Vol. 71/No. 13      April 2, 2007

A survey, released March 13 by the Mortgage Bankers Association, revealed that 0.54 percent of home loans entered foreclosure in the fourth quarter of last year—the highest rate in the survey’s 37-year history.

Many of these defaults are from working people. Because their income, net worth, and credit rating were low, many workers were lured—on the promise of ever-rising home values—into borrowing at exorbitant interest rates and fees.

This mortgage racket, which lenders call “subprime,” exploded over the past decade—increasing from 5 percent of all mortgage lending in 1994 to 19 percent in 2004.

The financiers who peddled these usurious loans targeted sections of the population that have often been denied credit—oppressed nationalities and the more exploited layers of the working class. At the height of the housing boom in 2004, nearly a third of mortgages sold to Blacks were in this high-interest subprime category, compared to 9 percent of those sold to whites.

At the same time, easy credit and rising real estate values fueled a boom in home ownership. From 1994 to 2003, nearly 9 million households joined the ranks of “homeowners”—increasing U.S. home ownership rates from 64 percent to 68 percent. Of that figure, 1.2 million were Black and 1.9 million were Latino.

Now many can’t make the payments. In the fourth quarter of 2006, nearly 18 percent of the subprime mortgage holders were either behind on payments or in foreclosure.

Ruthie Hillary, 70, from Pittsburg, California, was wooed last year by a broker into refinancing her home with a “senior citizen’s” loan from New Century Financial. She was promised no payments for several years, her lawyer told the Wall Street Journal.

Instead, her monthly payments jumped from $952 to $2,200 a month. By the year’s end she faced foreclosure.

New Century, once the second-largest subprime lender, has seen its stock decline from nearly $52 a share last May to $1.66 now, as the defaults mount. More than 24 such mortgage firms have gone belly-up since January 2006.

The “senior citizen” scheme was just one of the expensive loans these outfits promoted.

Others include “interest-only” loans, where the borrower pays only interest for the first few years. A pamphlet the U.S. Federal Reserve issued last year cautions that after the initial honeymoon you may experience “payment shock. Your payments may go up a lot—as much as double or triple.”

Another scheme starts with a fixed interest rate. After two years the rate changes and a “margin” is added—greatly increasing the payments. Those with bad credit are prime targets for such loans on the promise they’ll get a new loan if their credit improves.

The Wall Street Journal, which was among the big-business dailies that touted this housing market "miracle" a couple years ago, is now running items like a feature in its March 12 edition headlined, “Why Your Home Isn’t the Investment You Think It Is.”

“Buying a house with a long-term mortgage is just another form of renting,” the paper cautions. “Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house.”

It added, “Buy at the wrong time—like during the kind of buying frenzy that much of the country has just experienced—and you could end up wishing you had rented instead.”  
 
 
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