Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. 2 On Subprime/Mortgage MessFirst, a link to Doug Henwood's latest (June 25th) radio program, which features an excellent interview with Alyssa Katz on the history of mortgage lending in the U.S. from the '30s on. Second, this piece about a recent study which casts interesting light on the role of the Community Reinvestment Act on subprime lending (courtesy of Economist's View):Most Subprime Lenders Weren't Covered by CRA The Big Picture By Barry Ritholtz - June 27th, 2009, 9:00AM The CRA brouhaha last year led the Orange County Register to run an analysis of "more than 12 million subprime mortgages worth nearly $2 trillion" in late 2008. What did their data based analysis discover? "Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market--after smaller, unregulated players showed there was money to be made." Among their research conclusions: Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law. State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in. Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren't subject to the CRA law, though some were owned by banks that could choose to include them in their CRA reports. Among lenders that were subject to the law, many ignored subprime while others couldn't get enough. Read the rest of the piece Labels: Alyssa Katz, bailout, Barry Ritholtz, Community Reinvestment Act, Doug Henwood, financial crisis, subprime lending, The Big Picture Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 25 Lenders Made $1 Trillion In Subprime LoansFrom the Center for Public Integrity via HuffPo.Read the full report here. "The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or bankrolled by banks now collecting billions of dollars in bailout money -- including several that have paid huge fines to settle predatory lending charges," write John Dunbar and David Donald. Labels: mortgage meltdown, subprime crisis, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Review of SubprimeThe excellent Julian Delasantellis, who contributes regularly to Asia Times, reviews Confessions of a Subprime Lender, by Richard Bitner, who worked in the industry and coundn't take it anymore. The review serves as a good refresher on some of the chronology, arcana and issues, and is just fun to read because of Delasantellis' writing style and wit.BOOK REVIEW Subprime--an (im)morality tale Confessions of a Subprime Lender by Richard Bitner Reviewed by Julian Delasantellis In 1949, the hard-boiled American crime writer Raymond Chandler observed that "Such is the brutalization of commercial ethics in this country that no one can feel anything more delicate than the velvet touch of a soft buck." It wasn't that "velvet touch of a soft buck" that the subprime mortgage business felt, and fell victim to, these past few years; it was the creamy caress of about 3 trillion of those soft bucks. It was the heady intoxication of this sensation that caused the industry to abandon all pre-existing standards of banking probity and morality, and this is the story that Richard Bitner tells in his new book, Confessions of a Subprime Lender. By 2006, Bitner, co-founder of subprime broker Kellner Mortgage, had seen so much of his industry's blatant balderdash, howling half truths, and malevolent mendacities that he could stand no more. Walking away from a business that had made him, and everyone in his business, insanely wealthy in an insanely brief amount of time, he pledged to write a book that would tell the truth about this business. Amazingly enough, considering the dross that winds up in the business sections of the bookstores these days (The Way of the Bushido Method to Sell Your Timeshare or, 12 Apostles=12 Successful Salescalls--The New Testament Sales, Commission and Wealth Plan) Bitner could not find a publisher for his work, so he self-published. Buzz spread and word got around, John Wiley and Sons put out an edition in early summer. On Amazon.com, the book is now ranked number 4 in the "mortgages" sub-category of Business and Investing/Real Estate Read the rest of the article Labels: Asia Times, banking regulation, financial crisis, financial crisis bailout, Julian delasantellis, mortgage meltdown, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Auto Industry Hit HardThe NYTimes reports today that the crisis in the credit market is hitting the auto industry particularly hard.The virtual lockdown on credit is hurting Detroit’s Big Three and other automakers at every level. More consumers cannot get auto loans. Dealers are hard-pressed to secure financing for new inventories. The auto companies themselves are running short of cash and can hardly afford to borrow more at interest rates as high as 20 percent. U.S. car sales are hitting double digit declines this year, with no bottom in sight. Potential car buyers (an already dwindling group) are having a harder time than ever getting a loan. This year only 63% of car loan applications are being approved, compared to 83% in 2007. For subprime borrowers, the situation is even worse: only 22% are getting loans approved this year, versus 67% last year. Those that are getting loans are paying much higher rates. Auto dealers are already choking on bloated inventories of gas-guzzling SUVs and can't get financing to stock up on more popular models. This year 600 out of the country's 20,770 car dealerships have gone bankrupt, including Bill Heard Enterprises, formerly the top-selling GM dealership in the country. Japanese car-makers aren't faring much better. After two years of non-stop growth in US sales, sales are quickly heading downward. According to the Washington Post, the decline of US sales are leading the entire Japanese economy into a recession. Labels: auto industry, credit crisis, New York Times, recession, subprime lending, Washington Post Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Community Reinvestment Act Didn't Do ItHeard the latest joke about the current financial crisis?The Democrats did it. Actually, that's not a joke, but it's the sad excuse for one that corporate capitalist apologists are pushing. Ann Coulter even put out an entire rant with the typically subtle title "THEY GAVE YOUR MORTGAGE TO A LESS QUALIFIED MINORITY. Other lessor minds, from Rush Limbough to the Wall Street Journal, concur. The twisted thinking goes like this: in the late 1970s fair housing advocates pushed through the Community Reinvestment Act, or CRA, to stop banks from discriminatory practices like "Redlining" (the term comes from banksers who would use a red marker to mark off the minority neighborhoods on a city map to show where they refused to lend). Jim Campen discussed the act back in 1997. (The Act was reformed in 1995 and 2003). Right-wing pundits are now claiming that the law forced banks to give mortgages to "unqualified" minorities who are now all defaulting on their mortgages. Simple story, but there's one problem. It's not what actually happened. Writing on the Public Citizen's Consumer Law & Policy blog, Alan White wrote this response:
Read Alan White's full post here. Labels: CRA, Public Citizen, subprime crisis, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Collateral Damage From the Housing Crisis pt 1The fallout of the housing crisis is affecting many more people than just those who purchased a home on dicey terms (or who provided the loan, or now owns the debt). In several posts we will highlight how the current crash has been cause for concern in some unexpected places.Today's New York Times has a story examining how the housing crisis has hit the auto industry. The tightening of the credit markets has closed off the flow of easy financing for prospective car buyers with poor credit histories or others who would, in better times, tap into their home equity lines. Sales of pickups (a contractor favorite) are way down. How bad is it? Sales of new cars are down to their lowest levels since 1995. More loans are going delinquent, leading to higher losses on bad debt and swelling inventories of used cars. Subprime lenders like AmeriCredit project they will loan out just a third as much money in 2008 as they did the year before. "It is a bleak picture, and it all hinges on the availability of financing,” said William Ryan, a financial analyst at Portales Partners who has followed the auto business for years. “The whole universe related to the auto industry is touched in some way — parts suppliers, manufacturers, salespeople, trucking people, the paint and metals industries. Even semiconductors." Labels: auto industry, collateral damage, consumer debt, mortgage meltdown, subprime crisis, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Peas in a PodThis from Mike Allen's Playbook at politico.com, via Doug Henwood at the Left Business Observer's lbo-talk:REPUBLICANS ARE JAZZED ABOUT the news from USA Today's A4 that both Democratic presidential candidates "rely on close advisers who had oversight roles at financial institutions that went bust because of subprime loans. Clinton's campaign manager, Maggie Williams, earned at least $175,000 serving from 2000-07 on the board of Long Island-based Delta Financial, which filed for bankruptcy last year after a history of high-cost loans to low-income borrowers, according to public records. Obama's national finance chairwoman, Penny Pritzker, was chairwoman of the board of a Chicago-area bank in 1993 when it adopted a subprime business strategy that regulators say ultimately led it to collapse in 2001. Labels: Delta Financial, Doug Henwood, Left Business Observer, Maggie Williams, Mike Allen, Penny Pritzker, politico.com, Republicans, subprime crisis, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Just In: D&S Reads the News (#2)The second in a new series of blog entries by D&S collective member Larry Peterson.Before getting into the econ nitty-gritty, I'm going to take this opportunity to briefly lay out my plans for this series of blog entries, and invite suggestions, criticisms, and comments. It's my impression that lots of people aren't aware of the diversity of opinions and magnitude of the disagreements that characterize academic and policy discussions in economics, finance and business, even among conventional practitioners. That being the case, it behooves all of us, and especially those of us who consider questions of justice to be an essential motivator in our thinking about such issues, to attempt to maintain as broad an overview of the subject as we can. Accordingly, I propose, in this series of blog entries, to use my familiarity with the literature to trawl, two or three times a week, for stories, especially in the mainstream press, but also in academic papers and longer articles, that seem to me to be emblematic of how the economy interfaces with questions of justice in its current conjuncture. In addition, I hope to find stories that aren't widely disseminated or discussed in the mainstream press (though they are, in many instances, mined from it). In short, I hope to provide a useful reference and summary for those who, while interested in economic issues in general, aren't familiar with all the facets of the controversies that animate—or should animate, from the perspective of those for whom social justice issues are important, or indeed paramount—its public debates. As for a name, I propose two candidates: "Moral Hazards" and "Lagging Indicators." If anyone has any strong feelings about the name, or proposes an alternative, I'm all ears. Otherwise I'd probably go with the former. Oh—then there's me. I'm a very recent addition to the D&S collective, and am a member of the Union for Radical Political Economics (URPE). I'm not a professional economist or journalist, but have studied all aspects of economics, finance and business pretty intensively for about fifteen years now. Hey, that was good enough for Marx, right (forgive me, Karl!)? Alrighty (to use the favorite expression of our esteemed co-editor here): I'm going to focus today on two issues: trade with China and the housing bubble (so much for all the bit about attempting to publicise what often gets overlooked, I know). Last week the administration slapped import duties on certain Chinese manufactured goods, claiming they were the beneficiaries of improper subsidies. And today, reports The New York Times (U.S. Toughens Its Position on China Trade), a World Trade Organization complaint is being prepared against China which will center on trade barriers and the piracy of goods. The Times notes that the recent aggressiveness towards China in trade matters stems from an increasing impatience in the Democratic-led Congress for action. In this light, the Bush administration appears to be attempting to prevent Congress from taking even harsher actions in the future, if nothing is done now. The administration is particularly keen to avoid such a scenario while Treasury Secretary Henry Paulson is engaged in sensitive ongoing talks about revaluing China's currency in an attempt to reverse the humungous US trade deficit with China. The Times also says that China is trying to ease tensions by committing to more large bulk purchases of US imports, which the administration no doubts hopes will keep select members of Congress quiet while softer diplomacy is given a chance to work. The reason I picked this article to comment on is that it's interesting to juxtapose it with a piece that appears in today's Asia Times (How Foreign Firms Dodge Taxes in China). The article, by Olivia Chung, begins with a paradox: "It seems strange that while Chinese enterprises, including state-owned, joint-stock and private companies, have been making profits in recent years, nearly half of all foreign owned-businesses have been losing money. Yet while so many foreign enterprises claim to be losing money, China witnesses a continual rise in its foreigh direct investment (FDI)." The article goes on to present some pretty astonishing statistics (mostly from official Chinese sources): two-thirds of foreign companies in China report "extraordinary losses;" of the top 10 countries or regions investing in China in 2005, many were offshore financial centers (including Hong Kong) customarily grouped as tax shelters, and that these foreign funds often outstripped those provided by major trading partners, including the US; and finally, the kicker: "…foreign funded companies contributed to one-third of China's industrial output, but generated one-fifth of the total tax revenues." The upshot of the story is clear: foreign investors in China are being accused of using all manner of devices to transfer costs to their Chinese subsidiaries while repatriating profits without paying tax. That being the case, the US complaints about China may not resonate as much with trade negotiators in Beijing (though the article also mentions how Chinese firms game the system by registering as foreign, and that local officials encourage foreign investors to play the tax-avoidance game to pad the books on local production. Now to the housing bubble. The Washington Post had an article today which suggests that one of the most alarming, yet underappreciated aspects of the housing bubble is the prevalence of fraud. It notes that a confluence of developments led to a situation rife with opportunities for criminal gain, from lax-or no-oversight of new mortgage companies to the huge demand for bonds made up of repackaged mortgage loans (a good deal purchased by the very Chinese we want to stop from buying our bonds now). Much of this stuff is common knowledge now, so I'll simply let the follwing comment from the article speak for itself: "No one knows exactly how extensive the crime has become, but new data from the federal government suggest that it has jumped tenfold since 2000 (another bubble year, recall, LP). Prosecutors are finding cases all over the country in which sham transactions, based on fraudulent appeals, led to homes changing hands at far above their real value." If such homes were purchased far above cost, that must have driven up the values of surrounding properties in to a similar extent. And that means there may be more-perhaps far more air left in the housing bubble than we care to imagine. This is particularly so inasmuch as investment in industrial property, which offset losses in the constructions sector for a while, appears to be tapering off as well. (Note also the April 7th op-ed piece on the housing crisis by Dean Baker of the left-leaning Economic Policy Institute (and also an occasional D&S contributor.) Oh—one last thing. The New York Times reported yesterday (Democrats Seek to Lead the Way in Tax Overhaul) about Democratic efforts to abolish the alternative minimum tax. This tax is slated to fall on unprecedented numbers of Americans in coming years (as their nominal incomes enter brackets set long ago, before the inflations of the ‘seventies and ‘eighties), and most politicians want to avoid this at all costs. The Democrats, while deserving applause for attemting to shield middle-class families from the incidence of this tax, propose no new taxes to offset the losses in revenue. The Times notes that this amount "…would be far bigger than Democratic initiatives to provide money for children's health care, education or any other spending program." Scared of their obscenely wealthy donors, ir seems the Dems are all too willing to shelter the rich by abolishing the AMT altogether, rather than for families earning up to, say, $250,000 a year (or raising other taxes on them). This inn is already full. Labels: alternative minimum tax, China, fair trade, housing bubble, subprime lending, URPE Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
