The resignation of James Johnson from Barack Obama’s running-mate selection team capped off a great week for that odd coalition of renters and responsible homeowners who think the housing bailout working its way through Congress is a horrible piece of legislation. If you listened long enough to the lawmakers who back this bill, you’d probably come away convinced that 90 percent of the people currently facing foreclosure were suckered by predatory lenders — an uncanny bunch whose business model was apparently built around lending money to people too poor to pay it back.
Until this week, that predatory-lending narrative dominated the housing conversation. But in the past few days, three poster children for irresponsible lending and borrowing have taken center stage in the debate over the housing bailout.
The first is Rep. Laura Richardson, a California Democrat. A former member of the California Assembly, Richardson was elected to Congress in a special election last summer. In order to finance her run, she lent her campaign $75,000 (in addition to the $100,000 she lent herself for her assembly run).
While Richardson was lending herself all this money, she was missing payments on her houses — all three of them. In the most egregious example, she stopped making any payments at all on her three-bedroom home in Sacramento. The home went into foreclosure, and Richardson’s bank sold it at auction for three-quarters of the value of the no-money-down mortgage, taking a $187,000 bath in the process.
After the press got wind of Richardson’s default, she preposterously claimed that the foreclosure never happened and that she had worked out a deal with the bank to pay off the loan. (“I would be happy to resell her the home for [it’s original value],” the new owner, James York, reportedly chortled.)
Even more astonishing is the fact that Richardson’s bank, Washington Mutual, is playing along in her defense, and has demanded that the new owner give back the house. York, who is suing to keep the house, told the Daily Breeze, “I’m just amazed they’ve done this… They never would have done this for anybody else.” If York’s lawsuit goes through, legal discovery could uncover all sorts of shady details about this sweetheart deal.
The second poster child is Michelle Augustine, another Sacramento homeowner (what’s going on down there?) who was featured Wednesday in a Wall Street Journal article about a phenomenon called “buy and bail.” According to the Journal, Augustine took out a no-money down, adjustable-rate mortgage on a four-bedroom home, and she says that soon she won’t be able to afford the payments.
Augustine’s plan is to secure a loan to buy another home, and then walk away from the one she lives in now, leaving the bank to foreclose on a property worth $200,000 less than it was when Augustine bought it. And presumably, since Augustine made her fraudulent intentions clear in a national newspaper, her bank will have a good case against her should it decide to sue her to cover its losses.
Nowhere in the Journal story does Augustine claim to be a victim of predatory lending. She presumably understood the terms of her mortgage, and she knew her payments would go up. Like many Americans, she probably just assumed that house prices would continue to rise and that she could refinance into a more affordable mortgage once that happened.
Assuming Augustine’s lender had accurate information about her income, it made the same mistaken assumptions about house prices and her ability to pay that she did. Congress wants us to bail these people out. Instead, they deserve each other — and whatever consequences befall them.
Finally, Wednesday brought word that former Fannie Mae CEO James Johnson would step down from Obama’s VP-vetting team after the Journal (again) revealed that he had received nearly $7 million in loans at below-market interest rates, courtesy of his pal Angelo Mozilo, the CEO of embattled mortgage-lending giant Countrywide Financial. It turns out that Mozilo had set up a “Friends of Angelo” program, and membership had its privileges.
The news created a problem for Obama. On the campaign trail, Obama had accused Countrywide of “infecting the economy and helping to create a home foreclosure crisis.” But Obama also backed — and continues to support — a housing-bailout plan that would allow Countrywide and lenders like it to dump their most radioactive mortgages off on the American taxpayer, while shielding lenders from lawsuits filed by investors in mortgage-backed securities.
Richardson, Augustine, Johnson — all three are perfect examples of why bailing out irresponsible lenders and borrowers is a bad idea. We’ve read too many sob stories in the press about “predatory lending” — a rare, misunderstood, and vastly exaggerated phenomenon. It’s time for the poster children for irresponsibility to get some face time.
– Stephen Spruiell is a National Review Online staff reporter.