Sam Uretsky

It's the End of the World as We Owe It

Welcome to the dress rehearsal for the end of the world. The applicable wisdom is simple enough; don't bet the farm, but to follow the reports about the sub-prime mortgage implosion, not only did the hedge fund managers and financial wizards make that bet, but these Masters of the Universe who can claim a billion dollars a year and then argue that they should be taxed at lower rates than teachers, plumbers and mechanics, still don't understand what they did.

In the 1990s, somebody concluded that there was money to be made by offering mortgage loans to people who had bad credit histories. All you had to do was set the rates high enough to offset the risk, and your investment was safe as houses. Then, these same people bundled up lots of these high risk mortgages, and sold the package to investors who couldn't, or did not read the fine print. When the bill came due, and the people who had taken loans they really couldn't afford, defaulted on the payments, the people who bought the mortgage backed securities lost their investment. The Federal Reserve Bank, Bank of Japan and European Central Bank are pumping billions of dollars into the credit markets to assure that there will be money available to make loans, and bankers are issuing reassuring statements.

Meanwhile, the sky is falling, but from the bottom up. While all the attention is being paid to the stocks and bonds and elaborate investments, down at the bottom, somebody is about to lose their house. This, by itself, would be bad -- but every time a house is foreclosed, the house next to it loses value. The loss falls on the rich investor who thought they had a safe, high return investment, and on the poor person who was gulled into taking a loan that they couldn't afford to pay, and will spread to the homeowner next door, who never missed a payment in 30 years. Whoever winds up foreclosing on these houses -- and from the way these mortgages have been sold and resold it's difficult to say who that is -- won't maintain the lawn, or turn on the lights at night to make the house looked lived in. For every person who loses their home, there will be two, at least, innocent bystanders whose houses will decline in value as a result of simply being near a foreclosure.

Prices for homes, single family and condominium, have been in a steady decline just about everywhere. Based on various reports, the median asking price for a house in Tampa, Fla., dropped $10,000 in two months, $28,000 in Salt Lake City Utah, $9,000 in Long Island, N.Y. The median prices for resale homes in San Diego, Calif., dropped to $550,000, down from $565,000 in June.

These numbers have largely reflected the fact that home prices had risen to a point of unaffordability, and represent a correction in the market prices, but over the next few months, people with adjustable-rate or interest-only mortgages will see their rates rise, and things can only get worse as more homes flood the market and loans are more difficult to get. The people affected aren't hedge fund traders, bankers and brokers; they're people trying to hold a job and make the payments, who were either gulled by promises of low rates, or were afraid that home prices would keep rising so that they had to rush into a market they didn't understand. Many have no savings beyond the equity in their homes, and because most of the people affected are recent buyers, the effect is to wipe out their life savings.

The Federal Reserve and other central banks are doing what they can to ease the credit markets, pumping billions of dollars into the system for the benefit of investment banks like Goldman Sachs and Bear Stearns, but the people holding the exotic mortgages might as well be from the 9th Ward in New Orleans, waiting for help, and their neighbors -- all they can do is mow the lawn next door in hopes of making the block look a little bit better.

Somewhere out there, there are industrialists who maintain that global warming is a hoax, a myth, and they want to keep building SUVs and running coal-fired generating plants without cleaning up their emissions. If they're right, they've saved some money -- but if they're wrong, we'll have lost the only planet in the neighborhood. The housing market should have been like that -- too important to gamble with. It wasn't, and we all lost, even those of us who never bought chips.

Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.

From The Progressive Populist, September 15, 2007

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