At Its Core, the American Dream Crumbles Quietly

Every single day, the media reminds us that there is a "sub prime crisis." Always, the media describes this so-called crisis in relation to its effects on "the economy" (meaning upper echelon investors) or its effects on banks and financial institutions. Both the so-called liberal and conservative media outlets are misrepresenting this crisis.

They are naming the wrong victims and sending the middle class citizens who are losing their homes to the time-out corners, as if these middle class citizens have committed crimes. Oh, the media has it wrong. I am so tired of this relentless bias towards the "haves" and the mass media's abandonment of the "have nots."

What is wrong with this perspective? What am I talking about?

First of all, the very predatory practices that set up these so-called sub-prime loans insured that these loans would be impossible to pay back.

Most of the subprime loans were lent at rates way above (way, way higher) than the average or going interest rates at the time.

For example, if average interest rates were 5% at the time, you could count on the sub-prime rates to be 8% or 9% or even more. This results in much higher monthly payments. Further, most of these sub-prime lenders dangled cash in front of the borrowers and said, "You can get a little cash back at closing, but, I'm going to need several more points and higher fees rolled into your loan balance."

In other words, the lenders and brokers took out a lot of cash for themselves up front, thus again, causing the monthly payments for these borrowers to increase substantially.

Then, to make matters worse, average salaries and wages for the middle class have been plummeting. As middle class people lose their jobs (usually to China) they then end up taking jobs with wages way below what they used to make.

Meaning, they cannot afford the monthly payment on their new wages.

A record number of people started the foreclosure process in the April-to-June quarter, according to the Mortgage Bankers Association of America (MBA). The performance of both prime and subprime adjustable rate mortgages, or ARMs, is contributing significantly to foreclosures.

Doug Duncan, the MBA's chief economist, said today that the worsening performance was driven by two factors -- heavy job losses in the Midwest states of Ohio, Michigan and Indiana and the collapse of previously booming housing markets in California, Florida, Nevada and Airzona.

It's important to keep these three things in mind when thinking of the foreclosures:

Not all the foreclosures are sub-prime loans; an increasing percentage of regular (or "prime") loans are subject to foreclosure this year.
Subprime loans were doomed from the beginning due to the predatory arrangements and the higher fees, rates and schedules.
Regular, prime or traditional mortgages are entering default due to the losses of jobs and wages.

Another big problem is that an estimated 2 million adjustable rate mortgages are scheduled to reset this year at sharply higher interest rates, which will cause monthly payments in some cases to double or even triple.

This presents emergencies and crises for the struggling middle class that is enduring higher costs for gasoline, home energy, food and medical care while simultaneously facing lowered overall household wages and incomes.

Homeownership is at the core of the American dream.

Since the era of the American Revolution, property ownership has been considered the mark of a solid citizen who is a stakeholder in the community.

Mortgages enable ordinary people, who do not have the cash to buy a home outright, to join the propertied class. For most people, even today, their prime financial asset is the equity in their home.

Forget the financial industry. It's profit margins are the highest in history. It is not in trouble. All mortgage companies should be brought under the direct umbrella of federal regulation. Irresponsibly speculative lenders should be prohibited from selling mortgages in the secondary market, even if they can find someone foolish enough to buy them.

Since the late 1970s, however, this system has been dismantled in the name of deregulation, causing a string of disastrous results.

It's too late to head off the current debacle, but Congress should act now to contain the damage and to prevent the next one. When I say "contain the damage" - I am not talking about bailing out the predatory lenders - I am talking about extending our hands to those earnest middle class Americans that are being squeezed by predatory loans, rising costs of living and lowering wages.

The American Dream is quietly crumbling at its core and all the media (and many of the politicians) seem to talk about or care about is the financial industry.

We need not only to offer our outstretched hands to our Middle Class but we also need to speak our words loudly, clearly and into every available megaphone.

The borrowers are mostly innocent parties, gulled by bait-and-switch lenders.

Owner-occupants who took out loans in good faith and did not make fraudulent claims about their incomes should be eligible for government refinancing.

The sleazy sub-prime lenders should be punished, not the innocent homeowners. America needs to restore a system in which government supports homeownership -- and makes sure that mortgage lenders serve as responsible creditors, not predators.

Otherwise, we risk a cascade of falling real-estate prices, more foreclosures, more bankrupt lenders, and more spillover into other parts of the economy.

Please don't let the American Dream crumble without making a lot of noise. It's happening as I write this - and, I don't hear the sound.

Help me make the sound.

(For my previous posts on this topic, check out Bitter Fruit & Lines in the Sand and Sub-Prime Crisis = Ultra Rich Still Looting the Middle Class.)