In yesterday's New York Times Sunday Business section, Gretchen Morgenson looked at the continuing foreclosure wave and quoted a Harvard Law School professor as saying that it's "proof that consumers need protection from financial products that can wipe them out." (subscription required)
I couldn't disagree more.
The data is that last year there were 1.2 million mortgage foreclosures -- that's when people lose their houses to the bank after defaulting on their mortgage agreements. Behind every one of those foreclosures is a sad human story -- a family going through terrible financial stress; a couple's relationship strained over money. Shame. Sadness. Anger.
And it's not over: Ms. Morgenson has tracked risky pools of mortgage loans all the way to Wall Street, where they're traded on the bond market. Bond traders have financial models which include foreclosures -- they expect a certain level of foreclosures within a pool of loans in which they're investing. One problem is that way too many loans still in these pools are delinquent -- more than 30 days past due -- which shows that we're not done with the wave of foreclosures that made headlines a few months ago when New Century, the subprime lender, crashed and burned.
Blame is being laid on two optional mortgage features: Adjustable interest rate ("ARM") loans and interest only loans. Both features offer payments that are initially lower than a traditional 30 year fixed rate loan -- and both features come with reset periods, after which borrowers' payments increase.
Are the features themselves inherently bad for borrowers? Not at all. Consider the quintessential capitalist: someone who can either choose to pay down his mortgage loan (usually the least expensive form of capital available to individuals) or to invest that same money in his business, increasing it over time. In finance they look not only at the interest rate that you might pay on your mortgage, they also look at the opportunity cost -- at the amount of money that you could have made over time by putting capital to work for you rather than paying down your mortgage balance.
Or consider someone whose credit is on the mend -- say, after a consumer credit counseling program (which lenders see as a form of bankruptcy.) A person with poor credit who has learned from the mistakes that hurt his or her credit to begin with would in all likelihood do much better by getting an adjustable rate loan initially, then refinancing to a long-term fixed rate loan after a couple of years' responsible financial management has improved his or her credit score.
The problem isn't with the features themselves; it's how they're used. And that gets to the all-American value of more, more more.
Greed.
People use these features to buy homes they couldn't otherwise afford, or to pay off credit card debts they've run up by spending more money than they take in as income without changing that pattern in their lives. It's greed. It's our American culture of Stuff. Flat screen TV's -- SUV's -- nice suburban manicured lawns -- iPods for our children -- bigger, better, MORE. And late at night we turn on the TV to avoid the fear that gnaws at us: that we're not making enough money.
The emotional drain is terrible -- who can think about it and not want to help those caught up in this cycle, especially those about to lose their homes? As a culture it's easier for us to legislate products than to inculcate values. Better for the economy, too.
Maybe regulating the use of ARM's and interest only loans will, in the end, make some people realize that they cannot buy that big house after all. But the house is only one piece of the financial puzzle, and frustration with "not enough" house will combine with the American ethos of more, more, more and manifest itself in other irresponsible spending. We cannot save ourselves from the impact of our cultural values without being honest about the values themselves.
Comments(2)