California fares poorly—receiving an overall “C” grade—in the 2007-2008 Assets and Opportunity Scorecard, a biannual report released by the national Corporation for Enterprise Development (cfed). This report presents a comprehensive look at wealth, poverty, and the financial security of families on a national and state level. The 50 states, along with the District of Columbia, are assessed on 46 performance measures in five major areas: financial security, business development, homeownership, healthcare, and education.
According to the report, California is at the forefront of small business development, receiving an “A” grade for Business Vitality. However, California still has a long way to go in areas of asset poverty, homeownership, and access to health care. For example, California ranked:
• 39th in asset poverty
• 50th in affordability of homes
• 51st in median mortgage debt
• 49th in homeownership rates
• 42nd in percentage of uninsured low-income children
• 39th in percentage low income parents without health insurance
Overwhelming new data for the golden state indicates a need for:
• More asset-building saving programs
• State earned income tax
• A public health insurance programs to cover all low-income residents
• Eliminating asset limits on public benefit programs such as CalWORKs and MediCal
Grim data such as this is just the beginning if legislatures and advocates fail to respond to California’s growing insecurity.
Countrywide Financial Corporation, one of our nation’s largest mortgage lenders is under heat for allegedly selling high cost, subprime loans to borrowers who would otherwise qualify for more favorable loans.
Inside the Countrywide Lending Spree, an article recently published in the New York Times, accused Countrywide for swindling many of its borrowers by only offering high cost or subprime loans to clients during the mortgage lending boom. For years brokers and sales representatives in the subprime unit were unable to input borrowers’ cash reserves when assessing risk and determining the kind of loan the borrower would get access to. This meant the borrower was able to show fewer assets and thus posed a higher risk, ultimately giving lenders free reign to offer high cost or even subprime loans to clients.
According to this article, one of the reasons subprime loans are lucrative for Countrywide is because “…investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates.” Therefore, the company’s incentive structure provides higher commission rates to brokers who sell risky subprime loans. For example, a broker who sold subprime loans made 0.50 percent of the loan’s value while receiving only 0.20 percent on loans that were slightly more favorable.
Last year 45 percent of Countrywide’s loans carried adjustable rates and because Countrywide has a large presence in California, more than 46 percent of Countrywide’s clients are Californians.
“As of June 30, almost one in four subprime loans that Countrywide services was delinquent, up from 15 percent in the same period last year, according to company filings. Almost 10 percent were delinquent by 90 days or more, compared with last year’s rate of 5.35 percent.”
The “spin” coming from spokespeople in the lending industry, and from elected officials on both sides of the aisle is that the current crisis was spurred by consumers’ irresponsible choices. But stories like the NYT piece on Countrywide’s incentive structure force us to re-evaluate the way we should consider the context in which these choices were made. Is this not similar to the debate about where to draw the line between allowing people to purchase cigarettes knowing they cause cancer? Rather than placing the blame solely on consumers, policy makers should take a hard look at the way the lending industry and its regulators operate.
