The Huffington Report
Evan Handler
February 13, 2008......
But my gripe of
choice today is about the so-called "mortgage industry crisis,"
because its root causes (and the complicity of many Americans in the dynamic)
are so emblematic of more widespread problems in our society.
In case any
readers are unaware, we are a
society based on credit. People here think they can afford things
if they're able to borrow enough
money to possess them. Though it might be difficult for many Americans to grasp
the notion, this is a serious flaw in logic.
As with many of
my breakthroughs in perception, this one was precipitated by my exposure to
my wife and her family. They are Italian citizens. Her parents have never lived
outside the small town near Bologna
where they were born, and she has only resided stateside for the past six
years. Her father was a mechanic, as was his father, fixing lawn mower
engines, motorcycles, and automobiles, until he trained himself to design
software for industrial routers (the kind that shave metal, not the kind that
send wi-fi signals) that would allow him to
manufacture parts for agricultural machinery in his own factory, which was
attached to his house, all by himself. The machine makes a hell of a racket
through the wall when you're sitting
in the living room, and the smell of industrial lubricant permeates the home.
But the inconvenience (just like the inconvenience of living with his mother
until he was in his forties, and my wife was nine) has allowed him to recently
retire wi th a good amount of savings, and as the owner of several
pieces of property.
And when I say
"owner," I mean "owner." My father-in-law has never taken
out a mortgage for a term longer than five years. Neither, I have learned, have
most Italians. When they borrow money to buy a house, it's
for five years maximum. They've
never even heard of a thirty-year mortgage. When I explained one to an Italian
bank loan officer, he stared at me in horror. What they'd
think of the common American practice of refinancing a house repeatedly,
sometimes annually for eight and nine years running, I can only imagine. They
just don't buy what they can't afford, or won't
be able to pay off in a reasonably foreseeable time period -- and when they use
the word "afford" its meaning is "to be able to pay for
completely, and own outright."
"It's like when I go to the
store," my wife says. "I give away the money, and I take something
home. The money is gone. And what I take is mine. Because I
paid for it. Until I do that, I don't own anything."
According to this thou ght process, anyone who's put twenty thousand dollars down on a four
hundred thousand dollar house doesn't
own anything. And, if their mortgage is for thirty years they won't own anything until that time period is up. If
they refinance for longer and longer periods, they'll
never own anything during their lifetime. As the currently accelerating
foreclosure rate demonstrates, their thought process is right.
Except
many Americans won't agree. They'll point to their title, and the paperwork that
says they own their home; they'll
point to their pink slip that says they own the car they make payments on. They'll point to their credit card bills, and to the
television they charged that's
hanging on the wall of their mortgaged home. They'll
insist that buying on time is a perfectly legitimate, time-tested way of
getting to live well in the little time we've
got. But foreclosures are exceedingly rare in Italy. People don't lose their homes. Because they
don't pretend to own them when they
really don't. In fact, they
don't live in them at all unless
they pay rent to the actual owner, or have paid for it in full - or plan to
within just a few years - themselves. If they can't
afford to do either of those things, they keep living with their parents, like
my brother-in-law does. And he's
thirty-nine.
Yes, I find the
prospect horrifying as well. Don't
worry Mom and Dad, I'm
not moving back in. But, no matter how unthinkable the practice of living with
your folks well into adulthood might seem, it's
less financially insane than thinking you can "afford" a home simply
because someone is willing to lend you enough money to move into it.
My wife and I
would like to own a home, but we still rent. Modest houses in nice Los Angeles neighborhoods start at around a million
dollars (and by "nice," I ain't talkin' Beverly
Hills). The nicer parts of Santa Monica, near the ocean eleven miles
west of us, cost considerably more. There, it's
one point eight million just for the "dirt," as the real estate
agents like to say - meaning that's
the cost of a single residential lot with no structure on it. Yet at every open
house we see the same thing: a parade of young couples who seem to be seriously
shopping for the million-dollar two-bedroom town house,
or the four-bedroom with a pool for three-point-five.
"How can
they afford it?" I wonder out loud.
"They can't," says my wife.
"But the
properties all sell," I go on. "Someone's
going to move in here."
Because they're going to borrow two million dollars," she'll say. "They're
not going to own anything." Then, as she passes the BMW parked out front,
"They don't even own this
car."
She's right. They don't.
But they do get to drive it.
At least, that
is, until something goes wrong.
A couple of years
ago my father-in-law made the stunning statement that he'd
like to help us buy a house. I explained our finances to him and told him what
I thought we could afford, with the help of a traditional thirty-year fixed
rate mortgage. He looked at me like I was nuts.
"No, no,
no...listen to me," I said. "We can put this
much down, helped by you, and we finance the rest. We borrow it."
His eyebrows
arched.
"Hold
on...hold on. First of all, we get a tax deduction for all the interest we pay.
You see? Then, with interest rates so low, we can make just about as much by
investing the cash we have left as the borrowed money is costing us. We'll be using the bank's
money for thirty years at almost no cost!"
Which
is true.
We could. And most American's do.
But "no cost" doesn't mean
"no risk." Which the Italians seem to understand, and Americans don't.
"What if
someone loses their job?" my father-in-law asked. "What if someone
gets sick? Then you have nothing."
Or,
as many who are now getting burned might ask, "What if my loan rate
adjusts?"
Or, "What if the value of the house goes down?"
But my
father-in-law's caution,
and the caution of Italians in general, doesn't
prevail here. It's seen as quaint,
or even foolish. If the money's
there and it's cheap, the thinking
here goes, you'd have to be nuts not
to use it. Go for broke, some might say. And that might be exactly what you'd end up doing.
Except now the
government is going to get into the act by helping to "save" some of
the more misguided borrowers who were preyed upon by criminally negligent
lending institutions. Or, those lending institutions will all help each other,
and themselves, by taking measures to stave off costly foreclosures (if the
prices of homes fall too much, or sales decline enough, the finance companies
lose as well). But it's not just
those companies that have been negligent. So has the government that's now coming to the supposed rescue. By imposing no
effective oversight, and by aggressively encouraging every American to live in
a structure they can't actually
afford to own -- which they're now
going to continue to do, through late-game interventions.
I keep hearing
about how many Americans will be hurt if housing prices fall precipitously.
Entire neighborhoods will be devastated. But those prices have gone up as much
as five hundred percent over the last ten years. Prices should come down. And
the only ones who'll be burned will
be those who bought when prices were already ridiculously inflated, or who
continued to borrow against houses whose "value" bore no relation to
reality. That kind of borrowing is speculation, pure and simple. It's a bet that prices will go up forever. And when
you bet, sometimes you lose.
Besides, even if
a number of people do get burned, for all those who suffer financial losses,
won't an equal number be helped who
wouldn't have been able to afford a
home if prices stay so high? Why shouldn't
those who've been more prudent and
sensible have the opportunity to buy at lower prices as the market adjusts itself down? It seems to me the entire system is geared
toward rewarding those who take what could be considered ill-considered risks.
What about those people who've
stayed on the sidelines, realizing that the buildup in prices is unsustainable?
That "adjustable rate" or "all interest" loans are
unjustifiable? Who've waited
patiently, perhaps even wisely, for the correction to occur? Are we really so
committed to our credit-based way of life that we're
willing to see those people penalized, while the speculators are protected? It
appears so.
As with some of
my other posts, I expect there'll be
at least a percentage of people who'll
say, "If you like Italy
so much, go live over there." But I don't
want to. It's a mess, for a whole
different set of reasons. The government is corrupt, barely functional, and
bleeding the people dry. (If you want to read some social commentary about
Italy that'll put my American rants
to shame, check out Beppe Grillo's blog, or read
about him in the February 4 New Yorker.) But at least the people there have
sense enough to protect themselves from the greed of their lawmakers and their
lawmakers' corporate partners. They
haven't bought anyone's argument that the most important thing in life is
to get to possess that which you can't
afford to actually own.
When
my father-in-law heard me say, "But, by your reasoning, we won't be able to buy a house at all. Or we'd have to buy one so small, or so far away, that we
wouldn't want to live there,"
he just shrugged. "So what?" he seemed to say (he doesn't speak English, so I'll
never know for sure what he meant). "I lived with my crazy mother for
forty-two years. Your wife slept in a dresser drawer, in our room, when she was
a baby. Just how much more than that do you think you deserve?"
A lot, a lot of
Americans seem to say. No matter what the risk. No matter what the possible
cost.
Of all the proposed solutions, the only certain, long-term one would be the most
unthinkable to many: stop buying what you can't
afford to own. Meaning, what you can afford to pay for, completely, today -- or
at least within a short-term time period, during which you actually plan to
continue to inhabit what you've
bought. Insane, you think. Right? But that's the way most of the rest of the world lives, and
always has.
As my father-in-law might ask, "Just how much more than that do you think
you deserve?"