Accumulation and Dispossession: Lifting the Veil on the Subprime Mortgage Crisis

Kendra Strauss
School of Geography and the Environment, University of Oxford, Oxford, UK; kendra.strauss@geog.ox.ac.uk

Greg Woods 19 September (2007) interview with Edward Jordan on BBC Radio 4s The Today Programme must have been the first time many UK listeners were exposed, through the mainstrain media, to the real face (or voice) of the American subprime mortgage crisis. Mr Jordan, 79, of Brooklyn, New York City, told how he had sought financing to cover $30,000 worth of credit card debt and ended up with a re-finance loan for $350,000. The interest rate, initially set at 1%, ballooned to over 8% within 1 month and the payments with it. I worked all my life for good credit, said Mr Jordan, who is now in danger of losing his home. Mr Jordan is one of those . . . homebuyers with a poor or non-existent payment record who were lent too much money, as subprime borrowers have been characterised (The Economist 2007a). Yet as Jessica Attie, a lawyer with the Brooklyn-based Foreclosure Prevention Project, explained, Mr Jordan could have qualified for a prime loan but was targeted by subprime lenders because of his age, where he lives, and the fact that he is AfricanAmerican. In the last decade many elderly, low-income, and ethnic minority borrowers have been steered to subprime loans even when eligible for better terms, and aggressive sales techniques, complicated terms, and misreporting of income data characterise many of the transactions: in Mr Jordans case, the lender inflated his monthly income from $2000 to 8000. These predatory practices, according to Ms Attie, represent the largest single drain on wealth in AfricanAmerican communities in recent years. The current crisis was foreshadowed by Michael E. Stones 1975 paper in this journal, in which he stated that: The stability of the entire structure of capitalism has become interwoven with the stability of the huge residential mortgage debt which has been created by the changes in the mortgage system (22). At the time that Stone was writing, however, the revolution in securitisationthe process of creating new financial
Antipode Vol. 41 No. 1 2009 ISSN 0066-4812, pp 1014 doi: 10.1111/j.1467-8330.2008.00652.x C 2009 The Author Journal compilation C 2009 Editorial Board of Antipode.

Lifting the Veil on the Subprime Mortgage Crisis

11

instruments by combining different types of assets and marketing them to investorswas in its infancy and the deregulation of mortgage markets was yet to come. The expansion of the subprime sector, in which lenders make financing available to those with supposedly poor credit histories and those on low incomes (usually at higher interest rates, because of the higher risk of default), has been more recent and has coincided with the partial retreat of the state from an active role in facilitating private property ownership.1 This explosion in subprime lending is the result of three imperatives that profoundly influence the functioning of housing markets in capitalist societies: the need to facilitate social reproduction, the need to embed and reinforce the ideology of property ownership for political ends, and the need to ensure that housing functions as a vehicle for the production of surplus value and capital accumulation (Boddy 1976). Between 1994 and 2000 the US subprime market grew by an average annual rate of 26% (Federal Reserve Bank of San Francisco 2001). That the subprime crisis affected more than just the wretched and the reckless (The Economist 2007b) and resulted in the current credit crunch seems to have taken many by surprise. Yet the predatory practices of subprime lenders, the profits they generate, and the spatial distribution and concentration of lending and borrowing had not gone undocumented. In 2006 Geografiska Annaler Series B Human Geography published a paper entitled American home: Predatory mortgage capital and neighbourhood spaces of race and class exploitation in the United States (Wyly et al 2006), which comprehensively spelled out the deeply rooted problems in the subprime sector. In it, the authors built on David Harveys (1983 [1974]) arguments to suggest that the subprime market acts to extract class monopoly rents through the delocalised conduits of transnational capital flows. The authors made a number of further important points: that subprime loans are extremely lucrative in terms of the fees and interest they generate, especially in the refinance market (where the majority of subprime loans are made); that these profits and the process of securatisation make subprime loans attractive to regular prime lenders such as HSBC, as well as to investment banks who pool them into mortgage-backed securities (MBS) and investors who purchase those MBS shares; and that despite the clear logic of accumulation, the authors geographical analysis of subprime segmentation shows that borrowers with good credit scores from working-class and ethnic neighbourhoods are targeted disproportionately for subprime loans while those with poor credit scores in wealthy white neighbourhoods are treated as prime borrowers. Perhaps because of the complexity of products themselves and the opaque world of structured finance from which they originate, perhaps because the paper was published quite recently (but see Wyly, Atia and Hammel 2004), there has been relatively little comment and/or further
C 2009 The Author Journal compilation C

2009 Editorial Board of Antipode.

12

Antipode

work in this area by geographers, especially those working outside the US. Leyshon et al (2006) examined moneylenders in the home-collected credit market in the UK using the ecological metaphors of parasitism and symbiotic mutualism to describe the relationships between the agents of doorstep credit companies and their clients. Yet while the concept of different, localised ecologies of finance is theoretically and analytically appealing, it precludes (at least as it is applied) a broader analysis of the macro-processes of capital accumulation, circulation and class oppression that create the conditions in which these relationships develop. Therein lies the value in Wyly et als (2006) analysis: it draws back the veil of mystification that surrounds the complex processes of global financial markets and their agents and traces specific effects of profit-seeking behaviour where it intersects with the needs and vulnerabilities of communities traditionally excluded from access to mortgage capital. In precisely tracing the mechanisms of class monopoly rent extraction through predatory lending in the subprime market they, like Harvey, illustrate both the concrete spatial segmentation of communities and the multi-scalar nature of the processes that underlie it. This multi-scalarity has been strikingly reinforced by the global reverberations of the recent market turmoil. Wyly et als (2006:124) paper also opens up further possibilities for conceptualising and analysing the current subprime crisis. From the standpoint of homeowners who wind up with high-cost, high-risk credit, they write, the result of securitization is to shatter the traditional shared interest of all parties in cooperating to avoid adverse events. In other words, dispossession is itself a mechanism of accumulation in the subprime universe. Defaults offer opportunities for the acquisition of assets at knock-down prices while borrowers have their credit ratings destroyed and risk bankruptcy. Homeownership has become the mantra of wealth creation yet the flight to bricks and mortar creates housing bubbles, which inflate the value of residential property with the consequence that low-income households who do manage to buy can afford a smaller and smaller equity stake in their home. The differences between renting and buying shrink: it is a matter of paying rent to the bank rather than to a private landlord.2 As Wyly et al (2006:126) point out: Demanding fair access to capital involves the risk of being targeted by capital . . . with no guarantee of greater individual or community security. Moreover, there is a question about whether illusory gains in the property market can make up for stagnant real wages and growing income disparity in the USA and elsewhere. What is certain is that the current subprime crisis, and rising numbers of people defaulting on their mortgages, will have real and material impacts on local communities, as Jessica Attie pointed out in her interview. If people like Mr Jordan are forced from their homes, those local neighbourhood ecologies suffer fundamental ruptures. It is also
C 2009 The Author Journal compilation C

2009 Editorial Board of Antipode.

Lifting the Veil on the Subprime Mortgage Crisis

13

unlikely that the effects will be confined to North America. The UK, for example, has a significant subprime sector and worrying evidence is emerging about similar patterns of predatory behaviour involving the targeting of vulnerable individuals and families, the falsification of information on applications to obtain larger loans, the use of low introductory rates which then balloon, and opaque terms and high fees. The subprime crisis thus needs to be seen as the manifestation of larger processes of capitalist accumulation with particular local, regional and national characteristics and effects. The challenge, posed by Stone in 1975 and equally relevant today, is to build an understanding of the relationships between housing markets, income inequality, the structure of capital markets, the role of the state, and private ownership. In addition we must pay heed to other axes of inequality such as ethnicity and race, gender, and age, and to the immensely complex social construction of home.

Endnotes
1

Although the governments of nations such as the US and the UK still promote home ownership through, for example, the tax system, the focus shifted in the 1980s and 1990s towards a reliance on the financial services industry to enrol ever greater numbers of buyers though ever more innovative mortgage productsand a willingness to lend evergreater income multiples. As Stone (1975) points out, this has inevitably fuelled housing price inflation, making a mockery of the attempt to reconcile the inherent contradiction between the needs of labour markets (to keep wage inflation low) and housing markets (to generate profits). 2 As Boddy (1976:22) states: Mortgage owners face a version of finance capital and a class of petit-bourgeois professionals in much the same way that tenants face . . . landlords yet their situation has never been a basis for active struggle or protest. The subprime crisis in the USA has mobilised resistance on a community level, yet according to The Economist (2007b), 70% of Americans polled do not believe that those affected deserve government help, indicating a belief in individual responsibility rather than the makings of a wider political movement. That may of course change, if the scale of evictions continues to grow.

References
Boddy M (1976) Political economy of housing: Mortgage-financed owner occupation in Britain. Antipode 8(1):1524 Federal Reserve Bank of San Francisco (2001) Subprime mortgage lending and the capital markets. FRBSF Economic Letter 2001-38, 28 December Harvey D (1983 [1974]) Class monopoly rent, finance capital, and the urban revolution. In D Lake (ed) Readings in Urban Analysis: Perspectives in Urban Form and Structure (pp 250277). New Brunswick, NJ: Centre for Urban Policy Research Leyshon A, Signoretta P, Knights D, Alferoff C and Burton D (2006) Walking with moneylenders: The ecology of the UK home-collected credit industry. Urban Studies, 43(1):161186 Stone M E (1975) The housing crisis, mortgage lending and class struggle. Antipode 7(2):2237
C 2009 The Author Journal compilation C

2009 Editorial Board of Antipode.

14

Antipode

The Economist (2007a) Another pounding. http://www.economist.com/finance/ displaystory.cfm?story_id=9482868 Accessed 8 November 2007 The Economist (2007b) Of the wretched and the wreckless. http://www.economist. com/world/na/displaystory.cfm?story_id=9767843 Accessed 9 November 2007 Wyly E K, Atia M, Foxcroft H, Hammel D J and Phillips-Watts K (2006) American home: Predatory mortgage capital and neighbourhood spaces of race and class exploitation in the United States. Geografiska Annaler Series BHuman Geography 88(1):105132 Wyly E K, Atia M and Hammel D J (2004) Has mortgage capital found an inner-city spatial fix? Housing Policy Debate 15(3):623685

C 2009 The Author Journal compilation

2009 Editorial Board of Antipode.