LA times today describes this new kind of mortages, "pay option" loans, where there are a few years with a monthly payment as low as half the interest alone. The result is that the debt goes up over time, instead of down. Here's some highlights, and a comment on how this relates to the problems of public health.
David Streitfeld
Los Angeles Times
December 11, 2006
"I am rather screwed," he said.
The real estate boom of the last few years has made it very easy to become overextended.
Essentially, option loans are bets that good things will happen. ...
After four years of escalating prices, they're the only way some first-time buyers can get into the market. But another group flocking to option loans are homeowners who find themselves stretched. For those beset by calamity, these are the loans of last resort.
Last fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.
But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan ...warning that when his loan hits 115% of its original size he'll run out of credit with the company.
That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up [from $1,106] to $2,848 a month.
"If I could afford that," he said, "I wouldn't have needed this loan in the first place."
It's a sorry situation, and Hertzberg is generous in assigning responsibility for it. To start with, he blames his mortgage broker, who didn't advise him how risky these loans were.
"The government wanted to keep the housing party going," he said."I got spoiled and complacent and was not prepared when the bottom fell out," he said.
[Mozillo] seemed to indicate that these borrowers might be naively optimistic.
Hertzberg always looks at these fliers, hopeful in spite of himself. "I'm waiting for a 100-year loan," he said. "My heirs can worry about paying it off."
"The average age of our borrowers is about 38 years old," Mozilo said. "They have never in their adult lives seen values going down. The concept is alien to them."
Maybe, the correct title of this article should be "A lifestyle that will get ugly fast, based on greed, ignorance, and too much arrogance to think parents, friends, or the library could tell you something you need to hear."
With few exceptions, these loans seem like a "deal with the devil" - promise of very short term relief from the consequences of your own actions for a few years, in exchange for a much worse fate following that. Despite that the nation, the states, the homebuilding industry, and individuals have been rushing to this phony "solution" to our problems in affordable housing.
Over 1 million people recently bought these, and the rates have increased in the past few years from very low to a third of the new mortgages being written. When the trap swings shut, the pigeon is the first to say a combination of "it's not my fault" and "how could I have known?"
I bring this up again to illustrate the costs of a society in which people aren't plugged into each other and don't seek advice and consultation with each other, let alone with history - or aren't willing to take that advice when it says they shoud "face the music" instead of "put it off more."
As to context effects, the lessons are admittedly harder to learn when "everyone is doing it", and even the country as a whole is racing into debt at a rate that has the international community shaking their heads and wondering how on earth the USA intends to ever repay it.
In a "systems thinking" way, of self-fulfilling expectations and perceptions, living "like there is no tomorrow" can be what brings about precisely that outcome.
Lessons from all that:
- a fool and his money are soon parted.
- You can't actually make it alone.
- those who don't learn from history are doomed to repeat it.
If the story above describes you, there are support groups that are willing to help. The sooner you go, the easier it is to sort things out.
The problem really traces back to the wide spread belief in the power of "individuals" in the US. We worship people with high "IQ" and design our whole school system to sort those out and raise them up, at the expense of everyone else.
That gives the false idea that people with lower IQ's can't make it just fine by working together, and the false idea that really bright people don't need the rest of society to succeed.
As my earlier post on the dice suggests, in much of life there is no "best". The whole idea of "best", and of "being number one" is flawed at its core.
And, the idea of being desperate to reach the status of being "number one" only means that you've shut your eyes to all the dimensions you sacrificed in order to put all your energy into succeeding in that one.
The lesson is that people and nations are chasing the impossible when they think they can only be worthy if they are "the best" or "on the top." In the long run, there is no such thing as "best", only those that are willing to be part of a mutually reinforcing society, and those who want to drop out and not play by those rules.
And the literature shows more daily that those who drop out tend to collapse inwards and self-destruct. It's overly simplistict to think that people, or companies, or countries don't need each other.
There's nothing wrong with that, and nothing "wrong" with people who need other people's help to get by. If we could just get that lesson across, we'd stop trying the impossible and start accomplishing the possible, and everyone would be happier.
Even in business, the new literature is showing that "Theory X", where the boss has to know everything, is far less efficient, and less fun, than operating under "theory Y" where it's ok if the staff know things too.Social relationships turn out to matter way more than high technology. That's true even for industries like computing or aviation or nuclear power, where there is so much technology. The world doesn't run on technology - it runs on people working with each other.
That means that what will "save us" is not more and "higher" technology -- it's just using what we have to make friends with each other and discover the world isn't so bad if you can just stop fighting long enough to notice it.
( photo credit: spoon )
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