Four years before the collapse of Lehman Brothers, housing attorney Ruhi Maker warned officials at the Federal Reserve that the nation’s housing bubble could cause “enormous” economic damage. Maker specifically mentioned Lehman Brothers, warning that a flood of faulty home loans could jeopardize major investment banks. Maker’s testimony drew on her experience dealing with the foreclosure crisis caused by subprime loans, where borrowers were unable to afford their homes. This warning came from a lesser-known group of housing attorneys, consumer advocates, academics, and federal officials who had been sounding the alarm about the housing market for years.
During the early 2000s, a small group of housing market experts noticed an increase in loans made to low-income borrowers, known as subprime loans. These loans, many of which were adjustable-rate mortgages, later caused borrowers to default when the interest payments increased. Housing experts who worked with these borrowers were aware of the impending foreclosure crisis and warned that the subprime market would collapse. In meetings with the Federal Reserve, these experts urged action and called for increased government regulation of the banks.
Despite their warnings, the critics felt ignored by the Federal Reserve and were fearful of the direction the U.S. economy was heading. However, they found support in each other and continued to advocate for action. The collapse of Lehman Brothers in September 2008 and subsequent bank failures validated their concerns. The following year, the net worth of U.S. households significantly declined due to lost home value and damaged retirement accounts. While the Wall Street traders famously portrayed in Michael Lewis’ book “The Big Short” were credited with anticipating the collapse, housing advocates on the frontlines received little recognition.
These warnings are detailed in the 532-page report commissioned by Congress after the financial crisis. Speaking at the report’s release, Phil Angelides, the chairman of the commission, emphasized the importance of remembering those who had warned government officials. He stressed that accepting the idea that the crisis was unforeseeable would leave the door open for it to happen again in the future.
