Housing market crisis threatens economy

By Milt Neidenberg

The housing industry, a key component in the recent expansion of the capitalist economy, is sending mixed signals. For almost three years, the Federal Reserve Board kept interest rates at 1 percent so the banks and other financial institutions could flood the currency markets with cheap dollars. The resultant home-buying craze triggered a huge spike in prices and construction of new homes.

“The national median home prices
[for March 2005] jumped 11.4 percent to $195,000 from the same month a year ago ... the biggest since December 1980. ... Home sales have been bolstered by low mortgage [rates] ... but some analysts said the housing sector has begun to show signs of easing. ... Last week a U.S. Commerce report showed a 17.6 percent plunge in housing starts for March.” (USA Today, Mar. 25)

One institution that capitalized on the frenzy in the housing market is the Federal National Mortgage Corporation—popularly known as Fannie Mae.

Created by Congress during the Great Depression, it was designed to provide stability and liquidity in the mortgage market. When the housing market collapsed, Fannie Mae provided local banks with federal money for financing home mortgages. It raised the levels of home ownership and the availability of affordable housing.

In 1968, President Lyndon Johnson shifted Fannie Mae to the private sector, to remove it from the budget deficits accumulated during the Vietnam War.

Today, Fannie Mae is a publicly-traded company on the stock market. Its primary aim is to accumulate huge profits for its corporate heads and big-time investors.

Fannie Mae is a Government Spon sored Enterprise (GSE)—a monopoly with special privileges, including borrowing money below market-interest rates, exemp tion from state and local taxes, and a credit line at the U.S. Treasury.

It is the largest non-bank financial services company in the world. Fannie Mae and its junior partner, nicknamed Freddie Mac, have grown rich on these freebies. Their combined assets are 45 percent greater than those of the nation’s largest bank. On the other hand, their combined debt is equal to 46 percent of the current national debt.

Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties they may be having. In the event of financial collapse, investors believe U.S. taxpayers will be responsible for hundreds of billions in outstanding debt.

Another Enron in the making?

Last year Freddie Mac revealed accoun ting errors of $4.5 billion to $4.7 billion, resulting in the termination of three of its top executives, who were bailed out in a golden parachute of benefits.

This year the Office of Federal Housing Enterprise Oversight, a government agency, charged Fannie Mae with cooking the books. Fannie Mae was significantly under capitalized and covered up a $9 billion shortfall. Two of Fannie Mae’s top exe cutives resigned with golden parachutes.

Beginning in June, Fannie Mae will be required to add 30 percent to its reserves —-calling for about $7 billion of additional borrowing.

On Feb. 17, the Wall Street Journal carried the banner headline, “Greenspan urges limits on Fannie portfolio growth.” The article set off alarm bells. “Fannie share price fell ... to its lowest level since August 2003. ... Limits on the finance providerenormous mortgage portfolios, which reached $1 trillion, 500 billion, would hurt their profits. ‘It’s an earnings killer,’ said an independent financial consultant, adding that a growing number of investors appear to be selling the company’s stock.”

If Fannie Mae went down, the entire housing industry would collapse. The mortgage behemoth is integrated into Wall Street banks and other major financial institutions. Fannie Mae borrows from the banks, which profit from unloading high-risk mortgage portfolios back to them. Fannie Mae in turn packages and guarantees these volatile high-risk mortgages, and sells them to the highest bidders in the billion-dollar secondary mortgage market. It receives humongous fees for this service.

Fannie May has entered the world of derivatives and hedge funds, and since there is neither transparency nor oversight, there is only speculation about whether Fannie Mae has accrued huge losses. It is casino capitalism and Wall Street’s favorite game. This GSE is suspected of establishing trusts to cover up its hedge funds investments.

Since European and Asian banks, private and public, have invested billions in the U.S. housing market, any significant downturn would have incalculable worldwide repercussions.

Is this a rerun of the Savings and Loan (S&L) collapse of the 1980s that cost consumers and tax payers billions of dollars? At that time, speculation, rapid inflation and high interest rates burst the housing bubble. The S&Ls hyped the price of real estate, which led to huge accounting frauds.

There has been no oversight since Pre sident Ronald Reagan deregulated the industry. Reagan made it easier for the S&Ls to lend recklessly. He increased the Federal Deposit Insurance Corporation’s (FDIC) guarantee to cover bad loans from $20,000 to $100,000.

The S&Ls approved huge numbers of highly leveraged loans at high interest rates. If they panned out, fortunes were made. If not, the FDIC would cover each account. Bankers and real estate developers, with their political clout in the Reagan and Bush senior administrations, were able to milk the S&Ls dry.

And they crashed.

A new S&L catastrophe

Is the Bush administration following in the footsteps of his predecessors? Are there similarities today to the housing and real estate bubble of the 1980s?

Currently housing prices have reached stratospheric levels because of low mortgage rates, strong demand and outrageous speculation. A sharp rise in interest rates can kick the props out from this critical market. The housing market directly affects a multitude of other industries, including lumber, steel and construction. It’s also tied to consumer products like furniture, appliances, outdoor items, etc.

The Bush White House is following the Reagan administration policy of attacking labor and the poor while bestowing tax cuts on the corporations and the wealthy 1 percenters. Huge military spending and the endless occupation of Iraq and Afghanistan have created massive current account debt and budget deficits.

The Federal Reserve Board has raised interest rates to 2.75 percent, its seventh quarter-point increase since June 2004, to slow down inflation. It has failed. Reagan, too, raised interest rates that many economists believe led to the October 1987 stock-market crash.

Is the housing industry about to follow the demise of the 1980s S&Ls? Is the auto industry, led by GM and Ford, a barometer of an ill wind facing the capitalist economy? Are they all the product of overproduction, inflation and speculation, leading to a growing stagnation?

Yes!

Even in its early stages, stagflation—economic stagnation plus inflation—is bad news for the housing market. With an exploding debt, Fannie Mae is facing a crisis of monumental proportions. Raising interest rates to head off inflation will soon discourage the home buyer who can’t afford increased mortgage costs.

The consumer/worker is already overloaded with debt. Wages are lagging way behind the rate of inflation and workers can’t buy back the super-abundance of goods and services they produce.

The cycle of overproduction and under-consumption has begun. Housing is the most expensive, yet necessary, commodity the consumer/worker can buy. The housing inventory is overloaded and priced beyond the reach of millions of low-paid workers and oppressed people. Home lessness is on the rise, rents have sky-rocketed and evictions and foreclosures are increasing.

Fannie Mae was created during the 1930s to supply equity to prevent these hardships. Today, as a corporate housing monopoly, its main concern is profits and dividends for its investors. It is up to workers and their communities to protect the basic right to decent, affordable housing, private or public.

As May Day is about to be reclaimed by a progressive and class-conscious coalition of opponents of endless wars and U.S. imperialist occupations, along with resisters of the war at home, the issue of decent, affordable housing, fighting homelessness, evictions and foreclosures, must be at the top of the agenda.

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