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June 18th, 2010

Is the American Dream Turning Into the American Nightmare?

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“For many, the American dream of home ownership turned into a nightmare of debt and foreclosure.”-David Wessel (The Wall Street Journal)

That pretty much says it all, doesn’t it?

David Wessel of the Wall Street Journal wrote a really thought-provoking article recently that suggests we (if we haven’t already) re-examine our nation’s housing system and the overemphasis we put on owning a home. Wessel says that maybe it’s about time that we recalibrate what it means to achieve (at least part of) ”the American dream.” Maybe more of us should stay renters as opposed to owners. Would that really be so bad?

Over the last 100 years or so, this country has championed the idea of homeownership. On the way to “achieving the dream” — joining the ranks of the middle class — it could be said that America has grown “addicted” to the idea of homeownership. As with any addiction, there has been a whole lot of denial and there have been plenty of enablers along the way.

“Dating [back] to a 1918 government ‘Own Your Own Home’ campaign,” writes Wessel, our political leaders have supported homeownership possibly to a greater degree than any other initiative:

The U.S. has long seen home ownership as an unquestioned virtue, dating to a 1918 government “Own Your Own Home” campaign. Herbert Hoover, Franklin Roosevelt, Bill Clinton and George W. Bush all talked as if owning a home was the only way to join the middle class. Not only did it promote social stability—recall Mr. Bush’s “ownership society”—and build well-maintained neighborhoods, home ownership became a hedge against inflation and a way to save for retirement. Until it didn’t.

Home ownership rose from around 40% of households in the 1940s to about 60% in the 1960s and then hovered around 65% until the 1990s, when a government-backed push to spread ownership, particularly among minorities, helped lift the rate, reaching a peak of 69.4% in mid-2004.

That “peak” in 2004 is now more commonly referred to by many as the “bubble.” But soon after 2004 things fell apart and that bubble burst.

Throughout the years, loan terms and lending conditions have gotten progressively longer and more lenient, while the repercussions of failure have gotten worse. As any market observer will tell you, the markets rarely ever learn from their mistakes. And it’s interesting to note that while the U.S. is mired in a housing meltdown, its neighbor to the north, Canada, has largely avoided any significant crisis:

As late as the 1930s, a U.S. mortgage was generally a loan for three to five years, at which time the borrower had to pay it off. Then the government fostered the 15-year fixed-rate mortgage—and eventually the 30—and the concept that the homeowner would pay off principal in monthly installments.

Most other countries rely on mortgages in which the rate is fixed for only three to five years. In the U.S., one usually can refinance a mortgage without penalty to take advantage of lower rates. More than 70% of mortgage applications filed in early June were for refinancing existing loans, the Mortgage Bankers Association says. Elsewhere, refinancing is less common. Adjustable rates and prepayment penalties make it less alluring.

So what’s the problem here? Are our mortgage loans too alluring? Do we have too many options?

You could counter the argument that U.S.-style mortgages are “too alluring” by pointing to the incredibly-strict private lending environment we are now experiencing: lenders requiring 20% downpayments, pristine credit and debt-to-income ratio requirements. We agree that things are tough in the private market, but as Wessel alludes to, maybe the real problem is that we have too many easy options.

It’s a shame that underwriting conditions in the private market are so tough right now that many have been prevented from getting a Fannie Mae or Freddie Mac-guaranteed mortgage, but let’s not forget about the Federal Housing Administration (FHA): a government insurer that makes it possible for just about anyone (low credit and income requirements) to own a home with as little as 3.5% down.

So even though credit conditions are tight in the private market, there’s still a wide-open credit spigot (in the form of the FHA) that’s making new loans available.

Have lenders and lawmakers spoiled us but giving us too many options and too many opportunities to own?

Are we leveraging an unreasonable amount of our income and assets just to own a home?

It seems that in America there are so many initiatives and programs (FHA, the tax code, state HMFA programs, HUD, etc.) designed to promote homeownership at any level, at any income and at any level of qualification. Beyond all the programs designed to get people in homes, what about all the programs designed to keep people in their homes?

Think of all the money we have spent over the last few years on housing preservation programs, and to what avail? There’s HARP, HAMP, HAFA, 2MP, HAUP, and those are just programs with popular acronyms. To what ultimate cost are we committed to support this idea of homeownership? Has the very idea that ‘to really achieve success in America you need to own a home’ made us worse off?

Owning a home is an investment. But what happens when too many Americans make a bad investment?

Many virtues of home ownership evaporate if the value of the house falls to the point where one owes more on it than it’s worth.

READERS: Has this housing downturn changed the way you feel about owning a home? Or, is owning a home still an important, if not the most important, goal in your adult life? Should we completely re-think all of the systems designed to promote homeownership?

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7 Responses to “Is the American Dream Turning Into the American Nightmare?”

  1. Tweets that mention Is the American Dream Turning Into the American Nightmare? | HSH Financial News Blog -- Topsy.com Says: June 18th, 2010 at 11:08 am

    [...] This post was mentioned on Twitter by HSH Associates, Susan Carter. Susan Carter said: Is the American Dream Turning Into the American Nightmare?: “For many, the American dream of home ownership turned… http://bit.ly/cLtArm [...]

  2. Mike Aurzada Says: June 19th, 2010 at 4:46 am

    If you purchase your home in an area that it costs less to build new 1/2 mile to 2 miles away from your home, you will struggle for some time until “location” or the difficulty of commute makes the value of your land exceed the depreciation of your building. At least that’s how it “should” work.

    As the overall housing market has slowed, those on the “outer circle” find themselves the farthest away, with close competition from new builders and with no differentiation on why to buy their house vs. a new build. They find themselves on depreciating assets in a “normal” environment. Add tighter credit, and an aging population, looking to downsize, and potentially rent, you exacerbate the likelihood of not seeing home appreciation.

    This is the cost and risk of suburbia. Telling people that their home will appreciate in value (quickly) was irresponsible. The area on the outside of the circle grows exponentially as the radius increases. Which means supply can increase significantly.

    When you add “1 mile” to the distance from the center of a city at say … 25 miles vs. 24 miles. You add 153 Sq. Miles of housing availability. Add one more mile, and you have another 160 square miles. That’s 200,320 acres. Or potentially 801,000 homes. Without any high density homes.

    That the US Government is “borrowing money” to create “pools of funding” to help low income (or tenuously employed) people to get into this is and has been irresponsible.

    This basic math of living on the “outer edge” could be taught to 9th graders.

    But they don’t. They want to tell them that recycling their 8 oz. sugary juice boxes is being responsible.

  3. brayansox Says: June 19th, 2010 at 5:25 am

    Mortgage Loan Modification is the only solution to save your home and stop foreclosure. Some 650,000 troubled borrowers have been put into trial loan modifications under the president’s foreclosure rescue plan, the Treasury Department said Tuesday. That number represents only 20% of eligible homeowners. Mortgage Home Modification Program is the solution to save your house and stop foreclosure process Use this free tool to see if you qualify for loan modification

  4. Tim Manni Says: June 21st, 2010 at 11:22 am

    Hey Mike,

    Thanks for commenting!

    -Tim

  5. Danger! My Dream Home is Still on the Market | Hall Financial Says: July 15th, 2010 at 7:58 am

    [...] Is the American Dream Turning Into the American Nightmare? (hsh.com) [...]

  6. OneMacIndyWest Says: November 3rd, 2010 at 1:48 pm

    Homeownership always has been the goal of the American worker, but as the economic momentum, which drove the market dropped dramatically, that goal has become harder to reach. The factors directly responsible for this change in the housing market are numerous and varied, yet can be fit into five major categories ranging from common sense to discriminatory lending practices. These issues in the present market are complex and interconnected, and the answers are only now coming to light. The American dream is now the American nightmare, as fiscally qualified individuals are being denied the ability to buy or refinance homes; additionally, research shows that owning a home today is not as desirable as in the past.

    It can be difficult to measure lending discrimination. There are different forms of lending discrimination and many possible scenarios throughout the financial industry in which this type of behavior can occur. Some examples are advertising and pre-approval, and some lenders have the option to approve or deny the loan application based on their own discretion. To understand why this is happening, some research will need to be done focusing on the approval process and why certain people were approved or denied and what were the main factors. Understanding the process, researchers will be able to make an analysis of the problem and what needs to be done to correct it. There needs to be regulations in place that deal with tricky advertising campaigns promising more than any one person could afford. A standard of best practices needs to be in place to safeguard the public against predatory lending practices. “Over the last several years, our nation has made enormous progress in expanding access to capital for previously underserved borrowers. Despite this progress, however, too many families are suffering today because of a growing incidence of abusive practices in a segment of the mortgage lending market. Predatory mortgage lending practices strip borrowers of home equity and threaten families with foreclosure, destabilizing the very communities that are beginning to enjoy the fruits of our nation’s economic success.” Predatory Lending United States Department of Housing and Urban Development, (18 May 2009) (Para. 1)

    A standard in underwriting and preapproval is necessary. Many years ago it was suggested that a borrower earn three times the payment, but over the years that went to one and a half times the monthly household income. Advertising techniques used to lure unqualified individuals and give them more than they can afford is something that needs to be done away with.

    Giving precedence to late borrowers, over on time accounts is another form of lending discrimination. This is a result of the increase in foreclosures that has banks stating they are too busy working on delinquent accounts to help the on-time borrower refinance their current account. Telling current accounts to wait until others are taken care of is another form of discriminatory lending. If the bank took an example of 100,000 mortgages, and all of them had interest rates ranging from three to fifteen percent, the averages of positive growth based on low and high rates is a slim portion of what would be paid on time. A standard interest rate for all accounts evens out the balance sheets to reflect current market rates. Today those rates are around five percent.

    Lending institutions will lose profits from current customers who are not developing any problems at their current rate but the reduction would help alleviate the stressed out borrowers who are paying higher rates and are not on time and are reflecting negatively on the lender. A book of 100,000 customers at five percent will beat out the book of 100,000 customers with rates ranging from three to fifteen percent. It may take time but this would seem to be a more lucrative way to do business for the long haul.

    Delinquent borrowers need to have more options, not necessarily to be treated better or worse, but shown a way out of the mess to help yield the cleanest separation, therefore the property keeps its value and the customer has a way out. If lenders implemented a department with specific counseling options for their borrowers, people would be less likely to walk away. It seems now that when any situation occurs the lender has nothing to say, or no direction to send the customer, except foreclosure.

    Upon finalization of an agreement with a bank, there begins a relationship that should last the duration of the loan; usually twenty to thirty years. Once an issue has arisen, lenders have acted like they have no option but to collect the funds. The reason for this is simply the lenders own practices. Most banks were processing the new loans whereas the big banks were shelving them, so most borrowers calling in to speak with their lenders are speaking to servicers of the loan, and not the original company the borrower closed the loan with. If the servicers were holding the mortgage note they would have more need to implement a counseling department to assist their clients, and not treat the agreement as a one-sided deal.

    Home values are plummeting and people are running out of options as to what makes the most sense in moving forward with their mortgages, and mortgage holders and servicing companies are now suffering. Value is hurting ratios, and this in turn is disqualifying borrowers from approval based on loan to value (LTV). Owning a home worth far less than what the customer is paying for it just does not make sense. For example, a customer buys a car and the next day the car company goes out of business. What would they think about making the payments knowing that due to financial instability they are no longer honoring the warranties? People would return the car to the dealership where it was purchased. It does not make sense to pay for something if it is only going to be treated as a one-sided issue of a two-sided contract.

    Owing more than the home is worth is another factor involving home values in America. Many financial advisors with experience in the housing market have stated that a new trend for even the wealthiest of people is strategic foreclosure. This simply means it makes more sense to walk away and take a hit on the credit grade than to pay for something that is not worth the value anymore. There are people walking away from their homes that just a few short years ago had built plenty of equity, but who now are back to square one.

    A prime example of what being “upside down” means in the housing market, and what many homeowners are using as their main reason to walk away, would be when a home valued at 250,000 in 2007, is currently appraised at 150,000 in 2010, effectively destroying any equity the owner had accrued in the three years of payment. “Though the United States home values have dropped for the 10th consecutive quarter, homeowners in some parts of the nation are seeing prices appreciating.” America’s Best and Worst Housing Markets, Forbes staff (08.11.09)

    Taking all accounts to a current rate could eliminate this problem. Ethical rate reduction is imperative; lenders must take care of current borrowers with perfect mortgage history, and eliminate one sided rate distribution. Standardizing interest rates is something that could help Main Street, and would force institutions to treat customers as people, not numbers when dealing with current market rates and existing relationships. Interest rates should be under the control of the Federal Reserve, and there needs to be a standard for primary residences in America. This would give a person the option to cut out the middleman when buying a primary residence, and could be a great option for primary living interest rates in America.

    A book of five percent rates is better than a book of seven percent delinquencies. Customer intimacy is missing in the lending system. People feel disgust and distrust with institutions that bear large financial relationships with customers only to treat them with disrespect once they are in the mortgage pool. Institutions should treat these existing relationships with dignity and respect considering some, if not a large handful, have perfect payment history. Lenders are now coming up with new excuses like debt to income (DTI), and with full knowledge that these new factors disqualify current existing customers from a current market rate. For example, if a customer could potentially save 300 dollars a month while paying 250 dollars more into the principal by refinancing, why would this not be a benefit to both the lender and the borrower? The borrower saves money and the lender is paid off faster, yet lenders have the option to make the excuse that the borrower does not qualify. If you have a history and are on time, why would a lender not give an existing customer a current market rate? This seems to be a logical but unforeseen solution that every lender should take into consideration. It could help to make a difference for the very same people who propped them up as taxpayers by treating their customers the same way the Federal Government treats the big banks; with honesty and transparency.

    A solution for the homeowner and the nation would be the implementation of a federal reserve bank for primary homeowners in America. This would give primary residence borrowers a chance to play on an even lending field. This would enable a controlled solution to an ungoverned problem. Implementing a federal reserve for American primary borrowers would cut out the middleman and make buying in America more affordable and based on true growth, not inflation from Wall Street.

    These issues will affect the dreams of millions, and only their successful resolution can guarantee the market returning to a place where once again homeownership is a realistic goal for the average American. The factors and solutions discussed here are but simplifications of the overarching challenges faced by the nation’s housing market. A modern economy is not a static entity, and therefore must adapt and change in order to guarantee its future. These changes, in the form of regulation, are even today becoming reality.
    Works Cited:
    Predatory Lending United States Department of Housing and Urban Development (18 May 2009) (Para. 1)
    From:http://www.hud.gov/offices/hsg/sfh/pred/predlend.cfm

    Americas Best and Worst Housing Markets
    Forbes staff (08.11.09) (Para. 1)
    From:http://www.forbes.com/2009/08/10/property-values-homes-lifestyle-real-estate- best-worst-cities.html

  7. Nalliah Thayabharan Says: November 1st, 2011 at 9:15 pm

    Wall Street, Greed & Disaster – “Foreclosure of American Dream By Wall Street”

    - Nalliah Thayabharan

    Wall Street is a confidence trick, a dazzling edifice built on paper promises, gambling, bets and rampant speculation. Wall Street doesn’t manufacture or produce anything. The Wall Street however attractive it may appear is built on paper.
    Modern day bank robbers are at Wall Street but they wear grey suits and not masks. Rampant speculators, propagandists and financiers of Wall Street are given some unfair advantage over the average consumers and taxpayers and the cumulative effect of the people watching selfishness prevail over the public interest has been an undermining of the public’s trust in the present US government. There’s no question the Wall Street is rigged against the average consumers and taxpayers. The Wall Street has a lot more information. Wall Street jerry-rig the system so that Wall Street always win. If the Wall Street loses trillions, the US Treasury will bail the Wall Street out so it can go back and do it again.
    50 trillion dollars in global wealth was erased between September 2007 and March 2009, including 7 trillion dollars in the US stock market, 6 trillion dollars in the US housing market, 8 trillion dollars in the US retirement and household wealth, 2 trillion dollars in the US individual retirement accounts, 2 trillion dollars in the US traditional defined benefit plans and 3 trillion dollars in the US nonpension assets. Greed, arrogance and incompetence created a massive meltdown, cost trillions, and still Wall Street comes out richer and more powerful.
    There are trillions dollars of new money taken again from Americans to make deals and hand out outrageous bonuses. And when these trillions run out Wall Street will come back for more until the dollar becomes junk. The value of the US dollar declined very significantly during the last 70 years. The value of the US dollar in 1940 was worth 2,000% more than the value of the US dollar now.
    Many big US manufacturers are outsourcing to Mexico and China to increase their profits, adding more unemployment in the USA. Manufacturing jobs in the USA declined 37% between 1998 and 2010. Since manufacturing industries declined in the USA, the US competitiveness in the global marketplace is also declined.
    The demise of Glass Steagall act helped spawn the credit crisis by allowing the US Banks to reinvest money that was not theirs; they gambled; they failed; they passed down the burden to the people.
    The top 6 US banks had assets of less than one fifth of US GDP in 1995. Now they have two third of US GDP. The financial crisis was created by the biggest US banks to consolidate power. The big banks became stronger as a result of the bailout by the US Treasury. The big banks are turning that increased economic clout into more political power.
    Oligarchy is the political power based on economic power. And it’s the rise of the Wall Street in economic terms, that it’d turn into political power. And Wall Street then feed that back into more deregulation, more opportunities to go out and take reckless risks and capture trillions of dollars.
    Wall Street only has the lobbyists. Today more than 42,000 Wall Street lobbyists manipulate USA’s 537 elected officials with huge campaign contributions that fund candidates who support their agenda. It no longer matters who’s the President of USA.
    Since the heads of Wall Street and their representatives are afraid because they don’t have the substance or the arguments, they will not come out and debate with the people who occupy the Wall Street.
    The political and economical leadership of the US has chosed to cartel profits and transformed the US economy to serve the colluding and unlawful oligarchy. The political and economical leadership of the US is bailing out failed paradigms with trillions of dollars while committing social injustice to its people. The political and economical leadership of the US including the US Congress have now become Wall Street’s “Trojan Horses”. The US banks are borrowing money at near zero interest from the US government, then lending it back to the US government at even mere fractions higher interest than they are paying. The net interest margin made by the US banks by lending the money back to the US federal government in the first 6 months of 2011 is 210 billion dollars.
    Due to the oligarchs’ rapacious looting and their purchase of a politically protected luxurious lifestyle, the people of the US are on the road to permanent serfdom under a police state. The democracy was not given to the people of the US on a platter. It is not theirs for all time, irrespective of their efforts. Either people of the US organize and they find political leadership to take this on or they are going to be in deep trouble.
    The failure of governance to address the current critical issues have already produced catastrophic consequences. Now we are experiencing a major global paradigm shift and it is still unfolding.

    “There is no calamity greater than lavish desires, no greater guilt than discontentment and no greater disaster than greed”
    - Laozi
    “Greedy desire is endless and therefore can never be satisfied”
    - Buddha

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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