Economists are warning that a crisis is looming in the home mortgage industry that could eclipse the bursting of the dot.com bubble and the Enron and WorldCom bankruptcies seven years ago. It has the potential of plunging the nation into a recession.
The alarm bells started to ring when New Century Financial (NCF), a huge Southern California mortgage lender, announced that it would stop making loans and needed emergency financing, signs that the company is on the brink of bankruptcy. More than two dozen other mortgage lenders have already collapsed. A shiver went up the collective spine of Wall Street bankers because this crisis is hitting at the heart of the $6.5 trillion mortgage securities market, an engine that is propping up the entire U.S. economy.
NCF is a “subprime lender,” meaning that it floats adjustable “liar loans,” whose interest rates start low or at zero but ratchet sharply higher in later years. These loans are floated to cash-strapped buyers with little documentation, cash or collateral. African American borrowers are 3.8 times more likely and Hispanic borrowers 3.6 times more likely than other borrowers to be forced into these predatory loans.
Seeking to escape increasingly exorbitant rents, and lured by the American dream of home ownership, many working-class borrowers face a desperate struggle, each month, to pay mortgages that consume half or even two-thirds of family income. Now, foreclosure and delinquency rates are skyrocketing. In February, 117,259 homes were foreclosed, 68 percent more than a year ago. Ohio, Michigan and Indiana suffered the highest rate in the nation, the result of “family economic distress” including “job loss and divorce,” the Wall Street Journal reported.
A front-page analysis in The New York Times showed that NCF and other such lenders, seeking to attract Wall Street investors, hid all the “bad debt” with Enron-style phony book-keeping.
Americans need protection from these corporate criminals. Congress and the states should step in. They should declare a moratorium on home foreclosures, and outlaw these predatory Enron-style lending practices. We need both rent control and mortgage control.