Economic opportunity, said Ben Bernanke, chairman
of the US Federal Reserve “should be as widely distributed and
as equal as possible". That was the first of three principles
he spelled out for economic policy in a recent speech. Further,
he said, “economic outcomes need not be equal but should be
linked to the contributions each person makes to the economy”
and “people should receive some insurance against the most adverse
economic outcomes, especially those arising from events largely
outside the person's control."
If there are people in need of the third of Bernanke’s
principle it is the people of Detroit. They haven’t been hit
by a natural disaster. Rather, they have fallen in the path
of an economic tsunami of devastating proportions. Right now
they are being hit hard by the forces of globalization and technological
change. The city of less than a million people, over 80 percent
of who are African American, in a metropolitan area of over
4.5 million, has become something like the epicenter of the
crisis of deindustrialization adversely affecting black communities
around the country.
Last week the city was delivered a new blow when
DaimlerChrysler announced it will cut 13,000 jobs in North America.
According to the company announcement, much of the effect would
be in southeastern Michigan, where 5,300 people will lose their
jobs over the next two years. For the state as a whole, the
job loss will include 1,000 positions at the Warren truck plant,
250 jobs at a Detroit axle plant, nearly 200 more at the Mack
Avenue Engine Plant I in Detroit, 100 at an engine factory in
suburban Trenton, 65 more at a stamping plant in Sterling Heights
and 100 at a stamping plant in Warren. In addition, about 1,600
of the 2,000 white-collar layoffs will come at the company’s
Auburn Hills headquarters. According to the Associated Press,
an additional 1,000 Michigan jobs will go, as Chrysler explores
selling support businesses not involved in its core car-building,
and 1,000 will be lost because of “productivity improvements.”
Industry observers are saying there will be additional
job loss if, as some suspect, the German parent DaimlerChrysler
spins off the Chrysler wing.
This is only part of the bad news visited upon
the city over recent months.
In 1996, metro Detroit was cited as having the
lowest home foreclosure rate of any of the large metro areas
surveyed in the country. Over the last three months of 2006,
the Motor City led all U.S. metro areas in the percentage of
homes entering foreclosure, at more than four times the national
average and 43 percent larger than the same period in 2005.
Over the course of the first two months of this year, the Detroit-
Wayne County home foreclosure total more than doubled reaching
the nation’s highest for a metropolitan area - one new foreclosure
filing for every 124 households
Wayne County has moved past Greeley, Colorado
to recording the highest rate of home foreclosures among major
metro areas in the nation - seven times more than the national
average. There were 6,653 new foreclosures there in January,
more than twice the number reported in December. The rate went
up in nearby Oakland and Macomb counties as well. The state
of Michigan moved into second place among the 50 states for
new foreclosures, behind only Nevada.
CNNMoney.com noted that, “The three cities with
the highest foreclosure rates were a wildly disparate bunch;
the Motor City, where auto industry woes have taken a huge toll
on homeowners, was followed by Ft. Lauderdale in the Sun Belt,
and Denver, the first city of the Rockies.”
Since last fall, the number of homes nationwide
in some stage of foreclosure continues to rise across the nation.
More than 1.2 million foreclosure filings were reported nationwide
during 2006, which is a rate of one foreclosure filing for every
92 households, according to RealtyTrac, Inc. The number of homes
in the United States foreclosed by lenders rose 42 percent in
2006 from a year earlier – “a sign that many homeowners have
became overextended in mortgage debt.”
The principal cause of this escalation of foreclosures
is the vast numbers of “subprime” mortgages taken out over the
past decades or so. In 2005, the subprime mortgage market had
grown to $665 billion, 23 percent of the entire mortgage market
– up from $35 billion in 1994.
Michigan's economy is essentially stagnant because
of the woes of the auto industry, which has shed tens of thousands
of jobs in the past few years, with more cuts to come, wrote
David Oates in the Detroit News. “The climbing foreclosure
rate in Michigan and the rest of the nation comes partly because
many homeowners are grappling with higher monthly mortgage payments.
When mortgage rates scraped bottom a few years ago, thousands
of homeowners opted for adjustable-rate loans to buy homes at
initially low rates. Others used the low intro-rate loans to
refinance or to take out home equity loans."
“Now rates on those loans are starting to climb.”
As much as $1.5 trillion in adjustable-rate mortgages
are due to have their rates reset this year, according to the
Mortgage Bankers Association.
“Although white, non-Latino homeowners have three
times as many high-cost mortgages, the impact of foreclosures
will be felt far more in the African-American and Latino communities”
wrote Glenn Haege in the Detroit News Jan. 2. “Fifty-two
percent of the loans granted to African Americans and 40-percent
of Latino loans are "high-cost loans" (a proxy term
for subprime loans). The percentage for whites is only 19 percent.
If 2005 subprime mortgages have a projected failure rate of
19.4 percent that means that 10 percent of African-American,
8 percent of Latino and 4 percent of white loans are projected
to go into foreclosure.”
The majority of subprime loans have been refinances,
rather than new home mortgages, says Haege. “A major reason
for this is families with after-tax incomes in the bottom 60
percent have only seen their incomes climb 5 to 15 percent during
the past 20 years, while housing, childcare and health care
costs have risen 53 to 75 percent.” Of course, for the people
of Detroit and surrounding area this has been compounded by
the steady loss of jobs.
Now it turns out that while the market in subprime
mortgage loans market has, in the words of one observer, “fallen
into the sea.” the loans might just as well be called sub-subprime.
“It is becoming clear, however, that subprime mortgages are
not the only part of this market experiencing strain. Even paper
that is in the midrange of credit quality — one step up from
the bottom of the barrel — is encountering problems,” wrote
Gretchen Morgenson in the New York Times on Feb.
18. That part of the market “used to consist of mortgages issued
to professionals, like doctors, with unpredictable incomes.”
Now it “is dominated by so-called affordability mortgages, adjustable-rate
interest-only loans, 40-year loans and silent-second loans.
You, dear risk-taking homeowner, know all about these loans
that allowed people to buy a house that might have been beyond
their means but looked attractive because they didn’t need to
make payments on the principal in the early years.” At the moment
3.16 percent of these loans are delinquent by two months or
more and the percentage is expected to rise, putting additional
people at risk of losing their homes.
This month the surge in home foreclosures began
to receive attention in Congress. On Feb. 7, the Senate Banking
Committee held a hearing at which committee chair Sen. Christopher
Dodd (D.-Conn.) said the mortgage industry has to take greater
responsibility and federal regulators may have to intervene
– the latter a suggestion banking industry witnesses immediately
rejected. "We are seeing increasing evidence that this
important source of wealth for so many American families is
under a grave threat from predatory, abusive and irresponsible
lending practices undertaken by too many subprime lenders,"
"The industry has got to step up,"
The Rev. Jesse Jackson, testifying at the hearing,
said Congress must pass "strong laws to protect the vulnerable"
by curbing abusive home-loan practices. "Lenders and brokers
have financial incentives to place borrowers in more expensive
loans," Jackson said. "It puts responsible lenders
at a competitive disadvantage with the irresponsible lenders,
allowing unscrupulous predatory lenders to control the market."
Dodd and Jackson are correct. Something must
be done to curb these lending practices. There must be new regulations
and oversight. However, to my mind it still begs an essential
question. What is to be done about the plight of the people
facing homes foreclosures and evictions and will in even larger
numbers in the months ahead? Surely they should be given some
relief. If the foreclosures are not curbed, a lot of pain and
anguish will spread across the land. Finding a solution is the
job of those sworn to protect the general welfare.
What is shocking and deplorable about this situation
is how little media attention it gets. The picture it presents
can usually be gleaned only from the business section of the
daily press. And there, it is usually laid out from a particular
angle. More often than not, the concern is expressed over the
possible affect the foreclosure developments will have on the
banks and lending companies that made the loans and on the general
health of the economy. Little concern is expressed over the
fate of the borrowers. This is, of course, consistent with the
reigning ideology: the “market economy” carries risks and a
rising tide lifts all boats. The reality is, only some boats
are rising and the passengers on others are being left to sink
or swim in unfathomable waters. If there is anything working
people in our country are not being offered it’s any (in the
Fed chair’s words) “insurance against the most adverse economic
outcomes, especially those arising from events largely outside
the person's control."
BC Editorial Board member
Carl Bloice is a writer in San Francisco, a member of the National
Coordinating Committee of the Committees of Correspondence for
Democracy and Socialism and formerly worked for a healthcare
here to contact Mr. Bloice.