Remember the so-called "sub-prime" mortgage crisis, with the efforts to portray it as lenders giving mortgages to folks who had "bad" credit? This was spun (briefly before even this disappeared) as "those folks got what was coming to them." However, the issue was (and is) less about borrowers with "bad" credit than those who had not built a credit history. It was also about rich folks trying to cash in on a peaking housing market, and developers doing the same (emphasis mine):
Similar to other banks, most of Umpqua's credit problems have come in the residential sector. About 75 percent of the loans now lumped in the troubled category as "nonperforming assets" are loans to residential developers, said Ron Farnsworth, Umpqua's senior vice president for finance.
Who is really getting slammed by the mortgage debacle?
Women - who were 40% of the borrowers in Baltimore, half of them "sub-prime."
Racial minorities who after struggling to get into the housing market (and hence wealth building) have lost more ground than they gained - an estimated $163 to $278 billion by the time the crisis is over. There is almost a 40% difference in the mortgage losses between whites and racial minorities - a clear signal of ongoing institutionalized racism.
More than 2 million subprime borrowers face higher mortgage costs and the possible loss of their homes if they cannot meet the payments. Studies have found that blacks and Hispanics were likely to be charged higher interest rates on subprime loans than whites with similar credit ratings. (Predatory Lenders Still Seen Targeting Minorities)
Renters whose landlords took the bait on the "easy" and "creative" credit terms. And yes, those renters are more likely to be women and racial minorities. Renters are facing skyrocketing rents and evictions as landlords try to recoup their losses. It is estimated that 20-45% (depending on the area of the country) of the mortgage foreclosures are on rental properties. Further, many of those losing their homes are also losing both deposits and a month's rent. Not surprisingly, more than a few are going from apartment dwellers to homeless.
The China Daily reported that the world stock exchanges lost $5.2 trillion in January in fallout from the U.S. mortgage collapse, and the early estimates of mortgage losses are $400 billion - which seems on the low side to me.
But, to speak of these "losses" is duplicitous at least. That $400 billion is in somebody's pocket, as is the $5.2 trillion in losses (it is called profit-taking). I don't have the resources to determine where that money went, but it is pretty clear where the bailout money is going.
According to a report in the Feb. 18, 2008 Financial Times, banks borrowed $50 billion from the Federal Reserve in January. They did this through an instrument initiated in December 2007 to improve liquidity in the market called a Term Auction Facility (TAF). This offers lenders below prime rate, short term loans. Other central reserves in Europe have similarly pumped money into the market.
While purportedly aimed at staving off a credit crisis, the Financial Times states that analysts are nervous about the lending scheme:
"The TAF . . . allows the banks to borrow money against all sort of dodgy collateral," says Christopher Wood, analyst at CLSA. "The banks are increasingly giving the Fed the garbage collateral nobody else wants to take . . . [this] suggests a perilous condition for America's banking system."
Indeed! Here we have a situation where the U.S. government deregulated banking, setting up a Ponzi scheme for both the credit and mortgage markets, which accelerated a housing bubble which has burst at the same time as the risky loans (not risky borrowers) hit their margins. Then, those engaged in the fleecing of borrowers (particularly borrowers faced by systemic predatory and discriminatory lending practices) are "bailed out" with our tax dollars, so that they can continue to fleece the people.
Not to leave the well-heeled behind, the economic "stimulus" plan signed by Bush has a little present for those in the high-priced home market. Namely, the limit on government backed home loans have jumped from $400,000 to $729,750 and jumbo loan rates are dropped 1%.
The change in loan limits, which allows the federal housing agencies Fannie Mae and Freddie Mac to purchase or guarantee the mortgages, is intended to encourage lenders to write more mortgages because they can easily sell them to the agencies.
Yes indeed. Sell those attractive "jumbo loans" to the same folks who created the sub-prime crisis.
Given all this expropriation of the wealth of the people, it is not too surprising that there are a growing number of folks who are looking beyond recession to an "economic meltdown." Martin Wolf reports on Professor Nouriel Roubini of New York University's Stern School of Business. Roubini predicts the worst housing crash in U.S. history which could take about "$6,000bn in household wealth." He estimates that about 60% of all mortgages originated in 2005-2007 had "reckless or toxic features." Sixty percent ... the crash could impact over 10 million households.
From there on we have what amounts to a domino effect - which we are already starting to see. Sub-prime leads to prime leads to credit leads to a rapid downward spiral.
In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake.
Walden Bello writes Capitalism [is] in an Apocalyptic Mood over at Foreign Policy In Focus:
Skyrocketing oil prices, a falling dollar, and collapsing financial markets are the key ingredients in an economic brew that could end up in more than just an ordinary recession. The falling dollar and rising oil prices have been rattling the global economy for sometime. But it is the dramatic implosion of financial markets that is driving the financial elite to panic.
F. William Engdahl writes at the Centre for Global Research, that the cascade will hit the global economy - not just the U.S. economy. Something that we are already seeing in both Asia and Europe. The initial reason for the global impact was the packaging of the sub-prime loans with other debt instruments and selling those packages to big investors who sold them on. Deutsche Bank being the object lessen in Engdahl's article. A ruling by an Ohio court that the bank could not foreclose on fourteen homes in Cleveland. This means that foreign mortgage holders (and there are a bunch of them) are going to have difficulty claiming the assets underpinning the failed loans.
However, what Engdahl, Bello, and Martin really don't state is that the reason this is not just a sub-prime loan issue is that the loans were not sold to investors as sub-prime loans. The loans were packaged and repackaged until it was impossible to separate sub-prime from prime from stock offering. While this might have been "creative," it will also making sorting out who did what very difficult as each investment house apparently repackaged the "investments" again - effectively blurring any fingerprints that might have "stuck" to the "packages."
This is where the profit - not losses - comes in. At each step along the way these monies were effectively laundered before they were sold on (at a profit) to someone else. Now, when the house of cards falls apart, the central banks step forward to offer sub-prime loans to the financial industry. However, while sub-prime is interpreted as "risky" when they are selling houses to "just folks," it is good business and national economic policy to give financial institutions sub-prime loans.
Do you think it is accidental that the same term is used for purportedly opposite situations?