Rising rates and the soon to be homeless

(This and other photos of homeless in Chicgago by crowbert )

The housing boom in the US appears to be over in a big way. Now they estimate that 1 to 2 million families will lose their homes this year to foreclosure, unable to pay the mortgage. It's a good time not to be prejudiced against the homeless.

Anywhere, here's a summary of the bad news, and then some reflection on what's going on here from a public health perspective.

The local reason is that their monthly payments will jump, and in some cases by a lot, meaning they will go from affordable to "not enough to buy food and pay the mortgage."

This is how today's New York Times put it today in
Rising Rates Squeeze Consumers and Companies
by Gretchen Morgenson and Vikas Bajaj

Now that party may be coming to an end....
The fallout is likely to be widespread, and felt most immediately by homeowners and people looking to buy a house.

Particularly hard hit will be consumers with weak credit — known as subprime borrowers — who are faced with mortgage rates that will soon reset to higher, in some cases double-digit, levels.

How many is that in real numbers?

Higher rates are already contributing to an increase in foreclosures. ...Foreclosures in May were up 90 percent from the period a year earlier... the total foreclosures of 176,137 in May were sobering. [ my note - that's a rate of over 2 million a year already]

For struggling homeowners, the rise in rates could not come at a worse time.

And even that number is low compared to what's coming, because many of those sub-prime loans had a 3 year grace period of low rates and the 3 years is just about up.

Last year, adjustable rate loans accounted for 25 percent of mortgage applications, up from 11 percent in 1998, Freddie Mac said. Demand for adjustable rate loans peaked in 2004 at 33 percent; many of those are at or near the reset point....Some $100 billion in subprime loans are scheduled to reset between now and October.

And we have this thought:

“I don’t think they are panicked,” he said. “But now they are wishing, ‘Why didn’t I take a fixed rate three years ago when I had the chance and rates were low.’ ”

Well, first we need to look at whether this problem is going to get worse before it gets better. Sadly, the answer is almost certainly yes.

The unusually low interest rates of the last three years have been an enormous boon to almost every corner of the American economy....The recent rate move came as something of a surprise to Wall Street. It is the result, traders say, of heavy selling by foreign investors...

The first thing I notice is that the article talks about "unusually low rates of the last few years" and then shows a graph of the last few years. Well, that's not very helpful. What are we talking about here? What's the "usual" rate? What's behind curtain number one, Johnny?

The media have done this consistently, and fed this short-term mentality. It took me quite some time to dig out what the long-term trend actually looks like, because almost every news story just had the last few months or years.

I did that for my piece "The Mortgage Trap Begins Closing" that I posted here December 11, 2006. and "Honey, we're losing the house" where I said

As, one analyst put it, people seem to have turned their houses upside down like piggy banks, shaken all the money out, and spent it already, and now there's nothing left to use to pay the new bills. To top that off, the monthly mortgage payment magical 3 year grace period has expired, and the minimum payment they're demanding just doubled. How can that be?

Then of course, as now, Wall Street analysts were baffled and surprised by this. I'm not sure why that is. Long term trends? Here's what the savings rate looks like, long-term, for individuals:

The last time the personal savings rate was negative was in 1933. (Source EBRI Databook, US Department of Commerce.)
US Trade Deficit (From BEA, quoted at invisibleheart. "Does the Trade Deficit Destroy American Jobs, Russell Roberts, George Mason University, Nov 2006.)

These aren't perfectly on the mark, and I get complaints from economist that I'm not using these correctly, but I think the overall point is the same regardless - whether we look at individuals or corporations or the USA as a whole, we've been living way beyond our means and "charging it" but the bills for the party are coming due now.

But let's do some "root cause" analysis and look beyond the surface here. So we have that many actors on every level have been spending like there's no tomorrow, writing checks against an empty bank account. And we have that foreigners, who have a lot of dollar-denominated IOU's, are starting to bail out and get rid of them, even at a loss, because they're getting worried that the dollar will be devalued another 30% or so, and they don't want the value of their IOU's to fall 30%, thank you, when there are other options and other places in the world to invest in.


And that entire process seems to be fueled and encouraged by the media, the banks, the credit card companies, television, all encouraging people to ramp up their debt and buy more stuff.

Aside: Back to the "yellow boxes" on the complicated flowchart I put up yesterday (see below) The "yellow boxes" are where "stories" or "narrative" have direct impact in the feedback control cycle that manages our lives, but that's sufficient to completely alter perceptions (lower right) and external reality and how others relate to us and act toward us (upper right).

-- this whole cycle is driven by a myth and mental story, a mental model, that makes such behavior "OK" or even "GOOD". First, there is the story that "things are cyclical and this is just a downturn and it will turn up again soon because it always does." (That story doesn't play too well in Flint, Michigan, where the GM plants closed and don't seem to be coming back.)

Then there is the story that a huge amount of debt is fine. Everyone's doing it. That always sounded a little too good to be true, but it was pleasant to the ears.

Then there was a popular misconception by probably millions of buyers that couldn't do basic math and slept through all that life-skills-math nonsense in high-school. If Johnny's adjustable rate mortgage is at 5% and he pays $500 a month, and the rate goes up a little, just 5 %, what will his new payment be? $505? or $1000. Most people were willing to buy the story that $505 was the right answer. Wrong.

Then there was that nagging suspicion that something else was too good to be true. How could these ads be right? Buy a $400,000 home for $500 a month? Better RUSH! SALE ends Tuesday!

OK, so, what's my point? A lot of people got "caught up" in this land-office business and thought they could get something for nothing, and that the rules normal mortals lived by didn't apply to them, and that tomorrow was a long long way away, so far away it didn't matter. Except that it IS tomorrow now, and we all live in our own wake of our own past decisions, and Sunday morning those Saturday night decisions aren't looking very good any more, and what a headache, and how did the couch end up in the front yard anyway?

With my annoying "Five Why's" (after Toyota's practice), again, I'll ask, "Why?" Why were people so gullible yet again? Why don't we get smarter as time passes? Why isn't the country a "learning organization?"

Well, some of the country is learning. The part that figured out it could rush in, sell a trillion dollars worth of junk mortgages, and rush out again before the door closed is learning. They just got a lot of positive reinforcement.

But the poor people, heavily minorities, didn't learn.

Why?

Why didn't they learn from history? Why didn't they learn from their own past? Why didn't they pay attention in school? Why didn't they ask around in church and see if everyone else thought this was a good deal or not?

Why are the poor, who most desperately are in need of making as few mistakes as possible, not organized to learn from experience so they don't have to repeat it?

Or is it the other way? Those who don't learn from experience end up being poor and exploited?
Well, some of both, most likely. It's a spiral that feeds itself.

There is a known remedy for gullibility, and that's "consultation". Have some sort of social system in which wiser people are identified and consulted with before rushing into some sort of precipitous action that you'll end up regretting that will, literally, cost you the farm.

This is not a difficult concept, and it costs zero dollars to bring to pass, but it is one that seems hard to carry through on.

Why is that? (I'll keep asking, and keep on going upstream towards the "distal" cultural issues that are generating all this downstream trauma.)

Well, the USA seems to have a culture that is revolted by the idea of working together, or learning from one's elders, or consulting before action, or otherwise limiting personal "freedom" by being burdened with lessons from the past. We bail on our parents, we discard our history books, and we want to be "free", even if it means "free to crash and burn and be exploited." "the past has nothing to teach us!! Everything today is NEW!!!" Oh, really?

Or do we really want that, or did that idea get into our yellow boxes and internal story some other way? Where exactly did this idea come from, and when did we vote on it and agree to it, anyway?

Rejecting every constraint doesn't make us free to run with the wind or sail the skies -- it makes us into jellyfish or slugs that have no bones, and are easy to eat for lunch because they have no shells either. Rejecting discipline and wisdom makes us exploiter-bait. Rejecting all that annoying math and school textbook learning makes us exploitable and gullible.

But, most of all, rejecting each other's consultation makes us end up broke, homeless, and dead.

So, why do we do that then? Don't get a guilty look and say "something inside me didn't work." This isn't a local, personal thing. It's a global, social, cultural thing that's broken here.

If the simple idea of pooling what brains and knowledge we have, and consulting with each other before taking action is such a hard thing, we need to stop, flag this point, and call a meeting to understand exactly WHY that is. Something is broken here that should be working. It can be fixed, but first we need to understand what it is and where it is.

And the something is at a higher level than people, and that's what makes this hard to see and hard to fix, unless you have tools to do "systems thinking." And, of course, you need to believe that there are levels higher than people that matter. I'm convinced of that.

Whatever cultural forces have conspired to cause us to reject education, understanding, discipline, and consultation need to be fought off and rejected, because that is not the way to freedom at all -- it's the way to the homeless shelter. No, they'll be full and overflowing. It's the way to dissolution and death. Social disconnection leads to death. Rejecting the past means rejecting the future, and also leads to death. Life is too complex to try to learn it all on your own dime, at your own expense.

So, we need to ask, if my current story, if our current internal story makes "consultation" seem wrong or impossible, what's a better story and where can I get one? Where can we get one? Can we all get in with one ticket if we come in the same car?

This conversation makes me think a little of a Peanut's cartoon strip, where Lucy walks by Linus, who is playing the piano (Is that Linus?) Anyway, he says "My fingers hurt." and she says "maybe your fingernails are on too tight" and walks away. He sits and looks at his hands in surprise and finally says "I didn't even know they were adjustable!"

Well, yes Linus, we all have internal stories. Some are helpful and some are harmful, but all of them can be changed. Some stories make it hard to do the right thing, and some stories make it easy to do the right thing - they affect that axis. Some stories motivate us and some stories suck the energy and life right out of us -- they affect that axis too. Some stories reach back all the way to our perceptions, and twist our perceptions around so we don't see things truly, but we see a distorted reality, a selective reality, that supports the story. It's as if the story was alive, and wanted to live, and didn't want to fade away, so it twists what we look at and what we see so that it adds up to something that supports that myth and story.

Suddenly, those who've been reading this for a few days may go, "Oh. Another S-loop."

Yes, another S-loop. Stories get into our head and live off our psychic energy and survive by twisting around our perceptions to support themselves, and sometimes even by twisting our actions around to support themselves, or by twisting our actions so as to cause other people to do things that support our self-concept and justify it.

The yellow boxes in my diagram can reach out and change the green boxes. Internal stories can change the lower right corner, and distort perceptions so that we only see things that support our myth.

We can never be free of stories -- they are part of how we operate. But we can change the story, we can reprogram the computer. If we can't have a palace, we can at least have an internal story that supports rational action and prevents us from harming ourselves or doing totally stupid things over and over again.

Such stories are far stronger, of course, if they are shared stories, supported not only by ourselves, but by our friends and family and neighbors.

Hmm. This is sounding a lot like the role religion plays. Or science. Those are each ways to put a story in place that can help stabilize us and make us figure out how to work together and consult and learn together what we can't learn separately.

That was one saying of of the American revolution, that if we didn't "hang together" we'd all "hang separately."

Some stories are way better than other stories. Pick a good one, since you'll have to live with it.

Or die from it.

The summer is gone,
The ground's turning cold,
The stores one by one they're a-foldin'.
My children will go
As soon as they grow.
Well, there ain't nothing here now to hold them.

North Country Blues (1963)
Bob Dylan