The Two-Income Trap - Elizabeth Warren [70]
The results are in. After two decades of mortgage deregulation, today’s homeowners are three and a half times more likely to lose their homes to foreclosure than their counterparts a generation ago.53 This defies the economists’ expectations. Today’s record low interest rates and rising home prices should have translated into a falling rate of home foreclosure, not a rising one. The only explanation is a lending industry run amok. The rise in “loan-to-own” lending, the disappearance of the down payment, and the explosion in high-interest, subprime refinances have taken their toll, as a growing number of families learn the painful consequences of getting trapped by a mortgage industry that has been allowed to make up its own rules.
And so it was that family spending was transformed in a single generation. In the late 1970s and early 1980s, consumer lending was deregulated, launching a complicated, potentially dangerous product on an unsuspecting public. The timing could not have been worse. Just as corporations were downsizing across America, just when a bidding war for decent family housing was heating up, and just when families lost the all-purpose safety net once provided by the stay-at-home mother, easy credit flooded in, looking just like a life raft to the family that was drowning.
Where the Money Is
“Why do you rob banks?” The question was put to Willie Sutton, famed bank robber of the 1940s. He replied, “Because that’s where the money is.” That’s how most businesses work: They make profits by dealing with customers who have money. And that is how the lending business used to work: Companies made loans to people who had the money (or soon would have the money) to repay them.
Much has been made about the changing nature of America’s debtors. Americans don’t have the same work ethic that they once did, people don’t work hard to pay their bills as they once did, and on and on. Even my [Elizabeth’s] elderly father agreed, telling me quiet stories of destitute families that labored for years to pay bills they had run up during the Great Depression. My father used to talk about Herring Hardware, a farm supply store that my grandfather had run in rural Oklahoma beginning back in 1904. When the Dust Bowl hit in the 1930s and families could no longer scratch a living out of their modest farms, many packed up and headed west, an exodus etched in the national memory by John Steinbeck’s Grapes of Wrath. Some of those families never forgot the debts they left behind. Twenty years later, my grandfather would still get an occasional envelope with a few twenty-dollar bills and a handwritten note: “Grant, we finally got ahead a little. Put this on my account, and let me know if I owe you more. Aileen sends her best to Ethel.” My father would lean back at the end of one of these stories and remark that these were “good people, good people who followed through on what they owed.” Then he would pause and draw his mouth into a hard line. “Folks just aren’t like that anymore.”
But my father—and everyone else who talks about changing values—overlooks one very important fact: Borrowers aren’t the only ones who changed. Lenders changed too, arguably far more than the people to whom they were lending. Most Americans guard their credit ratings jealously, living with a slightly prickly sensation that they could be cut off if they fell behind or forgot to pay a bill. What they don’t realize is that when a borrower makes a partial payment, when he misses a bill, and when his credit rating drops, he actually gets more offers for credit.54 He is not just down on his luck, behind on his bills, and