I've been wrangling with a post on the implications of the Wall Street bailout for housing advocates for the past few days with little luck, but when a draft of Stella Adams' commentary came across a fair housing listserve last night my worries were over. Stella, who is the former executive director of the North Carolina Fair Housing Center and is currently board member of the National Community Reinvestment Coalition and fair housing / lending consultant, does a fantastic job of summarizing how we got into this mess and who is responsible.

In addition to Stella's piece, I also highly recommend reading "Plan’s Mystery: What’s All This Stuff Worth?" by Vikas Bajaj in the New York Times. It gives you a sense of just how much of a mess Wall Street has gotten into.

Update: Jennifer Monastero has a new post up at Zillow's Mortgages Unzipped blog that echoes the story of Stella's neighbor as well as tips us to the other red herring some are blaming for the crisis:"minorities" .

Update 9/29/08: Think Progress has a report of yet another person blaming the CRA and lending to minorities for the crisis, this time Minnesota Rep. Michele Bachmann, and Progress Illinois has a great post summarizing the various responses explaining why the CRA is not to blame for our current crisis.

-Justin Massa, executive director

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After the Great Depression, Congress conducted numerous hearings and determined that it was ultimately the mixing of “commercial” and “investment” banking industries and the inherent conflicts of interest and fraud in some banking institutions’ securities activities that caused the collapse of our financial markets. Sound familiar? Congress passed the Banking Act of 1933 commonly known as the Glass-Steagall Act which prohibited the mixing of these activities in order to prevent this from ever happening again.

In 1999, Congress repealed the Glass-Steagall Act and passed in its stead the Gramm-Leach-Bliley Financial Services Modernization Act which enabled commercial lenders to underwrite, trade and purchase instruments such as mortgage-backed securities and collateralized debt obligations.

Consumer groups across the nation vehemently opposed the breaking down of these barriers, we warned that this was dangerous and could lead to another financial collapse. Instead of heeding our warnings, Congressional leaders in the Senate viciously attacked the Community Reinvestment Act (CRA) and included amendments to eliminate it as a Red Herring. Our allies in Washington capitulated in order to protect CRA, we were placed on the defensive and we blinked.

The result, in less than ten years time the financial markets have crashed and once again Wall Street and K Street are holding our neighbors and neighborhoods hostage pointing the gun at taxpayers and saying it is the fault of CRA . This time we are prepared for the fight, we will not sit silent, we will not blink and we will not rely on others to defend us.

In 1999 the State of North Carolina passed the first anti-predatory lending legislation in the nation followed by numerous cities and states across the country and what did Washington do? The Office of the Comptroller of the Currency stepped in on the side of the lenders and pre-empted these laws and said we could not protect our own communities.

In 2001-2002, anti-predatory lending ordinances in Atlanta GA, Dayton OH, and Philadelphia PA were all overturned or preempted by the federal government. Under pressure from Wall Street or K Street many cities including Toledo and Cleveland OH repealed their ordinances and too many states threatened by Wall Street weakened their existing laws or passed laws that were worst than doing nothing. Now they are demanding that we give them $700,000,000,000.

Deregulation and Greed caused this problem, NOT OUR NEIGHBORS. Here is how this whole mess happened:

1. <!--[if !supportLists]--> <!--[endif]-->Our neighbors were constantly contacted by mail or by phone at strategic times of the year, early spring (home repairs), late summer (back to school, college), late fall-early winter (holiday season) and early January (holiday blues) when most families are a little short on cash. They were told that they could refinance and consolidate their debts AND have lower payments.
2. <!--[if !supportLists]--> <!--[endif]-->Our neighbor contacted the originator for more information. She was told that she would benefit from a “piggy-back” loan with a first lien of 80% and a second lien for 20% so she could avoid mortgage insurance and include the originator’s fees and other costs in the second lien.
3. <!--[if !supportLists]--> <!--[endif]-->The originator did not tell her the reason the payment would be lower than her old loan was due to a teaser rate ARM with payments that will escalate beyond her ability to repay after two or three years. Our neighbor did not know that taxes and insurance were not included in her payment until she received her tax bill or the lender charged her 4 times more for property insurance. The loan originator told our neighbor not to worry she could refinance before the rate adjusted. When our neighbor tried to refinance, she discovered it was impossible because of a pre-payment penalty or because she owed more than the house was worth.
4. <!--[if !supportLists]--> <!--[endif]-->The originator did not tell her that he had ABSOLUTELY NO DUTY to help her get the best loan she qualified for; in fact, Wall Street paid the originator MORE MONEY to put her in a loan with abusive features.
5. <!--[if !supportLists]--> <!--[endif]-->The loan originator then sold the loan to a lender who bundled our neighbor’s loan with other abusive loans and sold them as a mortgage backed security. Wall Street knew that 30-36%% of these loans would go into foreclosure and the law required them to tell the investor BUT NOT OUR NEIGHBOR!
6. <!--[if !supportLists]--> <!--[endif]-->Wall Street paid the rating agencies (Standard and Poor’s and Moody’s) lots and lots of money to put lipstick on a pig (BBB rating or less) and call it a beauty queen (AAA rating).
7. <!--[if !supportLists]--> <!--[endif]-->The investors purchased these AAA rated instruments insured them against default and leveraged the loan 30-60 times its real value. That’s right - they took our neighbor’s $100,000 loan and leveraged it to get $3,000,000 to $6,000,000.
8. <!--[if !supportLists]-->Our neighbor can not make the escalating monthly payments. She asked for help from the servicer only to discover that she has fewer workout options than are available to borrowers with mortgage insurance.

We are opposed to any bailout of Wall Street without relief for our neighbors and neighborhoods. Not one penny of the $700 billion has been set aside to help our neighbors. We all remember the adage that those who do not know their history are condemned to repeat it.  As fair housing and consumer advocates we will not allow our neighbors to bear the brunt of this crisis while those whose greed and reckless disregard of our credit rights profit.