By Clayon Huggins
In 2005 when the housing market peaked, no one expected it to begin to fall the following year. In December 2008 the S&P/Case-Shiller Home Price Indices, which measure the residential housing market, reported the largest price drop in years since it started tracking this data.
“In short, what happened were re-securitized mortgages were bought by banks as investments. A good percentage of these mortgages were ‘ninja loans,’ so when the bubble burst, so did the banks,” said Neal Zephyrin, VP of Risk Management at a major French investment bank. Taking their name from products designed for those with “no income, no job or assets”, ninja loans were ripe for default.
Mr. Zephyrin suggests a nine-month moratorium on foreclosures for borrowers with recent lay-offs. He believes that mortgages for employed borrowers should be restructured, regardless of credit score, if the mortgage is underwater and payments are no more than 30 days past due.
With regards to avoiding a similar crisis in the future, Mr. Zephyrin offers that “There should be a real effort to continue to effectively regulate Wall Street and never again adopt the philosophy of ‘too big to fail’ and possibly bring back the Glass-Steagal Act.” This Act separated investment and commercial banking activities. It was enacted after the 1929 stock market crash, which many thought was a result of improper banking activities.
When the housing bubble burst, the damage spread quickly devastating our economy and unsettling markets all over the world. Eager to staunch the tide of foreclosures, president George W. Bush and chairman of the Federal Reserve, Ben Bernanke, announced a plan to help homeowners pay their mortgages. The problem with the bailout was that the money did not immediately go to homeowners.
What Bailout?
The first $350 billion that was given to Henry Paulson, former secretary of the Treasury, was turned over to the same banks whose reckless policies caused the market to fail.
“When the bailout occurred, those with variable rate mortgages that had not been delinquent, should have been switched into fixed rate mortgages and those with 30 year mortgages should have been extended to 40 or 50 year mortgages,” said a former analyst for JP Morgan. “This would have lowered their mortgage payments and increased their chances of keeping their homes, as well as, decreased the number of bad debts.”
Mortgages 101
When applying for a traditional mortgage, certain standards must be met. Typically, one must have two years of steady income, a down payment of 3-20% of the purchase price, good credit and monthly income that’s two to three times more than expected mortgage payments.
In the run up to the collapse, lenders qualified people who did not meet this criteria. They aggressively marketed “ninjas”, interest-only and adjustable rate mortgages. Fueled by skyrocketing home prices and a belief that values would only increase, many borrowed against the equity in their homes. Borrowers who never had the means to pay, or lost it as their loans adjusted, defaulted in droves.
The Future of the Middle Class
When the housing crisis began, home prices became stagnant. Adjustable rate mortgages increased and many could no longer afford to pay. Some walked away from their homes, and some stopped paying altogether. Banks stopped lending and the middle class, who would normally qualify for a loan, could not get a loan. Small business owners, primarily middle class, could no longer receive financing and banks stopped lending to one another. Without a flow of funds, that signaled weakness to the economy.
Today’s middle class is dwindling and so many of them are living paycheck to paycheck. TAP spoke to fifty middle class professionals, several of them entrepreneurs. 100% of them are college educated with a bachelor’s degree or higher, 9 work or have worked in finance, 10 are entrepreneurs, and 15 work in healthcare. Of the 9 who worked in finance, 1 was retired and 2 were laid off. The 15 healthcare workers did not seem to be affected; 3 of them had purchased homes within the past two years. All, but one, of the entrepreneurs said they were affected by the crisis, they noticed contracts stop coming, most are not able to pay their quarterly taxes, and most have scaled back on miscellaneous spending.
TAP asked: How would you define the middle class?
“The middle class was always the ‘spread in the sandwich,’ we are always affected by volatility and shifts in the economy. We are the ones who do not qualify for government help, but get hit with the bills that can be detrimental to us. We are the ones who fall apart when we lose jobs and work, while the top dogs still get their fat bonuses, and use our tax dollars,” said Shir Konas, owner of her own graphic design studio and certified fitness instructor.
Darlene Aiken, an author and owner of Inner Beauty Solutions, defined the middle class as, “those who pay for the wealthy and poorer classes.”
Dr. Vernon Murray, a professor of marketing at Marist College , defined the middle class as, “people who work hard and who still haven’t figured out that car notes and mortgages are not something to celebrate, but rather to avoid.” He believes that most middle class Americans still have no concept of alternative housing construction and used cars, to keep their debt down.
TAP also asked if the government is doing enough to help the middle class.
25% said no, while others believe that the government was not designed to undertake such a task. Others, about 80%, believe that this crisis was years in the making and will take years to get better.
Dr. Murray said the future of America will belong to people who will learn to live simplyand off the grid. They will not be the stereotypical rural impoverished. Rather, they will be white collar professionals who can work by computer/internet in self-built alternative homes, with organic gardens and fruit trees and who, if they lose their jobs, will not worry much, because their debt levels will be very low.
Today, the current administration is trying to add liquidity to the market by continuing to spend billions of dollars in the financial sector. However, unemployment has reached a level that many have not seen before, qualified people are not receiving loans, many credit card companies are lowering credit limits on accounts that would otherwise have probably received an increase and many are playing the wait-and-see game. Those who are homeowners are hoping that their home prices will rebound and those who wish to purchase, want to see banks lend again.
