Twenty years ago, banks had a reputation for being very conservative. Then came the high flying world of casino banking, with its high roller, risk-embracing culture. Beneath it all, though, the core of the banking industry mentality is deeply conservative -- not the good kind of conservative that makes sure that loans are collateralized and deposits are protected. Rather, it is a conservative mentality produced by an out-of-date understanding of the world in which the loans -- particulary mortgage loans -- operate. And that misunderstanding will continue to spell trouble for all of us.
Here is one telling case in point. In their new efforts to be cautious, banks and other mortgage-lenders are reportedly refusing to give loans to pregnant women. (Tara Siegal Bernard, Need a Mortgage? Don't Get Pregnant, New York Times, July 20, 2010) The refusals are based on the lenders' fear that pregnant women may decide not to return to work, or may not have a job to return to, after childbirth. What this policy reveals is not that the banks are sexist or family-hostile -- which they are -- but that they are about seriously of touch with the reality of the labor market. When was the last time any applicant for a thirty year mortgage had the same job, and income, for thirty years? Fixed-rate, self-amortizing mortgages were designed for a workplace in which workers stayed with their employers for their entire careers. These types of mortgages arose in the 1930 and 1940s, a time when employers wanted workers to stay with them a long time so they could develop loyalty, learn in-house skills and progress gradually up an orderly job ladder until retirement.
Long-term mortgages assume that borrowers have reliable and long-term employment relationships. For much of the 20th century, this was true, much of the time. America's great post-war middle class was comprised of blue-collar workers who enjoyed long-term, stable jobs and predictable promotion paths that extended from hiring to retiring. Auto companies, insurance companies, the steel industry, and other industries dominated by large firms offered their workers de facto job security, orderly promotion opportunities, a rising wage trajectory, dependable benefits and a reliable pension upon retirement. Such jobs were by no means universal -- they eluded most African Americans, women, and rural Americans -- but they formed the template upon which 20th-century social policy was built.
Over the past two decades, the reality of long-term stable employment has vanished for all but a lucky few. Employers have created new types of employment arrangements that do not rely on a stable and loyal workforce, but which provide them flexibility instead. Sometimes this means using temporary workers or independent contractors to perform tasks previously performed by regular employees. But more frequently it means altering employees expectations and repudiating the culture of permanency that employers used to foster. Employers want to be able to bring in new employees with new skills at any level, eliminate those with obsolete skills, and reassign incumbent employees across departmental and functional lines. These changes are not all nefarious -- they have unleashed creativity and enabled many to escape the deadening drone of dull, repetitive work. However, the change in the nature of employment has undermined many crucial elements of our social safety net, including our housing policy.
The problem now is that few people have the kind of long-term job security that our housing policies take for granted. According to the Bureau of Labor Statistics, the median length of time a worker spends with a particular employer has decreased in every age group since 1980, except for women ages 35-44, who saw a slight increase. Today, more and more people have an episodic experience in the labor market, moving from employer to employer, with periods of employment often followed by periods of unemployment and transition. When unemployment strikes, mortgage payments that once had been manageable become impossible.
So banks that refuse loans to pregnant women for fear that childbirth will disrupt the employment relationship are worrying about the wrong problem. Almost no one has safe, reliable employment these days. All workers are at risk of termination and seeing their jobs outsourced to temporary workers, independent contractors, or simply to new blood. The answer is not to single out one group whose employment relationship is precarious -- nearly everyone's is. Instead, banks and other lending institutions need to rethink their lending practices to meet the new reality of people's work life cycles. For example, they should redesign mortgages to have flexible resets that permit mortgage holidays or interest rate dips during spells of unemployment. Some commercial loans currently have this feature for businesses that are in temporary difficulties. Because the nature of employment has changed profoundly, it is time to revisit the structure of housing finance.
Katherine V.W. Stone is the Arjay and Frances Miller Professor of Law at UCLA School of Law. She specializes in labor and employment law, and her book, From Widgets to Digits: Employment Regulation for the Changing Workplace was awarded the Michael Harrington Award for linking scholarship to current issues of social policy.
Some of the old system did in fact work, it worked to protect the American people which caused great angst among the ranks of banksters.
The way the Treasury Dept, crediti rating agencies, bankers and brokers, ALL bamboozled the American people is nothing short of CRIMINAL. Having a background in finance and seeing my industry behave so abhorrently, leaves me ashamed.
Goldman Sachs, who was once considered the "gold" standard, has disgraced the investment business beyond repair.
The now defunct accounting firm, Arthur Andersen LLP, once, considered the cream of the crop and shinning example for the profession, jumped in bed with Enron and others and destroyed much of the profession's credibility.
PwC, (PricewaterhouseCoopers) the current leading accounting and consulting firm, compromised professional standards by providing healthcare lobbyist with tainted statistical data to bolster false claims regarding pending heathcare legislation.
Wachovia Bank, is now admittedly in the drug-money-laundering business.
Moody's Investors Service has proven itself incapable of prognasticating fraud on a massive scale. Repeatedly issuing AAA ratinged trash and utter junk, just to line their own pockets.
The affronts to my industry are too numerous to ever regain the industry's remaining honest working professionals, any sense of pride or honor .
I say, a pox on ALL of their houses!
So I link to the article that is used to build this whole argument (http://www.nytimes.com/2010/07/20/your-money/mortgages/20mortgage.html?_r=1) and read it. Guess who the drivers are of all these changes? Freddie and Fannie, our government owned and run lenders of mortgages. Not “Bankers”, not “Conservatives”, not anyone she points a finger at. No, it is the Congress of the United States that appoints the board of those entities, pays the deficits of those entities and writes the rules for those entities.
But I guess it makes sense, the article is written by two lawyers, and since the majority of our “beloved” Congress people and Senators are lawyers, we can’t point the finger there.
Oh please....get a grip.
House prices automatically rise to max affordability, "what the market will bear".
Low mortgage rates, longer terms, tax deduction for the interest:
all of them increase the mortgage you can afford, and housing prices rise accordingly
In this case, the banks current reluctance to write loans keeps housing prices down.
Make them write riskier loans, housing prices will rise - but that's what lead to the meltdown!
I got my first mortgage in 1978. Mortgages were MUCH harder to get back then, you needed at least 10% down, mortgage payments no more than 30% of income. Even with the current restrictions, mortgages are still easier to get now.
Easy credit already drove housing prices sky high, and they are still unaffordable.
That's why folks can't qualify for mortgages: they can't afford the house they want.
There is no solution other than for housing prices to fall to affordability.
If a lot of people qualify because of this, more mortgages will get written, house sales will increase, prices will rise.
If not a lot of people qualify, then the whole program doesn't help much and is kind of meaningless.
I'll restate: you can't make mortgage loans more flexible without increasing house prices. Loans became more "flexible" when they went from 25 year to 30 or even 40 year mortgages. That reduced the monthly payment for the same mortgage, which allowed people to afford pay more, so they did and prices rose.
It's an illusion. Any help you give homebuyers helps them afford more, prices will always rise to match that. Give everybody a $50,000 tax credit to buy their first home? House prices will immediately rise by $50,000.
Good to have you here. Fanned
Its sad, but we will see a lot less home ownership as incomes drop and the middle class disappears. The result will be a further stratification of income classes. Home ownership was a way for wage earners to participate in equity gain- to earn money from appreciation instead of sweat. With that weakened, it will be harder for successive generations to accumulate a down payment or pay fixed payments or even worse the new variable rate payments.
It was a big part of the American dream, and there's still hope, but that hope diminishes as we fall into a downward spiral of lower wages, less extra-wage income, less job stability, and so on.
The reason I think its as much stupid as mean is because they can't see that their policies are killing their customers. They are causing capitalism to devour itself, one mortgage at a time.
The workforce is now 50% female, compared to 31% in 1953.
In the "old days", houses were usually financed from only the man's income.
http://www.dol.gov/oasam/programs/history/herman/reports/futurework/report/chapter3/chart3-1_text.htmhttp://www.bls.gov/news.release/empsit.nr0.htm
Good reason to rent.
I suspect that several tens of millions of Americans have recently figured that out...
Sorry folks, I will work for whoever is running to replace Obama simply to get rid of Geithner (and Summers). I truly hope their is a democratic presidential primary so these issues can be fully vetted.
Why not reverse the conditions that destroyed long-term employment in the first place?
Like NAFTA/GAT and 'globalization'.
Trying to put band-aids on an amputation, by insisting on loans to precarious borrowers, makes absolutely no sense.
The fact that banks can't find suitable borrowers, indicates just how bankrupt the banks are, since they rely on borrowers and it shows the need for the entire Federal Reserve System be re-organized in Federal bankruptcy RECEIVERSHIP, so the economy can start over.
Any other suggestions, is just fluff talk and will only make matters worse.
WE HAVE NO ECONOMY - IT'S BEEN DESTROYED BY WALL STREET BAIL OUTS!!!
I would disagree with that. I think it shows just how bankrupt the individual borrowers are, and the banks have no appetite for leveraged borrowers.
However, if you don't fund the "pay-in" and you lose your job and can't make your payments, well I think the obvious is known.