Re-Engineer Mortage Finance and Declare a War on Debt

The Times deserves real kudos for this terrific article in yesterday’s edition.  The jist is that in the course of a about a generation–the 1980s to today–home equity loans in the U.S. have grown by a factor of 1,000 to just over $1 trillion.  The first enabler of this phenomenon was an unprecedented (and unlikely to be repeated) boom in housing prices.  The second was the application of mainstream marketing practices by financial institutions which previously thought marketing meant giving away toasters.  Suddenly, “second mortgages” –which were linked in the popular consciousness to desperation–became “home equity access loans,” which simply helped one “live richly.”

I had two reactions.

The first was incredulity at the following statistic:  having re-levered (and presumably spent) over $1 trillion in equity over the last 25 years,

…the United States has become a nation of half-home owners. For the first time since World War II, the portion of home value that Americans own has fallen to less than 50 percent. In the 1980s, that figure was 70 percent.

To quote someone from the article, people are literally “hocking the house to buy a blouse.”  So let me get this straight.   The vast liquidity in this market–much of which was provided by Fannie Mae and Freddie Mac–actually caused this measure of homeownership to go backwards, such that the typical homeowner actually “owns” one-third less than he did a generation ago.  As much as homeownership, FM2 have been enabling spending on vacations (a use which much bank advertising enthusiastically encourages).  What more evidence do we need that our system of mortgage finance is irreparably  broken, and needs to be reconstructed from the bottom up?

My second reaction was cultural.   The American public’s addiction to consumption and debt–what I call Wimpy Nation–simply must be cured.  It’s an epidemic which is not unlike obesity:  driven by the satisfacton of immediate desires but with huge costs down the road.  This is as true on a government level as it is at the household level. 

Who takes on this responsibility?   My wife suspects that answer to the question of why this reckless behavior didn’t really take off until the 80s lies not only in the fuel Madison Avenue poured on the consumptive fires.  There is also the fact that people who lived through the Depression have less influence on our society every day.  It’s ironic that the article mentions the 1975 All in the Family episode when the Bunkers throw a party and  burn their mortgage.  I was ten, and I didn’t know what a mortage was.  My dad explained it to me, and made it clear that owing money sucks, and that I never wanted to be in that situation if I could avoid it.   That was the same dad who refused to eat peaches because he lived on peach preserves and bread for the better part of a year. (With Dad, it was just as likely a couple of months, but he never let the facts get in the way of a “teaching moment.”)

True leadership is often defined by telling people things they don’t want to hear and getting them to do things they don’t want to do.  In other words, a call to sacrifice.  Churchill in WW2 comes to mind.  Without that level of leadership, only another financial catastrophe will sufficiently shock the system to break the debt addiction of Wimpy Nation.  And mounting such a campaign is not impossible:  although late to the fight, the government is now waging a battle against childhood obesity which is at least visible.  Why shouldn’t a war on debt be next?

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