Mortgage crisis stoked by incredible greed

Baton Rouge, La., Kansas City, Mo., and Bethlehem, Pa., are far from Wall Street, but they are among the ground zeros in the financial crisis now grabbing headlines. It’s a crisis caused, some say, by “incredible greed and looting” by the nation’s financial institutions.

The home mortgage scams that triggered the crisis have delivered a double whammy to residents of Baton Rouge and nearby New Orleans. “We have a double crisis here because we’re in the post-Katrina rebuilding era,” said Emma Dixon, project director for the Louisiana Community Reinvestment Coalition.

“We have a lot more vulnerable population — we still have a lot of people living in trailers,” she said.

Many people, already in debt, were lured into expensive home loans they couldn’t afford, a practice known as subprime lending. It’s no surprise they are having trouble making payments, and even losing their homes, she said.

In Kansas City, Richard Halliburton (no relation to the oil firm), executive director of Legal Aid of Western Missouri, said, “We’re seeing foreclosures increase dramatically over the last couple of months and years,” much of it related to subprime lending. “Anybody that’s low-income is already in somewhat desperate straits, and can easily be sucked in,” he noted, but higher-income people fall victim as well.

Northeast Pennsylvania’s Lehigh Valley, which includes Bethlehem and Allentown, has seen rapidly rising home prices, with houses bought by people who commute to work in New Jersey and New York. “What we’ve got in the great new world of predatory lending is a great new market of victims,” said Alan Jennings, who heads the Community Action Committee of the Lehigh Valley. The loan industry has been “helping people of greater means buy more than they can afford,” luring people in “not because they’re poor but because they want to be middle class,” he said.

Area foreclosures have increased about 50 percent in the last year, Jennings estimated.

As a cascade of mortgage companies go under, “the upside,” he said, is “the destruction of an industry that never should have happened in the first place.”

The house of cards has worked something like this: Mortgage companies, largely unregulated, sell high-priced mortgages to as many people as possible, then offload the risk by selling the mortgages to banks, who replace the money by issuing securities based on these mortgages, which are purchased by investors. Banks have also started selling high-risk mortgages. They all make huge amounts of money on the fees and interest. It works fine for them as long as homebuyers keep paying on their mortgages. If they default, as is happening now, the mortgage holders are left with houses they can’t sell.

Meanwhile investors have gotten nervous and don’t want to buy these securities, or any other bonds. So there’s a “liquidity” crisis — banks don’t have cash to lend to other businesses, and mergers, acquisitions and normal business activity can’t be financed.

European financial institutions have invested in the U.S. mortgage market, so now Europe has joined the U.S. government in trying to contain the crisis by lending billions to banks and other financial players.

“The subprime mortgage crisis is the trigger that has set off a whole number of financial imbalances — it triggered the whole pile to start falling,” said Art Perlo, who chairs the Communist Party USA’s economics commission.

“This crisis was caused by incredible greed and looting by the financial sector and incredibly bad policies particularly by this administration,” Perlo said.

The housing bubble was driven by the approach that “instead of guaranteeing affordable housing, we’re going to encourage people to borrow far more than they can afford,” he said.

“It bleeds over into the ‘real’ economy in a lot of serious ways,” he said. Companies that make things and employ workers have had easy credit. If it dries up, they could be forced into bankruptcy. And a lot of people involved in home construction and related industries can lose jobs.

Overall unemployment is starting to increase, said Perlo.

New residential construction is down about 25 percent. The number of unsold houses is at record levels.

Economists note that much of the recovery from the last recession in 2001 was because of growth in consumer spending, spurred by people borrowing on their home equity as home values rapidly inflated — the “housing bubble.” Now, with home prices dropping, people are not spending.

Business Week reports that state sales tax revenue is suffering the most in states with the largest drop in home prices. Lower state and local revenues from sales, income and property taxes will mean growing government inability to meet basic commitments.

Perlo called for a moratorium on foreclosures.

He singled out companies who specialize in subprime mortgages. “They don’t care. The execs are paying themselves millions every year. Even if the company goes bust, so what? They can retire.”

“The homebuyers who allegedly ‘should have known better’ are victims of fraud,” he said. These lenders “should all be sent to jail.”

Halliburton, of Western Missouri Legal Aid, said, “We need more low-income housing in this country.” His area has waiting lists of thousands for public and public-subsidized housing, he said.

suewebb @pww.org