ACORN versus Predator

Written by Amy Leaman, Art Director

The American mortgage crisis and recent collapse has left the world questioning how to reform our institutions. I spoke to Wade Rathke—founder of ACORN, Association of Community Organizations for Reform Now, and long time champion for low-income folks in the U.S.—about his new book Citizen Wealth, predatory practices, how the American system needs to reform, and lessons Canada should learn from our neighbour's mistakes.

Amy: Prior to the mortgage crash was ACORN working on subprime lending for its members?

Wade: We were trying to stop predatory practices in subprime lending. We did not say that there should not be any subprime lending, because frankly some of our people, whether it’s in Canada or here, have challenging credit circumstances. So, sometimes for them to be credit-worthy a subprime lender is the only alternative, and it’s when it gets to be predatory then it’s a problem. It helps people that have a little damage in their credit. But what happened that went so wrong about subprime lending in the U.S. was not only did it become predatory, but the loans were not based on affordability. So they were just trying to push loans onto people, in some cases people who did not even need to be in subprime instruments but could have qualified for regular mortgages. Too many of these loans were based on stated income, income you can’t document from Canada Revenue. In some cases you need a stated income loan, if you’re a tipped employee or self-employed and don’t have employment records in the same way that you might have from the magazine. That whole market now is dried up because the subprime selling system credit doesn’t exist in the same way.

Amy: How is ACORN dealing with this fallout from this outsourced lending and from foreclosures?

Wade: Well, for years we tried to negotiate modification programs. The problem has been that the level of the modifications has not kept up with the extent of foreclosures, so as many of the modification programs as we negotiated in 2007 and early 2008, they’ve had huge impact but have not been able to really dent the acceleration. Now, because of this collapse, regular mortgages, prime mortgages, adjustable rate mortgages, subprime mortgages, top-of-the-line, all-day mortgages, whatever, all of them have foreclosure and delinquency rates because the value of homes has now sunk an average of 25 per cent across the country, putting a lot of homes—in the colourful expression of New Orleans—underwater, so that you owe more than the price of the house, what the house is worth. With every other situation where you owe more than what the house is worth, you’re going to be tempted to walk away from that. The last time a similar crisis happened in the U.S., there were a whole lot of people who just mailed their keys to the bank. And although you don’t read about that much yet, my sense is it is going to be happening or is happening now. Part of the problem is a lot of the servicers and mortgage brokers or mortgage companies are just converting the existing owners into renters because they know they can’t sell the house. It’s just a terrible situation.

So to answer your question, a huge amount has been done, there’s a huge infrastructure that ACORN and others built to handle modifications, but the modification process by banks and mortgage servicers has still been so slow that it has had impact for millions of people but there’s still millions of others who are being fast-tracked to lose their homes.

Amy: And how do you think that in the future, when you’re trying to negotiate mortgages for low-income borrowers, what sort of challenges do you think you’re going to be facing as a result from the financial institutions?

Wade: My fear is that the baby will end up being thrown out with the bathwater, that financial institutions that were never in love with CRA down here. With making mortgage loans available to lower income families, they will use this financial crisis as an excuse to curtail that even though, as near as we can determine, there’s no significant difference in the foreclosure rate from our neighbourhoods and areas elsewhere at this point. In some cases, it’s less in our communities than it is in some of these design-built suburban areas that were virtually financed by all subprime loans.

Amy: That’s interesting because that’s not the media message, right?

Wade: No, it’s not the media message whatsoever. You sort of get it on the bounce, I mean if you look at where the rates are the highest, where it’s a foreclosure, in places like the Phoenix market, Florida, and California and the central Valley, those were not working, inside-city neighbourhood communities where that was happening. It was all specially developed—“spec suburbs” is what I call them. I don’t know what they call themselves. But these sort of US$200,000 and above houses that they shoehorn people into these loans—often the very building developers had companies that they were either affiliated with or that were part of their overall corporation that were in fact issuing mortgages to their own development. It’s just crazy. And that’s where you have these stories where people look at a block, and out of ten houses on the block, eight of them were in some form of foreclosure process. It’s a disaster.

Amy: Because the mortgage crisis has been very blatantly and publicly outed as being predatory, has it become easier for you to talk about predatory practices, given that people have a precedent to understand the issue?

Wade: You know, I’d like to believe that, but we’re not really finding it that much easier. I mean, whether you read Susan Wells or Fool’s Gold or any of these books now that look at the financial crisis, there’s a lot of fairly disingenuous finger-pointing. The conservative right blames the crisis on CRA 32 years ago, which is preposterous. By the time of the financial crisis, there were less than 30 per cent of the mortgages being issued by CRA-compliant banks or mortgage companies. Most of them were these new fancy deals or outside of regulation. And the mortgage brokers—who are, I think, a huge part of why this happened—have largely escaped any form of censure. Certainly there’s no discussion, really, of new licensure or regulation for mortgage brokers. But if you really look at not just the crimes of Wall Street but the crimes of Main Street, if you will, and how so many of these loans were funnelled to subprimes and got into such bad shape, a lot of this was right at the hands of unsupervised networks of brokers. The story that’s in the book about New Century, when we met with them, they were at that time the leading mortgage issuer here in the United States, and half of their loan portfolio was stated income. Well [there] just aren’t that many waitresses in the world. There’s not that many tipped employees. I mean, how could you be looking at US$14 billion of those loans and not be suspicious when half of them had to make up what their income was? And they sat there and looked me right in the eye and the rest of the ACORN people at that time, and said, “We’re saved by our computer program that really can detect all of these problems and calculate the risk.” Wow.

Amy: I was wondering if you find it difficult to get the policy-makers to see these institutions as directly taking advantage of low- and moderate- income persons.

Wade: Surprisingly not. We have not found it easy for them to understand that the core nature of their business model is predatory, even though it clearly is. Partly it’s the ideology of profit [that] creates its own rationalization, justifying whatever it wants to do as having created a market and a demand, and therefore is rational and satisfactory [in] itself.

The best examples we found had to do with this system where you were getting your tax refunds early. HSBC, I actually applaud in the book as you know, for having agreed—no matter how many hundreds of millions of dollars they were making on this—at the end of the day [this] was going to end up hurting their brand. They really had to step aside and look at this in a different way than they ever had because it was like a good drug, they couldn’t get enough of this stuff. They were fierce competitors, and Chase and City and all the rest of the folks who were a factor in these loans were in awe of how HSBC was doing it. But by definition, the people who would want that money that way were people who could not afford to wait literally the seven to 14 days to get the refund directly from the IRS. So essentially you were offering a margin of 250 to 300 per cent interest because you were willing to give somebody the money before Canadian Revenue or the Internal Revenue here would give it to them. Well, maybe it’s just what’s in a term, but how could that be any other thing than predatory, taking advantage of the desperation for lower income families to get the money that they’d worked to get and therefore was a tax refund, but desperate to have to have it as soon as they could possibly get it. To me, it’s just such a fundamentally shocking thing that we don’t, as a society, wherever we are—U.S., Canada, wherever it is—be frank about calling a spade a spade, if you will. And understanding that in those potentially—let’s be friendly in this magazine here—those potentially predatory situations require more governance and restraint, which means regulation. And the demand for regulation is always going to be that when businesses can’t self-correct.

Amy: In your book you wrote that they said “Well, we’re the lesser of the evils.” If you ask larger organizations to change this profitable exploitation, then you open the door for other people who are less accountable.

Wade: Yeah, it was sobering to hear that. That was Chase that argued that, and frankly, it’s a leap of faith when you actually say “We’ll take our chances on it being worse,” because in fact, you end up knowingly trying to go for what the maximum benefit is even knowing that there will be some segment of our community that ends up getting hurt as badly, if not worse, because they fall below the radar. A big operation like Chase or HSBC or something like that can’t really escape scrutiny forever.

Amy: Revenue Canada has been trying to bridge the tech gap for a long time, being able to get people to file their taxes online or have some agency in filing their taxes. How can tech contribute?

Wade: The whole gap now in terms of getting your refund quickly has to do with whether you have a bank account. What most of these institutions tried to claim they couldn’t do was allow us to set up accounts for people so they could immediately get their refund and spend it that way. So you could load a debit card or do the kinds of things we talked about doing with H&R Block’s bank, and that’s because here in the U.S., the Homeland Security regulations meant that a bank officer had to physically see a new customer. Now it turned out that was all baloney. It turned out, working with H&R Block, that they were able even under the Bush administration to get an opinion from Homeland Security that said they could supervise in a different way.

Well, in the same way, if you’re filing electronically, why couldn’t you set up a bank account where a loan officer, a bank person, wherever it might be in Canada or the U.S., could look right through a computer where somebody is helping you do your taxes, identify you, ask the questions—those two questions—and boom, you’ve got an account. If you’ve got the technology, and that’s part of what drives me crazy, the whole thing I cover in maximum eligible participation, is almost as true in Canada as it is in the U.S., there are lots of benefits that people are eligible for that they’re not getting. Yet why is that, if we’re so technologically apt now, we can’t figure out a way to get more people automatically enrolled?

Amy: Is it a matter of people touting technology when it’s profitable or when it’s convenient for them? For example, banks are the first to say ”Get online and use our online services,” when they want to cut down on tellers or customer service agents, but then if it comes to something like opening a bank account over Skype, then it’s not secure.

Wade: Yeah, I think it’s a rationale rather than a reason. I had a member way before you were born who used to tell me, “Wade, do you know what the definition of a rationale is?”and I’d dutifully say—because he told me this 50 times—“No, Bill, what is that definition?” and he said, “Well all a rationale is, is a lie in the skin of a reason.” That’s always stuck with me. But what you said was a classic example of a rationale, just a lie in the skin of a reason.

Amy: Is there a gap between what we perceive as need and what the actual need is? Are government services not being used to their capacity?

Wade: I argue that no, they’re not being used to their capacity. And in some cases I think this is ineptness and in some cases I think it’s actual policy.

You’ll lose some number of people just as leakage in the system, who just can’t make it all the way through or for some reason get confused, or don’t read well, or don’t have somebody who’s knowledgeable on the governmental bureaucracy side. All that is just devastating to lower income people. These programs supposedly were passed by government, whether Canada, the U.S. or wherever, in order to impact on income security, yet then are made difficult to be implemented in order to retard participation even though people are eligible.

In most states in the United States, you have to go through a process, and it can take you literally weeks and months to be declared eligible for unemployment. And that’s something you have your own dollars worth in the game.

Part of the way I seated the argument was hey, you wouldn’t even need to win a new vote or a new act or anything new to have a huge impact if just we made sure that everybody had full participation in the existing programs.

Amy: You talked very briefly [in your book] about micro-lending. Do you find there’s opportunity for a social currency model in North America around mortgages and small business lending?

Wade: As community organizers, we have a huge belief in the value of collective process just in the same systemic way you’re talking about. Unfortunately, my concern about this is whether or not it really is a poverty reduction strategy. I try to handle this very gently because we’re hugely supportive of a lot of what has been done in micro-lending, but essentially, it’s hard to ever really believe that you’re going to significantly reduce poverty through a system that’s based on debt.

By themselves these kinds of microcredit schemes are going to be very micro and very marginal and highly informal, and there will be success stories, but whether or not they’re even going to be large enough to build mass base incremental increases in citizen wealth … it worries me. I’m just not sure I see that.

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