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Vol. 71/No. 34      September 17, 2007

 
1.1 million in U.S. face home foreclosure
(front page)
 
BY PAUL PEDERSON  
NEW YORK, September 1—U.S. stock indexes swung sharply in August, as the continued unraveling of the housing boom rattled investors. Nearly 180,000 homes entered foreclosure in July, almost double the figure for the same month last year.

These were among more than 1.1 million homeowners who faced default notices, auction sale notices, and bank repossessions in the first seven months of this year, according to Realtytrac, a firm that maintains a tally of foreclosures.

More than half the properties in foreclosure proceedings involve high-risk, so-called subprime loans. Lenders have lured many working people and middle-class families into borrowing at high interest rates and fees on the promise of continuously rising home values.

“Global financial losses have far exceeded even the most pessimistic projections of credit losses,” Federal Reserve chairman Ben Bernanke announced in a speech yesterday. The losses “have not been confined to mortgage markets,” he said. “Diminished demand for loans and bonds to finance highly leveraged transactions has increased some banks’ concerns. He noted that these banks “have become more protective of their liquidity.”

U.S. president George Bush gave a speech the same day promising measures to “help American families keep their homes.” Bush outlined a few proposals to allow debt-burdened homeowners to refinance their mortgages and keep paying. “It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford,” he said.

The housing boom reached a peak in 2005, as the market for “subprime” home loans hit a fever pitch. High-interest loans such as adjustable rate mortgages—which start out with a few years of interest-only payments then “reset” to substantially larger payments—represented a growing share of the mortgage market.

“The newer mortgage products, such as ‘piggyback,’ ‘liar loans’ and ‘no doc loans’ accounted for 47 percent of total home mortgage loans issued last year,” financial commentator John Mauldin noted in his August 17 online newsletter. “At the start of the decade, they were estimated to be less than two percent of total mortgage loans. As a result, homeowners have never been more leveraged: the average amount of debt as a percentage of a property’s value has increased to 86.5 percent in 2006 from 78 percent in 2000.”

Thousands of working people who had previously been denied credit purchased homes with these loans in the last several years. Many are now seeing their mortgage payments balloon beyond their income as the price of their home sinks.

Many more are expected to lose their homes in the coming months.

“We have just seen $197 billion of mortgage resets so far this year,” Mauldin wrote August 2, referring to the point in an adjustable rate loan where the payments shoot up. “The first six months of next year will see more than the total for 2007, or $521 billion. This suggests to me that the number of foreclosures is due to rise dramatically.”

Sections of the middle class also bought such low-payment, high-risk loans for “investment homes.” With little money down, they thought this was an opportunity to make relatively easy money, reselling them as housing values increased.

Between 21 and 32 percent of the loan defaults in California, Florida, Arizona and Nevada are on “investment homes” that are sitting unoccupied and losing value, the Mortgage Bankers Association reports.

Working-class and middle-class debtors aren’t the only ones affected by the home mortgage crisis. The owners of U.S. capital, seeking profit rates they cannot obtain through investment in production of saleable goods, have increasingly turned to stocks, bonds, and myriad forms of speculative capital investment, and are sitting on a mountain of debt.

Since the early 1990s, banks, hedge funds, and investment firms began pouring money into bundles of debts—home loans, business loans, car loans, credit card debt—pooled together by the lender. Agencies such as Moody’s and Standard and Poor’s gave them ratings and they were sold like stocks. As the housing market ascended, the ratings got higher, the gambles riskier, the credit more free-flowing, and the profits larger. Now a number of these funds are posting big losses.

In June the investment banker Bear Stearns announced that it was suspending redemptions on its impressively titled High-Grade Structured Credit Strategies Enhanced Leverage Fund because the “investment manager believes the company will not have sufficient liquid assets to pay investors.” The hedge fund was down 23 percent for the year as of April 30. Countrywide Financial, the largest U.S. mortgage lender, has seen its stock value drop by more than half from February to August.

The number of unsold homes hit a record of 4.4 million in May. As a result, residential construction has been cut back. The Mortgage Bankers Association estimated that 12,000 jobs were lost in the building industry in July.
 
 
Related articles:
Behind deflating housing bubble
Foreclosures, evictions hit Georgia workers hard  
 
 
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