Ben Bernanke's Friday surprise temporarily lifted markets around the globe, but it also fueled speculation that a major American lender was on the brink of becoming the next Enron. Months after New Century's failure, the subprime mortgage crisis has unquestionably "infected" major financial institutions, from Countrywide, to Kohlberg Kravis Roberts to BNP, France's largest bank. But the credit crisis has less to do with liquidity than with the way lenders have been redefining the American Dream -- home ownership -- for more than a decade.
The mortgage-backed securities market thrived on a single assumption -- that consumers would pay the mortgage first. In other words, we would do anything to cling to our piece of the American Dream. But abandon our dreams we have, suddenly and at an astonishing pace. Earlier this week, the financial giant A.I.G. reported that delinquency rates on its mortgages had jumped 33 percent in the past two years, to roughly four percent. Delinquency rates for subprime mortgages are much worse, of course, and that's before hundreds of billions in Greenspan's ARMs reset later this year, which will surely take the percentages much higher. More interesting is the fact that credit card delinquencies have been moving in the opposite direction, to 4.41 percent of all accounts in the first quarter of this year, down a bit. Before the end of 2007, more Americans will be abandoning the roof over their heads than the tiny piece of plastic in their wallets.
Yet economists continue to blame high-risk customers rather than their own high-risk loans for the crisis. Sure, blaming "sub-prime borrowers" for a global credit meltdown initially gave us all some comfort -- it was as if those people were lepers who had been safely quarantined on an island somewhere, unable to swim over and infect the rest of us -- but, in the end, the "bad apple" theory proved utterly false. Worse, the bankers should have known better. After all, they're the ones who have redefined home-ownership as an interest-only mortgage and redefined the home itself as an ATM. In the days when people had to prove they were worthy of a mortgage and the bank had a vested interest in seeing it paid off, of course customers were more responsible! If they are conditioned to see it as a cash cow that allows them to pay off their credit cards, go on fancy vacations and buy a Viking Stove, of course they're going to abandon it as soon as it ceases to serve that purpose.
The fact that credit cards have so far held up relatively well should not be interpreted as a sign that our credit crisis will be contained to home loans. Americans have long been encouraged to pay for all sorts of other long-term liabilities, like education and healthcare, with high-interest rate short-term loans and high-fee, variable rate credit cards. Given that we've had a negative savings rate for some years now, the only question really was, What will we stop paying first? That Americans are defaulting on the mortgage more frequently than on their credit card means that most of us are protecting our ability to spend rather than protecting the roof over our heads. This is not because we are jealously guarding our right to buy iPhones and flat-screen televisions and Italian shoes. Rather, it's because many of us need the credit card to pay for our groceries, our utilities, our prescriptions, our taxes and a number of other things that seem pretty important. Indeed, much of the refi boom of the past several years was about paying the credit card at the expense of hanging on to the home. As a longtime bankruptcy attorney told The New York Times last week, "What we see now are people who refinanced to pay existing bills, with the encouragement of lenders, on very poor terms that only worsened their problems." He added, ominously, "If you sat in at the mortgage closing, you could have predicted the bankruptcy."
As the refi cash stops flowing, it is a mathematical certainty that people will be forced to stop paying the credit card bill as well. Bankruptcy rates, which took a tumble after reform (and after many Americans were erroneously lead to believe that bankruptcy had been outlawed) have climbed back to their previous levels. Home prices are falling. This is what really terrifies the markets, because as it become clear that our debt level is unsustainable, lenders will see the writing on the wall and stop lending, no matter how low the Fed is willing to go. This is what Mark Zandi, the chief economist at Economy.com, recently called the "self-reinforcing downward cycle" of credit.
Those who understand the paradigm shift in the mortgage market are acting quickly to contain their losses. Some hedge funds are making billions by being ahead of the curve. Those who cling to the old reality will find the inevitable all the more surprising -- and painful. Just before the Fed was jolted into action, Ed Craine, a spokesman for Countrywide, observed that, "The credit crunch is working its way through the whole market, taking companies we've seen as solid companies that nobody would ever expect to have problems and putting them on the brink of disaster." Yet some economists, like Princeton Professor Paul Krugman and former Fed Governor Ed Gramlich have been loudly warning of the problems for a long time.
I just read a poll that only 18 percent of us feel that we have achieved the American Dream -- versus 68 percent of us who "own" our own homes. The myth of home "ownership" is fading fast from the collective consciousness, faster even than the easy credit that propped it up for so long. Even if the lenders, like Countrywide, survive the current crisis, they may discover an even bigger problem that they never imagined two weeks ago -- a lack of willing borrowers.
James Scurlock, author of Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders (Scribner, 2007) and the documentary film Maxed Out.
What too many Americans have found out is home ownership oftentimes feels like being tethered to a ball and chain.
It's just another way companies market crap to us that we don't really need.
The whole point of home ownership (to me at least) is not to gain an asset, it's that it allows you to eventually eliminate your biggest expense - housing. After your mortgage is paid off, you only have to pay taxes & upkeep, which is way better than paying rent.
No sound financial business plan .. for a home builder, a banker or otherwise .. can be built upon either "a greater fool" or exploitation.
This is "Business 101."
WHO is driving those huge SUV's, big trucks and Hummers racing down the road from red light to red light wasting gas like it's 29 cents a gallon.
WHO is that in the drive through line at the Starbucks paying $5 for a cup of coffee every morning?
WHO is packing the parking lots of the mall every weekend.
WHO is packing the movie theatres every weekend?
WHO is buying lunch out every single day?
WHO goes out to dinner every day?
Everybody keeps talking about a meltdown, but I don't see any evidence of people cutting back.
(2) Those who still have a credit card which they can use
They are cutting back. I live in the heart of a US National Park and summr resort area. Normal number of visitors between Memorial -Labor Day is about 1,500,000 (we are on the shore.) Attendance has dropped by 18% this summer.
We also have 'summer people' - some own a house, some rent them by the week. The 2nd homeowners are throwing them on the market - and in 18 months the only thing that sold was after a price cut of close to $150,000 or 30%. The weekly rental are vacant about 50% of the time - used to be vacancies of 10% of less.
Overall business income is down 15-18%. Tourists are coming - but not as many; and those who come do it for a long weekend, not a week or two.
(SUV owners can't sell those things - no one wnats them.)
Right now, foreclosures are only affecting 1.7% of households.
That is not to say it is not a huge problem.
It does not, however,ever pay to grossly exacggerate.
And image the enormous rise in those creditcard interest rates once a foreclosure appears on the credit report.
Blaming the idiots schmo's who thought they could afford an interest only adjustable home loan..is like putting all the blame on the poor drug addict..and none on the pusher..hey..first one's free baby!..
thanks goldman sachs,,thanks Lehman..thanks bear stearns.....oh..and thanks China..for keeping the white house roof over W's head.
If your income is equal to or higher than the median income of your state, you have to file a Chpt. 13 which is the court supervised repayment and budget plan. (Trust me - IPhones are not on the Bankruptcy Court's list of must-have items in a budget.)
If you can establish that even though your income is at or above the median, that you can not repay the debts, the Court can let your convert to a Chpt 7. It would be something like having had an income of $60,000 last year but you developed cancer, lost your job because you couldn't work, couldn't afford the COBRA and have $800,000 in medical bills - and it is clear that you can not return to work for a long time and maybe never.
For those below the median income of the state, it ispresumed that they can not pay and they file a Chpt. 7. All debts (with very few exceptions like taxes) are wiped out - except that mortgage where you have to catch up and keeping paying to keep the house.
You can look up the median income for your state at the US Census website. It is updated every year on income levels.
America's in a mess, and it's going to be a meltdown.
You can't say the US does not produce anything anymore, we lead the world in Debt production.
Where I live it seems everyone is only one misfortune away from disaster and being tossed from their homes. On the surface things seem ok, but we are perilously close to 1929.
I have often wondered why?! I think we get so engulfed by our own philosophies and predilections that we lose all perspective. The neocon movement which started in the early 70s by certain players, had the same players finally sieze power, and after 9/11, absolute power. So insanely blinding were their geo-political ambitions, that they could not see past (simply)bombing Iraq!
On a similar note, the "American Dream" revolved around Life, Liberty and the pursuit of happiness and with a sense of responsibilty towards self and Country. Now, it is about 'instant gratification', get-rich-tomorrow, live beyond your means, buy now pay later etc.. Such banality has been encouraged by the media and the market place as a whole. What was everyone thinking?! Did they completely forget that some day they will have to repay?!
From the Federal government to family units, it has all been about 'deficit financing'! Loans and plastic as if it was that forever-giving-well of happiness! To paraphrase the "Omaha Oracle", Warren Buffett, a time will come when just servicing the debt will become a debt in itself!
That time is not far away ...
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Do what you can. You are not alone. I've worked two jobs for forty years. I am a few weeks ahead of being penniless. Yes a few setbacks, ... but mostly a worker bee meant to be worthless at my demise, leaving nothing to my family and everything to the corporations and banks.
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So what do you do? Be brave, like your mother. She was not single, but lived on a single income with your father and you kids. I have begun to "walk away" from any advertisements for things that are not essential. I mean "ESSENTIAL". Now that we are down to no raises, or less than cost of living increases, ... then something has to give. You don't have extra money, SO DON'T BUY EXTRA THINGS. I don't write that to sound harsh but to be kind. No malls, no browsing, ... think of you as the most important person to whom your money should be intended!!! You are it, ... Number One! Always.
The powers that be have everything they need and only cared about our vote, ... up to the point that our votes were actually counted. That ended in 2000. That is also about the time they dramatically changed the Bankruptcy Act to allow the banks to chase us to our graves for our debts. Somehow they seemed to know there was an impending crisis in the mortgage and credit card markets. Funny how they have the jump on us, eh?
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So, ... pay yourself first. Teach your children what frugality means, ... buy needs, ... save for the future. You can come back to teach ME what that might become as a personal financial strategy! I believe in you, ... You are what we say America is about. Let us prove them right, ... but to OUR benefit for a change, eh?
Many studies show that the poor and middle class are the onyl one who feel their debts shoudl be repaid.
Not so with the upper class. The look for ways not to pay while shouting to the skys everyone needs to pay their bills.