BLAGOJEVICH: Subprime Governor To Bailout Governor


Long before he would become a blazing symbol of political corruption, Illinois governor Rod Blagojevich was making Illinois into one of the leaders in risky mortgage lending. He pushed a program, called Opportunity I-Loans, that would make loans for up to 97% of property value, with borrowers making only a 3% downpayment. When the state legislature resisted, he went ahead and created the program through an executive order.

How did that program turn out? We haven’t been able to uncover the default or foreclosure rate on those loans. But shortly after he created the I-Loan program, Illinois became one of the leaders in mortgage defaults. Defaults under the I-Loan program would likely have been even higher than the state average because the combination of minimal downpayments and declining property values is a recipe for rising loan defaults.

Rather than react with regret about the loose mortgage climate he helped create, Blagojevich became one of the earliest political leaders to call for a housing bailout.  In the fall of 2007, he called for a national freeze on foreclosures. In early 2008, the llinois Housing Development Authority got millions of dollars from the federal government to assist borrowers who were at risk of defaulting. The I-Loan program was actually expanded to offer 40 year mortgages. The new loans were funded by municipal bonds.

Later the Illinois government turned against mortgage lenders, describing them as predatory for offering loans to borrowers who could not afford large downpayments. Illinois stripped Countrywide of its state licence and filed a lawsuit seeking damages. Both these moves, along with Blagojevich’s recent threats against Bank of America, now have a decidedly more sinister appearance in light of today’s corruption charges. They look an awful lot like the Chicago machine punishing Bank of America for failing to play by the politicians’ rules.

Illinois has one of the most regulated mortgage markets in the country.  Mortgage brokers are required to be licensed and must have three years experience working. They are required to hold a $100,000 fidelity bond and a $20,000 surety bond. None of that, of course, slowed down the mortgage mania that overtook the state.