Sunday, April 08, 2007

But wait, there's more!

Trillions in Debt, Can the Middle Class Hang On?

By James Scurlock, AlterNet. Posted April 3, 2007.

How do we stop the credit industry's predatory business model and get Americans out of debt when incomes aren't rising as fast as the costs of healthcare and housing?

Last week, the FDIC and the Federal Reserve Board were forced to remind the nation's bankers to verify their customers' incomes -- adding that it might be a good idea to determine whether or not said customers could afford their mortgage payments. The new guidelines are expected to have a chilling effect on what the industry calls "home ownership." Many esteemed economists have expressed hope that the resulting declines in home values, which have been inflated by the lack of such guidelines, will not stop too many Americans from cashing out the equity in their homes to keep consumer spending up. In other words, the "new economy" is based on people slowly losing home ownership, not gaining it...

Yes, this is both absurd and dangerous. But no, go-go bankers are not entirely to blame for our national credit fiasco, of which subprime mortgages -- the ones that have been blowing up lately, wreaking havoc in markets here and abroad -- will ultimately prove but a footnote. Go back and do the math, like professor Elizabeth Warren of Harvard Law School, and you'll discover a systemic problem: Incomes aren't rising nearly as fast as big-ticket costs like healthcare, education and housing. Ergo the negative savings rate, the two-thirds of us who can't pay our credit card bills off every month...

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There are several reports floating around the internet that stagflation is making a comeback. For those of you too young to remember the Carter era, stagflation is a situation where prices for the things you need for everyday living go up, but your income doesn't. The short story is that people have taken on more debt than they could afford, sometimes out of ignorance about their true ability to pay bills, and some out of wildly misplaces assumptions that their income and the value of their homes would go up regularly and significantly. They made a bet - and it is turning out to be a losing bet.

Some of this is in fact the fault of the bankers. When we first looked for a house about 12 years ago, I had carefully calculated on a spreadsheet what all of our bills were and how much we could allocate for a mortgage payment. Our realtor, however, had her own spreadsheets and declared that we "qualified" for a loan that would have payments much larger than I knew we could really afford. We told her this plainly, and said we only wanted to see houses in such-and-such a price range. She blatantly ignored our instructions, and spent the entire three months of her contract showing us places that we couldn't afford, I presume so that she could earn a higher commission. So when her contract expired, we didn't renew and again explained why, though she had been told repeatedly what we wanted. She was angry.

So we got another realtor, and explained again up front that we didn't care what the bank said we were "qualified" for, we knew what we could afford and if she didn't show us things in that price range, we wouldn't buy anything. She was much more responsive, and we bought a house from her in 1995.

We put a lot of work into that house, and sold it a year and a half ago for a wild profit, just before the housing market started to tank. So our story ended well.

But hundreds of thousands of people out there don't have the same fortitude that I had when dealing with the bankers and realtors. They believe that when the brokers tell them "You're qualified for XXX amount of a mortgage" that means they can afford that amount.

But it isn't necessarily true. In fact, I'd say it's rarely true these days. The system is fraught with moral hazard, to say the least. You can't trust your broker or realtor anymore. You have to figure out for yourself what you can really afford, and stick to your guns.

But most people don't realize that. And they get trapped in a situation not entirely of their own making with no way out. Then when prices for gasoline and groceries and medicine go up, but their income doesn't, they're in trouble. And if they got one of those flaky adjustable rate mortgages and it flies up through the ceiling, they're in deep trouble - because they trusted people to give them proper advice that was in their best interests. Instead, the brokers and realtors gave them advice that would line their own pockets, in total disregard to their client's real needs.

Greed, class, is the bottom line. The realtors and brokers wanted bigger commissions, and the buyers wanted to live above their means, so they believed the lies. It is partially their fault, but I feel most of the blame goes to the mortgage brokers and realtors. They had a professional responsibility to do what was in their client's best interests, and they blatantly and knowingly didn't do so.

So when you hear later all the fussing about predatory lending, and buyer irresponsibilities, remember the truth is in the middle somewhere. By all means, the lenders should be held responsible for their greed and moral hazard. But that doesn't mean every family should be bailed out by the government so they can keep their overpriced McMansion, either.

The real solution is one that you will not hear offered, even though I have proposed it to several movers and shakers. All of the flaky adjustable rate mortgages made for the past three years should be exchanged quid pro quo for 5% fixed rate mortgages. If the buyers still can't afford their home at this rate, then they should move to a less expensive property, either through a sale or through foreclosure, if necessary. That's the price they pay for losing their bet. But most families should be able to handle a reasonable fixed rate mortgage, and this will stop a lot of the needless foreclosures and suffering caused by the mortgage industry's predatory lending.

And yes, 5% is a bit less than the going rate for mortgages, but it is morally and ethically wrong to burden the poor with higher rates of interest than rich people pay. Corporations should not be extorting money from the poor over and above the amounts paid by the rich - it's wrong, period, and it creates the very situations that the mortgage companies "claim" they're trying to prevent, namely forcing people out of their homes. The poor should get a LOWER interest payment, not a higher one. This follows Torah. I have no sympathy for banks and finance companies that do otherwise. They deserve to go out of business, class.

So "just say no" to bailouts for banks and finance companies that pricegouge the poor. Write your congresspersons and tell them so plainly, class. (Isn't it interesting how these companies acclaim "free market economics" right up until they're the ones that need a bailout? Hold them to their word. If they can't make it in the free marketplace, then they should go the way of the dodo. That's economic darwinism - free market economics - and those that live by this model should die by it. So there.

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