The title of your book, All the Devils Are Here (Portfolio Hardcover, 2010), written with Joe Nocera, suggests there were many culpable players in the recent financial collapse. Can you single out who was in the best position to prevent the debacle?
Between banks, politicians, regulators, and Wall Street, there was a lot of blame to go around. No one group was responsible, as much as Americans would like there to be. But if I had to point a finger, I’d say Congress and the federal regulators bear the most blame because they could have done something. Consumer advocates as far back as the 1990s were testifying about the dangers of the subprime market. People were taking out loans they couldn’t afford to pay back, and the Federal Reserve led by Alan Greenspan was in a position to address that. But nothing was done.
You say that the growing use of subprime mortgages during the boom years was not about spurring home ownership. Explain that.
Home ownership was the fig leaf for the rise in subprime lending. But that was really about cash-out refinancings, not buying homes. As much as three-quarters of the subprime business during the boom times was for loan refinancing, for people who wanted to take the equity out of their homes with the assumption that home prices would continue to go up. These loans were much more about financing consumer spending than contributing to home ownership.
What is your take on the pushback against home ownership in the media and in government?
The financial crisis has become a giant referendum on home ownership. But the crisis in no way proves that home ownership is the problem. People were living beyond their means and had more credit than they could handle.
Do you think the government should continue to support home ownership through programs like the mortgage interest deduction?
I don’t have a point of view on this. These tax policies were in place long before the crisis, and the crisis didn’t prove they were bad policies. What the crisis proved is that it’s bad policy to lend people more money than they can afford to pay back. However, I do think that, as a country, we need to have a wide-ranging discussion on home ownership. Fixing Fannie Mae and Freddie Mac in isolation, without looking at the big picture, would be short-sighted. Maybe it would make sense to have the deduction just for [purchase-money mortgages] and not refinancings, which is just about people taking on more debt.
Do you believe the leading players involved in the mess learned a moral lesson from this?
No, I don’t think the politicians or the banks have learned anything. But I hope the American consumer has learned something. What’s good for the financial industry probably isn’t good for you.
Could a crisis like this happen again?
Something will go wrong in the financial system again. It just won’t be exactly the same thing as this. We need the regulators to do their job, but to try to prevent it by enacting such tight regulations that we’d never have any innovation again would be a big mistake.
But haven’t lenders pulled too much in the other direction lately, become too restricted in their lending practices?
Yes, they are relying far too much on a single FICO score to make decisions about a borrower. They need to look at the whole financial picture of an individual, including their length of employment and credit history. The FICO system is totally flawed.
Do banks still have a long way to go in restoring the confidence of the American people?
I think the rage against Wall Street goes too far if it allows people to deny their own personal responsibility in the crisis. But banks continue to prove they have no respect for consumers. Just look at the way some tried to dismiss the sloppy foreclosure processing. Banks should treat home owners with at least as much respect as the prison system treats criminals. By comparison, prisoners receive more due process when they file suits about procedures being improperly filed than some of these home owners received.