As home foreclosures mount and Washington struggles to find a solution to a dilemma that threatens to drag the nation into full-fledged recession, one thing seems inescapable: Ultimately, the taxpayers will be assessed for the greed of lenders and the self-indulgence of a couple of generations of Americans who want everything without struggle.
One can only hark back to when zero-down loans didn’t exist and the rule of thumb was that a mortgage payment should not exceed one-quarter of one’s monthly income. In 1961, my house in Denver cost $15,000 and I needed $3,000 down to qualify. That amount of front money wasn’t easy and required several years of apartment living to save, even when the first child arrived and two salaries suddenly became one because pregnancy then meant automatic job termination.
The tendency to bite off more than one could chew was always there, but it was stifled by the business of getting a loan made difficult perhaps as a lingering hangover of the Great Depression, when defaults and evictions were as common as double-digit unemployment. Lending agencies, at least those with long histories of responsibility, demanded that applicants meet draconian requirements before receiving a nickel. Even borrowing $500 without collateral was difficult. Most of us settled for less house than we would have liked.
But somehow, while those who had been forced to play by the old rules weren’t looking, the sane approach to borrowing and repayment went out the picture window as housing prices climbed steadily through the popcorn ceilings of those snappy ramblers and imposing colonials. Houses quadrupled in value once, then twice, then a third time facilitated by creative loans devised by greedy, often-unscrupulous lenders who required nothing up front and provided ridiculously low but insidiously misleading interest rates. Five percent could become 10 overnight. So what if the sub-prime rates climbed. Who could lose when the value of the property was always way ahead of the purchase price?
In the best “what goes up must come down” tradition, we have discovered that there are millions of pampered Americans — for whom adversity meant doing without a third bathroom — who never should have been lent the money in the first place. They simply weren’t in a position to buy and, apparently, were too unschooled in basic economics to know a flimflam from a 30-year fixed. Only after they found themselves out on the street did they finally understand.
So now everyone is scrambling to find a way of getting them and their money-changing facilitators — including some of the largest financial institutions in the world — out of the scalding water in their backyard hot tubs. Federal Reserve chief Ben Bernanke is lowering interest rates at a mighty clip while urging the White House and Congress to do more, including forcing banks to cut back on the principal owed by so many poor people. Majority Democrats in both houses are talking about several remedies, none of which bodes well for the majority of us. They include changing bankruptcy laws, buying out bad loans and other emergency measures that would require an offsetting increase in taxes.
Never mind that this mess was not the fault of Aunt Sue and Uncle Harry, who have made responsible lifelong decisions about their finances and are trying to enjoy retirement. They avoided the too-good-to-be-true sales pitches that led less prudent Americans into speculative bets on the housing market. Then why now should Sue and Harry be required to pay for the mistakes of those who sold their souls to the banking devils? Isn’t a contract between private parties still a contract, even if rife with potential disaster? That may seem hardhearted. It is. Letting them sink might finally bring some sanity back into the process, purging it of the outrageous excesses. The danger of a hands-off policy, of course, might be a sizable economic downturn that hurts everyone.
Most Americans — and I’m one of them — haven’t a clue about how to solve any of this. They simply know that greed, self-indulgence and funny money are at the bottom of the very deep hole someone has dug for us. It would be my guess that a referendum on the issue of responsibility would not go well for those yelling for a bailout. Yet, what alternative do we have?
(Dan K. Thomasson is former editor of the Scripps Howard News Service.)