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Economy

ORIGINAL FRENCH ARTICLE: Subprime ou subcrime?

by Jacques Coubard

Subprime or Subcrime?

Translated Monday 20 August 2007, by Henry Crapo

How the real-estate loans favored by the "Ownership Society", so dear to George W. Bush, led to this crisis.

The rhythm of real-estate failures in the United States increased again at the end of last week. Unhappy property owners who had been seduced by attractive loans have seen their American dream of house and garden turn to nightmare. By tens of millions they signed contracts offered without verification of their revenue or financial solvency. The new system of "subprime" loans
 [1]
has led to what may well be the embezzlement of the century.

The insanity of cheap loans in the year 2006 amounted to 605 billion dollars, compared with 120 billion five years earlier. Defaults in payment for over two months have doubled since the year 2005. Today, they amount to 90 billion dollars. In one year, thirty loan companies have slid the key under the door, five of them bankrupt.

In the beginning, the market for "subprimes" appeared very profitable for the credit organizations. The lenders resold their contracts in sophisticated forms to speculative funds, to pension funds, and to banks avid for profits that would permit them to finance the insatiable appetites for concentration and purchase of large enterprises. The whole system was crowned by the electoral slogan of George W. Bush, vaunting the merits of the "ownership society" in which everyone could own a home. An opportune reform of mortgage loans and the elimination of government controls on two national loan institutions, Fanny Mae and Freddy Mac, encouraged household endebtedness. It was thus a question of abandonment of safeguards already in place for forty years that permitted a new inflation of household endebtedness, which reached 120% of household income, on the average, to increase consumption and, artificially, economic growth. The real estate market ran in high gear.

All went marvelously well, except that the vertiginous increase in credits these past years soon forced house-owners to sell. The prime rates for lending, fixed by the Federal Reserve Bank, saw seven consecutive rises. Modifiable rates on contracts, hidden from sight by the loan societies, rose by four percentage points in two years, announcing an insupportable escalade. The continued euphorie in housing sales guaranteed profits in the prospect of resale of the house. This situation held until the year 2003, when the first defaults in payment created a downward pressure on housing prices. The following year, the fall in prices attained a degree that made it impossible to renegotiate the loans, with the house unsaleable, even at below the purchase price.

Households caught in this trap are forced to seek exile in mobile-home camps such as exist at the periphery of cities, or else declare bankruptcy. Those most affected are the Afro-Americans and Latin American immigrants. As for the loan companies, they find themselves forced to cease operation.

Finished are the gifts to future home-owners and investors looking for a fast buck. Loans are more costly, and monthly installment payments for those who did not need to enter the "subprime" market have in turn become insupportable for the wealthier sectors. This is a matter of concern for hundreds of millions of people in a country where 1% of the population holds a third on the national wealth.

The scandal of the "subprimes" poses a question is a country where so many of the organisms of control had ceased to generate warnings. A national organization (FIDO) charged with evaluating the honesty of money-lenders never uttered a sound. As for the press, it has showed rare discretion with respect to this embezzlement, baptized "subcrime" by Danny Schlecter, author of the film entitled "In Debt We Trust" (replacing the phrase "In God we Trust", printed on the US dollar).

We can discover, perhaps, the cause for this silence in the words of the president of Boston Properties, Morton Zuckerman. This credit company is also owner of the New York Daily News. He recently declared that "No one knows how serious this crisis is". This observation is a bit late in coming. Governors, district attorneys, associations announce their legal processes they have initiated. How far will this all go?

Another reason for astonishment, the marked lack of interest, until now, on the part of the Democratic candidates and the labor unions (AFL, CIO, and SEIU), in a situation that strikes a hard blow against the blue collar workers, and against white collar workers as well.

[1What are these famous "risk mortgages"?

In the jargon of the financial markets, the term "subprime" designates risk lending. The so-called "prime market" is reserved for those who can offer all guarantees of repayment. The "subprime" mortgages are granted to those with whom one does not raise questions concerning revenues, nor endebtedness on multiple credit cards in their possession, nor other purchases, such as automobiles, for example.

These "facilities" are accorded to borrowers. No immediate reimbursement is demanded, or there is reimbursement of interest only for five or even for ten years. The rates of interest remain fixed during the first two or three years, but climb rapidly in succeeding years. The house or apartment remains under mortgage, and can be siezed in case of default of payment.

While the prices were rising these past years, renegotiation of payments permitted easing of payments, which was transformed into revenue. This was the "wealth effect". Then increase in mortgage rates and the fall in housing values rendered hundreds of thousands of families incapable of repaying their loans.


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