When I left the magazine in 2005 to freelance, I knew an urgent story was out there. I asked the Mortgage Bankers Association for its latest National Delinquency Report, showing state-by-state default rates for home mortgages—and was astounded by the default rates for subprime mortgages. And Ohio was out of control—north of 14 percent of all subprime mortgages were in default. I wanted to tell the story behind that figure. As the real estate bubble raged on the coasts in 2005, San Francisco-based Mother Jones assigned me to report the story a world away, in Cleveland. Nothing prepared me for the streets I would visit, lined with boarded-up houses. I thought I would be gathering tales of wronged borrowers, and did much of that. But the sheer scale of the destruction made it clear that something even more dangerous was going on there. I would soon learn what that was—the city was crawling with real estate speculators, locusts who, with the collusion of appraisers and mortgage brokers, deliberately deceived lenders into issuing mortgages for far more than the dilapidated real estate was actually worth. Predatory lending, predatory borrowing, phony appraisals—the whole system was out of control.
And who was financing all this? How on earth was giving away hundreds of millions of dollars to criminal enterprises a viable business? Those from-the-gut questions led me to briefly describe the market in mortgage-backed securities and the rudiments of its financial modeling, including such strategies as diversifying mortgage securities pools among multiple states and shifting risk back onto consumers through prepayment penalties and other onerous terms.
It should have been obvious, even to a neophyte like myself, that that house of cards would fall apart. But at the time even I fell into the trap of believing that the financial industry’s Masters of the Universe knew best, and that the returns promised to investors on mortgage bonds would be honored. While I received invaluable help from analysts at credit ratings agencies in understanding the mechanics of securitization, they were hardly the ones to tell me that the emperor had no clothes. Community advocates, usually ready to go out on a limb with predictions of doom and destruction, had fallen into an “us versus them” mentality that distorted reality. Typically, they described the problem of mass foreclosures in their neighborhoods as one of collateral damage from a system that generally worked out well for investment bankers and investors alike. Those activists made the same error that Wall Street analysts and business reporters did: believing that the future would follow patterns of the past. As City Limits and other independent media had reported during the 1990s, subprime mortgages had defaulted at high rates for years - with the fallout overwhelmingly hitting urban, minority neighborhoods and borrowers. Yet only briefly, in the wake of the credit crunch of the late 1990s, did the securities themselves falter. And so all of us chose to believe that the story would continue to be one of discrimination and disparity—not a calamity that would swallow the entire housing market and then the economy.
But despite our own shortcomings, I hope business journalists can learn a few things from what we did get right and especially how we got there:
First and foremost, we looked for the real-world impacts of business practices. Financial journalists tend to focus on the internal benefits (to investors and bankers) of economic activity, without accounting for external social costs. We indies saw benefits and costs as inextricably linked. We could see clearly that it was a zero-sum game, and the gap between winners and losers was growing unconscionably wide. That chasm turned out to be a critical weakness in the financial system. The basic model of subprime lending, after all, exploited asymmetries of information between consumers and the financial services and real estate industries. It was only a matter of time before players within the industry—mortgage brokers, subprime lenders, investment banks, ratings agencies, etc.—played the same game, albeit for higher stakes, with the investors who were supplying the funds.