A WORLDWIDE FINANCIAL MELTDOWN;
IT MAY ALREADY BE A DEPRESSION, PEOPLE!
Of course, Democrats and poor people are being blamed for the sub-prime meltdown.
READ THE FACTS!
Democrats are blamed for passing laws that forced banks to grant loans in poor neighborhoods. Reactionary apologists for “FREE Markets” insist this was the seed of disaster to make home loans to people with bad credit and no income.
The following has been excerpted/adapted from a longer article by Cesar Uco: “The Origins Of The Subprime Market”.
No matter how the elites of EITHER party try to spin the facts - the origins of subprime mortgages are linked to a rise in poverty, unemployment and a decrease in the quality of life for working-class families. Subprime mortgages were designed to exploit the most vulnerable sectors of the population.
The subprime mortgage originated as an instrument devised by finance capital to replace bad debt with new loans to people who had lost their jobs or had suffered wage cuts and needed cash to continue feeding their families. In exchange, bankers got a security — i.e., guarantee — on the borrowers’ homes. In other words, banks “traded” risky, unsecured debt for a new loan backed by the guarantee that if a borrower failed to pay the mortgage, the bank had the legal means to repossess the family home.
Data collected in the 1990s shows predatory practices — like targeting minorities, low-income families and the elderly, offering “toxic” products with negative amortization and “teaser rates,” as well as charging excessive fees — were widely used.
The rates charged to working class and low-income families taking subprime mortgages has far exceeded the amount suggested by profit levels in housing. There has been the asymmetric relationship between real estate lenders and subprime borrowers. It is known that originators target the most vulnerable sectors of the population, like the elderly, immigrants and
single mothers.
These people are targeted to take subprime mortgages as a means of consolidating credit card debt. Often they are under significant psychological pressure, experiencing difficulties in making ends meet, so one can imagine that any loan that cost less than the more than 20 percent they paid in credit card interests could sound like a good deal. They generally are not aware of the default rate for someone of their economic condition, as loan originators don’t provide access to such information.
When the relationship tilts heavily to the side of the seller, such seller should provide the best market price to the buyer. As long as house prices kept going up and subprime borrowers refinanced for better rates, the actual default rates remained below historical rates. This prompted investors and collateral managers — people responsible for investing funds—to go for yield and not risk-adjusted yield.
As a result, little money, if any, was allocated to reserve accounts needed for potential defaults by mortgage borrowers in bad years; instead, those funds were added to profit. The common knowledge among market participants that historical default rates go through cycles — some years it is below the average default rate and other years it is above — was ignored.
So, what is the significance of the “extra” profits financial capital made from lending for subprime mortgages? In the long run, the extra profit must come from taking away some basic consumer good, such as food, education, gasoline, medicines, etc. In effect, by reducing the amount of money these families had to satisfy their needs — what is called the cost of reproduction of the working class — financial capital found a way to increase the exploitation of the working class, without passing through industrial production. This is a source of parasitism that has become the predominant feature of US capitalism today.
The hundreds of billions lost in the subprime meltdown roughly correspond to the dollar amount that should have been reserved, instead of being declared a profit, in the years the actual default rate was below the average rate in the mortgage markets. To date, this amount is more than half a trillion dollars.
In the Vice Presidential Debate Show Thursday evening, the Governess Sarah Palin repeated the phrase “putting government on the side of the people again” - which is nonsensical - unless the next administration (Hint: NOT McLame-Palin) moves to confiscate all bonuses paid to Wall Street firms’ senior management and goes after all individuals around the world who profited from the subprime market.
BUT WAIT - there are also those foreclosures from idiots who pulled the unrealized equity out of their homes and bought a second house, hoping to rent it or flip it in a year and make BIG BUCKS. It worked for a few people for a very short time. Now these smart-assed “rollers”have already walked away from their second house and are about to lose their first.