I wrote this in April of 2007 and I just found it when I was cleanig out my documents folder. Thought it would be interesting to post. It was in response to Inside The New American Home.
April 12, 2007
The New American Home Loan
As the sun rises and begins to peek through the shades, it is a time to let the world in. As I do, I see that across the street the Kincaid Reality sign now reads sold. Someone finally bought their 3,000 square foot dream house. Soon movers would be trampling across the lawn hauling couches, chairs, boxes and bags, soon my wife would be baking cookies and pies to take to our new neighbors, soon we would be staring out our window as these neighbors stare back, soon we would no longer be strangers. The day came when we shared a couple of beers over my barbeque, the conversation took many twists and turn moving seamlessly from cars, to lawns, to grilling techniques, politics, religion and finally we arrived at finances; his openness was surprising while we discussed our different financial situations. Eventually he informed me that his home was financed with zero down and on an eighty/twenty loan, the eighty was a 40 year sub prime loan-a loan with a higher interest rate that is reserved for individuals whose credit will not allow them to receive a conventional home loan and the twenty, a fifteen year ARM (Adjustable Rate Mortgage) with a balloon payment at the end
My neighbor is a prime example of the new American homeowner, doing whatever it takes to own the dream house and to own it now. There is no more waiting and saving to one-day move into that house on a hill. Everyone wants to begin with the big house on the hill with the manicured lawn, beautiful shrubs and large pool. The new American homeowner no longer moves up in home as their family and income grow. In Bill Saporito’s essay “Inside The New American Home” he discusses how the American home has grown from a humble abode born out of necessity to what it is today, a sprawling breadth of cavernous rooms filled with the latest hi-tech gizmos and gadgets. This need to be in a dream home today, no matter what the price may be later is a reflection on our society as a whole. Consumer debt has steadily increased, and in 2004 the average American had a total of $8,000.00 in credit card debt (Khan). Credit cards have become such a lucrative endeavor that now the number one advertiser in terms of money spent is the credit card companies who send out over six billion credit card applications annually (Ramsey), that is more than twelve cards for every man, woman, child, and pet in the United States. What do these trends say about our society? Is there a correlation between the American home and the debt of the Americans that indwell them?
The new American home truly begins and ends in the kitchen. “Today, the kitchen is the star again, family HQ . . . ‘It’s the meeting place, the eating place, the social gathering place, the communications exchange,’” (Saporito 3). Kitchens now come equipped with double ovens, restaurant style refrigerators and freezers, multiple dishwashers, indoor grills, espresso machines, sinks large enough to bathe in and more gadgets than most people could recognize. Indeed the new American kitchen is no longer built of necessity and practicality. For many people this kitchen is a dream come true but soon this dream becomes a nightmare. Aided by the purchase of extravagant kitchen appliances in 2005 the U.S. personal savings rate dipped into negative territory, -0.5% for the first time since the great depression (Associated Press). The median income in America is currently $43,200 for a family of four (Kirchhoff); in the same year this family will spend, $45,360. If this pace were kept for five years this family would be $10,800 in the red. This is a fiscal position that only Congress can sustain. “[Kitchens] headquarters tends to get all the bells and whistles” (Saporito 3). While bells, whistles and other gadgets are wonderful additions at some point the cost of obtaining these culinary contraptions will outweigh their time saving benefits.
If the kitchen is the family headquarters then the great room is the home’s flagship store. While the family spends most of it’s together time in the kitchen, the great room is where they bring their guests. These great rooms are a combination of living room, family room, dining room, and kitchen. “Simply put, we don’t want our houses to suggest English cottages anymore. Interior walls are disappearing. Volume has replaced coziness.” (Saporito 2). Walls are not the only things being replaced; the traditional home mortgage is also giving way to a whole new wave of creative financing. ARMs (Adjustable Rate Mortgages), balloons, sub prime loans, eighty/twenties, thirty, forty and even fifty year fixed rate loans are now all receiving increased popularity. During an interview with Barbara Pfaff the Vice President of Bank of America’s Colfax branch she stated “When I first began giving home loans 32 years ago the fifteen year fixed rate loan was the most popular followed by the 30 year fixed rate. ARMs and sub prime loans were not even invented yet and no one dreamed of something like a forty or fifty year mortgage.” (Pfaff) These new home loans were invented to do one thing and that was to put more money in the pockets of the lending institutions.
The ARM was born in 1982 when banks realized that they were losing money from fixed rate loans that were given out several years earlier at a rate of five to ten percent while at the same time they were paying interest of twelve percent or more to the consumers who had money market accounts, this was called disinter mediation. With the invention of the ARM all of the risk of a rising interest rate was transferred to the consumer. Since the invention of the ARM banks are no longer concerned about being stuck paying higher rates to money market accounts than they are collecting from mortgage payments. Currently there are many ARMS that will adjust up, causing roughly 1.1 million more foreclosures this year because people will no longer be able to afford their payments. This means 13% of all ARMs that will end up in foreclosure. The truly sad statistic is that when you are foreclosed you 100% have to move, you 100% get your credit trashed, you 100% get sued for what you still owe on your house, it 100% a bad experience. Negative Amortization loans and interest only loans are some other relatively new types of loans. Both of these loans operate on the same principle; you only pay the interest (or part of it) that your loan balance incurs. The advantage of these loans is that your monthly payments can be substantially lower. The disadvantage is that if you only pay the interest that the loan is incurring then the balance is never paid down and no equity is built; worse yet if the loan is a negative amortization loan then not even all the interest that is being incurred is paid off so the longer your negative amortization period is the larger the loan amount will be and the more negative equity that you’ll have. “The compartmentalized shelter with separate rooms for preparing food, eating, entertaining and watching television has been steadily giving way to an abode made up of larger, flexible living areas.” (Saporito 2). In much the same way that the great room has replaced the formal living space so now have these creative home loans designed to increase profits for the lending institutions while making the consumers happy about paying for these profits have replaced the traditional yet conservative fifteen year fixed rate mortgages. “Formals [living and dining rooms] are dead” (Saporito 2).
What will happen to America if Americans continue down the path that they are currently on? If everything goes as planned for everyone in every situation then there will not be a problem. However sooner or later something will happen, and that something is called life. Unplanned pregnancies, layoffs, tragic injuries deaths and disease, these all happen to unsuspecting people everyday who had the best intentions to refinance their ARM when their credit got better or they could afford a larger down payment. They planned to pay off the credit card debt with the money they made in the stock market until one day the goose that laid the golden egg died when Enron, Tyco or WorldCom collapsed rendering their portfolio worthless. “People don’t seem to care.’. . .’They want all the house they can possibly have.’” (Saporito 2). Caution is thrown to the wind while people ignore what they or their local market can afford and go for broke, literally.
It’s been just over two years since I peeked through my shades at our new neighbors. Today the sun is not shining, today no pies are baking, today we will not be sharing stories over my barbeque while drinking a beer. Today I am helping them pack up everything they can because tomorrow their house will be put up for auction. After two years of fighting to stay afloat, the weight of their ever increasing consumer debt and continually rising monthly mortgage payments finally became too much to handle. The “For Sale” sign is back out in the front yard and the moving van is back, smiles have turned to frowns and tears of joy have turned to sadness as this family is forced out of their dream home. After two years of payments they have built no equity; in fact after the sale of their home they will likely be sued for tens of thousands of dollars because houses that get auctioned off rarely if ever bring what is owed on them. It is despairing to see people forced into a situation like this by their own actions, especially when these actions are deemed normal by society. These are actions that if allowed to run their course will result in a weaker fiscal position, a direction that Americans have learned from their leaders in Washington is normal.
