It was a shocking phone call. I had just finished speaking with a mortgage specialist at my credit union just over a year ago, and couldn’t believe what I was being told. My wife and I were looking at the possibility of buying our first home in West Los Angeles, and the dream that seemed so far out of reach suddenly looked realistic. “Are you sure we qualify for that much?” I asked the agent. “Yes, absolutely,” was her confident reply, “with your credit rating it should be no problem.” I had to go over the numbers several times to make sure she realized the mortgage she was offering would take nearly half of our combined salaries. The agent understood, but I still don’t.
As many know the current financial crisis finds most of its origins in the mortgage crash of the last couple years. Of course, those “Wall Street Fat Cats” share some of the blame, operating within a system that rewards risky investments (like packaged mortgages) when they pay off, but never penalize for a loss. In a recent radio interview, financial “talking head” Larry Kudlow put it this way: “A guy can make $20 million one year for making much more than that for his company, but nothing happens to him when he loses $50 million the next year.” He proposed a salary structure that would be computed over multiple year periods as a way of solving this perverse incentive scheme. This risk/reward scenario is obviously absent for most homeowners who are suffering under the weight of depressed housing prices and imminent foreclosure.
On C-SPAN this week, the former CEO of Fannie Mae, Franklin Raines, declared that, “we have to stop blaming homeowners for this mess. Wall Street got into this problem all by itself. It didn’t need our help.” But is he right? Both of our current presidential candidates have bought into this “Wall Street vs. Main Street” language, savaging those working for financial institutions for their greed and risk-taking while defining the rest of us living on Main Street as pristine, if gullible, citizens.
In several important ways the beginnings of this crisis could be seen in a 16-pp. report published by PPIC back in August 2005, ironically entitled, “California’s Newest Homeowners: Affording the Unaffordable.”
In it the authors declaim the high costs of housing across the state, and announce rather alarming statistics about Californians who had bought homes in the period leading up to the height of the state’s (and nation’s) housing market. I hope you read the study, but here are a couple of the more disturbing figures:
1. Of those Californians who bought a house between 2003-2005, 20% took on mortgages that demanded half of their household income (HHI).
2. By far those at this highest risk level were those households with an HHI of $60,000.00 or less. In fact, 72.4% of homes with an HHI of $30,000.00 or less spent over 50% of their income on housing costs.
How was this possible, and why did many undertake such heavy financial burdens? There can be little doubt that some of these bad mortgages were falsely marketed and offered to those who couldn’t afford them, but as the PPIC report states, both financial institutions and the general housing market seemed to make these purchasing decisions a good bet: “These data suggest that large numbers of homeowners in California have relatively low levels of disposable income after paying for their housing. However, the effect on disposable income is undoubtedly tempered by income tax benefits and the wealth effect.” Some. quickly after buying their home, took out a home equity loan further multiplying this “wealth effect”. In fact, PPIC’s research found that 10% of California homeowners obtained such loans within two years of buying their home.
The report concludes ominously, “What is new in the latest run-up of California housing prices appears to be the financial degree to which Californians are willing to go to buy a house and the willingness of financial institutions to accommodate that desire…Many have suggested that these practices place recent homebuyers in a vulnerable financial position.” Still, the thrust of even this PPIC study from 2005 is to declaim the availability of affordable housing, rather than focusing on the huge risks undertaken by the “Main Street” Californians that are at the heart our current presidential candidate’s financial plans.
After much discussion, my wife and I decided to rent a small apartment here in Santa Monica, but I can’t say this was any great prudential feat – abject fear of a huge monthly mortgage payment was probably more operative. And I must add that there were certainly more signs of the real estate market’s “looseness” in Summer 2007 than in Summer 2005. But even then many Californians decided to rent rather than own. The PPIC study shows that whereas 30% of then new homeowners in the $30,000 to $60,000 HHI bracket were spending more than half of their incomes on housing costs less than 5% in the same HHI category spent that much on rent. Similar drop-offs occurred in every income segment.
At the heart of our democratic system are citizens practicing the hard task of self-governance – taking responsibility for what we should and demanding accountability from our elected and administrative representatives. And while institutional breakdowns have contributed to the current financial disaster and new regulatory frameworks should be introduced, we will not fully recover from it unless we acknowledge that both Wall Street and Main Street played their roles in its creation. It has been encouraging to see such bi-partisan efforts in Washington to address the problems at hand, but we are not being served by politicians – of either party – who hold exclusively to this Populist rhetoric.