Sub-prime crisis a house of cards waiting to collapse

US President George W. Bush recently announced a “Mortgage Rescue Plan” in an effort to stave off the further development of a major financial crisis that began with the US sub-prime mortgage market.

This is the market which typically involves those on low wages or with poor credit ratings (the latter based on an analysis of their ability to meet loan repayments).

These are by and large the same persons from whom surplus value is taken as they engage in work that is social in nature. Rather than that surplus value, taken from the people, going back into services or investments for the benefit of the people (ie socialism), it is taken as profits by the tiny handful of owners and managers of the means of production (ie capitalism) .

The squeeze is always on the workers to lower their cost to the employers so that the latter can extract even greater profits. Capital, by its nature, must constantly seek to reproduce its own value over and over again.

It can do this by investing in new productive capacity, and it can do this by investing in other capital for which there is a guaranteed rate of return.

The private equity buyout is a relatively new form of the latter: a small amount of private capital is used to obtain a loan which enables a publicly listed company to be bought out and “taken private”. The loan is transferred to, and becomes a debt liability for, the bought out company, not for the buyer which took out the loan. An asset stripping regime is implemented as quickly as possible, and the bought out company then resold, with its debt, at a great profit for its private equity purchasers.

Similarly, debt generated through personal loans to working people can be bundled up and sold by one loan institution to another: from a finance company to a bank, from one bank to another, and so on. Each time the debt is sold on (the buyer hopes to gain a source of income through repayments on the loans in the package) a profit is made through no productive utilization of the capital value of the loans, and their artificially-inflated value continues to be a burden on the original borrowers who are finding their own cost of living (food, petrol, various taxes and charges etc) is making it harder and harder for them to meet their loan repayments.

The onsale of the debt incurred by working people with a limited or diminishing capacity to service the debt creates a veritable house of cards, or because it involves people, a wavering human pyramid, which is highly vulnerable at its foundations. If one card at the bottom of the house falls, or one person in the human pyramid collapses under the strain, then there is a flow-on effect to the whole structure.

And this is what has prompted Bush’s “rescue package”. The sub-prime mortgage crisis has not only exposed the working class borrowers to foreclosure and sale of their loan-purchased property, but it also makes vulnerable some very large financial institutions whose greed for growth and profit has them currently at the end of a feeding frenzy of financial gluttons - the last holders of a debt parcel in an international game of “pass the parcel”. In this game, more and more of the debt, in larger and larger parcels, is passed to (purchased by) bigger and bigger financial institutions.

It is their interests that are being protected, indeed that of their whole system, by the Bush Mortgage Rescue plan.

In a country where some people, tele-evangelists for example, market their worship, the most blindly religious are those who worship the market.

Blinded, Samson demolished the temple of the Philistines, pulling down its two central pillars, in a conscious act against his oppressors.

If the sub-prime mortgage crisis develops any further, it may well be a case of the temple of capitalism being brought down by its own blind adherents and supporters, the oppressors themselves.

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The article that follows is from the website of the Communist Party of Canada (Marxist-Leninist):

Dark World of International Usury

U.S. Economic Crisis and the Mortgage Rescue Plan

- K.C. Adams -

President Bush and his Treasury Secretary Henry Paulson announced a Mortgage Rescue Plan December 6. The plan was characterized as a response to the crisis of home foreclosures and falling house prices that is sweeping the U.S., especially in California, Florida, Michigan, Pennsylvania, Nevada and Ohio.

This year, falling house prices have diminished existing home equity by over $1-trillion. Home foreclosures have hit an all-time high in the third quarter. The Mortgage Bankers Association said the percentage of mortgages entering the foreclosure process reached 0.78 per cent during the July-to-September period surpassing the previous high of 0.65 per cent set in the second quarter. The percentage of homeowners who have fallen behind on their mortgage payments climbed to 5.59 per cent in the third quarter -- the highest level since 1986. The percentage of subprime mortgages in foreclosure reached a record of 4.72 per cent, a percentage poised to increase dramatically as more introductory "teaser" interest rates reset higher.

The mortgage crisis is one aspect of a gathering economic storm leading inexorably towards a recession, which emerges from the trend towards relative and absolute impoverishment of the U.S. working class. The neo-liberal anti-social agenda is exerting unrelenting downward pressure on the U.S. standard of living, resulting in the inability of more and more people to pay for the necessities of life including their mortgage or rent, and failure to keep up with their car, credit card and student loan payments. Neo-liberalism allows to flourish the full destructive consequences of the basic contradiction within the U.S. capitalist economy between its aim to protect and expand private wealth as much and as fast as possible (mainly in the form of capital) and in so doing restrict the claims of the working class on the added-value it produces and distributes, and limit the social programs on which the people depend.

The U.S. state and political system are firmly under the control of the most powerful monopolies and are incapable of renewing themselves or the economy. Their response to every crisis is failure, war and repression. This mortgage plan is yet another example of the ruling elite failing to address the real underlying economic problems and contradictions. Only the working class armed with its own advanced consciousness and independent political program can save the U.S. from a looming economic, political, military and social disaster.

Mortgage Rescue Plan

The U.S. economic plan is typical in its origin. The executive branch through the Treasury Department acts as a coordinator for the most powerful owners of monopoly capital. The plan is essentially under the private control of those monopolies directly involved and does not include any government restrictions on finance capital. It merely shifts a small amount of the burden of the crisis for a short time from one area to another without addressing the reality that something that is not produced cannot be consumed. High real estate prices, which were deliberately inflated by monopoly capital, do not reflect intrinsic value and when houses or other real estate are realised at high prices money must be taken from elsewhere in the socialized economy. The same holds true for the parasitical interest payments and fees paid on the inflated mortgages. The chickens are coming home to roost and this plan is a pathetic smokescreen clouding the scale of the problem and the ramifications for the entire U.S. socialized economy and many institutional investors worldwide.

Treasury Secretary Paulson, who is unelected as are most members of the U.S. Cabinet, made this very clear in his remarks. (Paulson's brief remarks are analyzed in another article.) Mr. Paulson is the former CEO of Goldman Sachs one of the world's largest centres of finance capital, which is currently mired in losses of billions of dollars of unrecoverable outstanding loans.

It should be remembered that when it comes to matters of high finance including the dark world of international usury, elected officials play a very limited role. For example the U.S. Federal Reserve, which is a private consortium of the most powerful U.S. financial institutions, plays a distinctly state role issuing U.S. currency, lending newly issued money to private banks, setting interest rates and directing U.S. imperialism's campaign for worldwide dollar hegemony.

The voluntary plan put together by the Treasury Department and certain of the most powerful monopolies sets guidelines to identify qualified homeowners who would be eligible to avoid having their subprime mortgages reset at a higher interest rate.

The Treasury Department issued the following guidelines:

- Plan to focus on subprime, first-lien, adjustable-rate mortgages, and particularly once-popular 2/28 and 3/27 loans. Under such plans, mortgage rates were fixed only for the first two or three years of a 30-year loan.
- Loans originating between January 1, 2005, and July 31, 2007, whose interest rates will reset for the first time between January 1, 2008, and July 31, 2010, would be eligible for a five-year interest-rate freeze.
- Only owner-occupied homes would qualify for a rate freeze.
- The plan is not binding on all mortgage industry players, but would stand as a set of best-practices and guiding principles.
- Some plan provisions might be applicable to troubled prime and Alt-A loans, though not second liens.
- Plan says target borrowers should be contacted about the program four months prior to the date their interest rates are set to be increased.
- Borrowers must be making timely payments at present and not have missed two months of mortgage payments in the previous year to qualify for a rate freeze.
- Eligible borrowers cannot have a loan-to-value ratio of more than 97 percent and must be facing an interest rate spike, typically 10 percent or greater.
- Mortgage servicers will help borrowers refinance in a way that avoids costly pre-payment penalties for abandoning the loan early.
- The program identifies three general classes of troubled borrowers according to their ability to pay, two of which potentially would be eligible for relief:

1) Strong borrowers facing a rate-reset. They will be shepherded into conventional, fixed-rate mortgages, such as those available under the Federal Housing Administration.

2) Borrowers who may be eligible for a rate freeze. A formula comparing a borrower's current credit score with a score assessed at loan origination will help determine whether a borrower can get a "fast-track" rate freeze.
Borrowers with credit scores of less than 660 that have not increased by 10 percent or more since the origination of the mortgage will be fast-tracked for a modification.
Borrowers whose credit scores have climbed may still qualify for a freeze if they meet other tests.

3) Struggling borrowers who are deemed not able to afford even a modified loan. They would face foreclosure.
Secretary Paulson explained why a collective approach was necessary: "The current system for working out those problem loans would not be sufficient to handle the anticipated 1.8 million owner-occupied subprime mortgage resets that will occur in 2008 and 2009." Economists estimate however that the plan would only affect some portion of the less difficult cases about 10-12 per cent of all subprime Adjustable Rate Mortgage resets. It would exclude those who are delinquent on their payments -- about 22 percent of all subprime borrowers, according to First American Loan Performance. Among those not qualified are borrowers whose introductory rates expire before January 1, 2008. This excludes around $57 billion in subprime loans scheduled to be reset at higher rates in the final three months of this year.

Mortgage companies could also exclude borrowers who they conclude are making enough money to afford higher monthly payments. Barclays Capital, extrapolating from a similar program recently unveiled in California, estimates that only about 12 per cent of all subprime borrowers or 240,000 homeowners would get any relief.

Comments in the monopoly-controlled mass media reveal disagreement within the capitalist class regarding the plan:

"The critical component of President Bush's program will be what he provides to move worthy homeowners into long-term fixed rate mortgages . What is needed is a mechanism to provide permanent financing -- fixed-rate, long-term mortgages." - Peter Morici, U. of Md.

"Without question, the Bush administration's mortgage rescue plan will exacerbate, not alleviate, the problems in the housing market. As the plan will sharply reduce the ability of new buyers to make purchases, it really amounts to a stay of execution and not a pardon . The result [of the plan] will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan." - Peter D. Schiff, Euro Pacific Capital

"One thing should be clear at the outset: investors in these assets (securitized mortgages such as Asset Backed Commercial Paper) will be much better off (i.e. the value of their claims will be higher than otherwise) with this proposal rather than the alternative of letting millions of homeowners default on their mortgages." - Nouriel Roubini (Wall Street Journal)

"Some analysts say that more than a third of all subprime borrowers could have qualified for cheaper conventional loans at the outset." - Associated Press

"At least one thing is clear about President Bush's plan to help people trapped by the mortgage meltdown: it is an industry-led plan, not a government bailout. Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers. The plan was the target of criticism from consumer advocates who said its scope was too narrow, and from investment firms, who said it went too far. Others warned that the plan, by letting some stretched homeowners off the hook, could encourage more reckless borrowing in the future. Investors typically lose 40 percent or 50 percent on homes that go into foreclosure, and the cost of shielding borrowers from a big jump in rates can be much less than that.

"The Mortgage Bankers Association reported that the number of new foreclosure proceedings hit an all-time record in the third quarter, and that the delinquency rate on mortgages climbed to the highest level since 1986.

"Tom Deutsch, deputy director of the American Securitization Forum, which represented investment funds in the negotiations, made it clear that any rate freeze would be strictly voluntary and based on what investors decided was in their self-interest.

"This is not a government bailout program," Mr. Deutsch said. "This is an industry-led framework for providing the best market standards and practices. There is no mandate here.

"'This grossly inadequate plan is likely to harm the president's desire to close the minority homeownership gap and create an ownership society,' said Robert Gnaizda, general counsel for the Greenlining Institute.

"Some Wall Street analysts were equally unenthusiastic. 'This plan only really amounts to a set of recommendations for lenders that is sure to meet some resistance from investors' in the mortgage-backed securities, wrote Paul Ashworth, an economist at Capitol Economics.

"'Why would anybody in his right financial mind agree to a five-year price freeze, especially when we're staring in the face of possible inflation?' asked Roger Kirby, managing partner at Kirby McInerney, which has represented investors in class-action lawsuits over securities. 'Mr. Paulson has overestimated the generosity of people on Wall Street.'" (Excerpts from On Mortgage Relief, Who Gains the Most? New York Times)

"Just as the U.S. President was unveiling details on Thursday of a five-year mortgage rate freeze, Standard & Poor's Corp. issued a grim warning about the plan's impact on the bonds at the root of the continuing credit crunch. The freeze, S&P said, could leave bondholders much more exposed to losses from the mortgages that go into default. While keeping a lid on rates may lower the risk of mortgage defaults, there will also likely be a matching reduction in the 'cushion' built into securities, known as 'excess spread,' the rating agency pointed out. Critics also worried that a freeze is only a temporary fix, putting off the inevitable day of reckoning for borrowers and lenders alike. 'Freezing adjustable mortgages at teaser rates will only push the problem to the next president,' said Peter Morici, a business professor at the University of Maryland." (Excerpts from Globe and Mail December 6)

(Sources include The Wall Street Journal, New York Times, Reuters, AP, Globe and Mail and Financial Times)