Fleecing Working People

Posted: June 4, 2014 in Shorts

In case you missed the story, I’ll recap. There was a big increase in the number of homes purchased last year with “sub-prime” or “near-prime” mortgages. These are the ones that people take out after they find it difficult, if not impossible, to secure housing loans at regular rates; or, as the New York Times put it, people “pushed out of the most favorable loan categories.” Amid the 2005 escalating of housing prices almost a quarter of the mortgages taken out were of this kind, more than double the percentages in 2005.

Over half of the home loans taken out by African American last year were sub-prime whereas the percentage in 2005 was less than a third. The rate for Latinos was 46.1 percent compared with 20.3 percent the previous year while white borrowers went for the higher priced and riskier mortgages at the rate of  17.2 percent in 2005, up from 8.7 percent in 2004. For Asians the 2005 figure was 16.6 percent in 2005 compared with 5.9 percent in 2004.

Over all, mortgages going for three percentage points over regular rates climbed to 24.6 percent of loans made for on owner-occupied homes. In 2004 it was 11.5 percent. Last year, African Americans, Latinos and Asians were – by a large margin – most likely to be denied a standard loan to purchase a home and thus more likely to accept a sub-prime loan.

Constantly touted by the Bush Administration as an example of its accomplishment, the whole “home ownership” thing has always looked to me a bit ambiguous. I’ve never been quite sure the tradeoff in terms of galloping urban sprawl, transportation difficulties and resource consumption was worth it. Besides, the argument that owning a home ties a working person to a locale, limiting mobility and dampening wage negotiating power carries some weight, even in the era of the passenger car and extended commuter time. But the desire for home ownership is strong, and after a few years of paying off the loan, there are no housing costs (except the roof and plumbing repairs and fixing the holes in the sidewalk out front).

However, the drive to vastly increase home ownership over the recent period has been largely driven by something else: investment. As housing prices rose, the chances increased of making money by selling your house. And accruing a home as an asset of constantly increasing value represents security against problems with retirement or health in later years. Additionally, borrowing on the value of existing homes has contributed to maintaining the level of consumer spending and fueled the consolidation, but not the reduction – of household indebtedness. All of this borrowing activity has recently approached mania status, peaking in the third quarter of last year. It’s had a contradictory impact on the economy. For instance, it has created jobs; there are now 2.5 million real estate agents in the country; membership in the National Association of Realtors has jumped 25 percent over the past five years.

The biggest impact, however, has been on the nation’s economy – and the world’s. The booming housing market has become a major driving force in the economy.

Now, housing sales are slowing rapidly and construction firms are reducing their planned activity. As the Christian ScienceMonitor reports, “And millions of consumers face indirect effects: With interest rates rising even as home prices stall, fewer people can borrow on home equity as a source of free cash. Many others – those with adjustable-rate loans – are now being hit by a jump in their mortgage payments.”

And many are simply not able to afford the new rates.

As the Times reported recently, “As the boom thundered on, the pool of available credit grew larger than the pool of credit worthy borrowers, resulting in an explosion of risky mortgages with features like no money down, interest-only payments and super-low teaser rates.”

Seldom mentioned in reporting about the housing mortgage crisis is that most of those affected are working people and the most vulnerable to increased economic pain and insecurity are those who were the most vulnerable to begin with. For many what at first looked like a new rung on the ladder to the American Dream is becoming a slippery handhold.

Our society, through the government, should be doing something about all this. Measures should be taken now to rescue the workers and working families at risk of default or being propelled into poverty. This should be a demand of organized labor and other social and political movements. A lot of people are in danger of being left hanging out to dry.

Yea, I know the arguments against it. This is capitalism and capitalism involves risks. But even under this system people should have some reasonable expectation that they are getting what they think they are buying. Taking out a mortgage to buy a home or refinance your current one is not the same as using extra cash to invest in the stock market. Yes, people should read the fine print but much of what has been going on in the mortgage business is nothing short of flim-flam. And government economists knew all along that the housing market was a “bubble” and that when it burst a lot of people would get hurt, some of them real bad. A sensible society with a sense of economic and social justice wouldn’t allow that to happen.

I wasn’t around at the time, but they tell me that during the Great Depression, good neighbors often showed up to help evicted people move their belongings back into their homes. As important as such solidarity action is (you men and women with good backs prepare to move into action) something has to be done soon to compel the political establishment to bring some relief for the individuals and families facing the possibility of being rendered homeless.

For one out of every 281 families or individuals in metropolitan area around Atlanta, the coming of August raised the possibility of losing their homes. That month over 5,000 properties entered some stage of foreclosure, most of them because their owners couldn’t meet their mortgage payments. The August Atlanta area foreclosure rate was up 36 percent over July, three times the national average and the second highest in the country for major urban centers—behind Dallas.

According to RealtyTrac, in the city of Atlanta itself, one out of every 70 homes faces some stage of foreclosure. The startling Atlanta numbers – an alarming statistic in an economic sense, 281 tragedies in human terms – are a dramatic illustration of the national epidemic of people – mostly working people – losing their houses.

The collapsing of the nation’s housing market now underway is wrecking havoc on our way of life. Whether the burst of the “housing bubble” results in a “soft” or “hard” landing is really immaterial to those facing financial ruin. And the losses are not restricted to major urban centers.

By the end of summer, one of every 66 household in Greeley, Colorado, was in some stage of foreclosure. Colorado has the country’s highest state foreclosure rate, with one new foreclosure filing for every 301 households. The foreclosure rate there rose 60 percent in August over July.

Three factors are being cited for the rash of foreclosures now expected to quicken over the coming months: production layoffs, the undermining of pension plans, and the practices of banks and other mortgage lenders. Principal among these latter factors are adjustable mortgage rates (ARMs) and various other forms of exotic lending schemes designed to cash in on the recently-concluded housing boom and to take advantage of people denied usual standard rate mortgages. Such loans have initially low rates, but later increase.

About $2 trillion in adjustable rate mortgages are scheduled to reset at higher rates from the beginning of 2006 to the end of 2008. Adjusted upward by an average of 2.5 percentage points, the interest payments by holders of such mortgages would be $50 billion higher in 2009 than they are today, according to the Oct. 1 New York Times.

“When these option ARMs reset to market rate interest, a first time homebuyer’s payment could almost double,”ForeclosureS.com President Alexis McGee wrote recently on the company’s website. “On top of that, there has been a significant drop in home values in that market. The owners can’t make their new payment, and they can’t sell in a market overloaded with unsold homes.”

“We saw a drop in California foreclosures in the west in July, but that’s not going to last,” wrote McGee. “You could say that this summer is the calm before the storm.” As of Sept. 11, there were 44,683 properties in some stage of foreclosure in California, and, wrote McGee, “again, these exotic mortgages are a major factor.”

Over half of the home loans taken out by African Americans last year were of this type. The rate for Latinos was nearly that high and nearly three times as many loans to Asians were sub-prime in 2005 compared to 2004.

“ARMs are a ticking time bomb,” Brad Geisen, president and chief executive of Foreclosure.com, recently told the Chicago Tribune. “Through 2006 and 2007, I’m pretty sure we’ll see a high volume of foreclosures.” The overheated housing market, relatively low interest rates and the use of these kinds of creative lending practices, contributed to a significant increase in home ownership by African Americans, Latinos and Asians.  Now, disproportionately, those communities are feeling the negative results of the market chilling.

Across the nation, the biggest rates of home foreclosures are to be found in places where African Americans and Latinos are concentrated. “African Americans and Latinos are paying a premium for home loans because of the color of their skin.” Hilary Shelton, director of the NAACP’s Washington bureau, told MSNBC.com.

In August The Charlotte Observerreported African Americans borrowing from 25 of the nation’s largest lenders were four times more likely than whites to pay high rates, and that black people with incomes above $100,000 a year were charged high rates more often than whites with incomes below $40,000. The trend of rising foreclosures within the African American community has already begun to erode home ownership gains, says Marc H. Morial, president and CEO the National Urban League. African American homeownership actually decreased by one percent in 2005.

In Chicago, foreclosure filings tripled between 1993 and 2005. Neighborhoods that are at least 88 percent Latino and/or African American represent about two-thirds of all home foreclosures in the city. Citing these figures, Dr. Manning Marable, director of the Center for Contemporary Black Politics at Columbia University, has observed that “ Home and business ownership create the equity to pay for children’s college educations, as well as to pass down to successive generations. Tragically, when the majority of black Baby Boomers – people born between 1946 and 1964 – die, they will bequeath debt to their children and grandchildren, or at best only several thousand dollars in savings. Structural racism is the cause of all this.”

According to Dr. Marable, “Without wealth, a home, or a retirement account, millions of African Americans approaching retirement age now face a perilous future.”

Just how insecure the future has become for many seniors is illustrated by new statistics on elderly debt which has increased substantially over the past decade. Over 60 percent of families headed by someone over 55 had housing debt last year, which takes more and more of their income. The largest increases were for people 75 or older. The result has been that older families “have at risk what is typically their most important asset – their home,” according to the Employees Benefit Research Institute.

“Consequently, older families that take on higher housing debt are likely to have difficulty avoiding a major lifestyle change in living arrangements for the remainder, if they have to rely on their home as an asset,” the Institute concluded, and “are placing themselves in a position where they could be forced to sell their home – something that current and past retirees, in general, have not had to do.”

Various public service efforts are underway to aid people who, faced with this new reality in the housing market, are in danger of losing their homes. Groups like the Urban League and Legal Services have established hotlines to respond to people under threat. Special clinics exist in numerous communities offering assistance in working out arrangements that will hopefully avoid mortgage loan defaults. Such programs will help alleviate the pain for many and ameliorate the effects on families and communities. However, they are limited in scope.

In Baltimore, the Community Assistance Network Inc. reports more and more moderate-income people requesting help with their mortgages, rents and even evictions. Of the 100 new households the agency’s shelter housed in May, 85 percent of them had recently been evicted. “I don’t want to sound like an alarmist, but we have reached our maximum capacity in the emergency assistance that we do,” the agency’s director Richard P. Doran told the Baltimore Sun.

The larger question remains: will the government acknowledge that current economic circumstances – to a large degree the result of official policies – are threatening the security and well-being of many people? Will the political leadership find a way to reduce or halt the epidemic of foreclosures and evictions?

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