Brother, Can You Spare One-Point-Seven Million, at 6.25%?

Of all the proposed solutions to the mortgage crisis, the only certain, long-term one would be the most unthinkable to many: stop buying what you can't afford to own.
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I'm sorry to "go negative" here, but there are so many repulsive things to expound upon these days. There are minor, but not meaningless, matters, such as member after member of a congressional oversight committee hobnobbing with Roger Clemens in the days before they publicly interrogate him for possibly perjuring himself in earlier testimony (not to mention the fact that the New York Times has now given his testimony more prominent coverage than yesterdays' presidential primaries). Clemens' extensive series of meetings with elected officials is not a "completely unprecedented" occurrence, according to one expert on such matters -- though that leaves a huge swath of descriptive terms still available, from "unusual," to "unseemly," to "wildly inappropriate." It would be one thing if there were even an effort being made to justify his lobbying as an attempt to garner or clarify facts. But the most apparent fact is that a host of old, white, male baseball fans are ejaculating all over themselves with glee from spending a few private moments with one of their heroes -- the day before they're supposed to get to the bottom of whether he's lied to them already. If they had any seriousness about their work and their reputations they'd resist the urge to end their meetings by posing for photos and receiving autographs from the subject of their investigation. Or maybe the dumb ones would do it anyway, but try to hide it from view. None of them have done either.

Then there are the really serious abominations in the news, like yesterday's U.S. Senate vote to absolve the telephone companies that turned over legally protected private information about their customers to the government as part of its spying operations and insulate them from any lawsuits that have resulted. This is, in practice, an official sanctioning of the telecommunications industry as a partner with the U.S. government in the surveillance of American citizens. I don't know about you, but even if I were one of the people who think it's sort of okay for the government to listen in on private phone calls without demonstrating to a judge some reason for suspecting the wiretap's subject (which I don't), I sure as hell don't want AT&T and Verizon acting as my overseers. Those companies can't even keep my cell phone calls connected. And they haven't, in my experiences, been exactly straightforward and forthcoming about their own deceitful billing practices. Yet now they're in the law enforcement business, with my tax dollars helping to pay for their efforts.

But my gripe of choice today is about the so-called "mortgage industry crisis," because its root causes (and the complicity of many Americans in the dynamic) are so emblematic of more widespread problems in our society.

In case any readers are unaware, we are a society based on credit. People here think they can afford things if they're able to borrow enough money to possess them. Though it might be difficult for many Americans to grasp the notion, this is a serious flaw in logic.

As with many of my breakthroughs in perception, this one was precipitated by my exposure to my wife and her family. They are Italian citizens. Her parents have never lived outside the small town near Bologna where they were born, and she has only resided stateside for the past six years. Her father was a mechanic, as was his father, fixing lawn mower engines, motorcycles, and automobiles, until he trained himself to design software for industrial routers (the kind that shave metal, not the kind that send wi-fi signals) that would allow him to manufacture parts for agricultural machinery in his own factory, which was attached to his house, all by himself. The machine makes a hell of a racket through the wall when you're sitting in the living room, and the smell of industrial lubricant permeates the home. But the inconvenience (just like the inconvenience of living with his mother until he was in his forties, and my wife was nine) has allowed him to recently retire with a good amount of savings, and as the owner of several pieces of property.

And when I say "owner," I mean "owner." My father-in-law has never taken out a mortgage for a term longer than five years. Neither, I have learned, have most Italians. When they borrow money to buy a house, it's for five years maximum. They've never even heard of a thirty-year mortgage. When I explained one to an Italian bank loan officer, he stared at me in horror. What they'd think of the common American practice of refinancing a house repeatedly, sometimes annually for eight and nine years running, I can only imagine. They just don't buy what they can't afford, or won't be able to pay off in a reasonably foreseeable time period -- and when they use the word "afford" its meaning is "to be able to pay for completely, and own outright."
"It's like when I go to the store," my wife says. "I give away the money, and I take something home. The money is gone. And what I take is mine. Because I paid for it. Until I do that, I don't own anything."

According to this thought process, anyone who's put twenty thousand dollars down on a four hundred thousand dollar house doesn't own anything. And, if their mortgage is for thirty years they won't own anything until that time period is up. If they refinance for longer and longer periods, they'll never own anything during their lifetime. As the currently accelerating foreclosure rate demonstrates, their thought process is right.

Except many Americans won't agree. They'll point to their title, and the paperwork that says they own their home; they'll point to their pink slip that says they own the car they make payments on. They'll point to their credit card bills, and to the television they charged that's hanging on the wall of their mortgaged home. They'll insist that buying on time is a perfectly legitimate, time-tested way of getting to live well in the little time we've got. But foreclosures are exceedingly rare in Italy. People don't lose their homes. Because they don't pretend to own them when they really don't. In fact, they don't live in them at all unless they pay rent to the actual owner, or have paid for it in full - or plan to within just a few years - themselves. If they can't afford to do either of those things, they keep living with their parents, like my brother-in-law does. And he's thirty-nine.

Yes, I find the prospect horrifying as well. Don't worry Mom and Dad, I'm not moving back in. But, no matter how unthinkable the practice of living with your folks well into adulthood might seem, it's less financially insane than thinking you can "afford" a home simply because someone is willing to lend you enough money to move into it.

My wife and I would like to own a home, but we still rent. Modest houses in nice Los Angeles neighborhoods start at around a million dollars (and by "nice," I ain't talkin' Beverly Hills). The nicer parts of Santa Monica, near the ocean eleven miles west of us, cost considerably more. There, it's one point eight million just for the "dirt," as the real estate agents like to say - meaning that's the cost of a single residential lot with no structure on it. Yet at every open house we see the same thing: a parade of young couples who seem to be seriously shopping for the million-dollar two-bedroom town house, or the four-bedroom with a pool for three-point-five.

"How can they afford it?" I wonder out loud.

"They can't," says my wife.

"But the properties all sell," I go on. "Someone's going to move in here."

Because they're going to borrow two million dollars," she'll say. "They're not going to own anything." Then, as she passes the BMW parked out front, "They don't even own this car."

She's right. They don't. But they do get to drive it.

At least, that is, until something goes wrong.

A couple of years ago my father-in-law made the stunning statement that he'd like to help us buy a house. I explained our finances to him and told him what I thought we could afford, with the help of a traditional thirty-year fixed rate mortgage. He looked at me like I was nuts.

"No, no, no...listen to me," I said. "We can put this much down, helped by you, and we finance the rest. We borrow it."

His eyebrows arched.

"Hold on...hold on. First of all, we get a tax deduction for all the interest we pay. You see? Then, with interest rates so low, we can make just about as much by investing the cash we have left as the borrowed money is costing us. We'll be using the bank's money for thirty years at almost no cost!"

Which is true. We could. And most American's do. But "no cost" doesn't mean "no risk." Which the Italians seem to understand, and Americans don't.

"What if someone loses their job?" my father-in-law asked. "What if someone gets sick? Then you have nothing."

Or, as many who are now getting burned might ask, "What if my loan rate adjusts?" Or, "What if the value of the house goes down?"

But my father-in-law's caution, and the caution of Italians in general, doesn't prevail here. It's seen as quaint, or even foolish. If the money's there and it's cheap, the thinking here goes, you'd have to be nuts not to use it. Go for broke, some might say. And that might be exactly what you'd end up doing.

Except now the government is going to get into the act by helping to "save" some of the more misguided borrowers who were preyed upon by criminally negligent lending institutions. Or, those lending institutions will all help each other, and themselves, by taking measures to stave off costly foreclosures (if the prices of homes fall too much, or sales decline enough, the finance companies lose as well). But it's not just those companies that have been negligent. So has the government that's now coming to the supposed rescue. By imposing no effective oversight, and by aggressively encouraging every American to live in a structure they can't actually afford to own -- which they're now going to continue to do, through late-game interventions.

I keep hearing about how many Americans will be hurt if housing prices fall precipitously. Entire neighborhoods will be devastated. But those prices have gone up as much as five hundred percent over the last ten years. Prices should come down. And the only ones who'll be burned will be those who bought when prices were already ridiculously inflated, or who continued to borrow against houses whose "value" bore no relation to reality. That kind of borrowing is speculation, pure and simple. It's a bet that prices will go up forever. And when you bet, sometimes you lose.

Besides, even if a number of people do get burned, for all those who suffer financial losses, won't an equal number be helped who wouldn't have been able to afford a home if prices stay so high? Why shouldn't those who've been more prudent and sensible have the opportunity to buy at lower prices as the market adjusts itself down? It seems to me the entire system is geared toward rewarding those who take what could be considered ill-considered risks. What about those people who've stayed on the sidelines, realizing that the buildup in prices is unsustainable? That "adjustable rate" or "all interest" loans are unjustifiable? Who've waited patiently, perhaps even wisely, for the correction to occur? Are we really so committed to our credit-based way of life that we're willing to see those people penalized, while the speculators are protected? It appears so.

As with some of my other posts, I expect there'll be at least a percentage of people who'll say, "If you like Italy so much, go live over there." But I don't want to. It's a mess, for a whole different set of reasons. The government is corrupt, barely functional, and bleeding the people dry. (If you want to read some social commentary about Italy that'll put my American rants to shame, check out Beppe Grillo's blog, or read about him in the February 4 New Yorker.) But at least the people there have sense enough to protect themselves from the greed of their lawmakers and their lawmakers' corporate partners. They haven't bought anyone's argument that the most important thing in life is to get to possess that which you can't afford to actually own.

When my father-in-law heard me say, "But, by your reasoning, we won't be able to buy a house at all. Or we'd have to buy one so small, or so far away, that we wouldn't want to live there," he just shrugged. "So what?" he seemed to say (he doesn't speak English, so I'll never know for sure what he meant). "I lived with my crazy mother for forty-two years. Your wife slept in a dresser drawer, in our room, when she was a baby. Just how much more than that do you think you deserve?"

A lot, a lot of Americans seem to say. No matter what the risk. No matter what the possible cost.
Of all the proposed solutions, the only certain, long-term one would be the most unthinkable to many: stop buying what you can't afford to own. Meaning, what you can afford to pay for, completely, today -- or at least within a short-term time period, during which you actually plan to continue to inhabit what you've bought. Insane, you think. Right? But that's the way most of the rest of the world lives, and always has.

As my father-in-law might ask, "Just how much more than that do you think you deserve?"

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