The recent Northern Rock crisis showed how problems in the financial markets can hit ordinary people. The chaos was caused by massive problems in the subprime mortgage industry in the US.
This threatens to wreck the lives of thousands of poor working class people across the US – and has brought to light the workings of a rogue industry of mortgage lenders.
Subprime mortgages were offered to low income borrowers with poor credit ratings desperate to buy a house. But these mortgages have higher interest rates than “prime” mortgages.
Many people are now defaulting on these subprime mortgages, and this has triggered the panic across world markets.
It is estimated that subprime borrowers face average rises in repayments of 26 percent, or £200 a month. Nearly 110,000 US homes were repossessed in August – a record high.
In Brooklyn, New York, repossessions have doubled in the last year. One analysis found that 6,100 families in Brooklyn could be at risk of losing their homes by the end of 2008.
Jessica Attie works at a not-for-profit legal services firm in Brooklyn which helps those “victimised by the predatory practices of unscrupulous mortgage lenders, mortgage brokers, home improvement contractors and real estate companies”.
Her office has recently seen a massive increase in calls.
Jessica told Socialist Worker, “We used to receive around five or six calls a day, but now it can be up to 25. It’s overwhelming. A lot of the people who come in are people on low to moderate incomes.
“Many are the ‘working poor’ such as security guards or bus drivers, and we also have a lot of retired elderly people and people on benefits.
“The crisis can wreck communities. The immediate effect is that people lose their homes, but there are a lot of secondary effects.
“People live month to month – if their mortgage payments go up it means that other bills won’t get paid.
“People use credit cards to pay other bills, meaning their debt is increasing. They can’t afford their health insurance and will take second or third jobs to try to make ends meet.”
Many have criticised the lending companies at the heart of the subprime crisis. New Yorkers For Responsible Lending highlights the “predatory practices in the financial services industry”. It campaigns to introduce tougher legislation to defend borrowers from abusive practice.
Companies have targeted minority groups. Jessica said, “Everybody we see is from minority communities – African-American and Latino. They have been deliberately targeted for subprime loans.
“In the 1980s these people were denied access to credit, but since the industry was deregulated lenders have swooped into these areas.
“People are targeted very aggressively. Lenders ring them up several times a day, go to their houses, go to their churches. Their advertising is very misleading.
“They discourage people from discussing the loan with relatives or with lawyers. The lending companies provide their own lawyers – who just sit there and do nothing. The legal documents are incredibly confusing.
“They’re often between 50 and 100 pages long and even lawyers have a hard time understanding them.”
George Bush has proposed a Federal Housing Administration programme, called FHA Secure, to deal with the crisis. But this will not help those who are worst hit.
To qualify for any help, borrowers must have at least 3 percent equity in their homes. Because many people were pushed into borrowing more money than their homes are now worth, they have negative equity and are not eligible for the programme.
Some 27 percent of people who have seen their mortgage payments increase have missed a payment. This means they are ineligible for government help. Hundreds of thousands of people could lose their homes.
“A lot of people don’t have any options,” says Jessica.
“The only option would be to sell their house, but this is increasingly difficult, because the loans are so over-inflated that the house is worth much less than the loan value.
“There has been a failure of regulation. The lenders offer loans with a fixed interest rate for two years – but the interest rates rocket after that period.
“If interest rates go down it won’t solve the problem. The problem is built into the subprime loans – they were unaffordable from the beginning.”
Meanwhile Bush spends $720 million a day on the war in Iraq – which could buy homes for almost 6,500 families or healthcare for 420,000 children.