Thursday, August 16, 2007

Subprime Capitalism

" All contradictions of bourgeois production collectively come into eruption in the general crises on the world market." (Marx, Theories on Surplus-value, Vol. II, Part II, P. 318.)
Today CountryWide Financial Corp, one of the largest mortgage lenders in the United States, announced that it is tapping a $11.5 billion loan to stay out of bankruptcy due to overextending itself in the sub-prime lending market (full story). The stock of this company slid 13% on the news, after shedding nearly 50% of its value already this year.

CountryWide is one example of many mortgage companies which are teetering close to failure because of overextending themselves with sub-prime loans which fueled the "housing bubble."

This had been widely reported as a looming disaster by progressive socialist publications, because housing prices were forcing low and middle income people out of cities, because people were being saddled with unmanageable debt, and because the cyclical nature of capitalism naturally produces crises (see below) which disproportionately affect the working and under-classes.

The Wall Street Journal ran a story today describing the plight for one couple which reflects the stark reality for tens of millions of Americans:
Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.

The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. "We agreed we wanted to be homeowners again," says Mr. Montes, "even if it meant the end of vacations and not eating out as often."


With a December "reset" on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses' loan balance may exceed the value of their home.


"We have a disaster on our hands," says Mr. Montes, a 48-year-old warehouse manager. He fears he won't be able to handle the payments after the December reset and wonders whether the family can avert foreclosure. "At this point," he says, "we really don't have a plan."

Wall Street Journal: One Family's Journey Into a Subprime Trap
The Montes annual income is $90K whereas their yearly mortgage loan payments (sans-taxes) are nearly $40K. They are in terrible shape, have no equity in their home and have very difficult decisions ahead of them. However, their plight could be considered relatively good news in the sub-prime market. Why?

A large percentage of sub-prime loans are "refis" - refinancing an existing home with a second mortgage against the "equity" in the house due to increased property values.

Alexander Gourse describes the practice in a recent In These Times article:
When the housing market began its rapid ascent in the mid-’90s, many observers waxed rhapsodic about the potential of high-interest, subprime loans to merge the financial interests of investors and low income and minority communities.


Industry representatives typically cite the poor credit histories of most subprime borrowers to explain increasing foreclosure rates. Consumer and community advocates, however, paint a darker picture. “Predatory lending is definitely a systemic problem within the subprime mortgage industry,” says Al Hofeld Jr., a litigation attorney and chair of the South Side Community Federal Credit Union in Chicago (SSCFU). “There are very few subprime lenders who will make a subprime loan where the interest rate actually reflects the risk involved.”

According to Smith, predatory lenders put borrowers into loans that they cannot afford. While blatant fraud, such as the falsification of a borrower’s income to justify a larger loan, is becoming less common, the misrepresentation of a loan’s characteristics, like the concealment of a fixed rate “teaser” period that adjusts upward after two years, is a growing problem.

Hofeld says subprime mortgage companies routinely use bait-and-switch tactics to lure in potential borrowers and maximize the amount of money loaned out. At closing, borrowers are often presented with terms that do not match those previously offered by the company, and then pressured into signing documents which they have not had time to review. Ameriquest Mortgage Company is currently facing hundreds of lawsuits which allege that they routinely baited potential customers by promising fixed interest rates, low or no fees, lower monthly payments, no prepayment penalties, or by representing to borrowers that they qualify for a particular set of terms.


As they later discovered, however, the terms of the loan were not as they expected. Not only did the loan have an adjustable rate that can go as high as 13.4 percent, but the Walkers allege that Ameriquest falsely told them that their home had doubled in value since they had bought it a few years earlier, thus qualifying them for a larger loan amount. Ameriquest didn’t give them copies of their loan documents at closing, and as a result the Walkers did not realize that the terms had been changed until well after the three-day period during which they could legally cancel the loan. They have since tried to refinance, but have been unable to find another lender willing to lend them the amount currently owed to Ameriquest; the artificially inflated appraisal value has in effect trapped them in a loan with a rising interest rate.


“The problems in the subprime mortgage industry should be framed as an affordable housing issue,” says Hofeld. “We often compartmentalize the way we think about issues, but I really think that predatory lending is something that is decreasing the supply of affordable housing. And the lack of access to mortgage credit on fair terms is something that prevents people from getting into homes.”

In These Times: The Subprime Bait and Switch
The cyclical nature of the capitalist system is designed to concentrate wealth into the hands of the few. This latest cycle is an example of that process writ large. Real estate values will rebound eventually but only after many people loose their homes as foreclosures and bankruptcies commence. Capitalist enterprises and wealthy individuals will swoop in to buy up the properties and do with them as they please.

To close, an excerpt from a political economy course:
The general possibility of crises which is inherent in the commodity form of social production, attains its further development in the expansion of credit and the functioning of money as a means of payment (i.e., goods are sold but the money for it is paid only after the lapse of a certain time, and it is then only that the business is concluded; money thus exercises the function of credit).

During the space of time which lies between the moment of inception of the credit operation and that of the actual payment of the money, the value of the commodity may change. The payment might, besides this, not be made in time. The separation between purchase and sale and the independence of one from the other then again become revealed. The [consumer] for instance buys 20 yards of linen at the price of $40. He does not, however, pay this money immediately, as he has not yet sold his wheat, the value of which is similarly $40. The weaver, on his part, buys machinery which he promises to pay after he will have received the money from the [consumer]. But if the value of the wheat changes at the time when the [consumer] can sell it and he can realize for it less than $40 or if the [consumer] cannot sell it at all, he can of course make no final settlement with the weaver. The result of this is that the weaver is also unable to pay the manufacturer of the machinery, etc.

Credit ties up in this way all commodity producers who participate in credit operations by a chain of reciprocal dependence. The consequence of the break of any link of financial obligations may result in a shock to the whole chain, i.e., a crisis might break out.

Political Economy: The Marxian Crises Theory
Clearly, not the borrowers, but the capitalist system itself is subprime, unable to meet the basic needs of housing in a fair, equitable and sustainable fashion for the vast majority of citizens who labor under its dominion. A bold new direction is needed which can guarantee fair and affordable housing standards for all people. This can only be accomplished by breaking with the capitalist profit model through adoption of a democratic socialist program.

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