How Did This Mortgage Mess Happen?

Sep 10, 2007

The news media blames low-income working people for the housing crisis, unwisely taking out “sub-prime” mortgages that they can’t possibly afford. This is crap, and they know it.

The runaway housing prices were not caused by people buying houses for themselves. The problem was fueled when the previous speculative bubble burst in 2000–that time, in technology stocks. When the price of tech stocks collapsed, pulling down the stock market, the government rushed in to bail out big investors who otherwise would have lost billions.

Once all this new money was pumped into the financial system, the big investors–Wall Street banks and brokerage houses–had to find somewhere else to invest it. They found...real estate.

Real estate prices had begun to rise in areas of the country where many people were moving–places like California, Florida and New York City. The biggest banks were loaning money to big construction firms and the “housing boom” took off in those areas, spreading then to other areas.

This price rise was noticed by speculators, who started buying houses, only to re-sell them, making a quick profit.

This quick buying and selling of houses–or “flipping” them–helped fuel even faster skyrocketing prices all over the country, as well as a rash of new construction, as speculators demanded houses, and builders built houses, just to make a quick return on this skyrocketing price. Often speculators were selling to speculators, who resold to other speculators.

Working people simply needing a place to live were trapped by this whole speculative bubble. Many workers–with steady jobs, and sometimes two or three jobs–could no longer afford to buy an ordinary home; the price had become too expensive.

This is when the biggest banks and mortgage firms started pushing sub-prime loans: loans that started out at a low rate of interest but then spiked up to a much higher rate after a couple years. In other words, investors were trying to hold off the popping of the housing bubble by convincing working people that they could afford a home–if they took out such a dangerous mortgage. What would happen when the higher interest rates kicked in? No problem, they told prospective homeowners: home prices would just keep climbing, and they would be able to take out another low-interest mortgage in a couple years, on a home that would be worth even more.

And that’s not all–with wages not keeping up with inflation, people started buying more and more on credit just to pay the bills–racking up big credit card or loan debt.

And then came the ads and the hard-sell to refinance their houses all over again, to “consolidate” their debt, to use the rising value of their houses to pay off their credit card debt–and to take on even more mortgages that started off at a low rate of interest but then reset to a much higher rate further on down the line.

Then the inevitable happened: too many homes had been built, and prices began to fall. Speculators couldn’t resell their houses for more money, so they quickly began to default on their mortgages. They account for more than one third of all the current foreclosures. This pushed housing prices further down.

So, then, people stuck with exorbitant mortgages at high interest rates were being forced to default. The banks began to foreclose on their homes, leaving them with nothing.

Capitalism doesn’t care about the long term. All it cares about is what profit can be made now. At every step of the way in the housing bubble and now into this latest financial crisis, it has found ways to take advantage of working people who are struggling just to get by.

Finally, as the big banks and brokerages start to lose big bucks in this mortgage fiasco, the government is doing what it always does: it’s pumping money in to bail out the big players, while leaving working people to take the hit yet again.

Enough is enough. Working people didn’t cause this crisis. And we shouldn’t pay for it, either.