From Volume 6, Issue 14 of EIR Online, Published April 3, 2007

U.S. Economic/Financial News

Now Subprime Auto Loans Start Going Bad

Oregon's CNW Research estimates that issuance of subprime auto loans rose from $6 billion in 1999, to $11.6 billion in 2006, and that a total of about $34 billion is now outstanding. As a percentage of all autos made each year, they rose from 9.4% in 1999 to 13% in 2006.

Some lenders, like Wells Fargo, are trying to cut back, while others are issuing more such risky auto loans to replace lost business in real-estate mortgages. GMAC says there has been a slight deterioration in its subprime portfolio, but the company is not concerned about it.

S&P Warns vs. Subprime Mortgage-Backed Securities

Subprime mortgage-backed securities sold in 2006 may be the "worst-performing in recent history." The warning was made by Standard & Poor's, noting that delinquencies on the underlying loans have been "consistently higher" than in the prior five years. Some 13% of subprime mortgage loans made in 2006 are delinquent, according to S&P, with 6.65% of the total classified as "seriously delinquent," or more than 90 days late. S&P raised its estimate for losses on bonds backed by the loans to as high as 7.75%, from a previous peak assumption of about 6.5%.

S&P said this revision could have a "material" impact on the ratings of collateralized debt obligations (CDOs), or securities consisting of slices of other higher-rated mortgage bonds. Residential mortgage bonds represented a whopping average of 73.8% of CDOs of asset-backed securities collateralized by so-called mezzanine structured finance tranches in 2006, up from 42% in 2003.

Sixth-Largest U.S. Homebuilder Under Investigation

Beazer Homes USA Inc., a [Mis]Fortune 500 company with assets of $4.5 billion and revenues of $5.5 billion in 2006, saw its stock fall 9% on March 28, and another 8% in after-hours trading, according to the Financial Times. It had already suffered hefty losses in the fourth quarter of 2006.

Beazer said it believed the U.S. Attorney's request for documents related to its mortgage business was triggered by articles published in the Charlotte [North Carolina] Observer, which detailed allegations of questionable loans Beazer arranged for low-income buyers, and unusually high foreclosure rates in Beazer's subdivisions in the area of Charlotte. Those foreclosures rates have averaged 13% since 2000.

"The FBI is conducting a potential fraud investigation regarding Beazer," the FBI said in a statement distributed by its Charlotte field office March 27. The investigation is being conducted jointly with the Department of Housing and Urban Development and the Internal Revenue Service.

States on the Edge of Mortgage Disasters

With news that up to ten U.S. states are now either floating bonds to "help distressed homeowners refinance" or exploring ways to do so, Lyndon LaRouche stressed on March 28 that this path of action—in effect, states attempting to bail out the collapsing $12 trillion U.S. residential mortgage bubble—will quickly lead to disaster. States can not do anything of the kind without ruining their credit and economies, LaRouche said; he emphasized that only the Federal government may issue sovereign credit in this Constitutional system, and thus only the Federal government has the authority and powers to overcome a financial crisis of this magnitude.

LaRouche approved the action of Massachusetts Secretary of State William Galvin—who testified to the Massachusetts legislature March 27 and demanded "emergency legislation" halting foreclosures statewide. This is absolutely necessary, and a proper state power, LaRouche said. Galvin told the Massachusetts legislators, "You are literally talking about tens of thousands of people in this state, who I would call the 'pre-homeless.' "

But there are already half a dozen states plunging into the hole of bailing out mortgages by refinancing for mortgage-holders with state money raised by taxable bonds, the Ohio policy, which is suicidal. Massachusetts is one of them; others are Maryland, Rhode Island, and Virginia. Others on the brink of doing so are California, Colorado, Washington, and Wisconsin.

Subprime Mortgage Racket Did Not Increase Home Ownership

Despite claims to the contrary, the wave of subprime mortgage lending has not contributed to an increase in home ownership; in fact, it has been a net drain on home ownership, the Center for Responsible Lending (CRL) said in a report prepared for the March 27 hearing of the House Financial Services Committee.

In every year from 1998 to 2006, they project that there will be found a net loss in home ownership; many more families will have lost their homes, than will have become new homeowners. The CRL report shows that subprime loans are creating "the worst disaster in the mortgage market since the Great Depression." Only 9% of subprime loans go to first-time homebuyers; most are for refinancing of existing homes. The CRL estimates that 15.6% of subprime loans originated since 1998 have, or will, end in foreclosure.

U.S. Income Disparity Widens, Surpasses 1928 Gap

The income gap between rich and poor in the United States has widened, and now surpasses that of 1928, on the even of the 1929 Crash. So concluded Prof. Emmanuel Saez, University of California at Berkeley, and Thomas Piketty of the Paris School of Economics. While total reported income in the U.S. increased almost 9% in 2005, the most recent year for which data are available, average incomes for those in the bottom 90% percent fell by $172, or 0.6%. Yet the incomes of the top 1% rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14%.

The income of the top 300,000 was equal to that of the lowest 150 million Americans, and on average 440 times as great, per person. The income of the top 10% was 49% of all income in 2005, the greatest since 1928, when it was also 49% of the total. The top 1% got 22% of all income in 2005, the highest share since 1928, when they got 24%. The income of the top one-tenth of a percent, and of the top one-hundredth of a percent, each grew by about 20% over a single year in 2005: up $908,000 to $5.6 million for the first group, and up $4.4 million to $25.7 million for the second group.

The IRS admits that its income data, which were used in the study, markedly understate larger incomes.

Rating Agencies Probed for Collusion with Utilities

The rating agencies are under investigation for collusion in giving power companies false ratings just before they apply for rate increases.

The Illinois State Attorney General, Lisa Madigan, has filed papers seeking disclosure of the credit reports issued by Moody's Investors Services and Standard & Poor's, of deregulated electricity holding companies with customers in the Chicago area. Cases have come to light showing that after the rating agencies issued their reports, which are supposed to be "objective," the utilities made changes—up to 48 changes in the case of Portland General Electric, formerly owned by Enron. The changes were designed to convince public utility commissions that the utilities were eligible for rate increases.

Madigan's filing refers to seven actions over a period of eight days last fall, and three in the last month. The changes are described as lobbying efforts on the part of the utilities, in collusion with the rating agencies, in order to raise prices. The uproar started last year, when an auction for utilities to buy long-term contracts for power sharply jacked up rates. Requests for the draft (pre-altered) credit reports, and correspondence between companies and rating agencies, have been made for utilities Ameren and Excelon. After Ameren voluntarily proposed a rate-relief plan after the auction, which plan was approved by the state commerce commission, Moody's and S&P suddenly downgraded its rating to junk status! Under the terms of Ameren's offer, the credit downgrade freed them from the obligation of rate relief!

Just as entire countries can have their economies destroyed through credit ratings that garner usurious interest rates from the IMF and commercial banks, Wall Street now determines which utilities are "credit-worthy," on the basis of how much they can manipulate the system, to get away with stealing from their customers.

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