Mortgage Foreclosures, Housing, and the Current Economic Crisis

The economic crisis we are currently experiencing had its origin in an economic “bubble,” involving mortgage rates and real estate trading, that started in the United States in 2001 and ended in mid-2006.

An economic “bubble” is a distortion in the economy that occurs whenever a major commodity or service becomes such an object of speculation that its’ price hyperinflates far beyond its’ actual value. Such a trend will only continue for a certain amount of time before the bubble bursts, and prices begin to fall. Unfortunately, one of the characteristics of a true economic bubble is that it often sets off a chain reaction throughout the economy, causing unusual expansion while it is still growing, and massive losses when it implodes. That is exactly what has happened with the real estate market.

Frenzied buying and selling of homes, combined with a shortage of available housing plus easy credit, led to rapid increases in the market prices on all available housing in the U.S. For years the banks, real estate agents and investors in real estate securities on Wall Street were making money hand-over-fist.

In the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market.

As more and more investment poured into the housing market, especially into mortgage-backed securities, the competition between banks and investment firms heated up. Soon, the banks opened-up credit on loans to more and more “sub-prime” borrowers—that is, borrowers who would not ordinarily qualify for loans because they didn’t have enough financial resources on hand to guarantee their ability to pay a loan off. The banks felt secure that the seemingly endless flow of investment funds and the constantly expanding economy would cushion them against the the likelihood of numerous defaults on these loans. Meanwhile, they would milk these sub-prime borrowers for every penny they could get.

Approximately 80% of U.S. mortgages issued to subprime borrowers in the 2001-2006 years were adjustable-rate mortgages. Adjustable-rate mortgages usually allow the homeowner to pay low monthly rates for a specified period of time (usually 1-3 years); after that , the monthly rates go up. The increased rates are usually based on increases in the general interest rates on the market. The borrower is the one taking the greatest risk in these kinds of loans, because even a small increase in interest rates can translate into a major increase in their monthly payment.

The borrowers usually convince themselves that they’ll be able to handle the increased rates by working more, cutting corners, or whatever. And, as long as the market value of homes keeps shooting up year by year, they may have the option of refinancing their original loan or taking out an “equity line of credit” (borrowing more money from the bank based on the increased value of the home, in order to help cover their costs), or, push-come-to- shove, selling the home based on its increased value, then re-buying a cheaper home with the profits, while paying off the original mortgage. This was how the game was really played—for those smart enough to figure out “the rules”.

After U.S. housing prices peaked in mid-2006 and began a sharp decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Because of this, securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The net result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit both in the U.S. and around the world. Many banks and investment firms, including some of the largest, have collapsed altogether.

As U.S. housing prices declined, major foreign financial institutions that had borrowed and invested heavily in subprime mortgage-backed securities also reported significant losses. Defaults and losses on other loan types also increased as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the multi- trillions world-wide.

So far, here in the U.S., over 4 million homes have been foreclosed on since mid-2006. Because consumer spending drops drastically whenever housing values decline, the entire U.S. economy has been in a tail-spin throughout this period. Over 10 million jobs have been totally eliminated due to a dramatic drop in consumer sales and the resultant decline in production.

Throughout this whole process, California has been one of the most heavily hit states in the union. This is because California was one of the principal areas where the housing bubble developed, due largely to it’s connection with the Pacific Rim economies, and the fact that large numbers of people have migrated to California from other states, as well as from other countries, in order to benefit from its economy.

Here in Los Angeles County, there have been over 100,000 mortgage foreclosures within the past twelve months. Approximately 60,000 of these foreclosures have occurred here within the City of Los Angeles itself.

Nationally, there are currently over 7 million American households that are 1-3 months in arrears in meeting their mortgage payments. 6 million of these are more than 60 days late.This means that one in seven American households is receiving foreclosure notices from their bank or mortgage-holder during any given month. Not all of these homes will fall fully into foreclosure, but the fact that so many families and individuals are scraping by so closely to the financial default line is a symptom of just how seriously the economic crisis is impacting our communities on the “ground level”.

Thus far, while the banks and Wall Street stock investors have been more than successful in getting hundreds of billions of tax-payer’s dollars in federal financial assistance to ward off the effects of a crisis that was largely caused by their own speculative practices in the mortgage-trading markets, homeowners, who have paid most of these taxes, have taken a back seat in the process of applying “bail-out” policies to put a brake on the collapse of our economy.

As a result, not only are larger and larger numbers of American individuals and families, of all economic backgrounds, finding themselves totally dispossessed of their homes and deep in debt, but a much larger proportion of the entire population is finding its financial resources being rapidly depleted, and both their long and short-range economic prospects are sliding further and further in the same downward directions.

Due to the general decline in property values, literally millions of homeowners have experienced a significant loss in equity (value) in their homes. In many cases, they are paying for mortgages much higher than the current market value of the home itself, whether or not they’re having trouble meeting their payments. The total loss in U.S. homeowner equity since 2006 is well over 4 trillion dollars—three times the 1.4 trillion dollar national debt that so many have been so agitated about over the past several years.

Many homeowners who have managed not to fall into foreclosure or miss their monthly mortgage payments as of yet, have only managed to do so by leaning more and more heavily on credit cards in order to cover their day-to-day expenses on everything from food, clothing, transportation, and general household needs to their personal and family entertainment. Overall, Americans are now carrying about $930 billion in revolving debt, a type of debt that is almost entirely made up of credit card balances, according to the most recent data from the Federal Reserve. As of March, credit card holders were paying an average interest rate of 13.08 percent on that debt. It is those who have lost their jobs or suffered reductions in their working hours or rates of pay who are most likely to be forced to use their credit cards; and at a time when most other consumers are trying to drastically cut back on credit card use and when monthly interest rates and penalties are steadily being raised by the banks.

This dynamic, in which credit card debt is now very closely tied to unemployment, underemployment, and declining personal solvency, has resulted in massive losses to the banks and other card lenders. In 2009, banks were forced to write-off over 83 billion dollars in credit card debt as totally uncollectible, due mostly to unemployment. During the first two quarters of this year, defaults on credit card debts averaged between 10-12% for most credit card issuers, despite efforts to limit credit card use by more “risky” clients.

While the Obama administration has earmarked over $75 billion for mortgage relief, through a variety of means, including the renegotiation of mortgages, the banks have been dragging their feet in actually helping to mitigate the effects of the collapse of the real estate market on mortgage borrowers. As a result, mortgage foreclosures hit the highest rates on record last year (over 985,000) with everyone predicting an even higher rate this year. (1-1.3 million homes will be lost according to both HUD and the National Association of Mortgage Lenders.) Up until March of this year, less than 200,000 homeowners had successfully been able to re-adjust their loans through programs sponsored solely by the banks, and less than one third of the 1.2 million applicants for government-sponsored programs have been able to do so (only 340,000), as of July 15th.

Again, as the past 3 years have illustrated, when the housing sector of the economy is “in the red”, the entire economy is dragged down. The failure to end the decline in housing values is the largest single factor militating against a general recovery of the consumer market, and tightening of consumer spending restricts production, sales and employment. According to the Federal Reserve Board, it is unlikely that the 10 million jobs that have been totally eliminated from our economy due to these conditions could be replaced in anything less than 5-7 years—IF the economy recovers. But, if the latest figures on foreclosures, new housing sales, consumer sales, and bank failures are any indication, which they are, we are about to experience another major drop in property values, which means that the economy as a whole will fall even deeper into recession/depression sometime within the next 6-9 months.

In the midst of all this chaos and economic confusion, groups like the so-called “Tea Party” have emerged, intent on promoting a politics of devisiveness and scapegoating. They, and other similar groups have consciously worked to undermine the functioning of government in general, and the Obama administration in particular. Instead of attacking the problems that plague our society, our economy, and our political system, they have done everything possible to hamstring efforts to relieve the effects of crisis on those most in need of help—even their own members!

It is in this situation that the Coffee Party has emerged. The Coffee Party is a grassroots movement of concerned Americans of every ethnic and political persuasion. The Coffee Party works to give a voice to Americans who want to see cooperation within governmentand within our communities to develop creative solutions to our pressing social, economic and political problems. We see government in itself as not the enemy of the people, but rather as a vehicle that must serve our collective will. We believe that we must participate in the democratic process in order to address the challenges that we face as Americans. As voters and grassroots volunteers, we support leaders who work toward positive solutions that benefit all Americans, and we hold accountable those who obstruct those solutions. The Coffee Party is not affiliated with any established political party. The Coffee Party is fully committed to restoring civility in political discourse, mutual respect in personal and political relations and genuine democracy in the day-to-day workings of our society. We are, in fact, a non-partisan democracy movement.

The Campaign To Stop Mortgage Foreclosures
Here in Los Angeles, the Coffee Party has initiated a campaign to Stop Mortgage Foreclosures.

  • We have begun to educate ourselves on the origin, significance and character of the the mortgage foreclosure crisis, and its’ relationship to the broader economic crisis.
  • We have begun to work with community-based organizations and local elected officials to identify and address some of the most critical issues connected with the foreclosure crisis.
  • We have initiated public actions at local banks to draw public attention to the foreclosure issue and the need to organize our community to bring pressure on the banks and public officials to provide immediate relief to families and individuals who are in danger of losing their homes due to the current financial crisis. We agree with President Obama when he says: “Our commitment is to the taxpayer. Our commitment is to recover every dime that the American people are owed.We want our money back—and we’re going to get it.”
  • We are now in the process of initiating a door-to-door effort to directly organize homeowners, tenants and all other community residents who want to bring an end to the massive loss of homes and property in our communities. Part of this effort is directed toward connecting homeowners with free, legitimate counseling services that can help them negotiate on their own behalf with banks and lending institutions to save their homes. The other part of our campaign is to organize homeowners and other community residents politically to ensure that everything which can be done by local, state and national government to assist homeowners, tenants, small businesses and our community at large is being done—and with dispatch. Our campaign slogans are: ” Wake Up, Stand Up”, “Bail Out Main Street, Not Wall Street!”, and “Stop Mortgage Foreclosures Now!”.

Members of the Echo Park-Silver Lake Chapter of the Coffee Party have been working with a number of community organizations, local elected officials and concerned individuals who understand the seriousness of the foreclosure crisis and the need to activate our communities to respond to it. We invite all who share our concerns and our commitment to grassroots democracy to join us in this effort at whatever level seems appropriate in terms of time, energy and material resources. We are more than willing to meet with any such groups or individuals to provide more specific information about the Foreclosure Campaign and explore the possibilities of a cooperative effort, at any level.

Current Plans and Needs
Currently, we are training volunteers who will work in teams doing door-to-door outreach in areas where foreclosures and pre-foreclosures are concentrated. We will be providing interested homeowners and community residents with free information on what to do if you are having trouble making payments, or your bank has already served a foreclosure notice.

Congressman Xavier Becerra has agreed to host a town hall meeting with homeowners who we’ve connected with, probably in September, to hear their issues and see what can be done about their needs—both in Congress, and here in his district. We will be doing similar work with other elected officials as well.

El Centro del Pueblo has agreed to help us to translate some of our information from English to Spanish. They have indicated an interest in assisting us in other areas as well.

We are certainly looking for any assistance with translations that we can get. We are also especially interested in Spanish-speaking volunteers to do door-to-door work.

— Los Angeles Coffee Party, Mortgage Foreclosures Task Force

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Comments

  1. says

    Stop One West Bank from evicting the Gudiel Family from their home. Sign the petition at http://www.makebankspaycalifornia.com. #makebankspay

    After the sudden death of her brother and cut banck at work Rose fell just 2 weeks behind on her mortgage payment. She was then put on a loan modification roller coaster. IndyMac, now One West Bank, put her home through foreclosure. The family is now awaiting eviction.

    Rose and her family have decided to stay in their home – no matter what.

    Help the Gudiel’s keep their home.

  2. Nate says

    Boy ;

    Am I ever glad I ignored all those ‘ smart ‘ people who told me to ‘ leverage the equity ‘ (MEANS : re-mortgauge) in my crappy little Ghetto home, I’ve been saying this crazy housing bubble wasn’t good nor sustainable but I’m ” stupid ” apparently .

    Of course , most of those same folks are now homeless or living in squalid apartments or someone’s garage or an old , beat up motorhome in the desert (shudder) .

    Me , OTOH , I’m doing just fine in my little house on the corner , no AC , nothing fancy atall but it’s now mine , all mine .

    regan said ‘ greed is good ! ‘ and too many otherwise good Americans jumped on that bandwagon , no one to blame but themselves now .

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