Submitted by Alex Birch on Thu, 01/10/2008 - 17:27.
By now you've all read and heard about the subprime mortgage crash in America and its possible future implications on the economy as a whole. Millions of families have been forced to leave their homes, subprime lenders across the country have filed bankruptcy and the effects have even spread to Asian and European markets. What's all of this really about?
Subprime works like this: people with deficient credit history (credit score for subprime borrowers is typically below 620), despite their inability to manage their private economy, are given opportunity to lend money from subprime lenders. Regular lenders would deny them this because of the obvious risks involved.
In turn the subprime borrower is forced to pay an interest rate higher than compared to a regular lending. Subprime lendings often require the borrower to also engage in a so called "balloon payment," which means that a prepayment of the loan has to be made within a certain amount of time. If the borrower fails, he or she is in debt and will have to refinance the loan or even sell off the entire house.
Despite what most critics say, subprime is and has always been a deliberate scam. It's a smart but ruthless way of exploiting people who can't take of their own economy and therefore are easy victims for businesses, who of course see their chance of getting rich on other people's stupidity.
While the system itself is flawed - lending out money on high interest rates to people who cannot even manage a regular lending payment - it also invites for corrupt companies to fool their borrowers with insane interest rates or forcing them to frequently refinance their loan and charging high closing fees each time. The system is designed to squeeze every single penny from borrowers who don't know any better. It's economical exploitation, legalized thanks to greedy capitalism.
This can also be seen in what groups of society that the subprime lenders typically are targeting. A study conducted by researchers at New York University from October last year, showed that "home buyers in predominantly black and Hispanic neighborhoods [sic] in New York City were more likely to get their mortgages last year from a subprime lender than home buyers in white neighborhoods [sic] with similar income levels." In other words, the subprime lenders know where to cash in profit.
The subprime phenomenon is a scam indeed but it reflects the time in which we live. Our societies are designed to let a few people at the top, exploit and fool the unknowing grey mass of servants that only live for today. Since their lives revolve around job and entertainment, two major businesses that are owned by the same few people, they're easy to control. Public reality is able to portray our lifestyle as one of freedom and selectivity, but using subprime as an example, this freedom is more likely a smokescreen for greed and exploitation, all in the name of profit.
One might think that these borrowers somehow deserve to go bankrupt; it's their own fault, after all. The problem with this attitude is that it supports a system, which rewards only the top elite, not "the people," healthy and responsible individuals included. The effects on society and on the economy also tell us that we can't sit inside our homes and laugh at other people who lose theirs; who will be laughing when a nation wide recession sets in? You know it and I know it: the global elite will, because they won everything by sacrificing nothing.
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mortgage mess
What has happened here is a lack of financial responsibilities on the part of banking institutions and borrowers. Banks lending people more money than they can afford or credit-worthiness would allow. Borrowers, being short sighted and borrowing more than they knew they could handle in hopes of either selling or refinancing before the rates adjusted. This(like a bad drug) all in turn falsely inflated our economy. Now we must suffer the withdraw from it. We have to look at the big picture. This sort of negligence has farther reaching implications than just those who wrote or signed the bad paper. Now the market is so soft that consumers who followed good judgement see their property values are dropping as I write this. The market is flooded with houses that won't sell. Contractors are going out of business and the acres of farmland that was detroyed for new structures are sitting with lots of vacant or for sale homes. Many newcomers to the real estate, construction and home manufacturing game are losing jobs. Let's face it, this situation has hit just about every sector there is. If you invest in a 401k, it's possible you may have lost a little you didn't even think about.
Now our government want to come to the rescue in an election year(I think that odd). I lean to the left about as far as anyone I think. But this is a mistake. For one thing we are rewarding negative behavior at the expense of those who are financially responsible with their money. Second, the world market of investors who banked on these mortgages are now not getting rewarded and they will think twice before investing in America when our government can jump in and change the rules any time it likes. Third, instead of taking the hit now and getting it overwith so Americans can go forward and recover. We have set this thing on slow bleed, the market can't recover because we are going to delay what I fear will be the inevitable. These same people are going to be in the same position in 2 years when it is time for it to adjust. So will we put it off again? And again? And again? The market can not correct itself with government interference.
I know several people who got these mortgages and I do feel for the position they are in. However, these are people I either wouldn't loan $5.00 to because I know I would never see it again or they are people who knowingly spend more than they make and excercised poor judgement. I do not mean to say that everyone who got one of these mortgages is the same way. However, I would say, the ones that are not are the exception.
I do not see how any good can come from this other than sweeping changes in lending practices for the future. But here and now I would say that we are all losers is this fiasco. I am all for helping someone when they are down. But not when they are pulling the rest of us down with them. We are not talking about those who have lost jobs or lost an income in the home or some unfortunate happen-stance. We are talking about those who were not credit-worthy to begin with.
The fact is we are a capitalistic society, like it or not. No one financially big or small can profit from this given situation. The government interference seems almost socialistic in my eye.Social housing reform was not on any ballot that I voted on. We can not consistently change financing rules as we go along to reinforce irresponibility. Furthermore, I, as a middle class American, have paid my bills on time and lived within my means. If my job were out-sourced tomorrow, will the cavalry come in and rescue me when I can't pay my mortgage? I think not!! So I ask you, if we as a country are going to bail out the irresponsible can we not bail out those who have been? Me, I would choose to help the latter.
Borrowers of the world
Borrowers of the world unite...