In the middle of March, it was reported that the British state-owned Northern Rock bank had resumed emitting the very same opaque (and potentially toxic) financial instruments which had caused its initial demise. However, Northern Rock is not the only player in this game, not even among the state-controlled part of British banking. In fact, while the financial crisis led to a lot of these toxic assets being written off by the banks, others kept being issued. With a market which was always awash with funds in search of high returns, the demand for such assets remained high, especially after politicians of all stripe backed Brown's financial bailout, proving their willingness to open public coffers to bankers, should the going get rough. Eventually, state largesse allowed much of the speculative activity of finance capital to return to normal - if one can use such a word to describe the myriad of pyramid schemes which make up the bulk of this activity! By the same token, the profits of the banks have returned more or less to their past stratospheric levels.
But, behind this, what has happened to the millions of households, which, one way or another, found themselves at the receiving end of the collapsing housing boom which triggered this crisis?
Housing market experts congratulate themselves over the fact that, after all, repossessions did not reach the level of the early 1990s. But have they not?
By the end of 2008, already, official figures showed the first year-on-year reduction in the number of owner-occupiers for decades. In fact, this trend had already started during the boom years behind home-ownerships which were apparently still rising: as soaring house prices reduced the number of first-time buyers, private landlords took on an increasing share of the privately-owned housing stock. But after the housing bubble burst, lenders attached increasingly drastic conditions to loans and the number of new mortgages began to shrink.
Thereafter, repossession orders began to rise. In 2009, mortgage repossession claims reached 116,000 for the whole year. This led the Brown administration to introduce all kinds of incentive schemes to get the banks to stop repossessions from turning into a full-scale social disaster. Many embattled mortgagees avoided losing their homes by becoming tenants in their own houses which were quietly repossessed by their lender. Others were allowed to add their arrears to their outstanding debt - effectively a form of remortgaging, but at significantly increased cost. Other schemes involving adhoc funds transformed mortgages into some form of shared ownership. Either way, all these households lost control of the roof over their heads and their dependence on the banks increased even more.
These tricks have undoubtedly helped to avoid a flood of repossessions over the past two years, at least among households not directly affected by unemployment, while allowing banks to make a neat profit, thanks to government incentives, but also thanks to savings on the costs attached to repossession orders and the ensuing fire sales.
Nevertheless, rather than resolving the problem, these schemes have only deferred it. The tip of the iceberg was revealed in August last year, when housing charity Shelter estimated that, over the previous twelve months, 2 million households had been paying their mortgage and rent bills by credit card - implying an average interest rate of over 16% on these bills! By the end of 2010, mortgage repossession claims began to rise again, to reach an annual rate of 75,500 by February this year, according to Credit Action. With an average 1,600 workers being made redundant every day and housing benefit cuts reducing even more the leeway allowed to working class households hit by temporary unemployment, it is not hard to figure out that the housing situation can only get worse - especially if banks consider that their self-interested benevolence is becoming less profitable.
In the USA, whose subprime housing crisis primed, so to speak, the bursting of the rich countries' housing bubble, the consequences of the crisis for households has been far more drastic, so far. And it shows, in some respects at least, what the banks and their politicians in government may have in store for the working class in Britain. This is the subject of the article we reproduce here, which was originally published in the quarterly produced by the American Trotskyist group "The Spark" (Class Struggle #69 - Feb 2011)
Banks have been seizing (repossessing) peoples' homes at increasingly break neck speeds, going from 514,000 in 2007, to 820,000 in 2008, to 918,000 in 2009, to 1.05 million in 2010, according to RealtyTrac data - 3.4 million homes stolen from people in four years. On top of that, in 2010 alone, the banks initiated 2.9 million foreclosure proceedings. With foreclosure, the banks just begin the legal process of seizing homes. The banks aren't done taking peoples' homes.
Moreover, an estimated five million mortgage holders are already behind in their payments - and therefore directly at risk of being put into foreclosure by the banks. And another 11 million homeowners, or close to 23 per cent of all those with mortgages, are "under water," that is, owe more than what the house is worth, increasing the likelihood of defaults and eventual bank seizures.
The steady drumbeat of propaganda from politicians and the news media has been to blame the homeowners for taking out mortgages they couldn't afford, as if they were the cause of the problem. But from beginning to end, this crisis was created by the banks, a crisis which is impoverishing ever larger parts of the population.
Rise and fall of subprime
It was none other than Alan Greenspan, one of the most prominent advocates for the banks, who admitted the banks' responsibility for the housing crisis in an interview with Newsweek (September 24, 2007). "The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford. We created something which was unsustainable. And it eventually broke, said Greenspan.
Many of the mortgages that people couldn't afford were subprime. These mortgages were first introduced after the recession of the early 1990s, a period when corporations were rapidly cutting jobs and income. In poorer neighborhoods some local mortgage companies sold homeowners, who had either paid off their mortgage or had low monthly mortgage payments, on the idea of getting out from underneath bills by refinancing their mortgage. Subprime loans were more expensive for the people lured into them - and therefore more profitable for the mortgage company. And for the mortgage company, there was little risk, a no-lose situation. Either the homeowners paid the new high interest payments, or they defaulted, in which case the mortgage company got the house and made a tidy profit when it sold it.
With the bursting of the Internet bubble and the stock market crash of 2000-2001, conditions ripened for subprime mortgages to really take off. The huge boom in real estate speculation fostered skyrocketing housing prices, especially on the East and West coasts, where housing was often in short supply. The big banks added fuel to the speculative fire by showering the housing market with easy money - which pushed up home prices still higher. Higher prices allowed the banks to offer bigger loans, which brought them higher profits. And the banks continued to encourage existing homeowners to refinance and extract even more cash out of their homes - based on the new speculative valuation on their homes.
The banks flooded the subprime mortgage companies with money, pushing them to reel in more clients. Eventually, many big companies and banks bought up subprime mortgage companies in order to directly sell mortgages themselves. By 2007, among the 10 biggest subprime lenders there were three mortgage companies, Ameriquest, First Countrywide and a subsidiary of Britain's largest bank, HSBC. There were also four huge banks, Citigroup, Wells Fargo, Merrill Lynch and Washington Mutual, as well as the financial subsidiaries of two enormous industrial companies, GMAC and GE, and the H&R Block tax preparation company. In other words, the biggest capitalists were getting in on the kill. From 2003 to 2007, the value of subprime mortgages went from $200 billion to $600 billion, while doubling their market share to 20% of all mortgages sold.
Selling mortgages was just the beginning of the gravy train. To provide more financing, the banks took the mortgages, bundled, sliced and diced them, and then turned them into mortgage-backed securities, which they sold off to investors. They paid credit rating agencies, Moody's, Standard and Poor's and Fitch, to rate them AAA, that is, the most safe and secure. There was a huge demand for these securities in financial markets around the world, given their high interest rates and credit ratings.
At every step of the operation, huge profits were made by mortgage companies and banks, not to speak of law firms, accounting agencies and credit-rating agencies, which were all paid for their seal of approval, attesting to the soundness of the securities.
Eventually, though, the market for subprime mortgages became saturated. But banks wanted still more. And the lenders did anything and everything to push the mortgages. They tricked those qualified for prime mortgages to take out much more expensive subprime mortgages. They foisted huge mortgages on people who obviously couldn't afford them. They sold mortgages that were larger than the value of the house. As journalist Michael Hudson explained, "deals were so overpriced and loaded with nasty surprises that getting customers to sign often required an elaborate web of psychological ploys, outright lies, and falsified papers. Mortgage companies' break rooms were turned into "Art Departments, fully equipped "with scissors, tape, Wite-Out to forge signatures and documents and a photocopier to fabricate W-2s, the tax forms that indicate how much a wage earner makes each year" writes Hudson.
By early 2006, many of the mortgages were so expensive and often fraudulent, some new borrowers were not able to make even their first payment. The most recent loans defaulted first. Foreclosure rates in subprime loans began to spike. By December 2006, the first companies specializing in subprime loans collapsed, sending shockwaves throughout financial markets that traded in mortgage securities.
The first wave of foreclosures in subprime set off a chain reaction throughout the rest of the housing market. As more homes were thrown on the market, prices began to plunge. More homeowners began to default, driving prices down further. In the first year of the crisis, most of the defaults were in subprime and near subprime. But as the economy continued to deteriorate in 2008-2009, banks seized more homes with prime mortgages, further exacerbating the crisis. With the worsening recession, borrowers were often not able to make their payments because of a loss of a job or a cut in pay, or else because they were overwhelmed by other bills, especially for health care. And with home prices crashing, the homeowner often owed more on the mortgage than what the house was said to be worth, and that cut off the possibility of either being able to sell their home to meet their mortgage obligation or to refinance the mortgage.
The lean, mean money collection machine
After the big banks had buried homeowners under a mountain of mortgage debt, the banks positioned themselves to profit from the homeowners' distress.
Five of the biggest banks - Bank of America, Wells Fargo, JP Morgan Chase, Citigroup and GMAC/Ally Financial - today service more than 60% of all the mortgages in the country, up from 30% of the mortgages in 2000. These five banks do the billings and collections on a total of about 35 million mortgages. Why would these banks choose to be in the servicing business, with all its headaches and paperwork, especially since the servicing fees are relatively modest?
As David Sambol, who was president of Countrywide Financial, explained in 2007, just as the mortgage crisis was breaking out and so many homeowners were no longer able to make their payments: "Now, we are frequently asked what the impact on our servicing costs and earnings will be from increased delinquencies... And what we point out is that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification program, a counter-cyclical diversification strategy...
In other words, the banks had set themselves up to take advantage of homeowners who fell behind on their mortgages. This brought the banks late fees and extra charges, which were quite substantial and piled on top of each other.
The banks also charged for what Sambol vaguely called "in-sourced vendor functions." For example, Bank of America (which took over Countrywide Financial) owns its own insurance company, Balboa, while other banks get kickbacks from insurance companies to handle their business. When homeowners let the insurance policy lapse, the bank back-dated bills for retroactive insurance. Of course, the insurance from the bank costs ten times more than the going rate. In an article entitled "Ties to insurers could land mortgage servicers in more trouble", he American Banker November 10, 2010) points to "evidence of abuse and self dealing"between insurance companies and banks.
The banks had found themselves new ways to make money off the backs of homeowners.
All these charges and fees, tacked onto mortgage payments that are already outrageous and un-affordable, put homeowners even deeper in the hole, practically guaranteeing they could not climb out.
The banks, of course, don't want to keep the houses. They auction them off, often for a price far lower than what's owed even on the underlying mortgage. As for all those fees and charges the banks had assessed on the homeowner, those are taken off the top by the banks. The actual owners of the mortgages take the loss. Up until now, the owner of the mortgages has usually been Fannie Mae or Freddie Mac [the acronyms of the now state-guaranteed Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation respectively], the two enormous government-backed companies. Through them, the taxpayer takes the loss. But many of the mortgages are also owned by pension funds and mutual funds around the world, through mortgage-backed financial securities the banks had sold them during the housing bubble, claiming the securities were safe and secure. Indirectly, people saving for retirement take the loss. The banks themselves also own a lot of mortgages. But they almost never take a loss, because most of those mortgages are guaranteed, either by the Federal Housing Administration and Veterans Administration, which are government agencies, or Fannie Mae and Freddie Mac. So, once again, the taxpayer takes the loss.
Thus, the banks make their money off of the homeowners, the taxpayers and working people all over the world saving for retirement.
To process foreclosures, the banks have created what the Washington Post (October 16, 2010) describes as:"a mass production system of foreclosure...
The banks are facilitated in this by a company that they had earlier set up called MERS (Mortgage Electronic Registry System), which holds 60 million mortgages. Created in 1996 in the midst of financial deregulation, MERS is owned by two dozen of the biggest banks, along with Fannie Mae and Freddie Mac. Previously, mortgages had been filed with the county and were a matter of public record. But with MERS, the banks privatized this information. Information like who owns the mortgage and under what terms is now confidential. If you go to the county-listed records, you are also likely to discover that MERS is now listed as the owner.
Consequently, mortgage holders very often don't even know who owns their mortgage, and have no way to find out. So the homeowners don't know who to contact or who to negotiate with. Homeowners "face a challenge even finding someone with whom to begin the conversation" said a report by NeighborWorks America, a community development group based in Atlanta.
MERS also acts as a barrier when homeowners try to fight against foreclosure, or try to get loans modified. "I'm convinced that part of the scheme here is to exhaust the resources of consumers and their advocates, Marie McDonnell, a consultant for lawyers suing lenders in New Orleans, told the New York Times (April 23, 2009). "This system removes transparency over what's happening to these mortgage obligations and sows confusion, which can only benefit the banks"
The mortgage modification trap
Over the last four years of unrelenting devastation and crisis, both the Bush and Obama administrations claimed they had set up government programs to help homeowners modify their mortgages, make the payments affordable and keep their homes. But all these programs had one thing in common: they put in charge the very same banks that have been doing all the foreclosing. The banks administer the government programs - and decide whose mortgage to modify.
The results should surprise no one. All together under the biggest of these programs, Obama's Home Affordable Modification Program (HAMP), introduced in March 2009, the banks have worked out only 522,000 "permanent" modifications as of December 31, 2010. Compared to the 3.4 million homes that were foreclosed on, and the tens of millions of homeowners in varying degrees of distress, who are already behind on their payments, in foreclosure or whose mortgages are upside down, this amounts to almost nothing.
What's more, those homeowners with "permanently" modified mortgages still risk going right back into foreclosure, since the modification lasts for no more than five years. More importantly, the banks have never agreed to reduce the principal on the loan, only to stretch out the payments for at most five years, meaning, overall, the homeowners owe more.
Many borrowers who won approval for modification and never missed a payment still risk winding up in foreclosure. The reason is: "They may face back payments, penalties, and even late fees that suddenly become due on their 'modified' mortgages and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent, according to the Office of the Special Inspector General for the Troubled Asset Relief Program in its October 26, 2010 report to Congress.
The government auditor also found that the banks foreclosed on an estimated 20 per cent of homeowners who applied for mortgage modification. The very banks that approved mortgage modifications, then often seized the homes before the modification took effect. When homeowners applied for a modification, one office at the bank spoke to the customer about "mods," while another office pushed the foreclosure process through. In response to all the complaints about this "dual track" policy by the banks, last March the Obama administration issued a directive ordering the banks to stop it. This directive was inserted in the HAMP handbook. Of course, the order from the Obama administration was not enforceable and carried no penalties. So, the banks continued as before.
It should have surprised no one that the auditor reported that the banks were responsible for a "parade of documentation horrors... Anecdotal evidence of their failures has been well chronicled. From the repeated loss of borrower paperwork, to blatant failure to follow program standards, to unnecessary delays that severely harm borrowers while benefiting servicers themselves, stories of servicer negligence and misconduct are legion, said the government auditors.
In conclusion, the auditors found that loan modifications often leave homeowners "worse off than before they participated" adding that the programs "undoubtedly put people into foreclosure"
Under the guise of helping homeowners keep their homes, the government had set up programs which only aided the banks doing the foreclosing.
Frauds, forgeries and robo-signers
Housing advocates, community groups and public interest attorneys, who had been working with homeowners to fight against the foreclosures and bank seizures, discovered the banks often did not have the proper documents and paperwork. Much of this had to do with how the banks had been registering mortgages in MERS. Often, much of the documentation turned out to be missing, and there was no paper trail. This was especially true of mortgages from the last years of the housing boom, when mortgages were so obviously fraudulent. Other times, banks had bundled mortgages, slicing and dicing them in order to turn them into financial securities - without keeping any records of who actually owned what.
Without the proper documents, the banks just created them. Bank employees testified that it was their job to sign thousands of fake documents a day. They became known as "robo-signers," and the discrepancies were usually so obvious - the same signature would appear under different names, for example on thousands of documents.
The courts consistently took the side of the banks. In 23 states, where the banks have to get a judge's approval to foreclose, foreclosures went through anyway. Some states, like Florida, greased the foreclosure wheels by setting up special courts for processing the flood of foreclosure filings, nicknamed "rocket dockets," because they are simply rubber stamps for the banks. ("Florida's 30 Second Dash..." said one Bloomberg headline.) In the 27 other states, including California, Nevada and Arizona, the banks don't even have to go to court, and homeowners have had an even harder time contesting foreclosures.
The sloppy and incomplete record-keeping explains how some homeowners found themselves being foreclosed on by several banks at the same time. "In Pinellas County, Florida, for example, two banks tried to foreclose on the same house, just one of several similar cases that are being highlighted by homeowners' attorneys across the country" according to the Washington Post (September 29, 2010).
It had even gotten to the point that some homeowners who didn't have a mortgage were foreclosed on.
But facing growing community activism around the issue, a few judges around the country began to rule in favor of the homeowners and ordered the banks to put some people back in their homes and reimburse the homeowners for everything the banks had charged them.
Facing increasing amounts of bad publicity and legal challenges, the biggest banks hit the brakes at the end of September 2010, declaring a temporary "moratorium" on foreclosures and seizures. The banks went through the motions of pretending to straighten out what they called problems of sloppy paperwork and some lost documents. After a few weeks, the banks declared they had reviewed their procedures, and straightened out the paper work. Bank of America officials declared that in less than a month they had managed to verify documents for over 105,000 foreclosure filings. "If we find any foreclosures in error, we will fix them, a spokesperson from JPMorgan Chase promised.
By early November, the banks declared they were ready to proceed with foreclosures once again, and the Obama administration supported them. "They've made a business decision, said Shaun Donovan, the secretary of Housing and Urban Development.
Obviously, the problems are so huge and glaring, government officials couldn't exactly sweep them under the rug. Instead, as usual, various government agencies announced they were "investigating" the banks' procedures. These include joint investigations by the state attorneys in all 50 states. The US Department of Justice, the Federal Housing Administration and the Federal Reserve all announced separate investigations. Given the track record of the federal agencies, Joe Nocera, a business columnist for the New York Times, cynically commented that the investigations are "not going to amount to a hill of beans.
It was not until January 2011 that the Massachusetts Supreme Court ruled that banks be required to produce proper legal documentation in order to seize a property in foreclosure. It took four long years of crisis before one lone state judiciary took that position. So far no other higher court has followed suit.
This has not stopped the banks from once more revving up their foreclosure machinery and seizing homes again.
The seizure of 3.4 million homes by the banks has already thrown more than 10 million people onto the streets - with more added to the rolls every day. This has brought enormous hardship, forcing some into homelessness, others to live in their cars, or double up with family or friends - who often times are themselves facing huge financial pressures and are also in danger of losing their homes. Whole families are squeezed into one-roomed apartments. In many cities, the push to rent a home has worsened the shortage of affordable housing, and driven up rents. Rent increases are usually highest in cities hit hardest by the housing crash, such as Miami, Phoenix and San Bernadino/Riverside, California. According to the US Census, more than 10 million families now pay more than half their income in rent.
At the same time, the number of vacant homes has skyrocketed. In US Housing and Mortgage Trends CoreLogic reports that there are more than four million vacant homes. With the glut of unsold homes so severe, the banks are keeping many of these homes off the market. CoreLogic estimates that it will take 44 months, or more than 3.5 years, to sell off all the vacant homes in the US. The millions of homes that the banks seized are overwhelmingly in working class and lower middle class neighbourhoods. They include outer ring suburbs that grew rapidly during the boom, in California, Las Vegas and Miami, turning developments on the outskirts of metropolitan areas into the nation's newest slums. They also include older industrial cities in the Midwest, such as Cleveland and Detroit, which had already been hit hard by unemployment and where there was already a huge supply of vacant homes and buildings. This latest foreclosure problem constitutes simply one more layer of vacant properties on top of a rash of vacancies that already existed. Overall, around the country, in some areas people who managed to stay in their homes are seeing the value of that home sink like a rock, in effect, dragging down their life savings with it. With their neighbourhoods in decline, they are more subject to crime, and all the vacant homes become a breeding ground for infestation and disease.
So, on the one hand, there is a huge oversupply of homes, with literally millions now vacant, while on the other, there is a huge shortage of affordable housing.
And all this, to satisfy the profits of the banks. Is there any more damning picture of the irrational and inhuman functioning of capitalism?