The Fraud Behind the American Dream

Say you’re out of work, as four million Americans now are, and you’re paying a $230,000 mortgage on a house that’s now worth $90,000. Is walking away from your mortgage justified, or even moral?

In a movement reminiscent of Egyptian protestors, more and more Americans are deciding that it is— challenging the entrenched and powerful regime of US banks, mortgage lenders and the government policies that support them.

Many who aren’t waking away are getting ready to. According to a new poll from real estate forecaster Housing Predictor, nearly half of all homeowners say they will default if housing prices continue to drop.

American homeowners are overcoming their own feelings of shame, and fears of decimated credit scores, thereby calling into question a value system that holds you must keep your obligation to the bank, come what may.

Here’s why they’re right:

  1. Banks aren’t working in good-faith with homeowners. 

On blog after blog, consumers say the banks that they are trying to negotiate with are abusive, neglectful, and inflexible. At the same time the banks admit they can’t keep track of their own paperwork, they lash out at customers for being irresponsible.

The Huffington Post quotes one man, “There should be support groups for people who have to deal with these banks… they made it feel like you’re at their mercy.” Other consumers in default on their mortgages report continued solicitations from credit card companies trying to sign them up for new cards.

It’s not just homeowners. Over-leveraged corporations going through bankruptcies encounter the same kind of arrogance and are resenting it as well. One COO I know recently found himself on the receiving end of a financial-responsibility lecture from a thirty-something bank official as he tried to restructure the company debt. Note, his company is cash-flow positive. The COO finally snapped. “How much experience do you have running a company through a Great Recession? And while we’re at it, exactly how much federal bailout money did your bank take to stay afloat?”

When JPMorgan Chase reveals, as it did Friday, that it knew eighteen months ahead of time Bernard Madoff’s fund was a Ponzi scheme and continued to do business with him anyway, what is the average consumer supposed to think? Our long-time national fantasy of banks as bastions of trust, security, financial conservatism, and good judgment is rightly crumbling in the face of such reports.

  1. Credit scores are mind control.

Everyone is worried about his credit score. Without a good credit score you can’t get a credit card, you can’t rent a car, you can’t even get a cell phone. But we seldom question the values that underlie the almighty credit score.

A credit score is not a gauge of your talent, morality, IQ, financial prosperity, or value as a human being. It is simply an equation that calculates how successfully you use credit. Someone who has a ten million dollars in the bank, pays for everything in cash, and does not have a mortgage will not rank as highly as someone who has a stack of Gap, Macy’s, Home Depot, and Capital One cards, pays them and his mortgage regularly but who lives check-to-check with no savings.

Is that good?

TIAA-CREF recently ran a contest where entrants said how they would raise the nation’s savings rate. The winning idea: A suggestion to include savings in the credit score calculation.

As a nation, we need to break from hegemony of the credit score and change our ideas of what makes a financially healthy individual or family.

Banks, who want to keep homeowners from defaulting, threaten that credit scores will be decimated and defaulters will never be able to get credit again. However, many, homeowners who walked away from their mortgages later report that their credit scores did not suffer as much as they thought.

  1. The American Dream is Corn Syrup. 

What is the “American Dream” anyway? A quick look at the phrase’s origins reveals notions of freedom and opportunity. The phrase had particular meaning to immigrants who contrasted what they saw in America against old European structures of class and aristocracy.

So exactly when did the American Dream get translated into “The Right to Have a Mortgage?”

Is it just me, or does the American-Dream-equals-mortgage smell like government-influenced support of the banking industry? I get a tax break on my mortgage; I don’t get one if I pay it off.

The whole thing reminds me of the rise of high fructose corn syrup, which replaced sugar as a preferred sweetener when the government needed to subsidize corn farmers. And then there were the dairy farmers. A cheese surplus generated government-funded TV commercials touting its health benefits.

Of course, we understand now that both cheese and high-fructose corn syrup are not the foundations of an ideal diet.

Should having a mortgage be considered the foundation of the American Dream?

  1. It may be better to rent after all.

Long-time fed chairman Alan Greenspan has never owned a house. Now why would that be? He tells you: Financially it’s better to rent. All that equity that’s tied up in your house can work for you more profitably in other investments. Calculate it yourself. It’s shocking but true. Somehow Americans have accepted that it is the right, good and financially responsible thing to invest in a home.

But think of all the reasons not to own a house. What if you lost your job and had to move suddenly to find another one? Try that right now if you live in Metro Detroit. What if you got divorced and had to sell? Try that in California. What if your want-to-retire years just happen to coincide with a housing downturn? The cash-out-and-relocate strategy suddenly doesn’t look so good anymore.

Unfortunately, your house is not just some investment you can wait out. It is also where you live. And that simple fact means it is a highly inflexible place to park your money.

As homeowners consider walking away from their mortgages, turning their backs on the “American Dream,” there are many voices raised in protest. And surely, many, many home buyers were foolish, even reckless. The standard anti-default objection: People have to take responsibility for their financial decisions. If a house turned out to be a bad investment, then the investor needs to take a loss. That is the basic principal of markets.

Who can argue against personal responsibility? In fact, if we’re talking American ideals here, you can hardly find a notion that’s more American. As long as it applies equally.

For bailout-receiving US banks and corporations those rules did not apply.

I’m the first one to say the Fed deserves enormous credit for the courage it demonstrated in saving the economy. But let’s not forget the Fed acted like a fireman putting out a fire he himself started—with years of low interest rates and turning a blind eye to the housing bubble, not to mention corporate malfeasance. The same fault can be found with Congress on both sides of the aisle.

Banks need to change their rigid, non-negotiating stance. Even President Obama is encouraging banks to be more flexible with homeowners, but so far mortgage lenders are not playing ball.

This Tuesday, homeowners can go to Meetup.com to find gatherings of people who have walked away from their mortgages and presumably get advice on how to do so themselves. Maybe, as the examples overseas suggest, the only way to get powerful, autocratic forces to change, is through this kind of grass-roots action.

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