Has the subprime mortgage mess trashed your neighborhood? This is a mess with no clear winners. The borrowers are losing their homes, the lenders are losing their payments, the investors that invested in mortgages are losing their retirements.
And now, in true congressional style, lawmakers have invented a plan called HOPE NOW that requires the nations six largest lenders to send out letters to borrowers that might qualify for a 30-day pause to re-negotiate their loans.
These lenders are Countrywide Financial, Bank of America, Citigroup, JPMorgan-Chase, Wells Fargo and Washington Mutual, firms with marbled lobbies. The bosses are probably too busy cooking up new deals to write the letters theyll need to send, so Im supplying one they can just cut and paste:
Dear (Borrower name here):
We screwed you.
You trusted when we told you that the pages of fine print were required by law, and didnt mean anything. All you heard was the low down payment and the low monthly payments for the first two years, because thats all we told you.
We have abused your trust. We owe you big time.
With sincere apology,
(Lender name here.)
And what will the lenders get in return for granting this pause? Theyll have the chance to trade in the failing loans for loans guaranteed by, you guessed it, your tax dollars under Fannie Mae and Freddie Mac, two government-private sector guaranteers that have a line of credit with the US Treasury, exemption from taxes, and other government protections.
The letter should be mailed to borrowers, and plastered on billboards and posters in the subway, but its only a first step. Step two is to create fair, new loans and create regulations that will prevent deception. Step three is to provide consumer education that tells the truth about credit.
The education will explain that with Adjustable Rate Mortgages, lenders raise their rates according to a schedule written into loan documents. In some cases, the rate starts artificially low and increases after two years. Going up by about 35%, the increase makes up for the low initial rate and means that if a borrower begins with a loan payment of, say, $1,000, it can increase to $1,350.
To sell these Adjustable Rate Mortgages, or ARMs, the lenders told borrowers that their income will rise, so the borrower can pay more in the future. Then the lenders said that property values rise. Everywhere and always. So that you can easily sell your home to cover the debt.
The older and wiser among us can see immediately that both premises may or may not be true. But, for the most part, people who took these loans are borrowers with little experience. A couple of years ago, when I first heard about these loans, I asked a banker about them. He said, I really hate it when I have to make one of those, as if it was the consumers driving the demand.
Consumers werent, and he knew exactly what he was doing.
To anyone experienced with community-based solutions to problems, the answer to the crisis is to look for local answers. The best solution for getting money for a big purchase into the hands of beginner borrowers would be for wealthy Uncle John or neighbor Betty to loan the money, and to write a legal note and collect interest. The lender benefits by having a good, young neighbor and by having his money in a relatively safe investment. And the kids have a fair loan.
But debt, while once held by communities to pay for growth in communities, is now held by multinational corporations. According to this corporate model, if you borrow from a bank, the loan you took out for your house was bundled with many others and sold by your bank to another corporation, then perhaps bundled again and sold again. Subprime loans, promising big returns in the future, were prized by these lenders. Their thinking was that when one bundle of loans crashes, values in the other bundle protect the lender.
But, on a neighborhood basis, the devaluation of a few properties affects everyone on the block. A home sold at below-market value forces other sellers to take a loss and pretty soon the entire neighborhood appraises at below the market.
The community-based transaction, common in the olden days, has gone away. Uncles and neighbors still have money, but the habit of community-based solutions has disappeared. The savings of Uncle John and neighbor Betty were once in local banks, credit unions or savings and loans. But, today, local banks are hard to find and individual wealth is tied up in 401 Ks and mutual fundscorporate stocks and bonds.
The mortgage loan crisis is the most visible result of this bad pattern of lending and borrowing, but stay tuned. Just over the horizon are predatory loans of other kinds credit cards, automobiles, educational loans. And, like the solutions for the predatory real estate loans, Congresss answer will be to bail out the lenders.
Margot Ford McMillen farms and teaches English at a college in Fulton, Mo. Email firstname.lastname@example.org.
From The Progressive Populist, March 15, 2008
Subscribe to The Progressive Populist