W. Curtiss Priest, Ph.D.
Center for Information, Technology & Society
466 Pleasant Street Melrose, MA 02176
E-mail: BMSLIB@MIT.EDU, Voice: 781-662-4044, FAX: 781-662-6882
This document may be distributed freely
April 18, 2000
An Open Discussion
with Government, Foundations, Non-profits
and Grassroots Efforts
Public Issue #74:
CITS DEBT WATCH
"'They Didn't Tell Me I Could Lose My Home' --
about Fifteen Years Too Late"
***************
Commentary by Dr. W. Curtiss Priest, Director:
Our last issue in December was entitled "Lending Reduction: Too
Little, too Late."
I am somewhat bemused that the current attention and fear about
the economy and the stock market are directed at the "dot coms."
They is hardly the problem. Yes, it makes for great press but
the levels of household indebtedness only continues to rise,
promising that a massive consumer spending retrenchment will only
be that much larger.
For five years I have put the blame on a household-lender
death spiral. Families not wanting to be left out of the
luxurious life have continued to borrow against their homes
in growing numbers, as documented in the Federal Reserve
Board's Survey of Consumer Finances (SCF):
federalreserve.gov
For example, from 1989 to 1995, the percentage of household
debt in mortgages grew an astounding 30% from 53% to 65% of
overall indebtedness. And from 1995 to 1998 the median
value of household mortgage debt rose from $54,900 to $62,000,
a 13% rise over three years. And, recall, inflation has run
at less than half that amount throughout this period.
A press release by Standards & Poors dated April 5th commented:
Household debt, on the other hand, continues to hit new
records. The average American household now owes 107% of
its annual income. Most of the recent increase has been
in mortgage debt.
And in a prior issue we calculated that about 2/3rds of the
growth in the U.S. economy in the '90s was debt-financed
out of rising household debt.
But what of media coverage of the Survey of Consumer Finances?
If we search the _Boston Globe_ from 1980 to the present, we
find four mentions of the survey, and only one Blanton, Jan. 19,
2000 briefly mentions the rise in overall household debt. The other
three addressed median income issues.
Turning to a full-text database of the Nation's fifty top
newspapers including the New York Times, the Wall Street
Journal, and other major city newspapers, I conducted another
search. Restricting the search to articles that mention
"households" in one way or another in the lead paragraph or
headline, I again searched for coverage based on the SCF.
Between 1986 and 2001 there were 103 articles (including the
Blanton one mentioned above.) But the focus of the coverage
was extremely skewed towards issues of household wealth,
stock ownership, and credit cards. Only one article out
of 103 generally talked about household debt. On May 13th,
2000, the LA Times ran an article, "Household Debt Grows
Precarious at Rates Increase; Spending: Total Liabilities
have passed After-Tax Incomes for the First Time, Especially
Among Low-earning families. Interest Hikes Weigh Heaviest
on those Maxed out on Cards."
And the impetus for this article was not any recognition of
the growing overall indebtedness, but from the rise in
interest rates in the last few years.
This impetus mirrored the reverse effect when interest rates
were dropping. Some half dozen articles over the period
of dropping rates were pleased to say that the "debt burden"
had been eased. But the debt burden was not eased by a
reduction in debt, but, rather, because the costs of borrowing
had dropped.
This pernicious behavior only encouraged households to encur
more debt to fund non-construction purchases including stock
purchases, automobiles, and other big ticket items.
Returning to the survey of articles, there were only four
other articles out of 103 that are even worth mentioning.
On February 3rd, 2000 the _Houston Chronicle_ mentioned a
drop in net worth. On January 19th, 2000 the _New York Times_
mentioned "some warning signs about accumulation of debt."
On June 1st, 1998 the Financial Times mentioned households
were "overspending income." And on May 17th, 1998, the
_San Diego Union-Tribune_ briefly mentioned household debt
in relation to income.
It appears that the main purpose of the SCF to almost all reporters
is a source of information about median income, net worth and
the ownership of stocks and mutual funds.
There were several dozen articles addressing the incomes
of various groups from millionaires to those with incomes
below $10,000. There was a fascination with the growing
wealth of households out of both fantastic rises in home
prices and in stock prices. The net worth (assets minus debts)
was improving, not because indebtedness dropped but because
the rises in home prices and stock prices made the rise
in indebtedness appear small.
There was no reporter who identified this trend in relationship
to the growing indebtedness of families. Only, when the
effect of the Fed's decision to raise interest rates did
the one LA Times story appear, again, focussed on the servicing
of debt, not the level of debt itself.
********
Has anyone been outraged by the level and danger of mounting
household indebtedness?
Recently, Senator Hollings expressed concerns about the
national debt and the impending strain of retiring "baby
boomers." ("Amid talk of surplus, contrarian senator sees
a deficit of reality," _Boston Globe_, March 3, 2001, p. A3)
but he did not address the correspondingly worrisome household
debt.
But throughout the country there has been a growing number
of nonprofits taking aim at helping individuals and households
to take better "charge" of their finances and to reduce
indebtedness. And Mr. Greenspan recently suggested that Americans
need to better manage their finances.
And, there have been the occasional articles about "abusive
lending" when the loan and the pain are closely tied together.
As a focal point for those concerns, the AARP has launched
a compaign against abusive lending. As the PRNewswire
release on April 17th details (below), AARP just announced an
aggressive campaign of state-based events, education and
advocacy.
The campaign theme? "They Didn't Tell Me I Could Lose My Home"
Why is it that even thoughtful organizations such as AARP
is about fifteen years behind the curve?
To my mind, the rises in home prices have been a fiction for
the last fifteen years and the rise in stock prices have
been a fiction for the last ten years.
So I consider most of the home equity lending and mortgages
since 1985 to be both abusive and predatory. And, like
the ill-effects of cigarette smoking, it takes a long time
for this country to wake up to the fact that such practices
are killers.
As long as house prices and stock prices kept rising faster
than the levels of indebtedness the "music" hasn't stopped.
While stock prices are distinctly down, house prices are
only beginning to wane.
But when the householder finds his/her self paying on a
$200,000 mortgage on a house worth $120,000, then they'll
really understand the meaning of abusive and predatory
lending.
But, you say, how were both borrowers and lenders to know
about either the stock bubble or the real estate bubble?
Didn't both lender and borrower innocently enter into
these agreements?
Well, if your house value goes up faster than the rate
of inflation or your stocks go up faster than 9% per year,
then you should always think twice. And while many
households, clamoring for home ownership fed into the
real estate bubble, they would be, as my mother would say
to me, "house poor." So, if in addition to the house
they also have two SUVs, kids outfitted with the latest of
everything, and prime steak on the table, someone's got
to be kidding someone.
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WASHINGTON, April 17 /PRNewswire/ -- AARP, alarmed at repeated reports
of wide-scale predatory mortgage lending abuses, is mounting a
national campaign to fight the problem. Built around AARP's state
legislative and litigation priorities, the campaign will link advocacy
on behalf of older borrowers with a major consumer education
initiative. The campaign will kick off with state-based events this
week in New York (April 17) and California (April 17 and 18), and next
week (April 24) in Ohio. Over the course of the year, AARP plans to
launch its education and advocacy campaign in other states as
legislators begin to consider predatory mortgage lending issues. More
than eighty percent of Americans 50 and older are homeowners.
Predatory lending is a collection of unfair and deceptive practices
used by some lenders to pressure homeowners into signing up for high
cost and often unaffordable mortgage loans. The predatory lender
manipulates individuals into obtaining a loan that they may not be
able to pay off. Frequently, older homeowners are ensnared in abusive
loans because they are persuaded to borrow funds for home repairs, to
cover health costs or to consolidate debts. "There is an outrageous
downside to the rosy scenarios offered by unscrupulous lenders," said
AARP Associate Executive Director Dawn Sweeney. "There is ample
evidence -- starting with dozens of interviews that we have had in
recent months with victims of abusive lenders -- that people are sold
loans as a miracle financial cure," Sweeney added. "Many homeowners
are then stunned to find out that they cannot afford to pay off those
loans and they may lose their homes." With a theme: "They Didn't Tell
Me I Could Lose My Home," AARP's campaign will:
* Offer an AARP toll-free number to consumers in the states targeted
for the campaign. Consumers who call the hotline can order a
borrowers' kit and obtain information about sources of assistance
available nationally and in their states. * Accelerate its drive to
win approval by state legislatures of measures to curb predatory
lending. * Enhance its efforts to fight abusive lenders through its
AARP Foundation Litigation attorneys. * Provide a borrowers' kit with
consumer tips and a checklist for those considering home equity loans,
as well as fact sheets for dealing with home improvement contractors
and reverse mortgages. The kit will advise consumers to consider all
the costs and fees when taking a loan. The kit also will include an
anti-predatory lending decal that can be displayed conspicuously at
the consumer's home. * Establish a web page
(http://www.aarp.org/homeloans ) that features consumer fact sheets
and links to other sources of assistance and information. * Support
the campaign with transit and newspaper ads, as well as radio spots,
in both Spanish and English.
AARP's efforts will be coordinated in individual states with law
enforcement officials, state attorneys general, consumer advocates,
and minority and community organizations. Predatory lending has been
described by federal agencies as involving one or more of these
elements: providing unaffordable loans based on the borrower's assets,
rather than on ability to pay; inducing a borrower to repeatedly
refinance in order to charge high fees or points; or engaging in fraud
or deception to hide some of the cost features of a loan. AARP's state
advocacy efforts are seeking to limit or prohibit these and the
following additional predatory lending practices related to some home
loans:
* Charging unfair prepayment penalties; * Packing single premium
credit and non-credit insurance products, and other excessive costs
and fees in the amount of the loan; * Requiring pre-dispute mandatory
arbitration; * Engaging in unfair, deceptive, and unconscionable
practices in connection with the consumer credit transaction; *
Including balloon payments that lock borrowers into predatory loans.
Launch activities will begin in New York today (April 17), with a
press conference at the Capitol in Albany that will focus in part on
current antipredatory lending legislation and on homeowners who have
been victimized. California AARP will conduct press conferences today
in Los Angeles and on Wednesday (April 18) in Oakland. California
Attorney General Bill Lockyer will be among those participating in the
events. TV star Doris Roberts will participate in the Los Angeles
event. Ohio AARP will hold a press conference April 24 at the
Cleveland home of one of the victims in a predatory lending case in
which AARP Foundation Litigation is legal counsel.
AARP is the nation's leading organization for people 50 and older. It
serves their needs and interests through information and education,
advocacy and community services which are provided by a network of
local chapters and experienced volunteers throughout the country. The
organization also offers members a wide range of special benefits and
services, including Modern Maturity and My Generation magazines and
the monthly Bulletin.
SOURCE AARP Web Site: aarp.org
aarp.org |
