Sub-prime mortgage lenders prey on aspirations of working families

As the U.S. housing market continues to deteriorate, many ruling class politicians and pundits are euphemistically referring to the growing crisis as a “market correction.” They insist that the economic hardship is only temporary.

While it may be possible for a millionaire Wall Street analyst to describe the current trouble in the U.S. housing market as a mere market correction, in reality it is a major crisis, particularly for working families across the country. Foreclosure rates and personal bankruptcy filings are soaring. The number of U.S. households involved in foreclosure proceedings grew a record 37 percent in 2006. Working families are being turned out onto the streets in waves.

At the root of the recent spike in foreclosures among working-class households is the predatory practice of sub-prime mortgage lending. Sub-prime mortgage loans are defined as loans to borrowers whose credit score is too low to qualify for traditional fixed-rate mortgage loans. The most prevalent form of sub-prime mortgage loans is known as the “2-28” loan, which typically features a low fixed-interest rate (some as low as 1 to 2 percent) for the first two years of the loan. After the first two years the interest rate increases or “resets” to a new level derived from a rate index. This new rate is larger than the introductory rate, and is then instituted for the remaining life of the loan. These loans are now increasingly being referred to as “exploding” adjustable-rate mortgages.

During the housing bubble of 2000-2006, offers for sub-prime mortgage loans were ubiquitous. Awash in capital, Wall Street bankrolled sub-prime lenders with credit, packaged the loans in the hundreds of billions of dollars, and sold risky bonds to greedy investors. Citigroup, Bank of America, Morgan Stanley and J.P. Morgan Chase, among other predators, sunk their tentacles in almost every corner of this volatile market.

Mortgage brokers sprung up in startup companies with little capital, offering an assortment of adjustable-rate loans through television commercials and billboards exploiting the dreams of homeownership. Working class families were told that if they took out a 2-28 loan to purchase a new home, they could take advantage of the low introductory rates for the first two years, and then use the equity accrued in the house to refinance when the rate was reset. Lenders were quick to point out that median house prices were rising every year, and implied that potential borrowers would be foolish not to get in while the market was expanding.

While many of these 2-28 loans were sold as “can’t miss” opportunities, the recent decline in house values has spelled disaster for borrowers and exposed the sub-prime mortgage loans as Ponzi schemes (creating huge debt based on fake collateral). As the two-year introductory rate period on the loans expires and the rates jump significantly, borrowers find that the homes they purchased have not accrued any value with which to refinance. Debtors are now saddled with sky-high interest rate payments and declining house values. This in turn has led to the record number of foreclosures among working class families.

Black and Latin@ households have been the hardest hit by the recent wave of sub-prime mortgage-induced foreclosures. A recent study by the Consumer Federation of America has shown that Black and Latin@ households are much likelier to be offered a sub-prime loan as compared to white households with similar income levels. (www.consumerfed.org, Sept. 5, 2006)

Institutionalized racism in the lending industry has made it increasingly difficult for Black and Latin@ households to gain access to traditional mortgage loans and many have no choice but to turn to the sub-prime lenders. Recent figures quoted in the Financial Times show that Black families were about four times more likely than whites to get stuck with “exploding” rate mortgage loans in major U.S. cities. (Mar. 15)

Unsold new homes and rising foreclosures have glutted the housing market and will begin to infect other sectors of the capitalist economy. In the coming months the trend of sub-prime induced foreclosures will only be exacerbated as some $265 billion worth of outstanding sub-prime mortgage debts are set to enter the “reset” phase, plunging more and more families into unmanageable debt. It is important to highlight the glaring injustice of an economic system that turns the human need for housing into an opportunity for exploitation.