The "Ownership Society" Means Foreclosure For Many
The N.Y. Times reports on the alarming rate of foreclosure among the nation's poor. Some areas, such as Cuyahoga County, Ohio are seeing 17 percent foreclosure rates largely due to the prevalence of subprime and balloon mortgages where interest rates jump steeply after only a few years. And crippling lending practices aren't limited to the poor and minorities. The mortgage industry is an equal opportunity predator making available all kinds of risky options.
Take the interest-only loan for example, or as we refer to it here at Blognonymous rent with property taxes. This type of financing is tailor-made for people inclined to buy beyond their means and makes up 50% of the loans taken out in frothy urban markets such as the San Francisco Bay Area. Like subprime mortgages, interest-only loans have rates that climb alarmingly after only a few years, putting enormous financial stress on the buyer especially if they've contributed nothing to their principal.
But now the chicken's is comin' home to roost--As the real estate market cools we see the beginnings of another enormous redistribution of wealth in the Bu$hCo era. Banks and lending companies foreclose, taking down-payments, principals, and homes from unlucky minority and urban buyers, and wealth moves once again from the poor and middle-class to the corporations. Of course, no one forces a buyer to buy or to choose a predatory lending instrument, but likewise Bu$hCo has done nothing to regulate these practices because 1) The hot real estate market has propped up the economy for 4 years, and 2) The administration knows who fills it's campaign coffers. I'll give you a hint, it isn't the poor, minorities, or middle-class voters.
Society has this element of 'living beyond our means' that pervades government spending AND consumer spending. People subsidize their earnings with credit, equity, etc. and when it comes time to pay they do not want to.Because once a person goes down a consumption slope, it is very hard to go back. People want to live and LOOK like they make far more than they do, credit makes this possible. Predatory lending makes this possible. Look at people that make twenty thousand a year, but HAVE to drive a vehicle that costs more than their annual salary! THAT thinking is a dynamic in the housing matter. Proportion. Now, Jane Doe can have a huge sprawling home without the sacrifices of saving and credit building key to other generations. Now I am not saying you are wrong, I am suggesting that a cultural trend toward credit-income subsidies is also to blame. Also, the transient nature of home ownership- face it, people move alla round now for jobs, etc. and the draw of staying by one's family is dwindling. So this moving around factors in, also the desire to get the tax deduction but knowing that ownership will not be long term, this entices people to go for balloons, ARMS, interest only, etc.
You are seeing consumer patterns of people that get into mortgages because they fully intend to move. They also trade up with equity. And the variety of mortgage products makes it possible to do more, with less...but ultimately the bill needs to get paid. People are inclined to think they will make much more in the future, and will 'deal' with it all then. Know people that have 120,000 in student loan debt and a mortgage, but find that their degree didn;t quite buy them the corner office they expected? Thats American culture.
Lily, you are absolutely right. I tried to make that point at the end of the post albeit weakly, but you really hammer it home.
There is definately a viscious cycle going on here. The housing/mortgage industry encourages moves into risky financing arrangements...which in turn encourages buyers to purchase more than they can really afford...which in turn causes real estate markets to rise...which props up the economy...which causes a disincentive for government to step in and regulate...and on and on...
The two places where this cycle could be broken: By the consumers (the buyers) by refusing to use a risky mortgage instruments or by really assessing the need for home-ownership, or by the lenders. On the latter, it's interesting to note that 30 years ago there was not such thing as an interest only loan.
We consumers bear some responsible for our own irresponsible spending. Yet at the same time our government has made it easier for lending predators to separate the financially unschooled from their money. On top of that, we have an economy who's "success" is dependent on the notion that Americans will spend more than they earn.
Ironically, America is the worlds richest country, but American's are the worlds most fiscally retarded.
So what're the chances we'll see a government sponsored "Just say no to personal debt" program to help people get out of debt and live within their means? Maybe if we can tie irresponsible consumer borrowing to gay sex... BING! We'd have a presidential commission on consumer debt in 8 min.
Unchanged? Not to hear Bush talk about it.
One point, I agree that consumers must make intelligent choices when they shop for a mortgage, but the industry needs to change the formula they use to qualify people for a mortgage. They take your information and tell you how much house you can afford and how large your payment can be. That's highly deceptive. Just because one person can handle 38% of their income going toward their mortgage, that doesn't mean the next person can. They need to do more counseling.
All the industry sees are the higher commissions from the larger sales. I advised all of my children to buy less than their banks and realtors told them they qualified for, and they all thanked me for that advice later.
Interestingly, I think the US is in a profoundly disturbing Catch-22. Thoughtful money-management and shunning personal debt are wonderful ideas, but with (and I'm guessing) 50% or more of our GDP deriving from consumer spending, any significant slowdown or debt level reduction is going throw the economy for a loop...maybe into recession. Note that right after the Sept. 11th attacks Bush practically pleaded with Americans to go on with their lives as if nothing had happened i.e., SPEND!
Not that I'm advocating better education and habits, but there are going to be short-term consequences that will affect everyone, even the prudent.
This is becoming a country of haves and havenots..no middle ground anymore..thank you Shrub.
The question is when will the average american wake up to tis?
It's no wonder BushCo want to spend every last minute trying to scare the bejesus out of people with their doom and gloom "we are not safe, give me more power" rhetoric- it distracts people's attention away from how they are being robbed blind by these robber barrons.
The problem is, the average American thinks he's above average.