Thursday, August 16, 2007

US Housing/Debt Crisis Is Much Deeper Than Media Says

US Housing/Debt Crisis Is Much Deeper Than The Media Says

“Subprime borrowers are no longer just low-income borrowers. They include high-income borrowers whose incomes and collateral value do not provide sufficient reserve for sudden changes in market conditions. A subprime borrower is one who over-borrows beyond prudent standards. The extra risk-premium value thus taken out of the mortgage sector contributes to the increase in liquidity to feed the debt market further, pushing the low credit standard of subprime lending further down. Once prime-credit customers have borrowed to their full credit limits, growth can only come from lowering credit standards, turning more prime borrowers into subprime borrowers. This is the structural unsustainability of CDO securitization, irrespective of the state of the economy, since risk of default is shifted from the state of the market to the direction of the market. Any slight turn in market direction will set off a downward-spiral crisis. The initial upward phase of this cycle is euphoric, like any addiction, but the pain will come as surely as the sun will set in the downward phase. Not many economists or regulators have yet focused on this structural defect of CDO securitization. The recent congressional hearings on subprime mortgages completely missed this obvious structural flaw.” US Economy: Liquidity boom and looming crisis by Henry C.K. Liu Global Research, May 9, 2007 Asian Times Online

The corporate media has made it seem like the subprime mortgage fiasco is the fault of people with low incomes and weak credit histories. To be sure many of the people who were induced by the Bu$h administration “home ownership” mantra, mortgage brokers and banks to jump on the housing bandwagon were folks who fit this profile: limited or stagnant incomes, poor credit histories and a lack of understanding of the intricacies of compound interest. These folks were the ones taking the early hits in the US real estate meltdown. “Several studies have used HMDA data to analyze whether specific racial and ethnic groups receive a disproportionate share of subprime loans. Because HMDA data does not specifically identify subprime loans, most of these studies have approximated which loans were subprime by using annual lists of predominately subprime lenders published by the U.S. Department of Housing and Urban Development (HUD). A 2000 joint report by HUD and the U.S. Department of Treasury explored the relationship between subprime lending and neighborhood racial composition. Relying on HMDA data, the study reported that subprime lending accounted for 51 percent of all refinance loans in predominately African-American communities in 1998, compared to only nine percent in predominately white neighborhoods. The study also found that these disparities persisted even when controlling for neighborhood income. A 2002 national study by the Center for Community Change analyzed the proportion of borrowers receiving subprime refinance loans by race and ethnicity and found pervasive disparities among African- American, Latino and white borrowers. In addition, the authors found that disparities persisted within income categories and actually increased as income went up. Specifically, while lower-income African-American borrowers were 2.4 times as likely to receive a loan from a subprime lender as lower-income white borrowers, upper-income African-American borrowers were 3.0 times as likely to receive such loans as upper-income white borrowers. At the same time, lower-income Latino borrowers were 1.4 times as likely to receive a subprime loan as lower-income white borrowers, and upper- income Latinos were 2.2 times as likely to receive such loans as upper-income whites.” Unfair Lending: the Effect of Race and Ethnicity on The Price of Subprime Mortgages
While statistically more people of color were steered to the higher priced mortgages and given loans they really couldn’t afford, we were not the only ones suckered into signing for loans at higher rates. “The subprime market is intended to provide home loans for
people with impaired or limited credit histories. In addition to lower incomes and blemished credit, borrowers who get subprime loans may have unstable income, savings, or employment, and a high level of debt relative to their income. However, there is evidence that many families who receive subprime mortgages could qualify for prime loans, but are instead ‘steered’ into accepting higher-cost subprime loans. As shown in Figure 1 below, in a short period of time subprime mortgages have grown from a small niche market to a major component of home financing. From 1994 to 2005, the subprime home loan market grew from $35 billion to $665 billion, and is on pace to match 2005’s record level in 2006. From 1998 to 2006, the subprime share of total mortgage originations climbed from 10 percent to 23 percent. Over most of this period, the majority of subprime loans have been refinances rather than purchase mortgages to buy homes. Subprime loans are also characterized by higher interest rates and fees than prime loans, and are more likely to include prepayment penalties and broker kickbacks” Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners
Obviously millions of subprime loans were not issued only to Black and Brown people. There are an awful lot of Euro-Americans and other folks who were steered to these high rate and high fee loans. What’s more, the Fed, the banking and finance systems repackaged these loans bundled them and resold them globally as collateralized debt. The Fed’s policies of extremely low interest rates, massive infusion of worthless paper money and their wink and nod towards predatory lending and exotic loans is what brought on the current economic catastrophe. The crisis is spreading to other markets within the economy and the whole world is feeling the shocks and tremors of instability and anxiety. “The Fed started inflating the housing bubble in earnest around 2001, after the collapse of the bubble, which failed with the stock market decline of 2000-2002. Then, over a trillion dollars of wealth, including working peoples’ retirement savings, simply vanished. Also according to mortgage specialists, it was in March 2001, two months after George W. Bush became president, that a ‘wave of intoxicated fraud’ started. Mortgage companies began to be instructed, by the creditors/lenders, on how to package loan applications as ‘master strokes of forgery,’ so that completely unqualified buyers could purchase homes. There could not have been a sudden onset of industry-wide illegal activity without direction from higher-up in the money chain. It could not have continued without reports being filed by whistleblowers with regulatory agencies. Today the government is prosecuting mortgage fraud, but they certainly had to know about it while it was actually going on. The bubble was coordinated from Wall Street, where brokerages ‘bundled’ the ‘creatively-financed’ mortgages and sold them as bonds to retirement and mutual funds and to overseas investors. Portfolio managers were directed to buy subprime bonds as other bonds matured. It’s the subprime segment of the industry that has now collapsed, triggering, for instance, the recent highly-publicized demise of two Bear Stearns hedge funds. And it’s not just lower-income home purchasers who are affected. The Washington Post has reported that for the first time in living memory foreclosures are happening in Washington’s affluent suburban neighborhoods in places like Fairfax, Loudon, and Montgomery Counties.” The Crashing U.S. Economy Held Hostage Our Economy is on an Artificial Life-support System by Richard C. Cook
The AmeriKKKan middle class and working class families are taking major hits on this. Most of the default and foreclosures are from members of the working and middle classes but effects of the mortgage collapse are spreading to global markets. “FRANKFURT: Fresh signs of trouble for U.S. mortgage lenders and ripple effects even across the Pacific unleashed a massive sell-off in Asian markets Wednesday. But the losses were more modest in Europe and on Wall Street as the U.S. Treasury Secretary cautioned against panic. The tumbling markets around the Pacific Rim underscored how quickly something that was regarded as a smart financial innovation a year ago can turn into a source of global instability. Lenders in the United States sold their subprime mortgages - loans made to less credit worthy buyers - on to investment banks, who repackaged them as bonds and peddled them worldwide. Now that the housing bubble is bursting in the United States, defaults on the underlying mortgages are rising and the impact is being felt around the globe, even though economic growth elsewhere is solid. A warning Tuesday from one subprime lender, American Home Mortgage Investment, that it could face liquidation preceded the Asian rout. Then Bear Stearns, which saw two of its hedge funds collapse last month, said it had barred investors from pulling money out of a third fund while it evaluates how to best emerge from the crisis. Fanning the flames was an announcement by Standard & Poor's that it was considering lowering its credit rating on several funds dealing in affected securities.” Ripple effects from U.S. mortgage crisis hit Pacific Rim By Carter Dougherty
Only massive infusions of money and credit by central banks around the world have forestalled massive panic. Even with all that, global markets are still very anxious and seem to be unconsolable. “A major global recession initiated by a collapse in U.S. house prices will probably usher in the chronic deflation we've been forecasting. Crude oil and other commodity prices will nosedive along with all fears of inflation. This deflation of 1% to 2% annual declines in major price indices will be the good deflation of tech-led, productivity-soaked excess supply, much like the late 1800s and the 1920s when concentrations of new technology propelled supply faster than demand increased. Nevertheless, a complete breakdown in housing and stubborn mortgage debt burdens could spawn the bad deflation of deficient demand, as in the 1930s in the U.S. and in Japan more recently, as consumer spending becomes moribund.” The Coming Collapse in Housing by John Mauldin
That report was written in 2006 but few took heed to John Mauldin’s analysis. The mainstream media tended to suppress or debunk such thinking. So much the pity. Now we are on the precipice of a major global economic collapse! Don’t go for the okey-doke the crisis is deeper than we are being told and it is far more extensive than just Black and Brown folks with poor credit histories.



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