Paying For The Mortgage Mess

Stephanie Cannizzaro is one of the many victims of the U.S. mortgage mess.

Stephanie says she and her husband, a New Jersey transit worker, were bamboozled last year by a company called New Century Mortgage into refinancing their home loan with an adjustable rate mortgage that started at an interest rate of 11.3 percent and required a monthly payment of $2,900.

The Cannizzaros missed the last four months of payments, according to the Asbury Park Press, and face foreclosure. If they lose their home, Stephanie doesn’t know where she, her husband and their three teenage children will end up.

Angelo Mozilo is in trouble because of the mortgage crisis, too. Mozilo is CEO of Countrywide Financial, the country’s largest mortgage lender, which last week said it was tapping $11.5 billion in emergency loans from major banks, after revelations of a high delinquency rate among borrowers caused its usual sources of credit to dry up. An analyst at the Merrill Lynch brokerage firm said Countrywide could end up in bankruptcy.

But Angelo Mozilo won’t have to worry about the roof over his head. A Forbes magazine survey of executive pay ranks him seventh among CEOs of major U.S. corporations, with total compensation of $142 million for the year.

According to the Wall Street Journal, Mozilo’s every need is taken care of by Countrywide–including $23,314 for automobile use and $24,076 for tax and investment advice in 2004. The $35,932 in country club fees that Countrywide picked up for Mozilo would have paid the Cannizzaros’ mortgage for all of 2007.

You’d think Mozilo might get canned for leading his company to the verge of collapse. But last year, it was announced that Mozilo would be paid $10 million for not retiring until 2009–on top of his annual salary, bonuses and stock options. If he does have to clean out his desk, though, Mozilo no doubt has a different scheme ready–under a golden parachute deal revealed by the company last year, he would have gotten $88 million if he left the company by December 31.

These two stories show that the real victims of the U.S. economy’s spreading mortgage crisis aren’t panicked investors or Wall Street banks–and especially not the loan sharks at Countrywide or New Century or the other mortgage companies that got rich off the housing boom.

The real victims–whether they lose their homes, or if they’re “only” forced to pay for the crisis through a variety of economic consequences, including a looming recession–are working people.

Two years ago, the Economist magazine called the worldwide real estate boom the “biggest bubble in history.”

“That bubble is now deflating, and it is having an enormous impact on the banking institutions that financed that bubble and, by extension, on the stock market,” says Joel Geier in an interview in the new issue of the International Socialist Review. “Every day, another shoe drops–another mortgage lender, hedge fund or bank goes out of business or announces that it is in trouble.”

When housing prices started falling earlier this year, gloomy commentators thought the main trouble would at least be confined to mortgage companies that specialized in so-called “sub-prime” loans–made to borrowers with little or no credit history, in return for all sorts of fees and variable interest rates that cause repayments to balloon over time.

But what emerged this summer is that the mortgage mess extends beyond predatory sub-prime lenders. Many of the biggest names in international finance are admitting their “exposure” to bad loans–and not just mortgages, but corporate debt, too.

Bear Stearns, Goldman Sachs and many more were part of a boom in arcane financial investments known as derivatives, which packaged together thousands of loans in giant bonds, to be bought and sold by the biggest investors. These bonds are spreading the sub-prime damage far and wide. For certain of these mortgage-backed bonds, banks can literally find no buyers at any price.

Because of the uncertainty about how many bad loans are out there, banks and other financial institutions are tightening requirements for even reliable customers–causing what’s known as a credit crunch.

The end of the housing boom was already having an impact on companies directly related to real estate and construction, but the drying up of credit could spread the contraction to other sectors of the economy, and quickly–leading to recession.

Only a few weeks ago, the International Monetary Fund announced it was raising its outlook for the global economy, predicting that any slowdown in the U.S. would be offset by rapid expansion in China and India, and an upswing in Japan and Europe.

But this month’s panic on the financial markets indicates that the opposite could be taking place–the crisis set off by the U.S. mortgage mess causing a generalized credit crunch that chokes off economic growth worldwide.

Whatever happens next, this much is certain–the threat of recession comes after a period of economic expansion in which U.S. workers’ living standards nevertheless stagnated or declined.

Even after the last recession officially ended in 2001, median household income (adjusted for inflation) continued dropping, ending almost 4 percent lower in 2004 than five years before. Individual states in the industrial Midwest suffered depression-like declines amid the “boom.” In Michigan, real household income dropped by 18 percent between 1999 and 2004.

Now, without even having made up lost ground from the last recession, U.S. workers face the possibility that the bottom will fall out again. The first signs this time won’t be job losses–but home foreclosures. And they will happen this time after Congress did Corporate America’s bidding and passed a bankruptcy bill that makes overwhelming debt a life sentence.

The business world’s first line of defense has become clear. The fault, it says, lies with the people defaulting on their mortgages. They bit off more than they can chew with their new homes, and now–regrettably–they’re paying the price.

Republican presidential hopeful Rudolph Giuliani summarized the reasoning in his bold plea on a CNBC business talk show for “no government bailouts” of borrowers. “This is something that the market has to straighten out,” he lectured.

The short answer to such claims is that Wall Street is blaming the victim–this tactic having served its friends in politics, like Giuliani, so well over the years.

The longer answer is that they get the story exactly backward. The housing boom and mortgage mania were driven by the big-money interests with so much to gain from them. Their enthusiasm for super-profits drew ordinary people into the maw, not the other way around.

The final inflating of the housing bubble was set in motion at the beginning of the decade by the U.S. government’s monetary policy, engineered by Alan Greenspan. As Federal Reserve chief, Greenspan pushed interest rates to rock-bottom lows to offset the global economic slowdown caused by the Asian economic collapse in the late 1990s–and, subsequently, when the U.S. dot-com boom went bust. Real estate took off, and so did the mortgage industry.

At the same time, the phenomenon of “structured finance”–the alphabet soup of mind-numbingly complicated investments, based on packaging mortgage and other debt as securities to be bought and sold–was becoming popular on Wall Street.

Faced with lackluster returns on investments in the “real” economy, cash-rich mutual funds and other big players pressured banks for more high-yielding mortgage-based securities, and banks in turned pushed the mortgage companies’ mania for financing and refinancing loans, on whatever terms would draw in new customers.

Credit agencies–the supposed watchdogs of the financial world–acted as accomplices by assigning ratings to the mortgage-based investments that masked the risk of their sub-prime component. Bond issues based in significant part on sub-prime loans managed to get a AAA rating, suggesting that investing in them were as risk-free as buying U.S. Treasury bonds.

“Had the securities initially received the risky ratings that some of them now carry,” the Wall Street Journal reported last week, “many pension and mutual funds would have been barred by their own rules from buying them. Hedge funds and other sophisticated investors might have treated them more cautiously. And some mortgage lenders might have pulled back from making the loans in the first place, without such a ready secondary market for them.”

In other words, the mortgage mess was created, promoted and proliferated by Wall Street. Which is why it’s frustrating that mainstream proposals to deal with the crisis put business interests first.

The proposals of Democratic politicians–though they say they want to protect homeowners threatened with foreclosure–will do little more than bail out the banks and speculators whose greed caused the problems in the first place.

A real solution to this crisis would require major government action. For one thing, the bankruptcy bill should be repealed immediately. The Feds could take over the mortgage companies and expropriate the assets of any of the crooks associated with them. Mortgages that were packaged together in bonds for the speculators to gamble on could be taken over, too, and the loans renegotiated on generous terms.

But in America today, the profits of a hedge fund come before the homes of working people.

What kind of society sets such immense financial obstacles in the way of people guaranteeing one of the most basic necessities of life–a roof over their head? As this crisis plays out, millions more people–in the U.S. and around the world–will be asking that question.

Alan Maass writes for Socialist Worker where this article first appeared. Read other articles by Alan, or visit Alan's website.

5 comments on this article so far ...

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  1. rosemarie jackowski said on August 23rd, 2007 at 3:42pm #

    Alan…thanks for this article. Too many in the media place the blame on the individual home owner. This crisis is similar to what happened in the 70s. Then many mid-west family farmers lost their farms. That is still having a negative impact on the whole country. Now much of our food supply has to be imported – what a strategic mistake for the usa. Then as now, all we have to do is to follow the money and see who has benefited from this mess.

  2. David said on August 23rd, 2007 at 8:28pm #

    Were the people in this article forced into a loan contract at gunpoint? Where has individual responsibility gone? Hello, but if offered similar terms, I would refuse. The Cannizzaro’s are profoundly stupid.

  3. Trevor said on August 24th, 2007 at 6:47am #

    Clearly, this whole problem is the fault of the non-business minded borrower who was naive enough to listen to the loan-hawker who, wearing a big howdy-doody smile, encouraged the public to come on in for a loan to buy their dream house. People should know enough to shun all advertisements and stay far away from home builders hawking their goods.

    Sure, these Wall Streeters knew very well that they were operating a Ponzi scheme, but they also knew three other very important things: the majority of the public doesn’t really understand economics and personal finance, the scheme was going to make them filthy rich and that, since capitalism has always been about the raping of the underclass for the benefit of the super-rich, the political system would bail them out and blame the underclass for being stupid enough to be victims of their criminal enterprise. This is all just more of what has come to be known in America as “good business.” If you are in a position to know something that allows you to screw over those who don’t, you go for it and let society clean up your mess while you catch some rays and count your winnings on the beach in Cancun.

    David is absolutely correct in his comment. We shouldn’t be blaming the poor unscrupulous business owners and shady finance dealers for their victims fates. Not in a capitalist society where that is actually the goal of the game being played. My only problem is that we don’t allow capitalism to fully blossom from criminal enterprise. I mean, to extrapolate a tad on David’s thought, we also shouldn’t blame drug dealers for their victims fates, nor bank robbers for their victims fates. After all, this is America! We’re a predatory capitalist society; and the essense of capitalism is the screwing over of someone else as you enrich yourself. What’s so wrong with that?

    For America, the recent housing catastrophe that greatly enriched the already super-rich and screwed over the underclass, while blaming that underclass and excusing the real promoters of the entire debacle in the process is just business as usual. As a red-blooded, flag-waving American, I say WOO HOO for business.

  4. James said on August 27th, 2007 at 11:29am #

    If you own 0 equity in your house do you own the house? Why bail out the speculators?

    A bailout of any kind creates a moral hazard that as an individual you are not responsible for your actions. If people aren’t going to think when they make the biggest purchase of their life I think they deserve to get burned.

    Plus a bailout is to bailout the hedge funds along with the speculators. Giving money to the home-borrower just enables him/her to pass the buck along to the hedgies and banks at the expense of savers and people who think.

  5. Alan said on December 31st, 2007 at 4:14pm #

    We know that Fannie Mae and Freddie Mac are already putting “bailout” deals inplace (wink-wink) for the banks. The next thing is for the banks to “package” all the overbaked loans and sell them to an S&L, just to let them take the “hit” on the bailout, while keeping their performing loans to themselves.
    The investor who was taking a measured risk (secured by property) will soon get the screwing of a lifetime with access to future mortgages and credit curtailed, and a big 1099 coming for the “write-down” on his defaulted mortgage.
    Its no secret that the Brokers and banks made unjust profits pumping out these loans, and could care about anyone getting stuck with them – after all, they have their$, and who cares if more dumb bastards (us) are getting screwed.
    I would like to see the brokers and bankers who knowingly placed this paper get some financial punishment from the stockholders who were powerless to prevent the raping of their corporate coffers with CEO guarranteed pay contracts and usurious commissions paid out of insane closing costs. (and we paid and paid).
    I got banged with points and fees and PMI at my closing, all of which was buried in the “you might have to pay this under certain conditions” in the fine print, which passes for “disclosure and truth in lending”.
    The banks will write this off, its us poor working slobs who bear the real cost of this. We need a way to retain our property and punish those who inflated values and closing costs.