Tuesday, June 28, 2011
The New American Poverty Part I
This week as we get ready to celebrate Independence Day, I am taking a look at the American Dream as it stands today. The American Dream is dying around us--being murdered actually--and although Progressives such as Suze Orman say this is a good thing, I disagree. The country that has offered so much opportunity to so many is fast becoming a land where freedom from responsibility trumps freedom to dream, to achieve and to succeed.
When we hear the words the American Dream, many of us think immediately of homeownership, since for millions of people, the ability to own our own homes has embodied the American Dream. For many Americans, their home represents their largest single investment. But there is a concerted effort today in this country to steal that dream of homeownership from most Americans and reserve it instead for the wealthy and privileged.
In her book "The Money Class", financial guru Suze Orman encourages homeowners who are underwater in their houses because they owe more than the house is worth to walk away from those homes in a "strategic default." Her rationale is that the housing market will not come back for 20 years, so it is ridiculous to make payments on a house that is not going to increase in value, even though if the loan is a fixed rate principle and interest loan, the payments are reducing the balance owed. Even though a decision to practice strategic default ruins the creditworthiness of the person, and may mean that in today's tough lending environment the homeowner may not ever be able to purchase a home again, Orman tells us that this is okay. It is okay to rent for the rest of our lives, because we are about to experience "The New American Dream."
Orman anticipates that in the future 60% of Americans will be renters (a very interesting number considering that 60% was roughly the number of Americans who were home owners before the boom and subsequent bust.) She says that in the future all homebuyers will be required to put 20% down as a downpayment and have at least 8 months of mortgage payments in their savings on top of the down payment. But this too, is a good thing she says, because in "The New American Dream" people don't aspire to have much materially. We have enough to cover our needs and we don't have the stress that prosperity apparently brings.
What many people do not seem to understand is that the concept of putting 20% down on a home mortgage is not the traditional way of purchasing a home in the United States. A couple of months ago, I wrote a blog post about this entitled, "The Myth of the 20% down payment." If you don't believe what I am saying, I invite you to read that post which has a lot of supporting documentation to back up the following statement:--in the last 80 years, during which the U.S. has experienced an explosive growth in homeownership, many Americans have purchased their homes with less than a 20% down payment. And many of them have been excellent homeowners.
The problem today is that Progressives want to re-engineer our society to be something it has never been. And since the desire for homeownership is so deeply ingrained in our American psyches, and since acquiring a home represents tangible wealth for many Americans, the first place to start is to strip us of the opportunity to own a home of our own.
The Dodd-Frank bill, which passed last year, is really designed to lock Americans out of homeownership. By killing the primary delivery system for mortgage loans--the independent loan originator--the government has assured that less mortgage money will be available. And by introducing guidelines such as the Qualified Residential Mortgage, which is virtually unattainable for most Americans, Dodd-Frank guarantees that most would-be homeowners will never qualify to buy a home. Currently the comment period on the Qualified Residential Mortgage Proposal has been extended two more months, through August 10, 2011, to give the public an opportunity to weigh in on the proposal. But after the comment period ends, we can expect to see the following guidelines: 20% mandatory downpayment, debt to income ratios of no more than 36% percent, and no 60 day lates on consumer credit in the past two years. Fewer than 20% of people who bought houses on "A" paper loans in the last decade will qualify to purchase a home under these new guidelines. As a result, overnight we will become a society of renters.
What many forget is that Chris Dodd and Barney Frank of Dodd-Frank were deeply involved in the housing boom that led to the housing bust. As a then junior member of the House Financial Services Oversight Committee, Frank recommended his significant other for a job at Fannie Mae in 1991. Frank admits this, but denies that there was any conflict of interest. And though for the past several years Frank has spewed vitriol about evil mortgage entities getting rich off of the people, he did not seem to object to Fannie Mae's excessive executive bonuses as long as his partner was one of the executives. Just to put this in perspective, former Fannie Mae CEO Franklin Raines, who left Fannie Mae in 2004, reportedly earned $90 million from 1998 to 2003, and $52 million of that was performance bonuses for Fannie Mae reaching its lending goals.
Chris Dodd was equally involved in the mortgage boom. Dodd was part of "Friends of Angelo" an exclusive list of power brokers to receive mortgage loans from Countrywide CEO and founder Angelo Mozilo. Mozilo built Countrywide from a small mortgage company to one of the top residential mortgage lenders in the United States. Although many people associate Countrywide with mortgage brokers, Countrywide actually had a huge retail network of branches throughout the country and bragged that over 50% of their loans were done in house. Always on the cutting edge, Mozilo pioneered the "Fast and Easy" loan which allowed borrowers with good credit scores to state their income and assets without documentation. The program became a huge success among the self-employed and those who generally did not want to have to document what they earned or what they had saved. In fact, "Fast and Easy" became something of an industry standard--in order to compete other companies copied the program and stated income stated asset loans became the norm.
In 2007, I had dinner with a friend of mine who was the Vice President of Ohio Savings Bank--a regional bank competing in the wholesale market. That evening she told me that Angelo Mozilo had just dumped his stock in Countrywide--just as problems in the subprime market were about break open. "Countrywide is going to be another Enron," she told me. But Countrywide was not Enron. True--they were taken over by Bank of America, but unlike Jeffrey Skilling, Angelo Mozilo is not sitting in a prison cell--nor will he ever be. Through the "Friends of Angelo" program, Mozilo had made residential mortgage loans at below market rates to special people who had the power to help him later in what amounted to a series of very well placed bribes. So when his company collapsed, he had "Friends" in high places to make sure that he did not collapse with it.
These two bastions of morality profited personally from the huge housing boom and then used the ensuing crash as an excuse to give us Dodd-Frank--at 2000 plus page bill which has codified into law financial ruin for this country and for Americans individually. The same bill which authorizes HUD to hand out $1 billion in the form of "lottery" to subsidize a tiny percentage of mortgages for the next two years (see my post "The Mother of All Entitlements" if you are unsure what I am referring to) also sets up safe guards to make sure that in the future we will be a society of tenants rather than homeowners.
And financial guru Suze Orman seems to be the lead cheerleader for the Progressives. Orman and her Progressive friends tell us that we should not worry about being renters. In The New American Dream we live within our means, and we focus on "what really matters" rather than materialism. But destroying home ownership has nothing to do with the American Dream--new or old. Instead, this is about a calculated re-engineering of our society to create The New American Poverty. In the New American Poverty, we know that home ownership is beyond the reach of all but a few elites. Our society is content to own nothing, to have nothing, to aspire to nothing because we know that as individuals we have no future and no opportunity. Having never experienced the thrill of success, we will not feel the sting of failure. We will know neither achievement nor disappointment--we will just exist.
If individual homeownership is no longer an option, then what do we have to look forward to? Tomorrow, I will look at the Progressive's model for the new American lifestyle.