The Slow Motion Mortgage Disaster

From time to time the media make efforts to convince us that the mortgage debt crisis in the US is improving. Or at least not getting worse. Or something. A rush of recent reports shows that, while wealthy people and banks are doing better, things continue to get worse for the majority. According to the Office of the Comptroller of the Currency, 5% of all mortgages are in default, with a further 4.1% in foreclosure. Which is to say one in ten of all homes is in default or foreclosure. And worse is to come, unless new and radical ideas being proposed by county government are enacted.

One indicator is that people keep trying to refinance. According to Bloomberg News:

Refinancings probably rose 4.2 percent to $275 billion in the quarter ended last week, the bankers group forecast, three months after saying the boom was over. About 5.6 million loans will be refinanced this year.

Banks then resell the loans to Fannie Mae or Freddie Mac–in effect to the Federal government–for a tidy profit and no risk:

The gain on sale that accrues when a loan is sold to a third party for more than its previous value was 2.36 percent for Wells Fargo in the first quarter, compared with 1.9 percent in the fourth quarter.

Meanwhile it remains very difficult for average consumers to get refinanced. Very high credit scores and enormous amounts of paperwork are now required. And that’s for people in relatively good situations, who are simply asking to pay less on their current loans. In a state like New York, this will in itself cost you thousands of dollars.

The government has been trying to get refinancing for people whose houses are severely “underwater” (meaning that the loans are worth more than the homes). Headlines tell you that they have succeeded. In fact, there were  only 4,400 refinances for those whose loans were more than 125% of the current home value in the entire first quarter.

To realize how little that is, look at the new Corelogic report. Here we discover that 11.4 million loans, 23.4% of the total, have negative equity. However, this problem is very unevenly distributed. While a state like New York has relatively low numbers, 61% of all mortgages in Nevada are underwater, followed by Florida (45%), Arizona (43 %), Georgia (37 %) and Michigan (35 %). So California, with 30%, doesn’t even make the top five. But there are 2 million underwater mortgages in California, compared to only 339,000 in Nevada.

Here come the kickers. First, it’s at the low end of the market where the bulk of the negative equity is concentrated. For example, for low-to-mid value homes valued at less than $200,000, the negative equity share is 31% for borrowers, almost twice the 15.9 % for borrowers with home values greater than $200,000. So while it’s good nowhere, it’s twice as bad at the lower end, meaning for people on low income.

Next, 4.5 million households whose loans are underwater also have home equity loans. There’s almost $300 billion nationwide in such loans and 60% of them are about to start asking for repayment of principal as well as interest. In 2014, according to the Office of the Comptroller’s report, $29 billion in home equity loans start full repayment, followed by $53 billion in 2015 and $66 billion in 2016. Homeowners will be unable to refinance in many cases because their total loan amounts will put them underwater. And interest rates, which are usually variable on these loans, can really only go up from current levels.

So what is to be done? A new idea has begun to circulate in county government. The county could use its power of eminent domain to acquire underwater properties and then resell them to the homeowners at the current property value. This plan is circulating in San Bernadino County in California, epicenter of the home equity disaster, and has attracted interest from places like Suffolk County on Long Island, NY, where 10% of properties are underwater. Counties are not making these moves because they are radicals but because their localities, dependent above all on real estate markets, are dying. The city of San Bernadino is bankrupt. National retail sales fell for three months in a row, largely because people are no longer doing up their houses.

Needless to say, the banks are in uproar, making solemn references to the sanctity of contract law and so on and so on. But as we’ve seen here, the states and the Federal government were more than willing to overturn contract law to forgive debt mortgaged against slaves after the defeat of the Confederacy. The argument was that human property was immoral so the debt did not apply. With all the evidence that we now have about the corruption of the housing market, from robo-signing of mortgages, to the fixing of interest rates, and the forcing of sub-prime loans to people of color, can we not say that extreme housing debt is also immoral?

Of course, if such a program were offered, homeowners who have been making payments are not underwater might feel cheated. So we might have to advocate that all mortgages be open to nationalization and reset at LIBOR without fees. It would be the most gigantic stimulus to the economy imaginable and might ironically be US capitalism’s best shot at long-term survival. However, because neo-liberalism is dedicated to the short-term, no national program of this kind has the slightest chance of approval in the current political climate. So we’d better get on it and change the political climate, no?

Red-Line the Banks

Perhaps calling what the banks have been up to in the past decade “mafia capitalism” is starting to become a slur on organized crime. Today we learned that major banks served as money laundering operations, openly discriminated against people of color, and that JP Morgan lost far more gambling than they had admitted. To try and cover this up, the NYPD launched a sad smear campaign against OWS that totally backfired.

In London, where regulations are so laughably weak that banks can do just what they want, HSBC was busted as a money-laundering front. Within the bank, this has been known for a long time and people in compliance who wanted to do something about it have been assaulted. Speculation is rampant that fines here may reach $1 billion for

the money laundering and terrorist finance vulnerabilities created when a global bank uses its US affiliate to provide US dollars, US dollar services and access to the US financing system to high-risk affiliates, high-risk correspondent banks and high-risk clients.

This is policy-speak from Congress about Iran. It shows that when the government actually cares about the outcome of an investigation, it is willing to use its powers to the full. By inference, then, it does not care very much about what happened in loans to its own citizens.

Elsewhere today, banks continued to display contempt for those citizens. Wells Fargo was merely the latest bank to admit that the long-standing practice of “red-lining” continues. That is to say, banks used to openly designate certain areas of cities where minorities lived as “red-lined,” meaning no loans were to be approved.

Here’s the official definition of red-lining:

Red areas represent those neighborhoods in which the things that are now taking place in the Yellow neighborhoods, have already happened. They are characterized by detrimental influences in a pronounced degree, undesirable population or infiltration of it. Low percentage of home ownership, very poor maintenance and often vandalism prevail.

 

This, then, was official policy in the 1920s and 30s. The impressive T-RACES digital project that has mapped these red-lined districts has shown that such neighborhoods continue to be financially disadvantaged and have a higher percentage of minority residents than favored areas for lending today.

Today, the hustle extends to selling more dubious products to people of color. Wells Fargo

steered more than 4,000 minority borrowers into costlier subprime mortgages when white borrowers with similar credit risk profiles had received regular loans.

African Americans paid an extra thousand dollars in fees per hundred thousand borrowed and were 2.9 times more likely to be made to take a sub-prime loan.

Now we’ve crossed $500 million in fines to major banks for racist loans of this kind but the reparations should just be beginning. Remember this clown?

Chicago trader Rick Santelli “spontaneously” rants against mortgage support for certain “people,” who will “drink the loan.” The flimsily-concealed racism has been a subtext to the entire Tea Party movement and the hostility to debt abolition. Now we can see that many of these loans were pushed on people who did not deserve (if anyone does but that’s another question) the high terms of a sub-prime mortgage. And then became targets of white resentment when the set-up-for-failure arrangement failed.

Tomorrow JP Morgan Chase will announce huge losses, somewhere between $2 and 9 billion for the quarter due to their terrible investments. These were pre-leaked today to try and minimize the impact. Do we think that there will be people on CNN and Fox ranting against Jamie Dimon? Of course not.

Instead yesterday the NYPD launched a bizarre allegation that someone in OWS must have been involved in a high-profile murder case because DNA found at a scene where some presumed OWS people had opened a subway gate matched that found at the murder. Except, oops, it turned out to be that of the Chief Medical Examiner. Somehow this cock-up found its way into all the newspapers. Retraction on p. 100 in the 4 point font. And last night irritated cops launched a totally unprovoked attack on people in Liberty Plaza, whose main offense appears to be “refusal to go away.”

No wonder the Democratic party wants the movement to concentrate on the generic “money out of politics” meme. Now the reality of what the finance capitalists actually did in this administration as well as the last is starting to emerge. Maybe we’re ready for a discussion on how to replace this morally and financially bankrupt system? Maybe it’s time to red-line the banks.