Reimagining Equality

by Anita Hill

  An Industry Icon

  As a consequence of the lawsuits, borrowers in Baltimore, Memphis, and Illinois have come to represent one end of the spectrum in the human drama of the subprime market. Agents like Jacobson and Paschal fit somewhere in the scheme, as do their supervisors and brokers, in some instances. However, if the bank could be reduced to a symbol of one person, it would have to be Wells’s former CEO, Richard M. Kovacevich.

  Kovacevich began his ascent in the banking world from an executive position in consumer operations at Citibank. From that spot, he went on to become second-in-command and then CEO (in 1993) at Norwest Corporation, a Minnesota banking operation with a large mortgage subsidiary. In 1998 Norwest, which was already a national player in the mortgage lending and consumer finance markets, merged with Wells Fargo, the nearly 150-year-old California corporation. Kovacevich called it the “most successful large merger in banking history.”19 Although by some reports the Minnesota company acquired Wells Fargo, Norwest took the Wells Fargo name.

  With the merger, Kovacevich climbed from number 206 in Forbes magazine’s annual ranking of executive pay in 1999 to number 7 in 2004. In 2005, during the apex of subprime and high-cost lending, his total compensation was $53.1 million, which put him in the number 12 spot on the Forbes list of all executives and number 1 among his banking peers.

  While Kovacevich was the banking world’s top money maker, the financial industry traded in more and increasingly risky credit products, including over-the-counter derivatives, which financial wizard Warren Buffett viewed as “financial weapons of mass destruction” and “time bombs, both for the parties that deal in them and the economic system.”20 A Brookings Institute paper concludes that 2005–2006 was the period when the bulk of the precarious loans were issued to consumers.21 The following year, although his Forbes ranking dropped, Kovacevich garnered $7 million in bonuses. When he resigned, precipitously, as chief executive in 2007, handing over the reins of Wells Fargo’s “stagecoach” to John G. Stumpf, Richard Kovacevich was considered one of the top bank executives in the country.

  Early in October 2008, Kovacevich, as chairman of Wells Fargo’s board of directors, announced the bank’s intent to acquire Wachovia, proclaiming the agreement as an “outstanding opportunity” for, among others, “the U.S. government and the banking industry.” In his words, Wachovia’s “outstanding customer service and their highest standards of community leadership are identical to [Wells Fargo’s] own values.” Less than a month later, Wells Fargo, on the brink of collapse along with other major banks, received $25 billion in assistance from the federal government. Within weeks the Wachovia merger was finalized, creating, as the heading on the firm’s news release proclaimed, “North America’s Most Extensive Financial Services Company, Coast-to-Coast in Community Banking.”22

  On October 21, 2008, just days after Congress voted to bail out Wells Fargo, Richard Kovacevich spoke to the Commonwealth Club in San Francisco about the era of banking that matched his career. He explained to the audience, almost apologetically, that his remarks had been prepared before the collapse of the banking industry. By his own admission, what Kovacevich had to say reflected the industry’s boom mentality. He described the banking business before 1985 as boring: bankers paid 3 percent interest on deposits, charged 6 percent for loans, and were “on the golf course by 3:00 p.m.” According to the former bank executive, an “exciting” industry period followed, marked by “unprecedented” growth enabled by deregulation, technology, and nonbank competition.23

  During this lauded period, bank assets rose from billions to trillions. And why not? President George W. Bush touted the country’s economic growth as a defining feature of his presidency. Not only was home ownership thought to be good for business—the banking business in particular—but it may also have been considered to have political benefits, as homeowners were assumed to prefer more conservative policies than renters.

  Years earlier, Greenspan had revealed his inclination to allow unfettered economic expansion. Along with Clinton appointees Robert Rubin and Lawrence Summers, the fed chief publicly rebuked Brooksley Born, chair of the Commodity Futures Trading Commission. Born had proposed that her agency reexamine the way it regulated over-the-counter derivatives, the devices that ultimately enabled the industry’s explosive growth. In a bold move, Greenspan, Rubin, and Summers convinced Congress to strip Born’s agency of its authority to investigate, let alone regulate, the derivatives market. Even the independent watchdogs seemed to have caught the fever. Independent rating agencies Moody’s, Standard & Poor’s, and Fitch put “their stamp of approval” on the uncertain deals, the Financial Crisis Inquiry Commission later said. And media watchers have since accused the business press of being too cozy with the financial institutions that ultimately brought about the financial crisis. Even in the down market, the reality television show Flip This House, which premiered in 2005, declared that “flipping houses is the most tried-and-true way to make a fortune in real estate.”

  In his presentation to a relatively friendly crowd, Kovacevich, the retired executive, spoke volumes in what he said and what he didn’t say. Missing from his prepared remarks was any mention of the human factors that came to play in the rise of banking in the country, especially as they related to the mortgage industry in which Wells Fargo was a major player.

  Kovacevich was only slightly more reflective a few months later when, in reference to the financial crisis, the organizers of his 2008 Commonwealth talk asked him to explain, as he put it, “what the hell happened.” Without pointing the finger in the direction of any one person, he laid the blame on greed, unchecked by regulatory authorities or the safety valves that rating agencies were suppose to provide. Kovacevich’s abstract appraisal still made no mention of the human costs of the industry’s transgressions or the monetary impact on communities and cities, as alleged by the three suits that Wells Fargo was defending against. To his credit, Kovacevich acknowledged the tragedy. But his lens still focused on the industry. Perhaps a banking executive who drew millions in bonuses lacks perspective in formulating a solution for those who lost homes. His mea culpa still demonstrated the financial world’s lack of affinity with its first-line customers and even its sales force.

  Don’t think for a moment that Wells Fargo was the only participant in the fleecing of borrowers. Brian Kabateck, a lawyer for the NAACP, will quickly remind anyone that the problem is industry-wide. Although the merger with Norwest placed Wells Fargo ahead of all other lenders in the number of residential mortgage loans it originated and serviced, Wells Fargo was responsible for only a portion of the subprime market. By 2006 a number of major banks—including Bank of America, Countrywide, and Citicorp—and smaller banks that specialized in subprime loans were in this lucrative market. Over 25 percent of home purchase loans made in 2006 were subprime loans. And that same year, 31 percent of mortgage refinancing was made on subprime terms.

  Kabateck will also be happy to tell you that the organization he represents was one of the first to detect the market practice that would ultimately drain massive amounts of cash from homeowners and would-be homeowners. In early 2007 Kabateck, whose consumer practice goes back to the late 1990s, met with leaders in some of the country’s top banks. Surprisingly, according to Kabateck, they were happy to discuss the claims that the NAACP raised about faulty lending practices. General counsels, vice presidents, and diversity representatives from several banks were quick to acknowledge that racial steering and reverse redlining were, in fact, happening. While neither of the banks Kabateck met with acknowledged its own participation in those activities, each was quick to say that other banks definitely engaged in it.24

  In July 2007, the NAACP announced its own lawsuit against Wells Fargo. Other suits followed. The subprime lending debacle has led to a sea of litigation. In all, the class action suits brought by the NAACP included thirteen more lenders: Ameriquest, Fremont Investment, Option One Mo
rtgage (H&R Block), WMC Mortgage, Countrywide, Long Beach Mortgage, Citigroup, BNC Mortgage, Accredited Home Lenders, Encore Credit (Bear Stearns), First Franklin, HSBC, and Washington Mutual. The cases in Baltimore, Memphis, and Illinois, along with the class action suits filed by the NAACP, attest to the fact that a whole host of lenders may have engaged in destructive practices. On behalf of the NAACP, Kabateck has negotiated settlements with a number of the banks, including Wells Fargo. Wells Fargo’s subprime lending was not unique, nor was it limited to a few communities; but by 2007, as the number-one bank in the subprime market, it had become the industry leader, for good or for bad.

  Granny Hunting

  News in the popular press about the expansion of subprime and predatory lending and the subsequent housing crisis caused me both intellectual and emotional disquiet. As the collapse unfolded, much of the coverage of the devastating effects of the housing debacle focused on its disproportionate impact on minority communities. For example, in October 2007, television cameras followed as the chairman of the House Financial Services Committee, Congressman Barney Frank of Massachusetts, held a public hearing in Roxbury, a predominantly black and Latino neighborhood in Boston. And the Boston Globe reported on the findings of housing analyst Jim Campen, who determined that while just 9 percent of white borrowers making more than $152,000 per year received high-interest loans, 71 percent of African Americans and 56 percent of Latinos in the same income bracket were victims of predatory lending.

  Yet as the problem grew, the losses attributable to blight in select neighborhoods did not account for the full extent of the mortgage crisis in Boston, let alone nationwide. No major bank could have supported the kind of expansion that Wells Fargo and Countrywide were supporting by lending only to poor minority communities. As I began to look at the problem, I found ample evidence that the problem was a lot more complex than Judge Motz’s assessment or even the racial discrimination outlined by the suits in Baltimore, Memphis, and Illinois. Predatory lending may have been launched in minority communities, and Wells Fargo may have been a major player in the market, but the enormity of the crisis suggested a much larger base for the practice than the three suits and the popular press covered. My work in social policy and my interest in women’s economic gains suggested that something more was happening. I quickly reached the conclusion that the full breadth of the subprime lending debacle could be explained only through an examination of the gender dimensions of the discriminatory practices.

  Why and how did the crisis swell beyond African American and Latino communities? Over time, I pieced together the gender dynamics of subprime lending practices that enabled the spread. I had followed home purchasing trends and knew that a large percentage of recent new home buyers were women on their own. Stories began to appear in both the trade and popular press heralding an increase in the number of women buying homes on their own. As early as 2004, Blanche Evans, writing for the trade publication Realty Times, noted what she called a “subtle but seismic shift in the demographics of homebuyers.” Simply put, women weren’t waiting for marriage to buy houses. Data from Harvard University’s Joint Center for Housing Studies backed Evans’s observation. Single women were a fast-growing segment in the home-buying market. Moreover, the value of the homes they purchased in a little over a three-year period at the turn of the twenty-first century added up to more than $550 billion. And single women typically entered the market with less money than either unmarried men or married couples.25

  With so many new female entrants into what had become an aggressive lending market at the height of the home-buying boom, I knew that there was something absent from the telling of the stories of home loss. I suspected that in reporting race bias in the subprime market, gender discrimination was being overlooked. Given that neighborhoods were being targeted, geography helped policy makers, like Frank, and reporters to identify racial disparities. Gender bias was more diffuse, at least geographically, and maybe even harder for interested parties to detect. And masking or ignoring gender issues wasn’t new; in 2005 the press had paid little attention to the inordinate impact that Hurricane Katrina had on women and their families, even though the number of households in New Orleans with children under eighteen headed by women alone far outnumbered the households headed by married couples or men alone. Given the history of gender discrimination in the extension of credit and property ownership, it was not difficult for me to imagine its presence in the mortgage crisis.

  Even as Marilyn Kennedy Melia, a Chicago Tribune finance contributor, was chronicling the rise in single women home buyers, she was cautious. Melia’s article advised women to avoid eroding home equity “as lenders aggressively market equity lines of credit and equity loans” and to be wary of adjustable-rate mortgages where “the interest rate could jump later, and they will then struggle to afford payments.”26

  As word of the rise in subprime and high-cost loans spread, the Consumer Federation of America started to expand its research to look at how women in and out of minority neighborhoods were faring in the mortgage market. In December 2006, the fifty-year-old advocacy group reported on a study of over four million mortgage loans in 350 metropolitan areas in 2005. Whether purchasing or refinancing homes, women were overrepresented in the subprime lending market. In some categories, women were almost twice as likely as their male counterparts to get subprime loans.

  Elderly women may have been particularly vulnerable. Women, on average, live longer than men and have a greater chance of living alone and being on fixed incomes for longer periods. Rising property taxes and other economic and social realities make elderly women particularly susceptible to abusive home mortgage lending practices that promise ready cash in exchange for second mortgages. Older female homeowners are overrepresented in the subprime refinance market, often losing the equity they have built up in their homes. According to Nina Simon, formerly of the AARP, at least one broker put the pursuit of older women borrowers in blunt terms: “It’s time to go granny hunting!”27

  Ironically, higher-income women received less favorable terms than their white male counterparts on home purchase, refinance, and home improvement loans. The tactics agents employed with high-end borrowers fit the target. According to Brian Kabateck, lenders were eager to advise homeowners to cash in on home equity in order to show their success. A bigger home, a three-car versus two-car garage, new vehicles to fill it, a boat, a second home—all became symbols of the achievement of the American Dream that brokers and lending agents sold.

  In 2003, four years into my own mortgage, I responded to the slew of invitations to refinance that lined my mailbox weekly. For thirteen years I had taught contracts and commercial law. I had written about consumer bankruptcy. I was equipped with a vocabulary that would, at the very least, keep me from getting into too much trouble. Nevertheless, I placed the call to my current mortgage holder with trepidation. In my mind, familiarity made my current lender somehow less risky than the hosts of other banks that offered me the chance to “lower my monthly payments” by taking advantage of “historically low rates of interest.” Of course, like most borrowers who refinance, I really wanted to pay less than I was currently paying in interest each month.

  Over three hours later, I ended the telephone conversation nursing a colossal headache. Nevertheless, I had negotiated a much lower monthly payment, albeit one that could escalate seven years later. Perhaps it was my tenacity, but the agent never suggested a subprime loan. That he offered me only conventional terms may also have been due to my unwillingness to accept the rates he originally offered and to my demand for a cap on the rate adjustments. There was no need for me to add “extra funds” onto the existing loan. I didn’t need a new car, furnace, or roof; didn’t want a boat or second house; and didn’t have children set to go to college. Yet even when the attorney from the bank’s signing service showed up at my home with the forty-five legal-size pages of documents for me to sign, I wasn’t altogether confide
nt I had gotten the arrangements that I had agreed to over the telephone. Fortunately, the promised lower payments proved to be accurate.

  A few years later, when the housing market began its downward spiral and the date on which my interest rates might adjust approached, I was at least thankful that my neighborhood had weathered the worst of the foreclosure crisis. Yet throughout the Boston area, many others fared far worse than I did. In October 2007, according to Attorney General Martha Coakley, weak or subprime credit had led to twenty-five thousand foreclosure actions in Massachusetts over the prior twelve months.

  Who Takes Out a Subprime Loan?

  Since the practices of subprime and predatory lending were not limited to neighborhoods in distress, as had been initially suspected, it was clear that neither would the devastation from the meltdown. The pundits who assumed that the problem could be contained were sorely mistaken. But what the stories of blacks, Latinos, and all women had in common was that old-fashioned bias was a contributing factor to who got fleeced. Recall the statement made under oath by the former loan officer at CitiFinancial, the largest consumer financial company in the United States: “If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the [extras at additional expense that] CitiFinancial offered.” And women’s expanded entry into the market just as new, high-cost, and extremely risky mortgage products were booming was a recipe for widespread disaster and, as a writer for Women’s eNews put it, “crushed dreams.” And Debbie Bocian of the Center for Responsible Lending helped to dispel some of the myths about subprime and high-cost lending—myths that many are tempted to believe—by directing me to information she gleaned from 2005 and 2006 Home Mortgage Disclosure Act (HMDA) data: