Aug 6, 2007
On August 3, American Home Mortgage Investment (AHM) announced that it is going out of business. This is not the first time a mortgage company has failed, but it certainly has sent shock waves through financial markets, because AHM was one of the biggest mortgage lenders in the country.
Until the collapse of AHM, the usual explanation for lender failures was to blame them on the “sub-prime” loans – home loans given to people without a previous history of credit or with bad credit.
As house prices skyrocketed across the country, it became almost impossible for working-class families to buy a house in and near big cities. Sub-prime loans, often for homes at least a two-hour drive away from work, were pushed on people who had no other means to buy a house. But these loans were not really affordable either, because of the adjustable interest rates attached to them. As interest rates went up, more and more families fell behind with their mortgage payments. More and more houses got foreclosed, house sales fell, and so did house prices.
But while it’s true that the collapse of the sub-prime market has contributed to the growing crisis in the real estate market, that’s not the whole story. In fact, it’s not even the main reason behind the real estate crisis, and the collapse of AHM shows this. For AHM also catered to wealthy investors, who were using a particular type of loan AHM had set up to speculate.
One third of AHM’s mortgages were written so as to allow borrowers to pay each month in the first few years less than the interest they owed, by adding the unpaid interest to the principal loan. Unlike the sub-prime loans, which are mainly for people buying their first house, this type of loan is taken out by speculators – investment firms and wealthy individuals who buy and sell houses to turn a quick profit.
This is what turned the real estate market into one big bubble. Mortgages were sold to speculators, who then sold the house quickly again, each time driving up the supposed “value” of the same house and making a quick profit on it. And based on these inflated mortgages, companies like AHM declared big profits and paid their stockholders huge dividends.
But bubbles burst sooner or later. As the real estate market stagnated, more and more of the big speculators started to default on their payments. And that’s what’s really behind the real estate crisis: big speculators not being able to find the money to keep the wheel turning – or rather, the bubble inflating.
AHM itself had borrowed the money it loaned out. So when more and more of AHM’s borrowers defaulted on their payments, the company itself started to have difficulty paying off its own debt to investment banks. In late July, the banks made margin calls – that is, they demanded that AHM pay back its debt instead of paying only part of what it owed, as it had been doing – and AHM came crashing down.
In other words, what really brought AHM down was that it had been speculating on real estate loans – like all big companies do these days.
Does this mean that all these speculators – these parasites who call themselves “investors” – are now impoverished, that they will have to go get a job like everyone else?
No, of course not. Just like it was working-class families who, by not being able to find affordable housing, paid the price for the bubble, these parasites will try to make workers pay the price, by losing their homes, for the bursting of the bubble as well.
And it’s not just new home buyers who’ll pay the price. For the bubble is not limited to real estate. When speculation drives interest rates up, working people get caught in the spiral as well, getting into deeper and deeper debt just to stay afloat. How many families have already mortgaged their homes to pay for their credit-card debts? And as wages fall more and more behind the cost of living, how many will lose their homes?
Countless numbers of them, no doubt, as long as the working class lets these leeches continue to suck blood – not just ours but our children’s as well.