Over recent months, The Audit and CJR have investigated how it was that business reporters failed to see the crisis in the mortgage and credit markets as it brewed and bubbled, even when evidence of its unsustainability was plain to see for those who chose to look. I’ve followed CJR’s account with great interest from the perspective of an independent journalist who in the mid-2000s reported on and questioned - often with one palm on the laptop and the other slapped against my forehead - a growing epidemic of financial insanity. The fact is, and as immodest as it may seem to say, independents were repeatedly ahead of the curve on covering the mortgage and real estate bubble and in connecting the dots between vital elements of the bigger story—especially the links between predatory and lending and the metastasizing mortgage-backed securities market.
In 2002, The Nation warned that the mortgage-backed securities market’s bottomless appetite for subprime mortgages was financing an epidemic of destructive lending. In 2003, Southern Exposure exhaustively documented Citigroup’s move into the mass production of high-interest loans designed to drain borrowers’ meager wealth. In 2005, Mother Jones assigned me to find out why the streets of Cleveland were lined with vacant houses. A reasonable question, and I found the answers on the Wall Street credit securities market. Indeed, all through this period, alt-weeklies told tales found in living rooms and legal services offices of homeowners who had believed a mortgage broker’s misleading sales pitch and wound up facing foreclosure. I’m contributing this post to The Audit to explain why I think I and other indie journalists were able to make the connections and warn of the dangers in the mortgage market with the hopes of passing along some of this outsider’s perspective to business editors and reporters. Hey, sharing is only fair—we independents have always relied on the business and trade media’s invaluable foundation of reporting to orient ourselves to the arcane instruments and markets that have such serious consequences for the outside world.
I don’t pretend our work was comprehensive; far from it. And at times it veered into the naïve and under-informed, particularly when it came to the inner workings of the credit markets. And did I predict that the ultimate consequence of what I was covering would be the near-implosion of the credit and banking systems? Hardly. But the fact remains independent journalists exposed the dimensions of the problem with a depth and timeliness that mainstream news organizations simply and regrettably did not match. It’s not about being better journalists; it is about being tuned to a different audience and set of interests.
From 1999 to 2005 I was editor of a small nonprofit magazine, City Limits, covering New York City neighborhoods. Mayhem caused by predatory and fraudulent mortgage lending was a story we couldn’t avoid—criminal rings had infested a HUD mortgage program and left hundreds of homes in Harlem and Brooklyn boarded up or sold in terrible condition at inflated prices to defrauded working-class buyers. (Besides leading to criminal convictions and the suspension of the program, the story we broke ended up as a plot line on The Sopranos, Season Three.) By 2002, I had learned enough to say this in an editorial about the Bush administration’s campaign to increase homeownership by pushing low-income people into real estate: “Without adequate regulation and oversight of the lending industry, it’s lunacy.” The following year we ran a feature on a spike in subprime foreclosures, a dress rehearsal to the mortgage crisis that essentially went unmentioned in the media.
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.
Two, we indies were also reporting out in the real world, in my case thanks to a magazine that values and invests in place-based reporting. While numbers were a starting point, it was only after I’d spent more than a week in a foot of snow in Cleveland that the scope and workings of the growing crisis began to become apparent. Leads gleaned from foreclosure, property and bankruptcy records, tips from consumer lawyers, and a spreadsheet of recent sales transactions compiled by a community development corporation yielded stories far more vivid and troubling than I could have imagined. Entire streets had been taken over by mortgage fraud schemes that left most houses empty and put remaining homeowners under siege. I met a Croatian immigrant whose 95-year-old father was found dead on the kitchen floor after a break-in. A suburban speculator living out a Flip This House fantasy introduced his low-income buyer to a subprime mortgage broker who fudged the borrower’s financial profile on the mortgage application, and didn’t deny it when I called. A speculator used his girlfriend’s good credit to buy a half dozen dilapidated houses, then immediately resold them to his own companies at double or triple the price. What I’d found was an organized crime scene that extended for miles and into hundreds of millions of dollars.
Lastly, I was free (and predisposed) to question authority, not to mention the basic business practices of large financial institutions. I know not every journalist can say that, and believe me, I’ve come to cherish the freedom. It’s difficult enough for business reporters and editors to challenge conventional wisdom, all the more so if they don’t have a business authority to quote or a financial report to cite. The people telling me that a mortgage crisis was upon us weren’t the Bear Stearns or Fitch analysts I called; it was the community organizers, public interest attorneys and elected officials dealing with the consequences. These weren’t conventional experts, and they hardly had all the answers; sometimes I was the one helping them understand the perverse workings of the mortgage market. But they had to become informed simply to serve their clients and constituents, and they did. Advocates have their biases—like all sources—but as a place to begin identifying the issues that matter, the stories that must be told, they are indispensable.
To be sure, some mainstream business journalists, notably, Peter Goodman and Gretchen Morgenson at The New York Times, among others, have embraced these reporting strategies and values, if only to keep up with the sheer pervasiveness of the mortgage crisis in almost every corner of American life. And that’s all for the best. If there’s one lesson to be learned from the financial crisis, it’s that numbers too often lie; business journalists have a responsibility to readers and viewers to report behind the numbers, from the neighborhoods of the nation, on the real-world consequences of business practices, and not just from the perspective of Bloomberg terminals and earnings reports.
Yet, a year into the crisis, I am sorry to say that business journalism on the whole, has failed to learn from its fatal reliance to an overwhelming degree on bankers, ratings agencies, and all the other usual sources—sources that have many reasons to provide bad information or information that is at best—at best!—incomplete. Mainstream business journalism, I find, continues to speak parochially to investors and their interests, as though the public has only passing interest in the outcome of the discussion. As the past year has taught us, it does so at all of our peril.