The subprime schemes are run through an intricate, intertwined system of loan brokers, mortgage lenders, Wall Street trusts, hedge funds, offshore tax havens and other predators. To entrap borrowers, the industry created an arsenal of arcane financial devices and maneuvers known by such exotic names as "exploding ARMs," YSPs, teaser rates, low-doc mortgages, loan flipping and equity stripping. Ultimately, these schemes are scams, extracting high payments from the families, sucking out any equity they might build up and stealing their homes.
This is one of those economic stories, like the savings-and-loan scam of the 1980s, that are usually buried back in the business section of newspapers. But, just as with the S&L collapse, this debacle is growing too big to contain, and all of us need to be paying attention. The built-in traps of the subprime mortgage market have already taken the homes of more than a million people in just the past year, and the dangers are quickly rising for millions more. This collapse in homeownership for the working poor has begun seeping into the rest of the economy, causing thousands of job losses, shaking the soundness and reputations of some major Wall Street firms, and slowly -- ever so sloooowly -- forcing lackadaisical bank regulators and clueless politicians out of their laissez-faire stupor.
What a system! Lenders mislead borrowers, collect fat fees from them, then shift the risk of any bad loans to Wall Street. The Wall Street repackagers then transfer the bad-loan risk to their rich investors, drawing even fatter fees. These investor elites get phenomenal yields on the IOUs, then plant their profits in tax-free havens like the Cayman Islands.
It's a brilliant Ponzi scheme ... as long as all those Mr. and Ms. Subprimes keep putting their little dabs of cash into it every month. Oops! There's the rub.