The "prime" mortgage crisis

Residential mortgage
crisis is looming


BY SETH GALINSKY
A new residential mortgage crisis is looming. Its effects could have devastating consequences for millions of working people.

In spite of talk about an economic “recovery” and government programs to modify loan terms, a wave of foreclosures is expected in the years ahead that could dwarf the 2008 surge in mortgage defaults.

A March 12 Washington Post article warned that as many as 7 million house and apartment owners today are “seriously delinquent” but have not yet had their residences foreclosed or repossessed.

Banks are holding off on taking action for fear that putting a massive number of residences up for sale will depress the market even further and undercut their profits. On March 24 the U.S. Commerce Department announced that sales of new residences in February fell to their lowest amount on record.

“Banks have remained in foreclosure paralysis,” Sandeep Bordia, head of U.S. residential credit strategy at Barclays Capital told the Post, adding that this could not continue “indefinitely.”

Some 11.3 million people—about one-quarter of all mortgage holders in the United States—owe more on their mortgages than their residences are currently worth, due to the decline in housing prices over the last several years.

A previous plan by the Barack Obama administration to buy time for people having difficulty with mortgage payments is widely seen as a failure.

The “Home Affordable Modification Program,” was launched a year ago with promises of helping 3 million to 4 million people lower their mortgage payments. Instead, only 170,000 people have qualified for permanent changes and 1.3 million are enrolled in trial programs. More than half of those who were granted lower mortgage payments re-defaulted on their loans within nine months.

On March 26 the White House announced a new plan. But, showing the lack of confidence in ruling class circles, the New York Times article reporting the plan’s details opened with a question: “Will it work this time?”

The first component would “encourage” mortgage companies to reduce monthly payments from unemployed workers for up to six months while they look for a new job. After six months, job or no job, mortgage payments would go back up and the owner would still be responsible for what the Times called “the missing money” from the previous months.

Banks and other lenders would also be asked to “consider” writing off a portion of the loan, especially of “underwater” borrowers.

The Times noted that “none of these programs have the force of law.” But, in order to “lubricate” what the capitalist daily claims are the “boldest” measures to date, banks that participate in the plan would be eligible for billions of dollars of government assistance and loan guarantees if the borrowers can’t pay.

Unlike in the previous bubble of so-called subprime loans, today most of the “borrowers in trouble,” in the words of the Washington Post, are “people who have better credit and safer loans and have become delinquent because they’ve lost their jobs or are dealing with other economic setbacks.”

In addition, hundreds of thousands of people will see their payments go up by the end of 2010 and into 2011 because they hold adjustable rate mortgages.

At least 90 percent of all housing mortgages in the United States are now either guaranteed or loaned outright by Fannie Mae, Freddie Mac, and the Federal Housing Administration.

The U.S. government seized control of Fannie Mae and Freddie Mac, giants in the mortgage business, in September 2008 as part of attempts to prevent the financial crisis from spiraling out of control. The Treasury Department has given the two companies $175 billion in aid and bought $1.25 trillion in mortgage-backed securities they held.

According to the New York Times, in “the last six weeks alone” the two companies have been transformed “into arms of the federal government.”

For all practical purposes Fannie Mae and Freddie Mac have been nationalized, and are being used to shore up the capitalist housing market and guarantee the profits of large banks. Even as large numbers of workers face long-term unemployment, Washington is using its control of the two companies to attempt to resuscitate the housing bubble.

The Times reported that the government ordered the companies to oversee the new mortgage modification program, buy large numbers of delinquent loans from banks, refinance millions of “at-risk” mortgages, and “loosen policies” to make it easier to lend money for house purchases to “questionable borrowers.”