Happy New Year to you and your family! As we enter a new year, an important issue that is on the minds of many Americans is the subprime mortgage crisis. The American Dream of prosperity, freedom and homeownership has been achieved by many Americans. As your congressman, I will work hard to support laws and programs (municipal and community-based) that promote saving, risk management, and financial literacy. The decision is in our hands. Do we seize this opportunity to change and make this dream a reality for more people or do we remain in denial? Let’s make a change for the better together! VOTE FOR JASON JENNINGS AS YOUR NEXT CONGRESSMAN!
The Not So Secret War Against the American Quality Of Life
Homeownershiphas always been synonymous with the American Dream. Sadly, this dream has turned into a nightmare for many low income and middle class families throughout our country as more and more homes are being foreclosed upon. How did we lose our way in the pursuit of homeownership and the American Dream? Why are so many local real estate markets in such disarray?
Our quality of life is being attacked and it’s time that we stand up and defend ourselves and our families! Debt dependency is so successfully encouraged and actively promoted by the lending industry that debt is the new servitude that is draining the financial health of our families and nation.
“In recent years, the personal saving rate in the United States has fallen sharply, and it is now at a very low level compared either to U.S. historical experience or to the savings behavior of many other industrialized countries. From 1980 through 1994, the U.S. saving rate averaged 8%; thereafter, it fell steeply, and since mid-2000, with allowance made for the tax rebates that boosted household saving in the months of July, August, and September 2001, it has averaged approximately 1%. By contrast, the personal saving rates from 1980 through 2001 averaged 13% in Japan, 12% in Germany, and 15% in France, with no steep declines after 1994; in fact, in France, the saving rate rose slightly. For the United Kingdom, the personal saving rate was close to the U.S. rate during the 1980 to 1994 period, averaging 9%, but it has since declined only modestly to an average of 7% after 1994, while exhibiting very large swings throughout the sample period. For Canada, the personal saving rate did decline sharply during the latter half of the 1990s, but it is still higher than the U.S. rates, averaging 16% from 1980 through 1994 and 7% since 1994.” [March 29, 2002, http://www.frbsf.org/publications/economics/letter/2002/el2002-09.html, What's Behind the Low U.S. Personal Saving Rate? FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Milt Marquis, Senior Economist]
We, as a nation and as individuals, have become so heavily dependent on borrowing to maintain our standard of living, whether from mortgages, credit cards, car notes, student loans, or business loans that we have stretched ourselves too thin. Our circumstances is a result of being constantly bombarded everyday with messages encouraging us to borrow, to buy bigger homes, to borrow to get a nicer car, to borrow on credit cards for that vacation we do not have the money to pay for on our own.
So extensively is borrowing incorporated in American culture that we define our success by it. Even colleges and universities are encouraging debt to obtain an education while collecting millions of dollars from credit card companies to solicit students on campus (not to mention how many students’ financial well-being was hurt by compromised advice provided by some university financial aid offices). If you look beneath the surface, you can see how stressed our families are: living paycheck to paycheck…one layoff, one crisis, one accident, one missed payment, away from financial ruin…
The Subprime Mortgage Crisis
The root causes of the current problems in the residential subprime mortgage market are greed, envy and a lack of financial literacy. In the past, Americans used to be more deliberate about their long-term financial planning/investment and cautious in their home purchase decisions. The normal practice back then was to save years to accumulate a 20% down payment to avoid private mortgage insurance (PMI) and only took out 15 or 30 year fixed-rate conventional mortgages. They avoided debt as much as possible in order to limit their financial risk and the risks associated with foreclosures. Unfortunately, in the pursuit of the Joneses, we lost this common sense wisdom. [Mortgage Meltdown - 44min. documentary, http://www.youtube.com/watch?v=fG5Z9_VFI8U]
America’s risk barometer is broken. We now assume enormous amount of risks that was unheard of in prior generations and we naively assume that the lending industry and government is protecting our interests. The average American is now painfully aware of the mortgage industry’s attempts to shift the risk to the consumer by spinning the beneficial use of “creative” subprime lending/mortgages (arms, adjustable-rates, balloons, 80-20 loans, etc.) as a way for all Americans to purchase homes.
"A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment. " [http://www.investopedia.com/terms/s/subprimeloan.asp]
"Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk. Many have questioned why minorities appear to be over-represented in the subprime lending market. Studies reveal that even in upper-income African-American neighborhoods one is one-and-a-half times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan." [http://www.hud.gov/offices/fheo/lending/subprime.cfm]
Our basic desire of homeownership and the lifestyle associated with it has been used against us to manipulate us into credit dependency. Lenders made so much money in transaction fees that they were willing to take the risk of some loss and used Wall Street to transfer that risk to investors. The tremendous amount of profit that lenders devised from subprime lending encouraged them to promote these devices even more.
“Steeply rising house values tempted new buyers to borrow beyond their means, and existing owners to borrow money by re-financing their existing mortgages, using as collateral the increased value of their real estate. In the case of loans made to marginal credit-worthy customers, commonly known as subprime loans, the lenders tended to "look the other way". Then prices began to turn around….[R]ising interest rate environment which caused people with adjustable rate mortgages to see significant increases in their loan payments amid declining property values. This left many borrowers unable or unwilling to meet their financial commitments, and many lenders without a means to recoup their losses.” [http://en.wikipedia.org/wiki/Subprime_lending]
Sadly, “[n]early a fifth of consumers with bad credit who borrowed money to buy a house in the past two years will default on their mortgages and lose their homes, an industry survey projects.” [Dec. 21, 2006, Group Sees Spike In Subprime Mortgage Foreclosures. A Nonprofit Critic Of Predatory Lending Says Delinquency Rates Are Rising As Housing Prices Fall, The Associated Press, http://articles.moneycentral.msn.com/Banking/HomeFinancing/GroupSeesSpikeInSubprimeMortgages.aspx]
Real Long-Term Solutions
We did not arrive at this state because of one individual, act, or company, but as a result of the cumulative effects over the last six years:
- Greed, blatant manipulation and misinformation by some of those who profited from the transactions;
- Buyers’ lack of knowledge about the risk associated with borrowing instruments;
- Unhealthy use of debt;
- Lack of financial literacy and responsibility to the future generations;
- Avoidance and lack of enforcement of consumer protection laws against abusive predatory lending/credit practices and collection activities.
Our elected officials and regulatory agencies have failed to protect our families by allowing lending institutions to help dictate our national polices. Many elected officials have abdicated their responsibility to protect average Americans. They allowed lending institutions’ powerful lobbyists to guide the very laws that are supposed to protect the consumers. Instead of protecting the interest of the consumer, our leaders have instead invited these industries to help write our laws (including amendments to the bankruptcy law). Isn’t this like asking the fox to guard the hen house?
Unfortunately, there are no quick-fixes for the crisis created by excessive subprime lending. Like cutting the stems of a dandelion will not preventing it from growing back, for long-term solutions to our mortgage problems, we must deal with the root causes, including short-term and long-term strategies. Even now, our government has not worked to protect consumers, only putting a band aid on a gaping wound.
“It isn’t just the debt collection agents who get a black eye in this series; it is the government officials who are charged with the responsibility to watch out for the public and who instead made themselves the dupes of out-of-control debt collectors.” [Aug 2, 2006, Warren Reports On The Middle Class, The Dark Underbelly of Debt Collection, Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School, http://www.tpmcafe.com/blog/warrenreports/2006/aug/02/the_dark_underbelly_of_debt_collection]
It’s time that our elected officials stepped up to the plate on behalf of the people. The recent proposed government bailout is a good start but it’s only a temporary relief for a small number of people. As a long-term strategy, we must make fundamentals changes to our relationship with debt, including:
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RESOURCES:
- March 29, 2002, http://www.frbsf.org/publications/economics/letter/2002/el2002-09.html, What's Behind the Low U.S. Personal Saving Rate? FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Milt Marquis, Senior Economist
- Jan. 30, 2006, U.S. savings rate hits lowest level since 1933Consumers depleting savings to buy cars, other big-ticket items, http://www.msnbc.msn.com/id/11098797/
1994, Global Debt and Third World Development, Vincent Ferraro and Melissa Rosser, http://www.mtholyoke.edu/acad/intrel/globdebt.htm] - [June 5, 2005, A Daily Reckoning White Paper Report, US Consumer Spending: Consuming America, Dr. Kurt Richebacher, http://www.dailyreckoning.com/rpt/USConsumerSpending.html]
- Dec. 21, 2006, Group Sees Spike In Subprime Mortgage Foreclosures. A Nonprofit Critic Of Predatory Lending Says Delinquency Rates Are Rising As Housing Prices Fall, The Associated Press, http://articles.moneycentral.msn.com/Banking/HomeFinancing/GroupSeesSpikeInSubprimeMortgages.aspx
- http://www.youtube.com/watch?v=6borpDebEHc, Maxed Out's James Scurlock and Elizabeth Warren on NightLine
- Aug 2, 2006, Warren Reports On The Middle Class, The Dark Underbelly of Debt Collection, Elizabeth Warren
- Unequal Burden: Income and Racial Disparities in Subprime Lending in America (April 2000, 15 p.), http://www.huduser.org/publications/fairhsg/unequal.html
