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Drawing Blood From a Stone

Drawing Blood From a Stone

Mortgages are America’s largest business. At present it comes to ten trillion dollars. That’s $10,000,000,000,000 — a sizable sum. But the business is in trouble right now. As The Wall Street Journal reported December 5, “More Borrowers With Risky Loans Are Falling Behind.”

Who are these borrowers, and why are they falling behind in their payments? They are known as “sub-prime” borrowers, as distinguished from “prime borrowers,” who are wealthy people. In an almost incredible piece of economic irony, the moneybags can borrow money at a lower rate than Joe and Jane Jones who are hardworking common folk and actually need the cash. Why? Because the working-class Joneses are a greater risk than their wealthy counterparts. The result is that the family with less wealth pays at an interest rate higher than the family with pots of dough.

In bad times, the system works to increase the Jones family’s debt load. Unable to meet their daily cost of living, the Joneses regularly borrow from lending institutions and assume an additional mortgage on their home as collateral.

The more deeply the Jones family falls into debt, the greater the risk they pose and the higher the charges they pay for additional borrowing. The Wall Street Journal reports that these sub-prime mortgages are among the fastest-growing factors in the industry. From 2001 to 2005, sub-prime mortgages jumped to $625 billion from $120 billion.

The most ominous development is the increasing inability of those in debt to meet their current obligations. The industry now confronts the challenge of drawing blood from a stone.

Written by

Gus Tyler

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Drawing Blood From a Stone

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