Without going back to find the causes of the foreclosure crisis it will not be possible to find solutions that work. The foreclosure crisis has led to bad debts, credit freeze, falling stock markets, popular anger and all round panic. The financial crisis gripping America seems to without parallel in its history.
But scholars studying the economies of 15 different nations that have experienced banking crisis during the past thirty years say that the pattern today in America is not something new. Thus the question posed is what can this country learn from the market tremors in different diverse countries like Mexico, Japan and say, Turkey?
When the Dow Jones fell by 777 points, a panel discussion was held at Lauder Institute of Management & International Studies comprising of eminent professors from University of Pennsylvania. Foreclosures could not have surfaced out of nothing – there must be deeper interlinking causes.
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It is really a global village with ripples in one part touching another part of the world. The ongoing foreclosure crisis in USA is hitting far off Calcutta or Kolkata in India. Nothing could be more symptomatic of the interdependence of the world economy.
Calcutta’s real estate market has been hit in a big bad way because of the foreclosure crisis in America. The first brunt of the attack has fallen on the civic authorities of Calcutta. The KMC or Kolkata Municipal Corporation coffers are looking slim ever since the foreclosure crisis began in USA. The KMC is about to lose the biggest source of its income – the fees it collects from jumbo developers and construction firms for granting sanctions to submitted plans. Read the rest of this entry »
The foreclosure crisis has badly hit the nation’s housing financing agencies. These agencies provide credit to poor-income and moderate-income people buying homes for the first time. West Virginia has stopped bond sales in the market. So has the housing development authority of Illinois. A $150 million bond sale of long-term planning in Ohio has been cancelled following foreclosures. The entire loan programme of Wisconsin was suspended. Two long-term loan programmes were temporarily suspended in California while two assistance programmes for down payment were removed.
Speaking for California Housing Finance Agency, Ken Giebel said, “”The banks are getting all this money and we don’t have access to anything,”
Housing agencies need to sell their bonds at reasonable interest rates in order to borrow money with which they can process the mortgages. With the foreclosure crisis, bonds could not be sold, particularly those linked to mortgages. With the opening up of the market, some bonds can be sold, but the interest rates are higher. This means higher costs for taxpayers. Read the rest of this entry »
The foreclosure crisis is leaving behind a trail of derelict houses that are not only eyesores to the community but also turning dangerous centres of crime and disease. More laws are being passed by different states to contain the problem of abandoned foreclosed houses. The problem is being tackled in many ways.
Chicago has begun to ban plywood. Providence is clamping down a fine of 10% of the valuation of the house. Garland in Texas is asking for $2,500 as bond money that can be utilized to maintain the foreclosed empty houses. The aim everywhere is the same – the prevention of crime and the lowering of property value in the adjoining areas. Read the rest of this entry »
Southern California has been hit twice by the foreclosure crisis, and is expecting a third attack in spring. However, preparations are afoot to check the third foreclosure attack. A large number of laws, both state and federal, have been pushed through in Sacramento and Washington by lawmakers as well as by consumer advocacy groups.
Many of these laws were passed before the foreclosure crisis. That was a time when Lehman Bros., AIG Inc. and other giants were in business and the Dow Jones index was between 10,000 and 11,000 points.
The foreclosure crisis changed things. Credit lines were frozen. Confidence of the investors plunged. The Congress passed a bailout package of $700 billion, but financial investments continued to fall. Read the rest of this entry »
One of the most prominent figures writing on economic history is Ms. Leper of University of New Hampshire. She opines that the foreclosure related bank crisis is nothing new and is more or less a repeat of similar incidents that took place yesterday.
No matter who is elected President this time he will not be the first man to be faced with a financial crisis of jumbo proportions. In 1933 FDR had battled a similar depression in banking. Even further back another elected leader, President Martin Van Buren had come up with a similar problem in 1837. A series of business mishaps had toppled the financial system of USA. Van Buren was blamed for it making him the first president to be made into a scapegoat.
The blame game however did not solve the problem. Today Bush is being blamed for the foreclosure related financial mess but that does not make things easier either for the next incumbent or the nation. The causes are knotty and difficult to unravel. Solutions depend on finding the root causes. Fumbling around can be painful for all concerned.
Alan Greenspan has rightly called the raging foreclosure triggered crisis as “a once-in-a-century event.” The financial disasters came in cyclical order – 1837, 1929 and now today. The faith in economic predictions and ability to contain disasters has been shattered.
The predecessor of Van Buren, Andrew Jackson had done away with regulations in the banking system. Easy credit was available and many new banks surfaced as more and more people gambled financially. Varieties of bank notes began to float around. But while the economy apparently boomed there were rumours about instability. Investors began to lose confidence. Interest rates soared as credit began to dry up. It is uncannily familiar with the foreclosure crisis of today. Wall Street went to Washington with the begging bowl. Van Buren refused bail out deals. He and his party had to give up power. Like Jackson, Van Buren was a firm believer of non-interference in banking movements and financial operations. When the people got to know of this they risked personal injury in lining up demanding gold in lieu of paper bank notes. The banks in New York closed their gates. Other banks across the nation followed suit. The economy fell six weeks after the taking of the oath of President Van Buren.
Since then more instruments have been developed to be used as tools to battle crisis but the system too has become complex and challenging.
Bank Foreclosures by Top States
One of the consequences of the foreclosure crisis is that the souring of the economy has caused many migrants to exit from USA.
Dionisio Urbina is one of the many who is going back. After trying hard to send money to his family in Honduras he has decided to return and saved money for a one-way plane ticket. His job as a day labourer was no longer sufficient. There were few other work options and after suffering the fourth straight week without a job he took the decision.
Thousands of legal and illegal immigrants are following the same trend. The foreclosure related crisis has led to the drying up of jobs in the housing sector and this has led to an all round slump in landscaping, restaurant business etc. The inflow and outflow of immigrants to and fro the border follow a cyclical pattern. Many return during Christmas. But those in authority say that the exit numbers are abnormally high.
The foreclosure crisis is not contained within the boundaries of America. The municipal government of Mexico predicts that the numbers of those returning are more than 20,000 or 30,000 of the regular figures because of lack of jobs. The consulates of Mexico in California and Chicago note that 4,000 more immigrants have already left because of the foreclosure related economic crisis. There are also other things that point to the fact that USA is no longer the magnet it used to be a couple of years ago. During the housing boom there was plenty of work for all.
Lesser numbers of illegal immigrants are caught crossing over into America. This year the number till 30th September has fallen by 18% from the previous year and 39% less than the numbers of 2005.
The immigrants, thanks to the foreclosure related credit crunch, are sending less money to their native homes. In August the remittances were the lowest since the last twelve years. The central bank of Mexico said that the amount of money coming in dropped in August this year by 12%.
There are about 12 million illegal immigrants in America and as such the number going back home is comparatively small. Most of them will continue to hang around USA because the job prospects are far worse in Mexico. Moreover many have brought over their families to USA. This was the opinion of Wayne Cornelius of California University, San Diego Center for Comparative Immigration Studies.
California Bank Foreclosures by Top Counties
Pundits had given adequate warnings but the ignoring of these has led to the foreclosure crisis of today in USA. But since the days were heady from 2003 to 2008 one did not heed the approaching storm. Defaults set in. It had a snowballing effect on financial bodies since the banks in USA are without SLRs and CRR’s. This meant that for every $1 deposit a loan of $8 is created by means of accounts on paper and transfers.
At this juncture rumours began to circulate. The cry of foreclosure was raised. The media thrived on it highlighting figures of millions of foreclosures. It meant banks were neither being able to get their mortgage dues nor make profitable use of the property they seized. People rushed to withdraw deposits. Banks failed them. Panic set in. The financial bodies do not have the reserve fund to satisfy all depositors at one time. They declared bankruptcy. The ranks of Fannie Mae and Freddie Mac were joined by Lehman Brothers, AIG and many other smaller fry.
The stock market generally reacts to each shred of bad news. This was no exception. It began to plummet and added to the mayhem as news of more foreclosures leading to bank failures poured in. Globalization led to international panic since one financial unit is linked to another. To restore confidence the governments had to step in.
The foreclosure crisis has led to the Bush government’s bailout package of $700 billion. In its first edition the package was rejected mainly it envisaged making direct grants to the busted banks. But after much trimming aimed at saving the taxpayer the bill has been given the green light.
The two presidential candidates Senator Barack Obama and Senator John McCain have their own suggestions to the foreclosure problem. But both plans seem to be much short of remedial expectations. Most of suggestions avoid the basic issue the ordinary man being harassed by foreclosure. The blame game is going along with some blaming the Blacks and the Hispanics for being gullible and greedy. This has set off racist tensions.
Foreclosures have become a socio-economic issue with entire neighbourhoods turning into eyesores with vacant foreclosed houses. The police and fire fighting forces with reduced budgets, thanks to the credit crunch, are in no position to tackle the increase in crime and disease. Meanwhile foreclosures have the last laugh.
Bank Foreclosures by Top States
The financial illiteracy of the ordinary Americans is said to be largely responsible for the foreclosure crisis. As the financial drama unfolds the blame game goes on with fingers pointing at bankers, borrowers and policy makers.
A recent report shows that that the financial literacy standards of the ordinary American are very low. It makes it difficult for them to oversee their simple cheque accounts in banks. How can they save themselves from the falling credit market? Even the policy makers are not much better financially educated. Less then 15% of the present members of the Congress have a degree in economics, finance or business. Of the adults 70% cannot note FICO scores being the most important point in being able to get a mortgage. About the same number of people cannot calculate late credit card interests. Thus it does not need much thinking to connect the present foreclosure related financial crisis to collective ineptitude. The survey brought out the shocking revelation that the widespread financial illiteracy has been a contributing factor to the proliferation of problems in all corners of the economy.
Undoubtedly the causes of the present financial crisis are complicated but one cannot deny the major role that foreclosures and mortgage defaults have played in it. There were shrewd dishonest mortgage brokers and confused Wall Street investment firms. But it has to be admitted that millions borrowed well beyond their means and aggravated the situation. The contracting of adjustable rate mortgages with negligible interest rates is indicative of the lack of financial knowledge. This has stopped them from asking fundamental questions about their loans. A simple question like how much will the monthly payment be in the fifth years would have been of great help to prevent people from falling into this foreclosure mess.
Financial education has not kept pace with personal finance that has become much more complex from what it was a couple of decades ago. For instance instead of the employer managing retirement funds, the employee is expected to do so himself. To do so one must have a basic knowledge of inflation, deflation, deferred taxes and diversification of assets.
A recent survey conducted by Rutgers University showed that more than 30% of the citizens had more credit card debts than savings in retirement funds. In 2005 the national savings dropped to zero – the first time since the Great Depression. Overspending and under saving can have dangerous consequences as seen in the eruption of the foreclosure crisis.
Bank Foreclosures by Top States
Robert Schiller has analyzed the foreclosure crisis in a brilliant understandable way. It makes excellent reading on the raging foreclosure drama being played out.
April 2008 had noted 243,353 foreclosure postings – it being treble the number of April 2006 according to the findings of RealtyTrac. The writing is on the wall and points to the inevitable that without the intervention of the government many millions of Americans will be soon losing more houses.
As such it needs to be considered, opined Schiller, that the blame for this foreclosure mess cannot be squarely be placed only on the house owners – that is the borrowers. The mortgage brokers, originators, appraisers, regulatory bodies, security rating bodies, the chairperson of the Federal Reserve as well as the President of America – et all had a prominent role to play in the unfolding of this foreclosure drama.
The President never rang out any warnings but rather continued to extol the positive side of house ownership. His ownership theme had laced his 2004 re-election campaign. People generally connect house ownership with good feelings about a warm home and hearth. There is a feeling of belonging to a society. It is important not only economically but in the mental make up and happiness of the people who make up the nation.
But today everybody is witnessing how the Ownership Society operations of the President are working in reverse gear. The ownership rate has slumped to 67.8% in the first quarter of 2008 from 69.1% noted in the first quarter of 2005. There are clear indications that this trend will continue to pick up speed in the forthcoming months. It has scarred the nation.
Either directly or indirectly the foreclosure crisis is impacting on all. It is rippling across the country from coast to coast. There are many responsible for the current crisis but it is the individual borrower who is the worst suffer and most clearly visible as the bubble is bursting. Overnight businesses have downed shutters causing jobs to vanish.
Caroline Bird authored “Invisible Scar” in 1969 motivated by the thought of keeping alive the memory of the Great Depression. She wanted a new generation to remember it. She wanted to preserve the lessons learnt from it for a future generation. Perhaps three decades forward from today somebody with an impartial view will take up the pen to document the great Foreclosure Crisis for posterity to take note of and be forewarned.
Bank Foreclosures by Top States
