The Current Sub-prime Tsunami
I bought my first house for $32,000. My father loaned me the money for the 20% down payment, which was $6,400. The financing bank was a local one, and did not sell the mortgage. But that was a long time ago, not just in years but in the evolution of the world of finance and real estate.
Even as we who make our living in financial services struggle to understand the dimensions and impact of the current sub-prime tsunami that has rocked markets around the world, there are thousands of lives that are tragically altered, and their stories do not make headlines dominated by the huge mortgage companies, banks and brokerage firms that created the greed-driven implosion and now whine about their own fate. For many of the hapless homeowners facing much higher payments than they’d bargained for within a disappearing housing market, there is no local bank with which to bargain. Their mortgage might well be “owned” by a large institutional investor as one miniscule part of a bond or other instrument sold by a broker.
One of the stories proved close to home when a friend told me that her mother and sister had received an “acceleration notice” for the mortgage on their suburban house, which is worth around $300,000 and has a mortgage of $130,000 and a home equity loan of $40,000. The 75-year-old mother lives on $500 social security, and the sister was recently laid off from her job – the mortgage and home equity loan together cost $1,662. They have missed two mortgage payments, and now they are told they owe the entire mortgage amount – payable immediately. They are lucky – their house is worth more than they owe, and they’ve put it on the market, but there are no buyers, because few banks are willing to lend. It’s likely that the house will be auctioned for the amount of the mortgage, leaving my friend’s mother and sister with none of their equity in the house. The combination of unscrupulous brokers and too easy money created real victims.
Ours, however, is an age of stark contrast and an income gap that is as wide as it’s ever been in this country. The New York Times reported in April that “in 2006 the top 25 hedge fund managers earned $14 billion – enough to pay New York City’s 80,000 public school teachers for nearly three years……unlike the dot-com billionaires who saw their fortunes collapse with the tech bubble, the gains on hedge funds….are huge cash payouts that most managers then reinvest in their funds.” Even as the crisis continues to unfold and people are fighting to hold onto their precious homes, these same hedge fund managers are fighting to hold onto tax breaks that allow them to bring home billions of dollars a year.
Although, undoubtedly the latest greed-driven crisis will run its course in the gargantuan global financial system, the greed itself remains. The challenge for those who believe in sustainable, responsible investing is ever greater.