Fellow Examines History of Subprime Lending Debacle

While Wilson Center Fellow Devin Fergus was finishing his new book, Liberalism, Black Power, and the Making of American Politics, he met with federal financial regulators around the country who shared their concerns about the financial industry's effects on average Americans. These concerns, specifically about lax lending policies and shaky mortgages, led him to pursue current Wilson Center book project, Land of the Fee: The Decline of the Middle Class and the Making of the New Financial World Order.

"My story is as much about Washington as it is about Wall Street," said Fergus, who teaches history at Vanderbilt University. The laws regulating the subprime industry were created in the 1980s to help boost the savings of average Americans. But nearly three decades before the 2007 financial crisis, average Americans were getting stung by such laws.

Fergus told of a young California couple, Leland and Sherry Conner, who bought their first home in 1980 for $85,000, with a monthly mortgage payment of $750. Barely a year later, their payments leapt 60 percent to $1,200 per month. Soon after, despite their best efforts, they foreclosed on their house. Such stories "raised red flags about the pitfalls of exotic mortgages and questions pertaining to broker deceit, fraud, and intentional misrepresentation," wrote Fergus in a recent report.

When the first financial deregulation law passed in 1980—the Depository Institutions Deregulation and Monetary Control Act (DIDMCA)—senators questioned its effects on the lower middle class and the poor. To enable lenders to assume these riskier loans, the legislation preempted state usury laws. This created some controversy as many southern senators, who typically defended states' rights, in this instance were siding with federal supremacy over state law.

Originating under President Carter, DIDMCA was expanded two years later by President Reagan. Such deregulation truly was a bipartisan effort. The 1982 legislation, the Garner-St. Germain Act, was named after the two co-sponsoring senators, a Utah conservative and a Rhode Island liberal.

"Today, we hear of subprime mortgages related to buying a first home," said Fergus. "But the Garner-St. Germain Act was looked at as an aid bill to lenders," to benefit the savings and loan industry.

For his book, Fergus is examining three aspects of what he calls the financial muck that has befallen the middle class: the mortgage industry, stagnant and declining wages, and auto insurance premiums. Auto insurance, for example, is a government-mandated, privately run industry that the government is using as a model for health care reform.

"Such public-private collusion without a public option resulted in skyrocketing premiums for insured motorists by the mid-1980s," said Fergus. Politicians on both sides of the aisle, he said, continue to overplay the auto/health connection.

Meanwhile, Fergus said, declining wages exploded the wealth gap. Studies show that in the 1990s while the income, gender, and race gaps shrunk, the wealth gap grew. To explain this, Fergus cited consumer fees, hidden fees, credit and other banking fees, loan interest, and exotic mortgages as major factors that exacerbated the wealth gap, problems that continue to fuel today's financial crisis. Unfortunately, even today, Fergus said, "the people targeted [in these financial deals] are often those who always played by the rules."