As the subprime mortgage crash and the housing market’s downward spiral pull the rest of the economy with them, there is a lot of talk about “personal responsibility.” President Bush and other “reformers” used the same kind of rhetoric when he modified bankruptcy law in 2005.
The subprime mortgage crash occurred after an unprecedented decade of home ownership growth. Conventional wisdom holds that home ownership is a good thing; it makes people more invested in their communities and in their democracy, and it allows homeowners to build wealth. Politicians and policy makers have long worked to make home ownership easier; encouraging banks to extend credit to those with lower incomes and lowering down payments.
But in the past few decades of a deregulation trend, adjustable rate mortgages were lent to more and more people in amounts that far exceeded their income. Though not every mortgage broker or bank acted dishonestly, many people were lured in by what were initially low-monthly payments only to see their payments double after a few years. The interest rates increased not because people made late payments or owed too much money; they increased just because of the
type of loan it was. Many people do not know, or do not understand, the indexes to which interest rates are pegged. Mortgage documents can number more than 100 pages, and many people did not understand that the interest rates on those documents can change over time. The banker signing them on to the loan might be less inclined to explain that to
them than an independent counselor.
I’ve talked to people in Connecticut who say their mortgage broker left the taxes and insurance on their loans of their monthly payment calculations, so that they appeared lower. These borrowers were then saddled with large bills months down the road. And I’ve talked to people who saw their monthly payments rise to as high as $10,000. Why would banks want to extend credit to people who might not be able to pay? Those late fees and higher interest rates make them more money, even if it means they risk not getting any payments at all. If you can’t make your monthly payments, there are options for renegotiations with banks, but those are part of their insurance policies and don’t kick in until you’re 90 days late on your payments and subject to those late fees.
Now, some people took out second mortgages on their homes. But if you listened to the trumpeters of homeownership from the 80s on, that’s what they were supposed to do. If homes allow people to build wealth in the way rentals do not, at some point, homeowners are supposed to tap into that wealth. Homes need repairs, children need to be sent to college, and medical bills need to be paid. When I went with my younger sister to an information event at her college a few years ago, one of the ways the advisor said parents could pay for college was through a home equity loan.
As James Surowiecki argued in this week’s New Yorker, building home wealth requires that home values continue to rise. And for the market to correct itself home prices and interest rates would have to continue to fall until people start getting mortgages and buying homes again.
Meanwhile, homeowners are seeing the values of their most valuable possession fall way below the mortgages they owe. One way to deal with this is to encourage banks to “short sell.” Homeowners in trouble can renegotiate the terms of their loan so that their mortgage is lowered to the amount their home is now worth. That means banks lower their principle, but it is better for them to get something and avoid the costs of foreclosure. Home foreclosures and delinquency rates around the nation have hit record highs, pushing people out of homes, and costing banks more money than it is sometimes worth.
Ben Bernanke this week encouraged banks to do as much, and much more. The government also promised to tighten lending rules. And all of this comes back to the deregulation environment that allowed this to happen in the first place. The argument for deregulation has been that the free market will correct itself without government intervention. Now
we’ve seen what the market can do to people, and the government is intervening, not just with the homeowners and mortgage lenders, but with the investment banks that bought into the loans. All of this might have been avoided if the government had been more involved from the beginning.
Mostly, avoid being swayed the rhetoric of “personal responsibility.” You don’t hear that argument when the government bails out the investment brokerages that knowingly took big risks on their investments. (You also didn’t hear it when Bush altered the bankruptcy laws for individuals but not for corporations, and at the time United airlines was defaulted on their pensions and many other airlines were filing for bankruptcy). Many people probably did act irresponsibly financially, but I would argue that just as many people were rushed past reading the fine print. Poor people at a higher risk of defaulting are not able to hire the lawyers or brokers who can explain things to them and keep them from entering a shady deal. And people
raised in poverty are less likely to have any experience with the details of home ownership or borrowing and simultaneously very likely to see owning a home at whatever cost a tenuous entry into the middle class.
At some point, we have to ask ourselves whether we believe our government should protect people AND corporations equally, or leave people to the vagaries of the “free market,” while they preach about personal ownership and responsibility, they keep corporations propped up despite bad business.
Monica Potts is a reporter in Stamford, CT.
