Mortgage Crisis: Who Would You Help?

By Tim Buchholz

The Federal Reserve recently announced they would be releasing an additional $200 Billion into the market to help ease the credit crunch brought on by the sub-prime mortgage crisis. They are releasing this “liquidity” in the form of “Treasury Securities.”

The US Treasury’s website (treasurydirect.gov), describes Treasury Securities as part of the Public debt. They explain this debt as “all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States.”

According to an article by Jeannine Aversa in AP called Fed Easing Liquidity in Foreign Markets, the Federal Reserve will offer this capital in auctions starting March 27 to big Wall Street investment houses and banks. These companies will be able to buy these Securities using their sub-prime mortgage loans as collateral.

So, we are letting the banks use these bad loans to buy good loans backed by our tax dollars, and the Fed is offering our tax dollars (or future tax dollars) to bail out the banking industry. Are the banks offering this same option to their customers? Is the Federal Reserve? While I don’t want my money going to pay somebody else’s house payment, I also don’t want the banker getting bailed out either. Wall Street seems to approve. On the eve of the announcement, The Dow Jones rose by nearly 500 points, it’s largest since 2002. But who should we be helping here?

According to another AP article by Jeannine Aversa, Fed Takes Bold Steps to Ease Crisis, The Federal Reserve is helping JP Morgan bail out (or is it buy out?) one of its biggest competitors, Bear Sterns. Morgan said the Fed has agreed to fund $30 billion of Bear Stearns’ less liquid assets. How many homes could have been saved by the same approach and $30 billion? How about the $200 Billion? And while Bear Sterns shares closed at $30 a share on Friday, JP Morgan will pay only $2 per share. If you are a conspiracy theorist, you might be able to trace JP Morgan Chase back as one of the original owners of the Fed, but this isn’t a story about conspiracy. It’s a story about morality.

According to an article by William Reed, Blacks and the Subprime Mortgage Market, blacks were 2.3 more times likely than whites to receive these loans, (and that’s the lowest estimate I found, other articles had up to 30% more), even when they had the same credit histories. Just a coincidence? These loans were made so appealing on a market that kept rising. These people were told they were making sound investments, and if they made their payments over the first few years at the lower interest rate, they would improve their credit ratings, build equity, and be able to refinance the loans at a lower interest rate. Sounds pretty good, huh? So, maybe they didn’t read the fine print and bit off more than they could chew, or they took out loans that they knew they couldn’t afford, but they did make payments on those loans. They built up equity, and paid interest to the banks/lenders. So, what happens to that equity they built up when the interest rate was lower, why can’t they use that as collateral on new loans or refinanced loans offered by our taxpayer dollars, just like the banks do?

Jeannine Aversa goes on to say that the Fed also approved a "cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately." The Fed will lower the interest rate the lenders have to pay, but not force the banks to refinance with its customers? You may say that helping these people with bad credit is a bad investment, why we already know they defaulted on loans, and these people had bad credit scores to begin with. But, if that’s your approach, why did the banks lend them money? Why did these banks and loan companies believe that these people with bad credit ratings, who could not qualify for standard loans, would be able to pay a loan that would increase so substantially in such a short period of time? Didn’t the banks and loan companies make bad investment choices already? Why are we bailing them out and adding it to our public debt? Who would you help out, if it was your choice?

And don’t forget, the people who took out these loans are either stuck with a loan that will cost them more than the home will be worth, or will default on the loans, lose any equity and credit they may have built up, and now probably never qualify for a home loan again. And also, it’s not as if these people with poor credit histories came up with these loans, they were recommended by the bank. Let’s just take a look at what the lending companies did with those loans, and then ask the question again of who made a bad choice.

In his article, US Subprime Mortgage Crisis, Martin Lee explains what happened next with these loans, and he explains it so well I am just going to use his words here:

“A few million subprime borrowers had borrowed 100% of the value of their house to finance their purchase. These are borrowers with very poor credit ratings (hence the term subprime). The Mortgage Lenders packaged those loans into bonds called Mortgage-Backed Securities, which they then sold to investment banks. Hence, they did not have to worry about default risks and could make those loans freely. Selling MBS is usually not easy as the credit quality is poor or non-investment grade. This means many professional managed funds could not buy them.

“However, smart investment bankers took the MBS and combined them with other higher grade bonds and sold off the entire package in “tranches”. These packages are known as Collateralized Debt Obligations (CDOs). If the CDOs are structured properly, they could qualify as investment grade rating and would be far easier to sell. Once the original lender has sold off their MBS, they will have cash which they can then loan to new subprime borrowers. This helps add fuel to the hot housing market. The story does not end here. It is who (and how) the CDOs are sold off to that could cause a ripple effect throughout the financial industry. One way is for the investment bank to set up a Hedge Fund to buy over the CDOs. What has happened over the past few years is that housing prices has gone up. This means that the market value of the CDOs has increased (significantly) as the risk of subprime borrowers defaulting is now less. The CDO price is easy to manipulate as there is not an open market for the CDOs. This leads to a boost in returns of the hedge fund, which attracts more investors’ funds. The hedge fund then goes to another bank to borrow more money using its ‘high- performing’ CDOs as collateral. The exposure has thus spread to the lending bank holding the CDOs as collateral. The hedge fund buys more CDOs and the money is ultimately channeled down to mortgage lenders who will make more subprime loans, thus pushing housing prices higher.”

Did you get all that? Now, which group here wins the prize for the worst investment? I’m not saying I want to pay for someone else’s house payment, I just don’t know why our government and the Fed are not offering the same chance to the people as to the companies. That would be a bad investment, right?

How about a good investment? According to a CNBC report on March 10th, Billionaire Wilbur Ross invested $1 billion into municipal bonds in the banking/loan industry to help in this time of crisis. All out of the kindness of his heart, or as a big tax write-off? No. At interest, for profit! You might have noticed The Fed also lends money at an interest. First, at interest to the banks, then the banks add interest for themselves. Want a good investment? Got several billion dollars? Uncle Sam wants YOU! It can only go up, you can buy homes, or heck, our debt, at incredibly low rates, that are guaranteed to pay off, and if they don’t, why the FED will allow you to use those bad loans to get more good ones and add it to the public debt! How could you lose? Or better yet, sell those American dollars! It’s time to get into the world stock exchange, where China’s stocks rose 179.8% in 2007. Get the big money out, get the poor out of their homes with no credit to get new ones, oh, and keep the money they’ve paid so far, and the house! They should have been smarter than to take that foolish loan the nice man at the bank recommended for them as a chance to live the American dream. When will they learn?
 
-Tim Buchholz is an activist and freelance writer based in Ohio. He contributed this article to PalestineChronicle.com.

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