Even as sensational daily headlines report the housing foreclosure crisis, a flood of seductive ads push home refinancing. One prominent internet ad shows a raging bull and promises “no credit check required!”
Just such come-ons are putting too many low-income workers in a trap, by promising the dream of home ownership — but instead delivering financial ruin and home loss.
A vicious cycle of debt. In May, home foreclosures reached the highest level ever recorded, a 90 percent climb over the previous year. The vacancy rate of owner-occupied homes is also the highest since the Census Bureau started tracking statistics 51 years ago.
Many of the foreclosures are on subprime mortgages. Subprime loans offer less desirable credit terms to borrowers who may have little or no money for a downpayment, or who can’t meet credit requirements for lower prime interest rates.
Subprime loans are generally adjustable rate mortgages (ARMs), which means they rise with inflation. Most of the ARMs written in the last three years will reset to higher rates in the next 12 to 18 months. And it is estimated that one of every five subprime loans issued in 2005-06 will end in foreclosure.
Predatory practices that are fraudulent in application, yet often entirely legal under current law, are common in this market. Enticements include artificially low introductory “teaser” interest rates, “option” payment plans that can be lower than the monthly interest (never mind the principle on the loan) and often result in a borrower owing more on the mortgage than the house is worth, and getting prohibitive penalties for paying off loans early. Such terms can make it nearly impossible for people with ARMs to refinance.
So how can loan sharks get away with these practices? The market has changed dramatically over the years. Banks have largely sold off their mortgage business to investors; there is little regulation of these “non-bank” lenders and brokers, who originate up to 80 percent of all new mortgages. And most borrowers don’t know that lenders often pay brokers kickbacks for arranging higher interest rates than are necessary.
The housing market crisis has the biggest impact on low-income workers, especially workers of color. Years ago, they were often barred from securing loans by so-called red-lining. The civil rights movement of the 1950s and ’60s won passage of measures to reduce lending discrimination. But now the same people pay more in credit, penalties and insurance. And the fall in housing values since the panic began affect houses in poor and workingclass neighborhoods the most.
The mainstream media doesn’t mention that falling wages for working people are a key part of the foreclosure picture. The real buying power of wages is at its lowest in 80 years.
A smaller paycheck means that people are more easily pressured into buying or refinancing a house on unsustainable terms. Approximately one-third of the $900 billion in home equity loans in 2005, for example, were spent on consumer goods.
While workers sink into debt, speculators make a killing. Before the implosion, subprime lenders were making up to six times more profit than the most successful banks! This sickening story is a scandal; it is also capitalism as usual.
Why the crash is happening. The prime imperative of this economic system is not only to make maximum profits, but to then keep reinvesting profitably. Any slowdown in the turnover spells trouble.
The scramble to find new investment opportunities is amplified in today’s economy because financial capital has come to predominate over production, and comparatively little investment is made in factories and businesses, especially in the U.S.
The dot-com crash of the 1990s drove speculators to look elsewhere, and the “housing bubble” was born. Real estate turned into an investment opportunity. Money flooded into the market and housing prices rose artificially. More homes were built than the market could bear.
One reason the boom lasted so long is because other countries, like Japan and China, prop up the U.S. economy with substantial lending, both governmental and private. U.S. deficit spending helps them sell their products to U.S. consumers, who are a major percentage of the world market. Only this prop has, so far, allowed U.S. government, businesses, and individuals to keep on borrowing. But there is a limit.
Deficit spending fuels inflation. In turn, interest rates rise to keep investors lending. Between June 2004 and June 2006, the Federal Reserve Bank jacked up interest rates 17 times. These interest hikes started the tsunami of foreclosures.
There are, of course, plenty of people who still need housing, but capitalism kicks to the curb anyone who doesn’t have the money to buy its commodities.
Workers foot the bill. The most vulnerable workers are feeling the housing crisis directly. In addition, a significant chunk of investment money comes from pension funds, which workers have no control over. Bailouts are likely on the horizon, which workers will pay for. The housing crash is already affecting the economy as a whole, and may spark the big crash that darkens the horizon. That also hits workers hardest.
Under “free enterprise,” especially in recessions, workers always pay for the system’s excesses, and the poorest pay most dearly. Only under socialism would workers have political power to plan and control the economy, and provide social stability for all.
Still, until then, there’s plenty to demand now:
• Fully fund federal low-income rental assistance programs. Provide federal money for rent as well as home ownership.
• End predatory lending practices with full regulation of the industry.
• No bailouts for Wall Street or financial institutions. Save federal supports for affected pension funds.
• Redistribute wealth through higher wages, nationalized healthcare, improved worker benefits, childcare assistance, and income guarantees for all. Reinstitute steeply graduated income taxes on the rich and corporations.