Today, 2 million families face foreclosure on their homes in the aftermath of what should be called the “subcrime”: Many credit-poor families were seduced into buying houses with so-called subprime loans (pricier than most ordinary loans) that the lender knew they could not afford. The mortgages had interest rates that were initially attractively low, but which quickly reset upwards. Families living on the edge soon found themselves in an unaffordable situation—especially as other costs, such as gas and food, went up. Many homeowners are now caught in a squeeze that could cause far more homelessness than Hurricane Katrina.
And they’re not the only ones in trouble. Financial markets are melting down. To keep them afloat, the Federal Reserve and its counterparts in other countries have had to inject hundreds of billions of dollars into the banking system. More than 140 companies have already imploded. Thousands in the housing industry are out of work. Economists fear a serious recession and are scaling back their projections for growth.
How was this allowed to happen? These days, instead of holding onto mortgages they make, most banks sell them to Wall Street. There, prominent firms make millions recycling mortgages into securities and other exotic financial instruments, often using them to provide financing for even bigger deals—and sanctioning the unrestrained greed and unregulated chicanery of the predatory lending industry.
It became a classic “the emperor has no clothes” story when it was revealed that many of those “asset-backed securities” had no real assets behind them. Suddenly, the paper proved worthless and the markets panicked. Soon there was a “crisis of liquidity” in financial circles, as it became clear that bad deals had been funded by bad debts. That’s where we are now: trying to figure out what’s real and what’s not, as the markets melt down and mortgage companies that engaged in predatory lending implode.