ACORN Foresaw the Foreclosure Crisis in 2001 

The grassroots group helped Oakland pass a tough anti-predatory lending law that would have halted the housing crisis before it started. Then subprime lenders started making campaign contributions in Sacramento.

The Association of Community Organizations for Reform Now has been a favorite whipping boy of Fox News for a long time. And it's no secret that the right-wing attacks have worked. A few weeks ago, Congress voted to defund the group after a pair of young Republican operatives went undercover and caught ACORN workers engaged in fraud. And although the group immediately fired the workers, Democrats have sought to distance themselves ever since. But before they completely turn their backs on ACORN, they should remember that while the group has made mistakes over the years, it also was way out in front of the foreclosure crisis. In fact, if politicians had listened, the global financial meltdown might never have happened.

Back in the late 1990s, ACORN was acutely aware of the grave dangers posed by subprime mortgage lending because of the group's close work with low-income property owners. ACORN officials were witnessing first-hand how unscrupulous lenders were enticing people to buy homes they couldn't afford and advising long-time homeowners to strip out all of the equity in their homes. The group then saw those very same people lose everything when their subprime mortgages kicked in and low-income neighborhoods were devastated.

So in 2001, ACORN helped sponsor anti-predatory lending laws in Oakland and a few other cities around the nation that would have greatly curtailed the subprime market. Oakland's ordinance, which was written by officials in the office of City Attorney John Russo and unanimously approved by the City Council in October 2001, was way ahead of its time. The law would have prohibited subprime mortgage lenders from making a loan unless the borrower could afford it and had obtained a written certification from an independent credit counselor stating that the borrower had received financial advice. In other words, subprime lenders would have had to make sure that people could pay back a mortgage before getting one. "Given the number of foreclosed properties that we eventually had, it would have made a huge difference," Oakland Councilman Larry Reid told Full Disclosure.

Moreover, Oakland's law would have gone much farther than requiring that borrowers could afford loans. In 2001, ACORN officials already recognized that the driving force behind the subprime lending was the ability of brokers to chop up risky mortgages, repackage them with good loans as "securities," and sell them to other banks on a largely unregulated market. When homeowners who couldn't afford their loans later defaulted on them, these securities became widely known as "toxic assets" and were the primary cause of the world financial crisis. Lehman Brothers collapsed because of them, setting off a chain reaction and prompting last year's $700 billion bailout by then-President George W. Bush and then-Treasury Secretary Hank Paulson.

But if Oakland's law had been widely adopted, the bailout likely would have been unnecessary and the worst economic downturn since the Great Depression probably averted. Why? Because the city's ordinance not only would have held mortgage brokers liable for making bad loans, but also every other bank that later bought pieces of those bad loans after they were securitized. In short, the market for subprime loans would have dried up. "Instead, what happened is exactly what we said would happen," explained Russo, referring to the financial crisis.

Indeed, in 2005, then-California Supreme Court Justice Janice Rogers Brown recognized the likely far-reaching effects of Oakland's law. In a court decision, she wrote that the city's anti-predatory lending ordinance probably would have resulted in "secondary purchasers being hesitant or unwilling to purchase mortgages originating in Oakland." Brown also wrote that "should other cities adopt a similar extension of liability, subprime lending could conceivably be sharply curtailed in the state." She saw that as a problem, but in fact it would have been a blessing.

A senior executive at Ameriquest Mortgage, at one time the nation's largest seller of subprime loans, confirmed Brown's assertion when he told the Associated Press in 2003 that his company and probably many others wouldn't have been "able to make loans" in Oakland and Los Angeles because of the "unquantifiable risks" posed by extending liability.

Who Killed Oakland's Law?

So what happened to Oakland's forward-looking ordinance? Moderate Democrats in the state Legislature unwittingly killed it after being lobbied heavily by the mortgage industry. In addition, one state senator, our very own Don Perata, attempted to snuff out Oakland's law on purpose, while taking huge campaign contributions from its biggest opponent.

In 2001, just days after Oakland passed its law, California Governor Gray Davis signed a watered-down predatory lending bill sponsored by Migden. Unlike Oakland's ordinance, Migden's bill only "recommended" that borrowers get financial counseling. In addition, the weakened bill had no provision for holding banks liable for the pieces of bad loans they bought. In other words, subprime lenders were free to bundle bad loans with good ones and sell them over and over again. Predictably, the state law eventually had no effect on the foreclosure crisis and, in fact, probably helped spur it.

Not long after Oakland passed its law, the mortgage industry sued to block it. Subprime lenders argued that Migden's bill "preempted" Oakland's ordinance and thus invalidated it under the doctrine that cities can't adopt ordinances that conflict with state law. However lawyers representing the City of Oakland defeated the mortgage industry at trial and at the appellate court level, successfully arguing that the Legislature had specifically discussed the issue of preemption and did not include it in Migden's bill. A preemption provision would have automatically prohibited cities from adopting a tougher law than Migden's.

Then, in the late summer of 2002, when it looked as if the subprime industry was going to lose its court battle and Oakland's tough law was going to go into effect, Perata sponsored a bill that would have killed it and a similar ACORN-backed ordinance pending before the Los Angeles City Council. Perata's legislation would have specifically "preempted" cities from enacting predatory lending ordinances.

At the time, the senator was taking large donations from Ameriquest, an Orange County subprime lender that strongly opposed Oakland's law. According to campaign finance reports, Perata and political committees closely associated with him accepted at least $200,000 in contributions from Ameriquest before he sponsored the bill that would have shot down Oakland's law. In all, Ameriquest donated at least $591,000 to Perata or committees closely associated with him from 2001 until late 2006, when the company went out of business because of its history of giving out lots of bad loans and preying on low-income borrowers who couldn't afford to pay them back.

In fact, Perata and the committees continued to take hundreds of thousands of dollars from Ameriquest even after the attorneys general of 49 states, including then California Attorney General Bill Lockyer, had charged the company with widespread fraud. Moreover, the Perata committees accepted more than $237,000 from Ameriquest after the company settled its legal troubles with California and 48 other states in January 2006, and agreed to pay $325 million. Ameriquest ceased operations later that year.

After Perata's support for the legislation became public, ACORN and other consumer advocacy groups eventually convinced him to abandon the bill. Perata, who is now running for mayor of Oakland, claimed at the time that he was worried about lenders pulling out of Oakland, thereby harming the local real estate market.

As for Oakland's law, the state Supreme Court struck it down in 2005, along with Los Angeles' ordinance, in a split 4-3 decision. Writing for the majority, Janice Rogers Brown sided with the subprime mortgage industry and ruled that Migden's bill preempted Oakland's ordinance after all, even though it contained no specific preemption provision and even though Oakland had then — and now — a much higher rate of foreclosures than the state average. A few months after the ruling, the US Senate confirmed Bush's appointment of Brown to the federal court of appeals in Washington, DC.

BRT Is on the Ropes

AC Transit is on the cusp of abandoning its plans to build a controversial Bus Rapid Transit system from downtown Berkeley to San Leandro because of severe financial problems. At a meeting late last week, the AC Transit board of directors voted to ask the Metropolitan Transportation Commission if it could transfer $35 million from the BRT construction project to its general operating funds. The move would allow the cash-strapped agency to forgo about half of the 15 percent service cuts it has planned for bus lines throughout the East Bay over the next three years. The planned service cuts have received widespread opposition from riders.

AC Transit also is considering asking the MTC to allow it to transfer another $45.6 million in BRT construction project funds to its operating account, which would allow the agency to forgo about half of the planned service cuts for a total of six years. But if AC Transit decides to make that move, and the MTC agrees, it will likely kill BRT as we currently know it.

The financial maneuvers would strip more than one-quarter of the funds needed to build the $237 million project. As a result, the agency likely would not have enough money to construct center-of-the-street platforms and take over the two middle lanes of traffic on Telegraph Avenue and International Boulevard. Instead, AC Transit would have to build a yet-to-be specified, scaled-down version of the plan that probably would not include the taking over of the two center lanes of either street.

Ironically, AC Transit General Manager Rick Fernandez, one of the biggest backers of BRT over the years, recommended asking for the $80.6 million fund transfer right away. Fernandez warned at the meeting that MTC staff probably would not approve of the $35 million transfer without the other $45.6 million, because it would only solve AC Transit's financial problems for three years and MTC wants the agency to have a longer plan for fiscal stability. But AC Transit board members were hesitant about requesting both fund transfers immediately because it likely would spell the end of BRT — a project the board has been pushing for the past decade.

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