Mortgage Crisis Spreads Past Subprime Loans
By Vikas Bajaj and Louise Story The New York Times
Tuesday 12 February 2008
The credit crisis is no longer just a subprime mortgage problem.
As home prices fall and banks tighten lending standards, people with
good, or prime, credit
histories are falling behind on their payments for home loans, auto loans
and credit cards at a
quickening pace, according to industry data and economists.
The rise in prime delinquencies, while less severe than the one in
the subprime market,
nonetheless poses a threat to the battered housing market and weakening
economy, which some
specialists say is in a recession or headed for one.
Until recently, people with good credit, who tend to pay their bills
on time and manage
their finances well, were viewed as a bulwark against the economic strains
posed by rising
defaults among borrowers with blemished, or subprime, credit.
"This collapse in housing value is sucking in all borrowers," said
Mark Zandi, chief
economist at Moody's Economy.com.
Like subprime mortgages, many prime loans made in recent years
allowed borrowers to pay
less initially and face higher adjustable payments a few years later. As
long as home prices
were rising, these borrowers could refinance their loans or sell their
properties to pay off
their mortgages. But now, with prices falling and lenders clamping down,
homeowners with solid
credit are starting to come under the same financial stress as those with
subprime credit.
"Subprime was a symptom of the problem," said James F. Keegan, a bond
****tfolio manager at
American Century Investments, a mutual fund company. "The problem was we
had a debt or credit
bubble."
The bursting of that bubble has led to steep losses across the
financial industry. American
International Group said on Monday that auditors found it may have
understated losses on complex
financial instruments linked to mortgages and cor****ate loans.
The running turmoil is also stirring fears that some hedge funds may
run into trouble. At
the end of September, nearly 4 percent of prime mortgages were past due or
in foreclosure,
according to the Mortgage Bankers Association.
That was the highest rate since the group started tracking prime and
subprime mortgages
separately in 1998. The delinquency and foreclosure rate for all
mortgages, 7.3 percent, is
higher than at any time since the group started tracking that data in
1979, largely as a result
of the surge in subprime lending during the last few years.
An example of the spreading credit crisis is seen in Don Doyle, a
computer engineer at
Lockheed Martin who makes a six-figure income and had a stellar credit
score in 2004, when he
refinanced his home in Northern California to take cash out to pay for his
daughter's college
tuition.
Mr. Doyle, 52, is now worried that he will have to file for
bankruptcy, because he cannot
afford to make the higher variable payments on his mortgage, and he cannot
sell his home for
more than his $740,000 mortgage.
"The whole plan was to get out" before his rate reset, he said. "Now
I am caught. I can't
sell my house. I'm having a hard time refinancing. I've avoided bankruptcy
for months trying to
pull this out of my savings."
The default rate for prime mortgages is still far lower than for
subprime loans, about 24
percent of which are delinquent or in foreclosure. Some economists note
that slightly more than
a third of American homeowners have paid off their mortgages completely.
This group is generally
more affluent and contributes more to consumer spending and the economy
relative to its size.
Unlike subprime borrowers, who tend to have lower incomes and fewer
assets, prime borrowers
have greater means to restructure their debt if they lose jobs or
encounter other financial
challenges. The recent reductions in short term interest rates by the
Federal Reserve should
also help by reducing the reset rate for adjustable loans.
Still, economists say the rate cuts and the $168 billion fiscal
stimulus package are
unlikely to make a significant dent in the large debts weighing on many
Americans, because banks
have tightened lending standards and expected rebates from the government
will not cover most
house payments.
The problems are most acute in areas that experienced a big boom in
housing - California,
the Southwest, Florida and other coastal markets - and in the Midwest,
which is suffering from
job losses in the manufacturing sector.
And it is not just first-mortgage default rates that are rising.
About 5.7 percent of home
equity lines of credit were delinquent or in default at the end of last
year, up from 4.5
percent a year earlier, according to Moody's Economy.com and Equifax, the
credit bureau.
About 7.1 percent of auto loans were in trouble, up from 6.1 percent.
Personal bankruptcy
filings, which fell significantly after a 2005 federal law made it harder
to wipe out debts in
bankruptcy, are starting to inch up.
On Monday, Fitch Ratings, the debt rating firm, re****ted that credit
card companies wrote
off 5.4 percent of their prime card balances in January, up from 4.3
percent a year ago. The
so-called charge-off rate is still lower than before the 2005 law went
into effect.
Banks are responding to the rise in delinquencies by capping home
equity lines of credit in
areas with falling real estate prices. A few credit card companies have
also moved to reduce the
credit limits of customers they deem more risky.
Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase,
Wa****ngton Mutual and
Wells Fargo are expected to announce on Tuesday at the Treasury Department
that they will offer
both prime and subprime borrowers who are more than three months behind a
chance to halt
foreclosure proceedings for 30 days and work out new loan terms.
In a conference call with analysts in December, Kenneth Lewis, the
chief executive of Bank
of America, said more borrowers appear to be giving up on their homes as
prices fall, noting a
"change in social attitudes toward default."
"You don't mind making a $2,000 payment when the house is going up"
in value, said Steve
Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several
clients walk away from
their homes because they couldn't refinance or sell. "When it's going
down, it becomes a weight
around your neck, it becomes an anchor."
Home prices in the North Las Vegas neighborhood of Brenda Harris, a
technology analyst at a
casino company, have fallen 20 percent to 30 percent. The builder who sold
her a new
three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is
now listing similar
properties for $314,000. A larger house a block down from Ms. Harris was
recently listed online
for $310,000.
But Ms. Harris does not want to leave her home. She estimates that
she has spent close to
$40,000 on her property, about half for a down payment and much of the
rest on a deck and
landscaping.
"I'm not behind in my payments, but I'm trying to prevent getting
behind," Ms. Harris said.
"I don't want to ruin my credit."
In addition to the declining value of her home, Ms. Harris, 53, will
soon be hit with a
sharply higher house payment. She has an option adjustable-rate mortgage,
a loan that allows
borrowers to pay less than the interest and principal due every month. The
unpaid interest gets
added to the principal balance. She is making the minimum monthly payments
due on her loan,
about $2,400.
But she knows she will not be able to pay the $3,400 needed to cover
her interest and
principal, which she will be required to pay once her loan balance reaches
115 percent of her
starting balance. And under the terms of her loan, which was made by
Countrywide Financial, she
would have to pay a prepayment penalty of about $40,000 if she chose to
refinance or sell her
home before May 2009.
She said that she now wishes she had taken a traditional fixed-rate
loan when she bought
the home. At the time, she asked for a loan that could be refinanced after
one year without
penalty. She said her broker had told her a week before the closing that
the penalty would
extend until May 2009 and that she reluctantly agreed because she had
already started moving.
A nonprofit community group, Acorn Housing, is trying to broker a
modification of Ms.
Harris's loan. In a statement Friday, Countrywide said the company had
been in touch with Ms.
Harris and would work with her.
Credit counselors say many borrowers like Ms. Harris were cajoled or
pushed into risky
mortgages that they never had the ability to repay.
Others disregarded warnings about complex loans because they wanted
to be a part of the
housing boom, which like the technology stock bubble lured people in with
seemingly instant and
risk-free profits, said Mory Brenner, vice president of Financial Firebird
Cor****ation, a
company based in Pittsfield, Mass., that publishes consumer debt
information and refers
borrowers to credit counselors.
"I'd say, Let me tell you something, this is crazy," Mr. Brenner
said. "You cannot afford
this house, even if nothing happens and rates stay as low as they are
today. And the response
would be: I don't care."
Lenders extended credit to people without verifying their incomes and
allowing them to make
little or no down payments.
But borrowers like Mr. Doyle, the engineer in Northern California,
say they are victims of
their cir***stances - housing prices collapsed and lending standards
tightened just as they
needed to sell or refinance.
In refinancing their home in 2004, Mr. Doyle and his wife were doing
what millions of other
homeowners did in the last decade - tapping into the rising value of their
homes for home
improvements, paying off credit card debt, college tuition and for other
spending.
The Doyles took advantage of the housing boom by refinancing their
home nearly every year
since they bought it in 1995 for $275,000. Until their most recent loan
they never had a problem
making their payments. They invested much of the money in shares of
companies that subsequently
went bankrupt.
Still, Mr. Doyle does not regret refinancing in 2004. "My goal was
clear: I wanted to help
my daughter go through college," he said. "It wasn't like it was for us."
Go to Original
Escape From Recession
By Jared Bernstein and Lawrence Mishel
In These Times
Monday 11 February 2008
What you should know about the economic stimulus package.
We hate to fulfill the stereotype of dismal scientists, but the news
is bad: The economy is
slowing sharply and may be in recession. The nation's broadest measure of
growth, real gross
domestic product (GDP), grew a scant annual rate of 0.6 percent at the end
of last year.
Unemployment has risen, and job growth has slowed sharply. The housing
market has yet to hit
bottom, and credit markets are still deeply chilled, if not frozen.
Here's the better news: When this type of scenario develops, the case
for an economic
stimulus package to offset the downturn is both simple and widely
accepted. But there are many
ways to craft a growth package, and if we don't get this right, we risk
wasting big money while
failing to mitigate the pain of recession.
As In These Times went to press, both chambers of Congress had passed
bills, and their
ratification looked all but certain. (President Bush had signed off on the
House bill, and had
agreed to sup****t the Senate's package after it had been signifcantly
scaled back.) The bills
spend about $150 billion this year and next on a combination of "tax
rebates" (though that's
really a misnomer) and business tax cuts.
Will that be good enough? Here's a Stimulus 101 primer, as well as a
list of what we think
is missing from the current economic recovery plan.
The Basics
Economies depend on robust demand. When folks stop buying, when
investors leave the room,
when governments stop building and improving public goods, growth grinds
to a halt. And when
that happens, the job machine stalls, unemployment rises, those with jobs
work fewer hours,
wages rise more slowly, and incomes decline, especially for the lowest
earners and many minorities.
The last two recessions-in the early '90s and early 2000s-led to
declines in the typical
family's income by about $2,500 (in today's dollars). That ain't peanuts.
Such a potential income loss is especially worrisome now, as the
inflation-adjusted median
family income actually remains about $1,000 below where it stood in 2000.
If recession is
imminent, this would be the first time that real incomes at the end of a
recovery have not
exceeded those at the previous economic peak.
That fact might be the greatest indictment against Bushonomics and
the "owner****p society"
he touted. It is a stark reminder that while the stimulus appropriately
targets a short-term
problem, the mechanisms that serve to fairly distribute income have been
broken for some time.
Most families in the United States have not fared nearly as well as they
should have, given
their contributions to the growth we've experienced. The coming slowdown
will only submerge them
in deeper water.
That's what makes fiscal stimulus so necessary. By fiscal stimulus,
we mean a tem****ary
infusion of expenditures into the economy by the federal government to
raise demand. The
infusion necessarily takes the form of some combination of a reduction in
taxes and spending
increases.
We've also got more time than we think. Each of the last two
recessions was short (eight
months) in GDP terms, but far longer in terms that matter most to most
people: jobs and
unemployment.
Unemployment rose for 19 months after November 2001, which was the
official end of the last
recession, and employment declined by another 1.1 million and did not
start growing until
September 2003. Had an effective stimulus package come late in the game,
as officially measured,
it would have helped shorten what turned out to be the longest jobless
recovery on record.
Current Proposals
The president and the House agreed on a stimulus package that spends
about $100 billion on
personal tax rebates and $50 billion on business, by allowing them to
depreciate new investments
faster than usual, and thereby pay fewer taxes. (Firms can deduct the cost
of depreciation from
their income to lower tax liabilities.)
The package has some pluses, but it could have been much improved.
Thanks to negotiations
by House Democrats, $28 billion more of the rebates will reach 35 million
more low-income
persons than were included in the initial White House package. Under
Bush's original plan, only
8 percent of the rebate made it down to the bottom 40 percent. It's now 21
percent. That gets
money to folks who need it, but also helps because those folks will spend
the money (rather than
save it) and generate more demand.
But the bonus depreciation for businesses is a particularly
ineffective form of stimulus.
For each dollar of tax revenue we sacrifice in this way, we get back a
measly 27 cents in new
demand, according to economist Mark Zandi. Of the 13 types of stimulus
Zandi tested, this one
was the worst. (Making the Bush tax cuts permanent was, at $0.29, a close
second.)
This package, while costing 1 percent of GDP, could boost the economy
by less than 1
percent, perhaps around 0.75 percent. That's unacceptable. We should get
at least 1-for-1. Any
stimulus worth passing should get back at least as much in GDP terms as it
costs, and even
that's a low bar.
The Senate's plan is a little better in this regard. While spending
about the same amount
on rebates, it gets them to even more low-income people. (Seniors
dependent on Social Security
were left out of the House plan.) But Senate Republicans blocked its
originally proposed 13-week
extension to unemployment insurance (beyond the normal 26 weeks), which
offered a strong
bang-for-the-buck: A dollar spent here gets you $1.64 in stimulus. The
reason is simple: People
unemployed long-term need money and spend money. That's not always the
case with rebates.
What's Missing
One thing the current stimulus package got right was making payments
to individuals. But
these are not "tax rebates," which implies that the government is
returning taxpayers' money to
people who overpaid their taxes. Rather, these are checks provided to
people in the expectation
that they will spend the money on goods and services.
Why is that helpful? Because as they spend these payments, they
create demand. For
instance, when you buy items at Costco, the store will restock its shelves
and re-order goods
from its suppliers, a process that maintains employment and wages being
paid and spent, all of
which boosts the economy. But, to energize the economy, these payments
have to be spent, not
saved. Better yet, they need to be spent on domestic items, as im****ted
goods stimulate another
country's economy.
When the payments are spent domestically, their impact reverberates
throughout the economy.
The sooner income-constrained households receive these checks, the sooner
these payments will
help both the recipients and the larger economy, thus achieving the dual
goals of both fairness
and effectiveness.
However, failing to extend unemployment insurance was a big mistake.
Such payments have the
greatest probability of being spent, and the unemployment insurance system
needs to provide a
better safety net for low-income, part-time and other workers. Tem****ary
improvements in food
stamp allocations and greater assistance for energy bills would also have
a similar positive effect.
Providing payments to state and local governments (for their Medicaid
costs or otherwise)
would also have helped mitigate rising unemployment. Downturns cause state
revenues to fall and
spending to rise, especially when they originate in housing markets.
That's because, as more
people need assistance, public programs kick in. But when states need to
balance their budgets,
they often respond by raising taxes, cutting services and laying off
workers-slowing down the
economy even more. It's necessary for the federal government to provide
relief for the states to
forestall these desperate moves.
Finally, though it's received scant attention, one of the best things
we could do is put
Americans to work building or repairing needed infrastructure. Jobs spun
off by these projects
put goods in the pockets of workers who would otherwise struggle, and the
improvements in roads,
bridges, schools and sewage treatment facilities can lead to higher
productivity, better health
and better education. Given the depreciation of our public infrastructure,
these efforts only
accelerate what we need to do anyway. To be timely, we should invest in
projects that are
planned or underway, but strapped for resources due to the slowdown.
Another advantage is that
none of such spending is "saved": While citizens may spend less than
two-thirds of the payments
made to them, governments spend all the money.
Though a recession has not officially been called, polls show that
most people think we're
already in one. While this may be a head-scratcher for those focusing on
GDP and financial
markets, it's clear to us that too many families have been economically
squeezed in recent
years, even in good times. Imagine what they are likely to face in bad
times.
Our political representatives had every reason to quickly pass a
package to jumpstart our
slumping economy. But they didn't get it completely right. It's up to us
to make sure they do.
Published on Tuesday, February 12, 2008 by Reuters
Predatory Lenders Still Seen Targeting Minorities
by Svea Herbst-Bayliss
BOSTON - Growing scrutiny into subprime mortgages has failed to stop
unscrupulous lending
practices to blacks, Hispanics and other minority groups, U.S. Rep. Barney
Frank said on
Monday.0212 06
Frank, chairman of the Financial Services Committee, warned lenders that
regulators would crack
down on groups shuttling minorities into subprime loans designed for
people with weak credit
histories or low incomes.
“We are still seeing more blacks and Hispanics being pushed into subprime
mortgages than they
should be and that’s where you’ll see more regulation,” the Massachusetts
Democrat said in
response to a question after a speech at Boston University.
More than 2 million subprime borrowers face higher mortgage costs and the
possible loss of their
homes if they cannot meet the payments. Studies have found that blacks and
Hispanics were likely
to be charged higher interest rates on subprime loans than whites with
similar credit ratings.
Frank helped craft legislation to curb predatory practices aimed at
minorities seeking home
financing and has pushed for more oversight of lenders in the wake of
losses tied to mortgage
securities.
Calling the current U.S. economic downturn the worst in a decade, Frank
said there was clear
evidence that too little regulation can be damaging.
Innovation in products and practices must be fostered, but regulation is
needed to stem
potential abuses, he added.
“We’ve got to enhance the ability of regulatory entities to do their job
and to pay them well,”
said the trained lawyer who has represented Massachusetts in Wa****ngton
since 1981.
Frank also said it was wrong to turn owning a home into one of Americas’
biggest dreams.
“I wish everyone in America earned enough money and had enough sense to
own a home,” Frank said,
adding however that many people are pushed into improperly buying one
instead of renting.
“Home owner****p is a good thing but Americans also made a great mistake
where home was equated
to home owner****p,” Frank said.
Re****ting by Svea Herbst-Bayliss, editing by Richard Chang
URL to article: http://www.commondreams.org/archive/2008/02/12/7005/
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Finally, the campaigns of 1793 and 1794 set Clausewitz on the path of
recognizing war as a
political phenomenon. Wars, as everyone knew, were fought for a purpose
that was political,
or at least always had political consequences. Not as readily apparent
was the implication
that followed. If war was meant to achieve a political purpose, everything
that entered into
war — social and economic preparation, strategic planning, the conduct of
operations, the
use of violence on all levels — should be determined by this purpose, or
at least accord
with it. Even though soldiers had to acquire special expertise, and
function in what in some
respects was a separate world, it would be a denial of reality to allow
them to carry on
their bloody work undisturbed until an armistice brought their political
employer back into
the equation. Just as war and its institutions reflected their social
environment, so every
aspect of fighting should be suffused by its political impulse, whether
this impulse was
intense or moderate. The appropriate relation****p between politics and war
occupied
Clausewitz throughout his life, but even his earliest manuscripts and
letters show his
awareness of their interaction.
The ease with which this link — always acknowledged in the abstract —
can be forgotten in
specific cases, and Clausewitz’s insistence that it must never be
overlooked, are
illustrated by his polite rejection toward the end of his life of a
strategic problem set by
the chief of the Prussian General Staff, in which every military detail of
the opposing
sides was spelled out, but no mention made of their political purpose. To
a friend who had
sent him the problem for comment, Clausewitz replied that it was not
possible to draft a
sensible plan of operations without indicating the political condition of
the states
involved, and their relation****p to each other: ‘War is not an independent
phenomenon, but
the continuation of politics by different means. Consequently, the main
lines of every major
strategic plan are largely political in nature, and their political
character increases the
more the plan applies to the entire campaign and to the whole state. A war
plan results
directly from the political conditions of the two warring states, as well
as from their
relations to third powers. A plan of campaign results from the war plan,
and frequently - if
there is only one theater of operations - may even be identical with it.
But the political
element even enters the separate components of a campaign; rarely will it
be without
influence on such major episodes of warfare as a battle, etc. According to
this point of
view, there can be no question of a purely military evaluation of a great
strategic issue,
nor of a purely military scheme to solve it.’
Everyman’s Library, 1993 ISBN: 0679420436 On war /by Clausewitz, Carl
von, 1780-1831.
Knopf, 1993. From the introduction by Peter Paret, Pg7
_____________________________________________________________________
The U-2 is a jet-powered reconnaissance aircraft specially designed to fly
at high altitudes
(i.e., above 70,000 ft [21 km]). It was used during the late 1950s to
overfly the Soviet
Union, China, the Middle East, and Cuba; flights over the Soviet Union,
the primary mission
for which the plane was designed, ended in 1960 when a U-2 flown by CIA
pilot Gary Powers
was shot down over the Soviet Union. This event was a major political
embarrassment for the U.S.
http://www.espionageinfo.com/Te-Uk/U-2-Spy-Plane.html
Soviet Prime Minister Khrushchev's reaction to the overflights which
were discovered
just before a summit conference in Paris with President Eisenhower: "It
was as though the
Americans had deliberately tried to place a time bomb under the meeting" .
. ."How could
they count on us to give them a helping hand if we allowed ourselves to be
spat upon without
so much as a murmur of protest?" The only solution was to demand a formal
public apology
from Eisenhower and a guarantee that no more overflights would take place
. . .
But the apology Khrushchev was looking for would not come. Despite
having trespassed
on the Soviet Union for the past four years with scores of flights by both
U-2's and heavy
bombers, the old general still could not say the words, it was just not in
him. . . A time
bomb had exploded, prematurely ending the summit conference. . .
Back in Wa****ngton, the mood was glum. The Senate Foreign Relations
Committee was
leaning toward holding a closed door investigation into the U-2 incident .
. . In public,
Eisenhower maintained a brave face. He "heartily approved" of the
congressional probe and
would 'of course fully cooperate,' he quickly told anyone who asked. But
in private he was
very troubled. For weeks he had tried to head off the investigation. His
major concern was
that his own personal involvement in the overflights would surface,
especially the May Day
disaster. Equally, he was very worried that details of the dangerous
bomber overflights
would leak out. The massed overflight may in fact, have been one of the
most dangerous
actions ever approved by a president.
pg. 51-55 ~Body of Secrets; Anatomy of the Ultra Secret National Security
Agency
James Bamford
----------------------------------------------------------------------
"Let me give you a word of the philosophy of reform. The whole history of
the progress of
human liberty shows that all concessions yet made to her august claims,
have been born of
earnest struggle. The conflict has been exciting, agitating,
all-absorbing, and for the time
being, putting all other tumults to silence. It must do this or it does
nothing. If there is
no struggle there is no progress. Those who profess to favor freedom and
yet depreciate
agitation, are men who want crops without plowing up the ground, they want
rain without
thunder and lightening. They want the ocean without the awful roar of its
many waters."
"This struggle may be a moral one, or it may be a physical one, and it may
be both moral and
physical, but it must be a struggle. Power concedes nothing without a
demand. It never did
and it never will. Find out just what any people will quietly submit to
and you have found
out the exact measure of injustice and wrong which will be imposed upon
them, and these will
continue till they are resisted with either words or blows, or with both.
The limits of
tyrants are prescribed by the endurance of those whom they oppress. In the
light of these
ideas, Negroes will be hunted at the North, and held and flogged at the
South so long as
they submit to those devilish outrages, and make no resistance, either
moral or physical.
Men may not get all they pay for in this world; but they must certainly
pay for all they
get. If we ever get free from the oppressions and wrongs heaped upon us,
we must pay for
their removal. We must do this by labor, by suffering, by sacrifice, and
if needs be, by our
lives and the lives of others."
http://www.buildingequality.us/Quotes/Frederick_Douglass.htm
Frederick Douglass, 1857
- - - - - -> More political discussion continues at
http://www.politicsusaweb.com/
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