?" And, "How am I gonna find housing?" And, "How am I gonna afford this?
RICK KARR: Tracy Grimes and her family ended up in a homeless shelter after living through two foreclosures. She says it was bad enough watching her neighborhood succumb to the crisis. But, she says, the ordeal has been hardest on her kids.
TRACEY GRIMES: Every day one of them asks me, "Mom, when are we leaving here, when are we getting our house?" Little one asks "when are we going back home?" and there's no back-home to go to.
RICK KARR: The number of homeless students in Cleveland's public schools has increased by forty percent over the last year and school officials say that's almost entirely due to the foreclosure crisis. Glenda Nolen teaches fifth grade in the city and works for a program called Project ACT, which is designed to help homeless students.
GLENDA NOLEN: All of a sudden, they're ripped out of their home. When they come to a shelter, they can only bring what they can carry. Stuffed animals can't, you know, do not come with them. So, not only are they ripped from their home and their friends, but their belongings. And that makes it
RICK KARR: Nolen says homeless kids can have a tough time staying focused on their schoolwork.
GLENDA NOLEN: They need attention and they know something is wrong in their lives, that they're being upset. They have more important thoughts on their mind than math. They're thinking, "Where am I gonna go tomorrow?"
RICK KARR: So, neighborhoods suffer, renters suffer and kids suffer, all through no fault of their own. And all despite the fact that local elected officials noticed that something was wrong starting in the late 1990s.
JIM ROKAKIS: In 1995, there were 3,300 private mortgage foreclosures filed in this county. By 2001, the number was 7,000. That's the point where a group of us approached the Federal Reserve Bank in Cleveland, and asked them to intervene. And we had a big conference here on sub-prime lending, predatory lending in Ohio, in March of 2001. So, as early as 2000, we were raising questions, and asking for help.
RICK KARR: Rokakis says Fed officials served them a nice lunch and listened politely as he and his colleagues pleaded with regulators to reign in sub-prime lenders. But in the end the Fed didn't do a thing.
JIM ROKAKIS: I don't think they had enough, we had enough clout, to get them to move. Obviously, we didn't. I learned a hard lesson. I learned that the Fed really is there to protect banks, and not to protect the consumers.
RICK KARR: Cleveland officials decided that if the federal government wouldn't do anything, maybe the city could. The City Council took up an ordinance that banned predatory loans. But at the State Capitol in Columbus, where Republicans controlled both houses of the legislature and the Governor's Mansion, lobbyists for the mortgage industry pushed for a law prohibiting Cleveland and other cities in Ohio from regulating lenders.
OHIO STATE REPRESENTATIVE JON HUSTED: I don't think that there is anyone in this body today that can tell me how we should regulate, manage or micromanage how people get loans in this state.
RICK KARR: Those lobbyists made hundreds of thousands of dollars in campaign contributions. In the end, legislators gave the bankers the law that they wanted.
COLUMBUS GENERAL ASSEMBLY: "Fifty- six affirmative votes, thirty-eight negative votes, therefore the Senate amendments are agreed to."
JIM ROKAKIS: We've been convinced that regulation is bad. Government doesn't have a role. That if we allow free flow of commerce and markets operate unimpeded, that things will be better and things will operate more efficiently. And this is what happened when you lack regulation.
RICK KARR: Without meaningful regulation, the loans kept coming and the banks kept foreclosing. And the situation in Cleveland, and its suburbs, kept getting worse. The banks that took possession of foreclosed houses let them sit empty; many of them were stripped of anything of value. Cleveland City Councilman Tony Brancatelli showed us one house in Slavic Village that'd been ransacked by scavengers.
TONY BRANCATELLI: They're desperate for copper, they're desperate for brass and non-ferrous metals. And so, we're at an all-time scrap price. And people will come in and pull the drywall off, just to cut at the copper wires. They'll come in and strip all the plumbing. They'll come in and strip the heating systems, because steel's at an all-time high. And so, there's absolutely no value left in the house. And this is what we're left with. And you multiply this times a thousand houses in our neighborhood.
RICK KARR: In the end, he says, these houses are worth less than nothing because they simply need to be leveled.
TONY BRANCATELLI: This year, the City of Cleveland will spend $6 million demolishing these types of substandard homes. Last year, we spent $6 million demolishing these types of homes. That's $12 million that we can't invest in roads. That's $12 million we can't invest in parks or infrastructure. And so, we are the victim. We're demolishing these houses. We're eliminating value in our communities. But we have to do that to save the neighborhoods.
RICK KARR: Foreclosures are straining Cleveland's police and fire budgets, too, as drug dealers and addicts gravitate to abandoned homes and arsonists set them on fire. Cleveland's mayor, Frank Jackson, says that meanwhile, the crisis is about to slash the city's property tax revenues.
MAYOR JACKSON: Evaluations will be next year, and when they do those evaluations, people will find a significant reduction of property value, not just here in Cleveland, but throughout this county, which will have a significant impact on our school system that supports itself by a property tax, and on our operating budget.
RICK KARR: So the City of Cleveland filed a lawsuit earlier this year to recover some of that money and hold Wall Street responsible for the foreclosure crisis. The suit targets twenty-one investment banks and mortgage companies that have foreclosed on thousands of Cleveland homes including Deutsche Bank, which has filed more than 4,750 foreclosure actions. Wells Fargo, with more than 4,000 and Countrywide and HSBC, which have filed about 1300 each. Cleveland didn't file suit against these banks because they made the loans in the first place, but rather because they allegedly created the environment that led to a lot of bad loans.
MAYOR JACKSON: Without them, this would not have happened. But for their actions, this would have not occurred.
RICK KARR: Banks were making a lot of money buying and selling mortgages whether the loans were sound or not. The more loans, the more money. So, the suit says, "in order...to keep pace with Wall Street's burgeoning demand" for new mortgages, the banks pushed for lower lending standards until, "Even borrowers unlikely to meet their obligations [got] loans".Jackson says the banks had to know that Cleveland would end up paying the price for what they were doing.
MAYOR JACKSON: It was very obvious that our market here in Cleveland, and in this region, could not support this model. It could not support. And that you and people cannot be — in these institutions cannot be, claim to be so brilliant to the point that they tell you, "Bring me all of your wealth, and entrust it to me, because I'm so smart that I'll know how to invest this money, guarantee you income," and then be stupid over here and ignorant, and saying that they didn't know. Now, you can't be both, they knew. But the money was too good. It was too good, and they couldn't give it up.
RICK KARR: Only 2 of the 21 banks had comments when we approached them: Wells Fargo called the lawsuit's allegations "completely unfounded" and said that "it is proud of [its] practices." HSBC said that, among other measures, it's set up a "Foreclosure Avoidance Program." But city councilman Tony Brancatelli says that isn't nearly enough.
TONY BRANCATELLI: I still would like to see my pound of flesh. I want to see these mortgage companies, even though they're taking billions of dollars of losses right now, they've also had billions of dollars of profit. And we need to have these mortgage companies step to the table and say not just they're gonna give us the house, because I don't want this house. I want this house, plus $10,000 for demolition. I want this house, plus environmental remediation money, so I can come in and clean it up and reoccupy it.
RICK KARR: Even as the lawsuit moves forward, the foreclosure problem is spreading deep into Cleveland's suburbs.
JIM ROKAKIS: There's a suburb, Garfield Heights, over 1,400 vacant homes, Maple Heights, a similar number. Cleveland Heights, over a 1,000, Euclid, over a 1,000, Shaker Heights, once one of the most prestigious suburbs in America, 500. Some of these neighborhoods will not come back. They will not come back, at least as we know them. This county has lost over 90,000 people in the past seven years. No county in the country has lost more population, with the exception of New Orleans parish. And as I said to many people, they had the hurricane. And we had overzealous, unregulated lenders. And the impact was almost the same in some communities.