Mortgage crisis
Millions can’t pay, risk losing their homes
By
Jaimeson Champion
Published Jul 26, 2007 12:50 AM
On July 24 the largest mortgage company in the U.S., Countrywide Financial
Corp., reported that its second-quarter losses were much worse than expected
and that problems in the subprime mortgage sector reported earlier were now
spreading into the prime mortgage market.
Prime mortgages are those loans made to borrowers with solid credit histories.
Delinquencies in this area are rising, indicating that the much-discussed
problems in the subprime sector were just the first phase of a larger
capitalist crisis.
Because of the size and breadth of its lending operations, Countrywide
Financial is regarded by many economists and analysts as a bellwether of the
U.S. housing market. The dismal report by the corporation sent all the major
stock indexes into a tailspin, as jittery investors fueled large-scale
sell-offs of stocks and bonds. The S&P 500, the Dow Jones Industrial and
NASDAQ all experienced substantial drops that day.
The stock market is the most volatile it has been in years as investors attempt
to decipher just how severe the mortgage crisis has become.
The view of the crisis put forth in the capitalist press has been that the
problem of rising delinquencies and foreclosures would be confined to the
subprime sector. Now it can be seen that this is not true.
For months, families with subprime mortgages have been feeling the acute pain
of the mortgage crisis. These are people who had to pay more in interest to
take out a mortgage because of their credit history. A disproportionate number
are Black and Latin@, reflecting the depressed economic status of people of
color in the U.S. They have already been forced into foreclosure and bankruptcy
in droves, and at rates not seen since the Great Depression.
Only one week before Countrywide’s gloomy report, in testimony given
before Congress, Federal Reserve Chair Ben Bernanke had asserted that while the
losses in the subprime sector were large and a detriment to U.S. economic
growth, he believed they could be absorbed by the larger financial system by
2008, and that they would not spread into other classes of assets.
But the announcement by Countrywide Financial shows that the rash of
delinquencies and subsequent foreclosures is spreading into the better-off
sections of the working class and large segments of the middle class, the major
holders of prime rate mortgage loans.
During the housing bubble of 2000-2006, those with good credit ratings were
easily able to get prime rate mortgage loans. Prime rate mortgages have fixed
rates of interest—usually 6 percent over 30 years. Subprime mortgages
have low teaser rates for the first two years and then “explode”
into double-digit interest rates for the remaining 28 years of the
mortgage.
Prime rate mortgage holders don’t have the exploding interest rates to
contend with, but the continuing downward spiral in house values has clearly
begun to affect their ability to pay their mortgages.
Many industrial workers were induced to refinance their mortgages during the
housing bubble of 2000-2006, often by the lure of ready cash. For many workers
with large medical, credit card and other bills, it seemed too good to pass up.
Now, especially in the case of autoworkers, they are facing the double whammy
of a rapidly deteriorating housing market coupled with forced cuts in wages and
benefits.
It would be hard to overstate just how disastrous this spread of delinquencies
and subsequent foreclosures can be for the lives of those sections of the
working class, and segments of the middle class, who thought they had secured
their futures after years of labor.
Consumer spending accounts for nearly 70 percent of all economic activity in
the U.S. today. Much of this spending has been stimulated by easy credit. What
worker, or even student, hasn’t been bombarded with offers of credit
cards? The middle class and better-off sections of the working class are the
primary source of this consumer spending. If these segments of the population
were to be forced into foreclosure and bankruptcy in large numbers, the
drop-off in consumer spending could snowball into a general economic
catastrophe.
The mortgage crisis poses a dual threat. The immediate one, a major drop-off in
consumer spending, is clearly growing. In addition, the crisis has imperiled
Wall Street and the global system of finance capital, limiting its ability to
stem the effects.
Major rating agencies like Moody’s and Standard & Poor’s are
slowly being forced to admit that they gave AAA ratings to what was essentially
junk paper. A major revision in ratings for investments could provoke more
large-scale sell-offs in the coming months and eliminate any chance of the kind
of soft landing alluded to by Fed Chair Bernanke.
Wall street takes a big hit
Goldman Sachs, the premier Wall Street banker, has a close relationship with
Countrywide. It has provided the mortgage lender with investment banking and
many other financial services. One of its partners sits on the board of
directors of Countrywide.
How deep its losses go remains to be seen.
Assessing Countrywide’s second-quarter drop of 33 percent in revenues and
10 percent in shares, the Wall Street Journal of July 25 reported that
CitiGroup, Bank of America and JP Morgan Chase have all noted
“deterioration in the credit quality of home equity loans.”
This crisis is already spreading to pension and money market funds, which have
invested heavily in the lucrative but risky real estate market, thus putting
many workers’ savings in danger from yet another direction.
And it has spread to the private equity corporations, which have been advancing
the funds necessary to exploit the buyouts and mergers happening in the
industrial sectors of the U.S. economy.
The Financial Times noted on July 25 that the $20 billion financing for
Cerberus’ purchase of Chrysler has “hit trouble with banks deciding
to postpone the sale of $12 billion of debt attached to the car-making
operations.”
The housing bubble has burst. Now the house of cards created by the Wall Street
robber barons in their mad rush for profits is also in danger of collapsing.
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