According to experts, risky mortgage loans have been issued for more than a trillion dollars, accounting for a fifth of all housing loans. Shares of mortgage banks and financial funds investing in this market are falling. As analysts predict, if this trend cannot be reversed, then by the law of chain reaction a global financial crisis may break out. And all because many Americans have miscalculated the limits of their solvency and - just like us! - do not read mortgage agreements carefully. As a result, nearly two and a half million of them face personal default.
Floating Rate
Walking around my New Jersey town, a typical one-story America, I noticed that recently the signs on lawns in front of houses have been changing less often. These are boards nailed to stakes with real estate company announcements indicating that the house is for sale. They show the agent's name and a phone number to call if interested in the offer. When the house is sold, during the transaction processing period (which can take two to three months), additional tags are added to the sign: 'contract signed', 'sale pending', and finally the final one - 'sold'. The sign is removed after the closing - a huge package of purchase and sale documents, on the basis of which the new owner receives the coveted keys. And now I see something wrong: decent houses that used to fly off in a couple of weeks are sadly sitting unclaimed for months.
The growth of the housing market in America has slowed down, and in some places has completely stalled. The most alarming symptom of the crisis is the record number of foreclosures, which in legal language means depriving the borrower of the right to redeem the mortgage, and in everyday terms it is formulated roughly like this: no money to pay the mortgage loan - get out.
For decades, politicians and economists have insisted that the growth in homeownership is the key to the stability and prosperity of the country. The more Americans buy houses and apartments, the stronger the middle class, and therefore the stronger the foundation of society. During the 1960s-1980s, approximately 65% of American families owned their own homes, and in the last fifteen years this figure has risen to 69.2%, which the White House is extremely proud of. According to official data, there are 73.4 million American families who own homes. The average cost of a roof over one's head, of course, varies widely: from $120,000 for a single-family home somewhere in an unprestigious hinterland to $750,000 for similar property in San Francisco and $850,000 in Manhattan.
'We want people to own something, because in that case they feel their own responsibility for the future of the country,' President George W. Bush proclaimed in 2004. Who would argue? Even the most ardent Marxist understands: if a person has something to lose, he will not go to the barricades. But here's the problem: this year, the grim prospect of foreclosure awaits more than 2.4 million Americans. The speculatively overheated real estate market in recent years is rapidly cooling, and there are several reasons for this.
The first and main reason: the desire of banks and their authorized brokers to foist a mortgage loan on the consumer at any cost has led to a threatening increase in dubious, high-risk mortgage contracts. Banks, due to fierce competition, come up with clever traps that trap not only simpletons. For example, the most popular 15- and 30-year fixed-rate mortgages can now be obtained at 5.8-6.5% per annum. But wouldn't you like a rate two to three times lower? And also pay a down payment not at the standard 10-20% of the home's price, but 5%, or even no down payment at all.
The fact is that in America, getting a mortgage is not just easy, it's very easy. Banks literally chase every potential client, bombarding them with advertising and promising to take care of all the hassles of buying a home for a ridiculously low interest rate. As a result, the problem of affordable housing, which is still unsolvable for us, has been successfully addressed in the US. True, another problem has arisen in its place.
Overseas, mortgages are sometimes issued like consumer loans in our country - without trying to ascertain the client's solvency and taking the risk of default in advance. The notorious effective interest rate on the loan is often not stated in the contract, luring with the so-called floating rate and numerous benefits. Many swallow the bait. Alas, people often forget that free cheese only comes in a mousetrap. And they don't pay attention to the fine print that follows the main terms of the contract. This is precisely an American invention - sellers shout loudly about the 'features' beneficial to the consumer, but modestly keep silent about time bombs. This experience, it must be admitted, is being successfully adopted by our bankers as well. And therefore, what is happening now in the American mortgage market, with allowance for nuances, can quite be considered the tomorrow of our domestic market. If, of course, the disease is not addressed in time.
The symptoms are as follows. For the first few years, the homeowner enjoys life, paying minimal monthly installments on the loan, and then one fine day discovers that the payment amounts have sharply increased, exceeding market average standards. The floating rate is tied to the refinancing rate, and if it increases, the rate rises rapidly, to the borrower's surprise. When the rate 'floats,' it is useless to complain: you were told and shown everything when closing the deal - see, that very fine print, and there are your signatures.
If Tomorrow - Default
Statistics show that the guillotine of foreclosure mostly falls on the poor and ethnic minorities. They are less educated, some have trouble with English, and it is easier to fool them. There is an unspoken general rule: the poorer a person is, the higher the mortgage rate for them. The main criterion for a bank is credit history. If it is poor, and a person, say, has delayed loan payments in the past, then the terms of the mortgage loan are tightened for them. And although outward appearances are maintained and everyone fears accusations of racism, colored Americans almost always get worse options. A recent study found that in the six largest US cities, a black resident is nearly four times more likely to get an unfavorable mortgage loan than a white American.
But still, millions of people want to get their own roof over their heads. The fetish of homeownership, aggressively promoted by the media, pushes the poor and poorly educated seekers of the American dream toward adventurous decisions. No money - it's okay, I'll borrow, I'll find a new, better-paying job. In general, things will work out. Mirages often obscure reality, and the philosophy of consumerism in its American version forms a conceptual carelessness in the consumer. Living in debt is the norm. A huge number of people buy goods without thinking that they spend more than they earn. I know people who, in addition to a hefty mortgage loan, owe banks that issued them credit cards thousands of dollars and yet sleep like babies. Until personal default strikes.
However, today is a more humane time than the era of Dickens and Zola. You won't be evicted for one month of non-payment. First, the lending bank sends 'reminders', one after another, then there are calls asking 'what and why'. Trying to save the situation, banks offer the borrower debt restructuring options. And only when the situation is considered hopeless, the eviction mechanism is activated, that is, forced eviction. That is if the owners do not want to leave voluntarily. Many would like to, but have nowhere to go, only to the street to be homeless.
After a court decision, a sheriff or his deputy comes to the house with the appropriate paper and isolation tape. He sticks the paper on the door and tapes off the perimeter around the house. Some families hope for a miracle until the last moment, and only when the fateful paper appears in the door do they pack their things and move out. But when they don't move out...
'I have never seen scenes more heartbreaking than the eviction of a family with children,' admits police officer John Shawkes from Lexington, South Carolina. 'Because children don't understand why they have to leave their home forever.' Shawkes has been performing gendarme duties for 20 years, and he says he cannot recall such a large number of evictions as in recent months. Listing the reasons why people cannot pay the bank, Shawkes ticks them off: divorce, job loss, serious illness, or death of the breadwinner. But the main reason, which we started with, is excessively expensive loans - 'tricks' with floating interest rates that people fall for without suspecting the consequences.
Contagious disease
There is a misconception that the bank benefits from foreclosure. Not at all: the bank, like a vampire, excuse me, benefits from drinking blood as long as possible in small portions, rather than losing the victim forever. The foreclosed house is put up for sale, but the prices at which such properties are sold are significantly below market, and the average property value in the area where evictions are frequent drops sharply. On average, mortgage lenders lose up to 40% of the loan value due to foreclosure and, in addition, must pay property taxes and other expenses for maintaining the house until it is sold again.
While the White House remains puzzled and silent, watching the mortgage crisis, legislators have sounded the alarm. The US Congress wants to tighten mortgage standards to protect consumers from predatory loans - preludes to a debt trap. Both Republicans and Democrats understand that over-tightening the regulatory nuts is dangerous. Refusing mortgage loans to the poor would essentially tell them: you are second-class people, and the American dream is not for you. That would be the collapse of America's main 'national project'. Who would dare to do that on the eve of presidential elections?
However, hesitation is also risky. Real estate firms are going up in flames. Following New Century, several other large companies that issued problematic loans may declare bankruptcy. There is a danger of a chain reaction, where the collapse of one industry pulls others into the abyss. Given the trillion-dollar volumes of the US housing market, we may be talking not about isolated seismic tremors but a destructive earthquake of global proportions. As International Monetary Fund chief economist Simon Johnson said the other day, 'When the US sneezes, other countries can catch a cold.' But he also reassured: the market is indeed in turmoil, but the US should not slide into recession, and the rest of the world's economy is in relatively good health. However, not everyone is so complacent. From time to time, much less optimistic forecasts appear. 'The crisis is unlikely to subside this year,' predicts Yale University economics professor Robert Shiller. 'Home prices could fall and fall for several years.'
If the pessimists turn out to be right, then the well-meaning construct of the American dream home, which has already developed noticeable cracks, may be on the verge of collapse.