Real Estate and Homeownership
Part I, The Deflating Housing Bubble: the US Economy’s Last Gasp?
Richard C. Cook, who worked in the Carter White House, NASA, and the Treasury Department, sums up this decade’s housing bubble in an article that he emailed us that appeared in Global Research, July 7, 2007, and from which we excerpt below. Cook sees the deflating bubble as a downward slide into serious economic trouble for many Americans.
excerpted by Jeffery J. SmithWith the collapse of the dot.com bubble, which failed along with the general stock market decline of 2000-2002, over a trillion dollars of stock value vanished, taking with it, in some cases, many working peoples’ retirement savings. To compensate the market -- not retired people -- and keep the economy humming along, the Federal Reserve under Chairman Alan Greenspan lowered interest rates to near zero, inflating the already swelling housing bubble.
Lowering the lending rate made loans relatively cheap. Consumers could borrow huge amounts of money at low cost for the purchase of homes or for taking out home equity loans to pay off their credit cards, finance college education for their children, buy new cars, etc. All that pumped liquidity into the economy. According to a Merrill-Lynch study, housing as late as 2005 accounted for 50% of US economic growth.
This housing bubble had begun as early as 1989-90, when credit restrictions on the purchase of real estate first began to be eased. In the mid to late 1990s, the mortgage industry began to be taught the methods for getting around consumers’ weak credit reports and selling them homes anyway. In March 2001, two months after George W. Bush became president, creditors/lenders instructed mortgage companies on how to package loan applications so that unqualified buyers could purchase homes.
Mortgage lenders maximized the “points” that buyers were required to finance, making the mortgages more attractive to Wall Street. Then Wall Street brokerages “bundled” the “creatively-financed” mortgages and sold them as bonds to retirement and mutual funds and to overseas investors. That relieved the banks which originated the loans from exposure; the millions of small investors who bought the bundled loans took the risk. Portfolio managers were directed to buy subprime bonds as other bonds matured.
Home purchasers were told by experts who knew better that they could re-sell their homes in time to escape the payment hikes. Now the collapse of the market has made further resale at prices high enough to escape without losses impossible. Borrowers have no cash cushion, because years ago people stopped earning enough money for personal or household savings.
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. The subprime bonds were known to be suspect. They were based on adjustable rate mortgages that were actually time bombs, scheduled to detonate a couple of years later with monthly payments hundreds of dollars a month higher than when they were written. Many of these mortgages will reset to higher payments this October, a month when collapses have occurred before.
As purchasers lose their homes to foreclosure, the real estate is being grabbed at bankruptcy prices by the banks and by any other investors with ready money. Whole neighborhoods of cities like Cleveland or Atlanta are turning into boarded-up ghost towns. 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 that foreclosures are happening in Washington’s affluent suburban neighborhoods in places like Fairfax, Loudon, and Montgomery Counties.
As usual when hypocrisy is rampant only the small fry are being called to account. Commentators, including a sleepwalking Congress, have self-righteously railed at consumers who got in over their heads. The Mortgage Bankers Association is even lobbying Congress to allocate $7 million more to the FBI to go after the supposedly rogue brokers within their own industry who are being scapegoated.
None of this could have happened 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.
Jeffery J. Smith runs the Forum on Geonomics.
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