It’s THE AMERICAN DREAM, to own a home, work for a living, build a profitable investment portfolio for a successful retirement, grow the rose garden, raise loving and obedient children, pay for their college education, have some pets, have at least 2 cars in the garage, a family cell phone plan, and a television in every room of the house. OH YEAH? Indeed, it sounds like a wonderful life, but Americans are no longer the innocent, joyous consumers we have been for the past 40 years.
Sure, we’ve been through tough times, like the 1970s oil embargoes, Iran-Contra, genocidal wars, the 1987 stock market crash; but we have never had to face the kind of sacrifice and suffering that our current economic environment can impose on us. Eight short years ago our future looked very different. As CNN White House correspondent Kelly Wallace reported in 2007, “President Clinton announced Wednesday that the federal budget surplus for fiscal year 2000 was at least $230 billion, making him the largest in US history and surpasses last year’s record surplus of $122.7 billion.” “Eight years ago, our future was at stake,” Clinton said Wednesday morning. “Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and this year the budget deficit was projected to be $455 billion.'”
We are now facing a budget deficit of $10.2 trillion; I can’t even begin to think about that amount. What I understand is that the government continues to borrow money from taxpayers to finance this deficit and pay the huge interest incurred on this debt.
We got to this point due to many factors, one of which is of course the subprime home loans being offered to citizens who didn’t understand the terms of the loans and couldn’t afford them in the first place. The idea of lending more than $100,000.00 to a family that did not have a down payment and could not prove their income is absolutely absurd, yet it was done over and over again through lending institutions like Countrywide, Fannie Mae and Freddie Mac and others. Many of these companies are receiving “bailout” money from the Federal Reserve, but many others will go bankrupt.
The real travesty is the upheaval this has caused millions of families across the country who have lost their homes or are losing their homes now. They were convinced that “owning” their home was the way to achieve the “dream.” Did you realize that by not putting any money down and accepting a variable APR, no principal would apply for years to come? Personally, I have been paying my mortgage for 3 years with a good fixed rate and 15% down. I’m stuck with PMI insurance of $30.00/mo (needed if one doesn’t pay 20% down) plus principal amount is only $162.00 with $546.00 interest. Principal increases slightly each month as interest declines, but as most veteran “homeowners” know, if one pays off the loan for the full 30-year term, the price of the home will easily double and the Proceeds will go to the lender. .
Personally, I don’t make enough money to pay off the huge interest payments, one of the benefits of “owning” a home, they say. I often think that it would be better to rent, since then I wouldn’t have to pay for that broken water heater or that expensive roof repair. I could more easily live within my means. Fortunately, I live in an area where home prices haven’t plummeted, so at least my investment can increase over time. That’s not the case for poor people who have seen their home values fall below purchase price and have even higher interest rates but steady wages or jobs that have disappeared.
We do not “own” our homes. We are constantly buying our houses and paying exorbitant interest to the banks and other institutions that have bought the loans.
When did our lending practices change? Steven Pearlstein of the Washington Post writes on March 14, 2007:
“It started years ago when Lewis Ranieri, an investment banker at the former Salomon Brothers, dreamed up the idea of buying mortgages from bank lenders, bundling them up, and issuing bonds with the bundles as collateral. Homeowners’ monthly payments were used to paid interest on the bonds, and the principal was repaid once all the mortgages were paid off or refinanced.
Thanks to Ranieri and his successors, almost anyone can originate a home loan, not just banks and big mortgage lenders, but any mortgage broker with a website and a phone. Some banks still keep the mortgages they write. But most other creators sell them to investment banks that package and “securitize” them. And because originators make their money from fees and the sale of loans, they don’t take much risk if borrowers can’t keep up with their payments. And therein lies the problem: an incentive structure that encourages originators to underwrite risky loans, charge the big fees, and let someone else suffer the consequences.”
There are a number of very risky practices that lenders offered to unsuspecting buyers during these bygone days of unethical financing, also featured in Steven Pearlstein’s Post article:
(a) The “balloon mortgage,” in which the borrower pays only interest for 10 years before the large lump sum payment is due.
(b) The “liar loan”, in which the borrower is simply asked to declare his annual income, without presenting any documentation.
(c) The “option ARM” loan, in which the borrower can pay less than the agreed interest and principal payment, simply by adding to the outstanding balance of the loan.
(d) The “overlapping loan,” in which a combination of a first and second mortgage eliminates the need for any down payment.
(e) The “teaser loan,” which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she does not have sufficient income to make the monthly payments when the interest rate resets in two years. .
(f) The “extension loan,” in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.
No wonder our financial institutions are collapsing and the American Dream is being shattered. With so many foreclosed homes saturating the market, it’s not likely to revive anytime soon. With so many families losing their homes, jobs and hope, the solution to these problems seems increasingly distant. Nothing short of a complete reform of our monetary systems and moral values will provide a meaningful way out of this mess. It is shameful, and in my opinion criminal, that large corporations like AIG continue to flaunt their extreme greed by allowing themselves extravagant “bonus” trips for their executives. Our global economy is on the brink: we all wait and watch as our destiny unfolds in the hands of our illustrious leaders. May the force be with you!