The Society of the Owned, Pt. 6: Just Drop Off the Key

When free market fundamentalists [1] like those in the Bush administration start at federal government action, after two interest rate cuts didn't do much to stall stop the economy sliding into recession, you know things have reached a crisis point. By the time they start taking baby steps towards a bailout, you can bet that — as with another disaster — many people are well underwater, some have drowned, and some aren't so much saving themselves as letting the tide carry them.

In the past week, the Bush administration and Federal Reserve chair Ben Bernanke have been making vague gestures that open the possibility an increased government intervention in the aftermath of the subprime debacle. That may be due to a trend which suggests some people caught in the crises spawned by the subprime disaster have found a outlet for their anger that, if number of those who chose that option reaches critical mass, could have consequences beyond what most of us could ever imagine.

It was when Fed Chairman Ben Bernanke mentioned the other "f-word" [2] — after twice tinkering with interest rate reductions, and a handful of additional interventions met with roadblocks in Congress — that I began to think that maybe the full implications of the crises had dawned on the administration, as well as the potential consequences.

However much they might oppose it on ideological grounds, the Bush administration and the U.S. Federal Reserve are inching closer toward a government rescue of distressed homeowners and mortgage lenders.

Ben Bernanke, the Fed chairman, told a group of bankers in Florida on Tuesday that "more can and should be done" to help millions of people with mortgages that are often bigger than the value of their homes.

Though Bernanke stopped well short of calling for a government bailout, he used his bully pulpit to try to push the banking industry into forgiving portions of many mortgages and signaled his concern that market forces would not be enough to prevent a broader economic calamity.

And the news that the Bush administration — packed with deregulation devotees as it is — has started taking baby steps toward  tighter regulations [3] (accompanied by headlines that the the subprime mortgage crisis has touched the Carlyle Group [4]) merely confirms it.

A presidential working group issued a broad set of proposals Thursday to correct weaknesses in the way homes are financed so that the sort of problems now crippling the nation's housing sector won't recur.

The President's Working Group on Financial Markets recommended changes in virtually every area of mortgage finance. It called for tougher state and federal regulation of mortgage lending and mortgage brokers. It also supported creating a national licensing standard for anyone who originates mortgages.

Its report is notable, however, for its restraint in expanding federal regulation: the national licensing scheme, for example, still would depend on enforcement by states. Weak local enforcement is one major reason that the housing market grew into a bubble and then burst.

The report also didn't propose putting the non-bank lenders, who underwrote about three-fourths of the now-toxic sub-prime mortgages, under federal regulation. Non-bank lenders, the largest of which are now in bankruptcy, must follow federal principles that are enforced by states, which often lack the capacity to do so.

You may judge for yourself, based on the above, how serious the administration is or is not. The point is now that some really important people — the actual ownership society — are in trouble, it's finally time for action.

That's the "broader calamity" that — and how far it might spread — that's making the Bush administration and the Republican party nervous about this election year. (And not merely that the subprime crisis has finally hit the Bush family [5], when the Carlyle Group began getting margin calls on mortgage-backed securities [6]) The calamity may not hit before the ballots are counted come November, but it's already underway. And in some places it's not called a calamity. It's called a revolution.

It starts when people look at their own numbers and see no way to come out on top, and no reason to keep trying, because they realize that they are among those Americans who are poorer than they were a year ago [7].

Considering the impact of higher prices, a bigger debt burden and sagging home prices, Americans were poorer at the end of 2007 than they were the year before, the Federal Reserve reported Thursday.

The net worth of U.S. households fell by $533 billion, or a 3.6% annual rate, in the fourth quarter of 2007, the first time total wealth has fallen since late 2002, the Fed said.

For all of 2007, household net worth rose 3.4% to $57.7 trillion, the slowest growth in five years. After the effects of 4.1% inflation are included, real net worth fell for the year.

That loss of wealth is due to a record decline in home equity [8].

Americans' percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday

Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.

Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.

"Upside down" is another way of saying that some 13.8 million will be saddled with
"under water" mortgages. Upside down or under water, these middle class homeowners do the math  and find themselves in an untenable position. They may, however, also be in a position to take some major financial institutions down with them.

All they have to do is get just a little angry. That's not a stretch for people who've bought into the long-standing notion — and some economists would say myth — of what homeownership is supposed to mean in America [9], only to learn too late what it actually means.

Home ownership is the American dream. Most everyone aspires to owning one. Some 69 percent of us do. For many of us, moreover, the equity value of the home represents the greater part of retirement savings. Why is home ownership so important to us?

One obvious reason is our culture. Ownership reflects permanence, stability, success and pride. Generally, people who own something take better care of it. No one tries to save the hotel when there is a fire. Rental car drivers don’t stop at the car wash. Renting seems so impersonal and temporary. These are emotional factors.

Another seeming attraction is economics. Homes are viewed as an investment. Renting is “just throwing money away.” But here’s where we get it wrong. The dirty little secret: most of the time, home ownership is a lousy investment.

For the middle class homeownership was almost a birthright [10], taken for granted, and a sign of middle class stability.

Home ownership used to be taken for granted by the American middle class. No longer. Rising home prices have made ownership impossible for many middle-class families, while easy credit and the pressure to overreach during the recent housing run-up have left America with a nasty housing-bubble hangover. Video: How much for this apartment?

The urge to have our own bit of land is etched in the American DNA. As settlers pushed west during the mid-1800s, President Lincoln's Homestead Act granted land to anyone willing to farm on it. After World War II, Americans streamed into new bedroom communities complete with a garage, a front porch and a Labrador retriever that dug holes in the fenced backyard.

But the homes our parents took for granted are slipping out of reach.

It signifies entrance into the ownership society, or at least a firm foothold from which to start that climb. It's a sign of having arrived; of having achieved an upward mobility most Americans are taught to desire and aspire to. (Subprime borrowers in economically disadvantaged communities are no less affected, which combines with other factors to make them susceptible to the apparent opportunity to finally attain what would otherwise always be out of reach. That's something we'll address later in the series.)

Some who thought they had achieved, the dream of homeownership are discovering that dream has not just slipped out of reach, but slipped right from under them. They're doing the the math, adding up stagnant wages, rising inflation, plummeting home values, and disappearing equity, and waking up from the American dream, and walking away from the American dream.

What used to be a last resort in economic hard times is now the first course of action. They're walking away from their homes [11], first.

In the more innocent days before the debt bubble popped, vulnerable borrowers tended to do everything they could to hang on to their houses. The result was that they would stop paying off their credit cards first, the car loans second and only last would they default on their mortgages.

But for many Americans in the credit bust, especially an overburdened minority, that set of priorities has been turned upside down.

"It's the American way of deleveraging," said Jochen Felsenheimer, a credit strategist at Unicredit in Munich. "First you sell your house, second you sell your car and in the end you also sell your TV set."

The numbers bear him out. Subprime housing loans started to go bad first, followed with a lag by subprime auto loans and now credit cards.

(But living in your car, if you give up your house, isn't an option like it was in those "more innocent days," because — as the article points out — cars are the next on the credit crisis hit parade [12].)

It's a relatively new phenomenon, but it's been around long enough to earn a catchy name, "jingle mail." [13] (That's the sound of keys, mailed in by fleeing homeowners). And it's spawned a whole new line of business [14].

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.

In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. "I was terrified," said Zulueta, who services automated teller machines for an armored car company in the San Francisco area.

Then in January he learned about a new company in San Diego called You Walk Away [15] that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender's problem. "They took the negativity out of my life," Zulueta said of You Walk Away. "I was stressing over nothing."

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure has changed, economists and housing experts say.

The Zuluetas aren't "speculators," who purchased a house intending to "flip" it, gambling that rising home prices would yield a profit. They're a working family that wanted a home and bought one with the help of an exotic breed of mortgage. (Whether they should have "known better" or how many of the rest of us "know better" is something we'll explore in another installment.) They've taken what would usually be considered a step backwards, moving from owning to renting.

The Zuluetas are also lucky to have found a home to rent. In some areas hit hard by the subprime crises, renters are facing eviction [16], even if they've always paid their rent on time. As properties go into foreclosure, and owners "drop off the key," banks are taking over ownership and seeking to unload properties as quickly as possible. The new "owners" are following a "clear it, clean it, and sell it" procedure, which means renters get the boot because an empty place is easier to sell. The result is steeper rents and a shortage of rentals [16], as foreclosed former homeowners enter the rental market themselves.

But, in some ways, those homeowners were really renters like all along.

Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. "I've had people say to me, 'My house isn't worth what I owe, why should I continue to make payments on it?' " Newhouse said.

"You bought an adjustable rate mortgage and you're mad the bank is adjusting the rate," she said. "And sometimes the bank people who call these consumers aren't really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative."

The same sorts of loans that drove the real estate boom are now changing the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.

"There's a whole lot of people who would've been stuck as renters without these exotic loan products," Sinai said. "Now it's like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren't any worse off than renting, and you got a chance to do extremely well. If it's heads I win, tails the bank loses, it's worth the gamble."

And — like the Zuluetas — they drop their keys in the mail after doing the math, even though they can afford to pay, sticking the banks with the property.

In some places, hard hit by the subprime crisis, there's an undercurrent of anger that's finding expression in what I call the "trash 'n' dash revolution," in which fleeing homeowners not only drop off their keys in the mail, but stick the lender with the task of cleaning up [17].

On the lookout for disturbing trends? Here's one for your pile: According to a recent article in Fortune, there has been a noticeable increase in not just fraud but arson that has kept pace with the housing depression. Professionals in the insurance and lending industry are bracing themselves for all manner of similar situations, as homeowners either trash or simply leave their trash lying around their houses, often taking off without even claiming their furniture. This is already a dirty problem in the housing business, with owners, lenders and banks having to figure out a way to stick each other with the check when tenants destroy their property on their way out the door. Woe is the person left behind to clean up the chaos.

"We just estimated a trashout yesterday where we're going to have to drain the pool," one Fontana, Calif., resident posted on AgentsOnline.Net, a resource and idea site for realtors, "and the stench from it when you enter the backyard is overwhelming. Then, of course, there are mosquitoes all over the top, and it's been sitting so long without chemicals that it's green on top and murky black on the bottom. We've already had to refuse one pool because of its really creepy condition and I'm not so sure about this one either. [I] just hope we don't find the previous homeowner at the bottom when we drain it."

...As if it were that easy. Especially for those homeowners, including those with good and bad credit, who have seen the light at the end of our current economic crisis only to decide there isn't a house in it. In fact, one could almost see the Wall Street Journal frown with disapproval upon reading the title of their December 2007 piece, "Now Even Borrowers With Good Credit Pose Risks." But the title no doubt was influenced by the comments of Bank of America CEO Kenneth Lewis in the piece itself. It seems that Lewis, whose company recently bought the housing meltdown's poster boy for bad lending, Countrywide, for $4 billion in stock, nevertheless feels confounded that customers of questionable loans would simply choose to abandon ship, er, house. "There's been a change in social attitudes toward default," Mr. Lewis told the Journal. "We're seeing people who are current on their credit cards but are defaulting on their mortgages. I'm astonished that people would walk away from their homes." While Lewis may scratch his head in disbelief, employees of the bank Wachovia have an explanation that might work for him: Homeowners have crunched the numbers and decided their houses are worth less than their mortgages. According to a recent conference call, many of Wachovia's current losses in California are originating not from subprime buyers fallen on financial hardship, but from homeowners who can pay their cleverly structured loans but are just choosing a different fate. "They've been from people that have otherwise had the capacity to pay," a Wachovia spokesperson said on the call, "but have basically just decided not to, because they feel like they've lost equity, value in their properties. It's hard to know right now, but we may have seen somewhat of an acceleration problem … as people have reached that conclusion."

Here again is the perpetual transfer of wealth. These home owners have done the math and realize that they are never going to come out on the winning end. They will never have a house worth what they paid for it. But they must continue to pay for it. Like sharecroppers of old — who realized they were never going to break even, let alone get out of debt, and escaped by slipping away in the middle of the night [18] — these homeowners are walking away from a losing venture.

In a telling moment, a HUD public affairs officer speaks of lenders and homeowners in terms that seem more suitable for landlords and tenants.

"We strongly encourage homeowners facing a financial crisis to stay in close touch with the lender holding the mortgage on their home," advised Larry Bush, public affairs officer for HUD's California network. "Because of the number of foreclosures, many lenders would prefer not to add to the inventory of foreclosed homes but instead work out an agreement with the homeowner. Lenders likely have higher costs for a vacant home than a homeowner has for living in the home. They have to make certain the property is kept in good condition; in most jurisdictions this means keeping the electricity and water hookups active, security monitoring to ensure there are no squatters or break-ins, and new appraisal and inspection. Homeowners absorb many of those costs."

Last I checked, utility bills, lawn services, etc., don't cost the lender any more than it did the homeowner. Of course, the homeowner is paying for the upkeep of one home. The lender maybe doing the same thing hundreds of times over, as more homes are foreclosed or more homeowners walk away from their properties. Homeowners — invested ones, anyway — do not just absorb costs. They are not just caretakers for the bank's property. The whole idea of ownership is that they are making an investment, not absorbing costs.

But that's all that's left now; absorbing costs. It's all that, in the end, trickles down. And that's where the anger comes from, as with those people find out too late that they've bought into a Ponzi scheme [19] or the bottom level of a pyramid scheme [20], or that they're left in the middle of the mess after a bubble bursts.

It's the same anger that follows a broken promise [21], or a betrayal, when people have followed the rules, or simply done the same what everyone around them: bought into the idea of the ownership society, only to find that the rules have changed, and the door was never opened anyway.

Today, the basic promises of the ownership society have been broken. First the dot-com bubble burst; then employees watched their stock-heavy pensions melt away with Enron and WorldCom. Now we have the subprime mortgage crisis, with more than 2 million homeowners facing foreclosure on their homes. Many are raiding their 401(k)s--their piece of the stock market--to pay their mortgage. Wall Street, meanwhile, has fallen out of love with Main Street. To avoid regulatory scrutiny, the new trend is away from publicly traded stocks and toward private equity. In November Nasdaq joined forces with several private banks, including Goldman Sachs, to form Portal Alliance, a private equity stock market open only to investors with assets upward of $100 million. In short order yesterday's ownership society has morphed into today's members-only society.

The mass eviction from the ownership society has profound political implications. According to a September Pew Research poll, 48 percent of Americans say they live in a society carved into haves and have-nots--nearly twice the number of 1988. Only 45 percent see themselves as part of the haves. In other words, we are seeing a return of the very class consciousness that the ownership society was supposed to erase. The free-market ideologues have lost an extremely potent psychological tool--and progressives have gained one. Now that John Edwards is out of the presidential race, the question is, will anyone dare to use it?

Will anyone? Will anyone who's able to use it, still have the will to use it? Will anyone with the will to use it still be able to use it? Corporate interests own shares [22]in the remaining presidential candidates. The Supreme Court — which includes two justices appointed by George W. Bush — shut the door on any hope of justice [23] for Enron's victims. Can anyone with the will to use it and the ability to use it still afford to use that weapon?

Yes, of course: those with little to nothing left to lose. Their numbers are growing, thanks in part the very financial institution now threatened by a weapon they created, loaded and left on millions of coffee tables and kitchen tables across the country, where almost anyone can pick it up.

And that's why even the "free market ideologues" in the Bush administration are making noises about government intervention. Because now there's a loaded weapon in the room, loaded by and pointed at the citizens they must protect.