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2 Pain relievers should share the
pain By Julian Delasantellis
Wrongly attributed to New York Tribune
publisher Horace Greeley in 1865 (the actual
author was Indiana newspaperman John B L Soule in
1851) "Go West, young man, and grow up with the
country" defines not only the American
expansionary spirit of the latter 19th century,
but, to a certain extent, the philosophical ethos
that forever has defined American society, from
the pilgrims at Plymouth Rock to the present.
Got a problem, be it with your work, your
community, your church hierarchy, your family,
even your spouse? The solution was always to pack
up stakes and strike out towards the frontier,
towards the plentiful open space of the boundless
West, towards the limitless new dreams guaranteed
to be just over the horizon, available to all free
men just by virtue of their birthright as
Americans.
Until now.
Because of the spreading and intensifying effects
of the subprime mortgage crisis, almost 9 million
American households (by comparison, there were
only 4 million slaves in the American South at the
beginning of the US Civil War) are now
indefinitely tied down as tightly as Russian serfs
to their plots of land, as the turbofinance of the
21st century puts into place a breathtakingly
oppressive new financial feudalism that, as much
as any poor 19th century peasant toiling on the
banks of the Volga, limits their options, their
mobility, ultimately their very freedom.
Like a cancer metastasizing through the
body invading vulnerable organs one by one, the
subprime mortgage crisis is now showing up in yet
another doleful manifestation of the closing of
the American dream. This time, it's the almost 9
million American homeowners who now owe more on
their properties than their properties are worth,
who are, in mortgage industry jargon, "under
water" on their properties.
The American
economic and governing elite, those who rule in
the name and for the benefit of the people, is
certainly springing into action to address the
problem. Last week, Countrywide Financial, the now
nearly bankrupt Pied Piper of subprime whose
golden flute now appears to have led a good
portion of the world's financial markets right off
a cliff, hosted a posh "eat drink and be merry,
for tomorrow we die" ski soiree (actually, it's
probably more accurate to say that the atmosphere
was along the lines of "eat, drink and be merry,
for tomorrow we'll all get fired" after the
pending buyout of Countrywide by Bank of America
goes through) for what's left of the mortgage
origination industry in Vail, Colorado.
And down there on those private islands in
the Caribbean, the places where, you know, only
the right sort of Gulfstream G550s are allowed to
land, America's business and political elite are
obviously burning with desire to assist the
nation's endangered homeowners.
Hey,
boy. Rub some oil on my back. Much in the
same way that longstanding cultural traditions
make those who suffer the coming-of-age ceremony
that is female genital mutilation welcome this
torture, in America, the formal ceremony that
accompanies the legal transfer of real estate from
seller to buyer, called a closing, is a
traditional torture that Americans have come to
accept as an inevitable right of passage along the
way to the American dream of home ownership.
Usually occurring at the offices of the
specialized professional parasites called real
estate lawyers, a closing involves bringing buyer
and seller together with lawyers and bankers for
hours of paper signings that codify into contract
the changes in the parties' ownership and status.
For the buyer, who foots the bill for all
parties providing the day's entertainment, the
closing involves a formal acknowledgement that,
although he may be now on record as the legal
owner of the property, his continued ownership is
always conditional on keeping current on the
mortgage financing obtained to acquire the
property.
For the seller, the closing
involves signing pounds of paper relinquishing his
ownership claim in the property, and, in return,
receiving a nice big check in payoff. But first,
before the seller receives a penny of proceeds
from the property, he must make a one-time payoff
of the remaining balance of the mortgage; the
difference between what the buyer is paying and
what the bank takes out is what the seller walks
away from the closing with.
With the
traditional pattern of American real estate price
appreciation, closings are usually fairly pleasant
for the sellers - the rising prices means that the
mortgages can be paid off with still healthy
chunks of cash left over.
Of course,
there's not much that the seller can do with his
newfound bounty, for, although he may then have a
nice big check in his pocket, he also has no place
to live.
Unless he wants to reside in a
refrigerator box or move out of his local real
estate market into a cheaper one, the riches
obtained in selling his old property will be eaten
up at the purchase closing of his new property. In
this, the varying real estate prices and
valuations of America's individual, localized real
estate markets work very similarly to the floating
rate regime of the international foreign exchange
markets.
If you own property in a
high-value real estate market, say San Francisco
or Boston, you can, in much the same way that
European tourists were able to travel to New York
this last holiday season to snatch up bargains
with their strong euros, sell that overvalued
property to get a lot more value in areas with
less expensive real estate. Fargo, North Dakota
currently lists for sale over 250 three-bedroom,
two-bath houses under US$200,000 , while
Sunnyvale, California, south of San Francisco,
lists, of course, none.
Sellers in
pain It's not at all uncommon for the buyer
to have to bring money to the closing, either as
the down payment, or to pay the 5-10% of the
purchase price that are the useless expenses,
called "closing costs", that the actors in the
system, collecting what economists would call a
"monopoly rent", bleed from out of the open veins
of the buyers. But, up until recently, it was
unheard of for the seller to have to bring money
to the closing.
This would be the case if
the selling price of the house was not sufficient
to pay off the remaining balance on the mortgage.
This would happen if, in between the time of the
house's purchase and its sale, its value declined
below that of the outstanding mortgage. This
situation would be more likely if the seller,
instead of paying down the mortgage and building
equity in the house, continually re-leveraged the
property with second and third mortgages and/or
home equity loans.
If the value of the
home selling price falls short of the mortgage
balance by say, $50,000, then that's $50,000 worth
of pain to be deposited on the head of the seller.
Even though he no longer owns the house, he still
has the same mortgage obligation to pay down the
debt; if he doesn't, the bank can go to court to
have his wages garnished or assets seized in order
to collect it. The only real alternative the poor
borrower has then is to declare bankruptcy, and in
doing so, resign himself to at least seven years
of existence in the shadowy, credit restricted
American netherworld known as the cash economy.
Obviously, what most homeowners will do in
this situation is to not sell the house; they will
continue to live in it and make the payments as
best as they can, in the hope that someday the
house's value will rise enough that they won't
have to keep living their lives as indentured
servants to it. This, of course, makes their
relationship with the house the most central
aspect of at least their financial, and frequently
their personal, lives. (A couple going through a
divorce in this situation may well find that, even
after the relationship they have with each other
is legally dissolved, the relationship they
continue to have with the house and its mortgage
keeps the two of them still bonded and living
together in unending, doleful personal embrace.)
In contrast to the supposed sclerotic
nature of the West European economies, the
American economy is said to be "flexible" and
amenable to rapid change. In terms of American
companies' human relations policies, that means
that most companies view their work staff as
interchangeable and disposable as tissue paper.
For a worker who thus gets laid off but who can't
move to an area with better employment prospects
because he can't sell his house, the American
promise of unlimited freedom and liberty will ring
very hollow, as will it for the worker who, for
the same reason, can't accept a promotion or a
better job in a new city.
Due to the
subprime mortgage crisis, almost 9 million
American households are currently in the situation
described above, being under water on their
mortgages.
Not all of these unfortunates
are subprime borrowers. With the quickening pace
of foreclosures and subsequent foreclosure
property auctions, the added supply of homes onto
the market is driving down prices. Also, the
tightening lending standards in the mortgage
finance industry, with prospective buyers who
previously qualified for loans now shut out of the
market, are thus further suppressing both demand
and prices.
In addition, during the go-go
real estate boom of the past few years, many
prospective homebuyers and home equity borrowers
were allowed to borrow right up to the then
inflated assessed value of their property, leaving
them almost no cushion of safety should, as is the
case now , values start to fall.
Last
week, different proposals emerged from both
government and the banking system as to how to
deal with the crisis of the submerged sellers.
Avatars of ideology The banking
industry is proposing a fairly simple solution to
this, and most of the other problems arising from
out of the subprime crisis. Much like the
nationalization of the Northern Rock bank in
stodgy old supposedly socialist Great Britain,
these avatars of free-market ideology in the
finance trade are, essentially, calling for the
nationalization of the entire subprime mortgage
industry.
Here is the core difference
between advocating for capitalism and supporting
capitalists. Capitalism is a system that heralds
the innate, natural superiority of the market over
government; as for
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