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Sub-prime mortgage problems spreading |
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There are two major subjects which are bound to arise in any discussion of the American scene at present. Number one in everyone's minds are the Presidential elections, which can be said to be under way even though they have only just started and have yet to decide on nominations. The other subject which rumbles on like menacing thunder is the sub-prime mortgage crisis and the ensuing and apparently increasing turmoil which it has created. Steve Schifferes (BBC economics reporter) has focused on Cleveland, Ohio, an industrial city on the edge of the great lakes which he describes as the sub-prime capital of the USA. The picture presented is of an unhappy community which is almost certainly representative of what is occurring (albeit on a smaller scale) throughout the country. He reports that around 10% of the homes in the city are empty and boarded up, with vandalised neighbourhoods, rising crime and a potential bill of around $100m for demolition of vacant property. Unfortunately Cleveland is only the worst symptom of a spreading problem. A quote from Michael Calhoun of the Centre for Responsible Learning shows how extensive the problem is. He claims that one in five US mortgages fall into the sub-prime category, and that "families all over the country continue to lose homes in record numbers……….destroying entire neighbourhoods." The ethos behind sub-prime home loans was commendable enough as it enabled those with poor credit history to obtain a mortgage and move into home ownership. There are claims however that mis-selling was rife, with many applicants not being given either accurate and/or sufficient information. For example, although most sub-prime mortgages are fixed-rate loans, the fixed rate period is limited to two or three years and it is then moved to a much higher rate. Some of those with problems claim that they were not told about the limit on the fixed rate period, others simply admitted that they could not afford to keep paying and claim that when they defaulted 'huge unexplained fees' were added to their bills. Sheila Blair of the FDIC (banking regulators) has proposed that a nationwide agreement is necessary, perhaps retaining the initial fixed mortgage rate where the borrower has no arrears; the problem with this idea is getting agreement with the thousands of investors worldwide. It is however clear that, when the US Joint Economic Committee estimates that in the first 8 months of 2007 there were 1.7 million foreclosures and that they expect another 2 million in the next 2 years, something needs to be done. That is an awful lot of homeless people. |
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