FAITH-BASED EARLY WARNING SYSTEM FOR INVESTORS:  “PROPHETIC”
RELIGIOUS GROUPS SOUNDED SUBPRIME LOAN ALARM 15 YEARS AGO

12 Years Before General Recognition of Spreading Mortgage Foreclosure Crisis, Faith-Based Investors Flagged Concerns; 3 New Emerging Issues for Investors:  Factory Farms, Supply Chains Woes and Human Trafficking. 

NEW YORK CITY///September 10, 2008///A full dozen years before some Wall Street experts and regulators reluctantly started to accept the possibility in 2005 of an impending subprime mortgage debacle in the U.S., faith-based organizations started urging that major corrective action be taken to reduce subprime lending risks to homeowners, communities and investors at large. The eerily “prophetic warning” from religious investors is outlined in the summer 2008 issue of The Corporate Examiner, a publication of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of nearly 300 faith-based institutional investors, representing over $100 billion in invested capital.

 Entitled, “THE BUCK STOPS HERE: How Securitization Changed the Rules for Ordinary Americans,” the article in ICCR’s The Corporate Examiner states:  “Subprime mortgages started to become more common in the (early) 1990s due in part to federal laws putting more pressure on banks to lend money to lower-income people. Concerns grew, too. As early as 1993, ICCR members were filing resolutions -- six just that year -- to more closely regulate subprime mortgages … ICCR members understood too well the dangers facing people who were often poor, minorities and without access to conventional lenders. Having met with lending institutions for years as one of the only voices of caution, ICCR members asked tough questions about the depth of banks’ exposure to risky financial practices.” 

Laura Berry, executive director, Interfaith Center on Corporate Responsibility, New York City, said: “When our institutional investor members view their holdings through the lens of justice and sustainability, the priorities for action that emerge frequently anticipate market moves. Time and time again, the prophetic voice of faith has allowed our members to anticipate emerging areas of corporate responsibility, in investment policy as well as in social, economic and environmental policy.  For more than a decade before anyone else, our visionary members have been expressing concerns related to predatory lending practices, inappropriate underwriting standards and the potential consequences of securitization of debt instruments.”

Harry Van Buren, staff consultant, Episcopal Church, and assistant professor of business and society, University of New Mexico, Rio Rancho, N.M., said: “The Episcopal Church, like many socially concerned institutional investors, has long been concerned with the social impacts associated with bank lending.  When the financial system works well, it can do much to build wealth in communities and for individuals.  If we didn’t have a commercial banking sector, we would have to invent it.  But loans with predatory conditions strip wealth from communities.  Further, securitization of mortgage loans can create perverse incentives for banks to extend credit without regard to whether it can be paid back, and we have all seen the results.  The ICCR report helps people make sense of what happened and why.  It is now necessary for there to be sober thinking about what a truly responsible banking sector would like, and ICCR’s members are an important part of that public conversation.”

Sr. Valerie Heinonen, consultant on corporate social responsibility, Mercy Investment Program, Orwigsburg, PA., said:  “The Sisters of Mercy of the Americas support and build sustainable, affordable housing for poor and low income families, particularly for women heads of households.  Subprime lending done correctly allows working families to build assets through home ownership. For more than 15 years, Mercy Investment Program has pressured banks and other financial institutions to end predatory practices, create products for permanent and rental units and ensure financial literacy by partnering with community organizations.”

Saurabh Narain, chief fund advisor, National Community Investment Fund, Chicago, IL., said: “Investors need to support financial institutions that create long-term development impact by providing responsible lending and retail financial services in low- to moderate-income communities.  As the crisis unfolds, we are pleased to find that Community Development Banking Institutions (CDBIs) did not originate irresponsible and predatory sub-prime loans.  As an investor we are pleased that they are not suffering from resulting credit losses.  As a socially responsible investor we are further pleased to see many step up in helping provide support to people and communities that are at risk. NCIF created a Social Performance Metrics that helps identify the best CDBIs so that we (and others in socially responsible investment community) can provide deposits, debt and equity to commemorate their work in low-to-moderate income communities.  The inherent leverage in financial institutions results in sustainable economic development.”

As the ICCR magazine article states:  “Subprime mortgages came about as a way to extend credit to lower-income people. They became more common after the passage in 1977 of the federal Community Reinvestment Act, which encouraged banks to lend money in their local communities. The current economic downturn may have given subprime mortgages a bad name, but they are necessary, even laudable, under some circumstances, Zerega stressed. After all, not everyone has perfect credit and many cannot come close to buying a house with a 20 percent down payment that would gain favorable interest rates. That’s why subprime mortgages can, when lent responsibly with reasonable terms, give low-income applicants with less-than-spotless credit histories access to home ownership when conventional mortgages would be otherwise unavailable.”

In 2001, the market for securitizing unconventional, subprime and exotic mortgages was $136 billion. By 2005, the market had soared to $1.2 trillion, according to published accounts. The percentage of subprime borrowers who didn’t fully document their income and assets grew from 17 percent in early 2000 to 44 percent in 2006, according to data from First American CoreLogic, a research firm in San Francisco.

NEW WARNINGS ABOUT EMERGING ISSUES

Now the subprime mortgage crisis meltdown is widely understood, what emerging issues are ICCR members focusing on today.   According to Berry, the following three issues just below the radar of most investors are now attracting considerable time from faith-based investors:

• Supply chain abuses. Many thousands of workers making products for major brands and retailers still work in sweatshops. But since 1992, ICCR members have been at the forefront of a growing coalition of investors addressing abusive working conditions. Their faith perspective and long-term engagement have persuaded companies to take responsibility to improve the conditions under which workers labor. As a result, more companies now have codes of conduct calling for humane working conditions and hours, protecting the right to organize, and stopping workplace harassment.
• Factory farms/food chain safety & sustainability.    ICCR works to protect our water resources from pollution and overuse by encouraging sustainable water management practices.  We are engaging the largest meat companies for whom hog suppliers have polluted many of the nation’s waterways. Meat production in the United States is big business, and environmental regulators have not kept up.  Four companies market 57 percent of the hogs produced in the United States, and cattle, poultry and egg-laying operations are similarly concentrated.  The industry’s giant feedlots mass thousands of animals in warehouses, often in unspeakable conditions, where they produce more fecal matter than a large city.  The off-gases from this waste are ventilated from barns and lagoons, and foul the air with ammonia, hydrogen sulfide and other contaminants.
• Human trafficking.   Human trafficking is the third-largest and fastest growing criminal industry in the world. Its victims are forced into selling sex, or coerced into laboring long hours in agricultural or domestic work. In the U.S., around 14,500 to 17,500 foreign nationals are coerced into this modern-day form of slavery every year, according to the U.S. State Department, with cases of human trafficking reported in all 50 states. The decision to expand worker visas for corporate operations in the U.S., particularly those related to agriculture and construction, without regulation or oversight already is resulting in labor wages and practices equivalent to slavery. Rising concern about this injustice motivated ICCR’s Human Rights Working Group and the State Department’s Office to Monitor and Combat Trafficking in Persons to convene a March 2008 symposium.

ABOUT ICCR

The Interfaith Center on Corporate Responsibility is a coalition of nearly 300 faith-based institutional investors, representing over $100 billion in invested capital. ICCR members bridge the divide between morality and markets by envisioning a civic economy that integrates ethical, environmental and social values. Inspired by faith, committed to action, ICCR members work to build a just and sustainable global community.

CONTACT:  Patrick Mitchell, (703) 276-3266 or pmitchell@hastingsgroup.com.

EDITOR’S NOTE:  A streaming audio replay of the news event will be available as of 6 p.m. EDT on September 10, 2008. 

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