Maxed Out: Hard Times, Easy Credit. James Scurlock D.
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find in a home of half the size and he made the rooms twice as large. But then there is also the design (not so good) and a smaller-than-expected master bath (bad) and, finally, a bizarre wall treatment in the foyer that is supposed to resemble marble but looks more like the side of a frat house after a party (very, very bad but fixable).
After sharing some parting words and nervous laughter with the developer, Beth and I get back into the Mercedes and Beth’s face softens a little. I can tell that she is underwhelmed. One of the negatives of a hot market is that expectations get out of control, she says quietly. Five and a half million dollars does seem pretty steep for a giant shoe box with an elevator, at least to my amateur mind, even if you can see a bunch of lights at night. Then again, if home prices rocket up another 50 percent in the next twelve months, it’s probably a steal.
But then I realize that what we have just walked through is not a home at all: It is an investment—or, to steal an analogy from the tobacco industry, it is a debt-delivery mechanism. Houses—homes, if you want to get quaint—used to be the savings vehicle of the middle class. The mortgage was a sort of layaway program guaranteed and closely regulated by the federal government. The obvious advantage to home ownership as opposed to putting money in the bank or under a mattress was that it protected you from the ravages of inflation—and, by default, destitution. But no longer. Now an entire, increasingly unregulated industry exists to ensure that the house is not a vehicle for saving but for spending and even for speculating. Armed with euphemisms like “Release the hidden value of your home” and fueled by Americans’ gratitude for credit and our short memories, this industry has become hugely profitable and almost unfathomable in size. The total amount of mortgage debt in the United States is now greater than the value of all the stock markets combined. It’s a similar story in the UK, where consumer debt recently passed the £1 trillion mark for the first time. Along the way, familiar phrases like home ownership and American Dream—simple terms whose goodness once seemed self-evident—have become hopelessly obscured. The goal is no longer to be free of debt, to own something of lasting value. The goal is simply to be free of “bad debt.” Debt that buys you a bigger house is “good,” because the home will always appreciate and you are simply leveraging your earning power to generate the maximum profit. “Bad” debt is the credit card junk and the other high-interest, unsecured balances you’ve accumulated,6 but those can now be magically transformed into “good debt” by refinancing your home and using the proceeds to “pay off” those “bad” debts. Presto!
In reality, of course, there is no difference between good and bad debt. Debt, by definition, is nothing but a liability, a promise to pay. And, to put it simply, if you can’t afford an expensive house now, you still won’t be able to afford it when that same house becomes even more expensive.
Our last stop of the day is the office, where Beth has scheduled a meeting with a lending consultant. He is an older gentleman, maybe early seventies. He was probably born during the Depression. He has definitely lived through boom and bust and boom again. After admiring Beth’s new digs, he sits down with her and explains why mortgage debt is “good” debt: The interest is tax deductible!7 He knows that most people don’t fully understand the math of the tax deduction, but he also knows that most people hate paying taxes, which is his ace in the hole. He can whip out a calculator and quickly show them how buying a bigger house actually saves them money, because the more interest you pay, the more you can deduct! Sha-zam! It doesn’t hurt that one local bank’s new mortgage calculator encourages folks to spend up to 55 percent of their income on the mortgage, more than double what Realtors used to recommend. Bad credit or no credit? No problem! This consultant can fix his clients’ credit ratings in a matter of weeks, sometimes days, by paying the credit bureaus special fees to expedite the erasing of negative items.
Beth interjects with an interesting question. She’s heard that you should never cancel a credit card because it hurts your credit rating. True, says her guest. You want to show as much available credit as possible, though you should maintain at least a little balance, presumably to show the credit card companies that you enjoy paying interest.8 Beth nods her head to show that she either understands this rather counterintuitive fact or else she needs him to speed things up.
When the consultant starts talking about building a relationship together, Beth finally cuts to the chase: What can he offer her clients? He responds that the only question on most people’s minds is “how big of a house can I get for the lowest payment?” So his job is to get them the biggest bang for their buck by hooking the biggest loan possible. How can he help Beth? By up-selling her customers into bigger mortgages and, by default, more expensive properties.
Beth wonders out loud how most folks can afford to buy a house these days. After all, the average listing in Vegas is now over $250,000. So later on I decide to call a mortgage broker I’m friends with in Los Angeles, where homes are really expensive. His chief assets are that he is attractive, enthusiastic, and very friendly. Like Beth, he also happens to live in one of the hottest real estate markets in the country. Locals are now saying that property in Southern California never goes down, even though that’s precisely what happened a decade ago. But for the moment they’re right. Home prices have been increasing by at least 20 percent a year for as long as anyone cares to remember.
Last year my friend pocketed $70,000, mostly in commissions. This year he’ll do even better. That’s more than double the median wage in America and far more than he made selling expensive jeans at the mall, his previous job. But, unlike Beth, his clients aren’t rich. Sometimes they aren’t even what we would traditionally call middle-class. His newest client is a cashier at Home Depot. She wants to be a homeowner—or, more precisely, a condo owner. The tiny slice of the American Dream she craves is priced just north of $400,000—a bargain by L.A. standards but unrealistic, given that her take-home pay is around $1,300 per month. In other words, she earns half the mortgage payment she would have to assume in order to buy the condo. It doesn’t take a calculator to figure out she can’t afford it.
Yet, the mortgage industry has created a product for her and the millions of other earnings-challenged Americans like her. It’s officially called the “stated income” loan, though mortgage brokers like my friend refer to it as the “liar’s loan.” And it works like this: The Home Depot cashier writes down whatever income my friend tells her the bank needs to see on her application (wink, wink) and both the broker and the bank promise not to verify it by asking for tax returns or paycheck stubs (nudge, nudge). If needed, she will find a “tenant” to mitigate her rent “shock,” i.e., the fact that her mortgage will be four times her previous rent payment, a fiction that he or she will put in writing for the bank (wink, wink). If she has no friends, or if she has friends who are unwilling to commit fraud on her behalf, friends may be appointed for her, probably by the mortgage company (triple wink). All the cashier needs to do is provide a decent credit score and her signature. The bankers will provide the money, and their sense of imagination/denial will reach new heights. “Who knew that cashiers at the Home Depot netted $6,000 a month?” they will ask each other incredulously at the water cooler. Must be one hell of a union!
But the application is just a bump on the road to the dozens of new products that make that monthly payment seem within reach. By far the most popular is the interest-only loan, in which the “buyer” pays only interest for the first two or three years at a very low short-term rate, then is “converted” into a traditional payment plan with a much higher long-term rate. In London, where prices are exorbitant even by US standards, things are even easier. You can get an interest-only loan for as long as you desire, as long as you repay the full amount by retirement. And, if your income isn’t sufficient to qualify, you can apply for “fast-tracking”—meaning that the bank won’t bother to verify how much you earn. There is also the “negative amortization” loan, in which the mortgage becomes larger every month because the payments aren’t high enough to cover the interest and principal. And then there’s the 125 percent loan, in which the bank lends the borrower 25 percent more than the value of the property. That extra money, I assume, can be used to make the mortgage payments the borrower could otherwise not afford. As Beth later explains with deadpan understatement, “These lenders are having to be very creative.” So are their ad agencies. NIG’s latest ad, for eample, asks