Monday, May 5, 2008

Subprime Mortgage Loans: No Money, No Credit Rating, No Problem Service?

Ever since the subprime mortgage debacle became headline news in the latter part of 2007 that resulted to a massive slowdown of our credit driven global economy, economists are now formulating cures and future preventives. Will it work?

By: Vanessa Uy

Ever since President John F. Kennedy’s speech about sending a man to the Moon, political rhetoric has become the latest selling point of the American industry. If sending man to the Moon made the US Military-Industrial Complex rich beyond their wildest dreams, shouldn’t other political rhetoric – if exploited right – could – in theory - benefit other industries as well? Like the proverbial “American Dream” of home ownership. One of the latest proponents of the home ownership rhetoric is the current American President George W. Bush whose speech about fulfilling every working-class American’s dream of homeownership was even caught on TV. Given the less than stellar records when it comes to corporate social responsibility and ethical business governance of American financial institutions (the Savings & Loan scandal of the 1980’s is an excellent example), are these financial institutions up to task in fulfilling every working-class American’s aspiration of home ownership? To fully understand our current subprime mortgage debacle, lets examine first the history of equity loan providers in America and their stance about Civil Rights.

Back in the 1960’s when an overwhelming majority of the American financial institutions thought that the concept of corporate social responsibility, ethical business governance and fiscal transparency – which are now the most overused selling points of financial institutions - were mere ideological musings of Marx and Lenin back then. These financial institutions were even engaged in a practice that would be deemed unacceptable by Civil Rights groups today, and they called it “Red Lining”. “Red Lining” is a very controversial practice adopted by equity home providers’ back in the 1960’s. Equity loan and other financial service providers literally draw a red line around neighborhoods whose populations are overwhelmingly African-American, Hispanics or other cultural minorities as no go zones when it comes to giving these people access to home ownership loans. Thus forever denying these people the proverbial “American Dream” of home ownership.

When the Republican / GOP neo-conservatives gained congressional power during the Clinton Administration of the 1990’s. The American financial institutions were literally given a carte blanche to make money by any means necessary. The concept of “Reverse Red Lining” first gained its first tentative steps. By providing risky or subprime mortgage loans to cultural minorities or to anyone with subprime or shaky credit ratings, equity loan providers could now actually pretend on how caring they are by providing these very high interest loans. The loan providers could easily feign corporate social responsibility sine they are providing loans to a group of people whose loan application were denied or rejected by other equity loan providers. These subprime mortgage loan providers even went public by raising money via IPO s or initial public offerings. Almost everyone, Wall Street even bought into it lock stock and barrel. Even including investors outside America joined the subprime bandwagon. A remote town in Iceland even bought into this “subprime loan gold rush” by investing a sizeable part of their town’s fiscal reserves. Lucrative loans with inherently high risks gained as much allure as casino gambling. Thus explaining why when the subprime bubble collapsed, its effects were felt throughout the entire world.

When the painful pinch of reality set in, it’s the ones with marginal financial resources i.e. the subprime mortgages target customers – namely African-Americans, Hispanics and other minorities – who suffered the most. Refinancing companies are doing a very poor job of consolidating the debts of homeowners affected by the subprime mortgage crisis. Some financial analysts even questioned the wisdom of debt consolidation in alleviating the affected homeowner’s problems.

Many are now starting to question whether the subprime mortgage’s original core mission is to recoup the profits lost by American financial institutions. Is it to recoup lost profits due to the Savings & Loan scandal of the 1980’s, the “dot com” bubble of the late 1990’s and the interest rates in which the former Federal Reserve chairman Alan Greenspan decided to set for far to low for far too long. With the questionable wisdom of predatory lending’s ability to kick-start the ailing American economy is a matter of lengthy conjecture. Shouldn’t all of us gain some form of wisdom by avoiding as much as possible very risky investment strategies or maybe we should stop treating our houses as mere financial instruments / tradable commodities and more as homes were our heart truly belongs.

1 comment:

Apple said...

Resorting to refinancing whose terms are dictated by second tier predatory lenders to pay your home mortgage, in my opinion, is a recipe for financial disaster. Yet almost anyone embroiled in the current subprime mortgage crisis had done so.
Speaking of predatory lenders, do you think that GE Money Bank qualifies as such? Their "store cards" franchise had made them into a financial colossus at the expense of their clients who are either not credit worthy or is financially ignorant. Maybe their shareholders are right in commenting that GE in general is too big to manage and their financial arm - GE Money Bank - really lacks transparency due to insufficient screening of their clients applying for loans and / or store cards.