One socio-economic crisis, hold the moralizing.
Say, have you wondered whatever happened to the Puritanical small-minded moralizing the literary rebels of the early twentieth century—Mencken, Lewis, Dreiser—made a good living ridiculing? Or perhaps you're nostalgic for the vengeful wrath of small-town prigs and hellfire-and-damnation preachers. Then check out the invective hurled at defaulting borrowers these days by the bloggers and mainstream media morals police.
The sin these defaulting borrowers stand accused of is pride, yea verily, the pride that goeth before a fall: "buying more house than they could afford". The indictment often includes dark allusions to McMansions and to a profligate suburban lifestyle based on SUVs, mindless consumerism and easy credit. No matter how the moralizing is couched, it sounds less like the social commentary of an Old Testament prophet and more like the bitter resentment of those who weren't invited to the party for those who crashed it.
The moralists prove that the less you know about a complex social issue, the easier it is for you to explain it. Lack of empathy and a preference for black-and-white thinking are always helpful when faced with a knotty social problem. Top this off with a firm belief in common wisdom, even if the wisdom is common only to your own small but vocal social group, and even if it's not wisdom.
To demonstrate this, let's make a few assumptions. First, let's assume that the over-extended homeowners in my area are much like the over-extended homeowners in every area. Let's assume that most come from the same socio-economic class, and that most bought the same type of housing. It's a logical assumption, which makes it dangerous, but let's work with it for now.
Next, we know that the majority of sub-prime borrowers are persons of color, so let's assume that most defaulting sub-prime borrowers are also persons of color. Sub-prime borrowers aren't the only ones hit by foreclosures but they account for most, according to data from the Mortgage Bankers Association.
Next, let's assume that the moralists filling the blogs with self-righteous fulminations are largely white, well-educated and middle class. Surveys of frequent Internet users, including one done in 2006 by the Pew Internet & American Life Project, suggest this.
Finally, let's assume that the self-anointed morals police in the mainstream media is also largely white, well-educated and middle class. Certainly their appearance suggests this.
Now that we've potentially identified the two sides—moralists and over-extended homeowners—let's look at the concept of the over-extended homeowner from the perspective of the moralists, largely white, well-educated and middle class. Moralists spring from a group that's come to see homeownership as a basic and inalienable right. And in fact, homeownership has been a basic and inalienable right for this group since it first gained access to credit in the late 1940s. For them, homeownership isn't some distant dream. Instead, it's a basic building block of middle-class life, an early achievement just as routine and predictable as college graduation. Hence the shock and outrage this group expresses when it discovers that being largely white, well-educated and middle class doesn't always get you your own home, especially here in the expensive Bay Area.
So from the moralists' point of view, "buying more house than you could afford" means trading that pleasant, unpretentious home in a nice neighborhood, the home everyone deserves, gets and should be happy with, for a flossy McMansion in an upscale neighborhood. This is hubris of the American middle-class variety. This is getting snooty. This is forgettin' your raisin'. This is the slippery slope and fatal trap of consumerism.
This is the sin of the over-extended homeowner, according to the moralists, largely white, well-educated and middle class.
But the other side, the over-extended homeowners, who we've decided are largely persons of color, differ from the moralists in their perception and experience of homeownership and therefore in their expectations.
This other group was, until as late as 2002, shunned by and mostly excluded from the credit market the largely white, well-educated middle class of the moralists has taken for granted for sixty years. "Redlining", the practice of refusing to make home loans in predominantly minority neighborhoods, was common practice among mainstream lenders well into the 1990s. When I got into sales in 1998, Bank of America's Acorn program was the first and, for a time, only major effort by a big lender to court borrowers of color. It was B of A's penance for its own history of redlining, and in 2007 this innocuous effort seems in retrospect more like corporate outreach than a hard-nosed business plan.
Denied easy access to credit, persons of color were often denied homeownership. Homes in predominantly minority neighborhoods were often owned by landlords outside those neighborhoods who didn't care what their properties looked like or who lived there as long as they paid the rent.
But by 2003, some lenders were moving into the sub-prime market. Why? Because by then, most of the prime low-hanging fruit had been picked. By then, real estate had boomed long enough for the usual purchase-money and refinance markets to have been thoroughly tapped. But originating and securitizing home loans was still highly profitable, and the machinery for doing so was in place. So lenders had two choices. They could either slash their operations and walk away from years of profits, or they could climb higher in the tree to reach the unpicked but riskier fruit. Add the carpet-baggers pouring into sub-prime lending to make a quick killing and the rest is unfolding history: suddenly a class under-served for years, largely borrowers of color, was now definitely and often disastrously over-served.
But for the traditionally under-served borrowers now over-served, "buying more house than they could afford" wasn't the over-weaning middle-class hubris that works the moralists into fits of self-righteous indignation. No, for the traditionally under-served, getting in over their heads didn't necessarily mean going into big debt for a flossy McMansion in an upscale neighborhood. More likely it meant trading a roach-infested apartment or small, shabby rental home in a rundown neighborhood for a small, shabby home of their own, often in the same rundown neighborhood because that's what they could afford or because that's what they were tied to by friends, family and shared culture. (One of my clients, an Hispanic engineer with Hewlett Packard, bought in a predominantly minority neighborhood expressly to stay close to his roots.) A few were able to buy small homes in slightly more expensive, not predominantly minority but still entry-level neighborhoods.
The goal of this movement was neither novel, ambitious nor over-weaning. Instead, it was the latest in a long history of neighborhood changes and migrations made by immigrants—Irish, German, Slav, Jewish, Italian, Scandinavian and others—over the past hundred-plus years. Many old big-city neighborhoods have changed ownership and ethnicity regularly since the mid 1800s as wave after wave of new-comers arrive, take the place assigned them at the bottom of the pecking order, persevere and succeed, move up and on to a better life and neighborhood. It's a safe bet that many if not most of today's moralists have forefathers who made this struggle, thirty, fifty, 150 years ago, so that their progeny could forget the tenements and take middle class life for granted.
Sorry, I just got a bit moralistic myself. And yeah, it does feel good.
And, sure, this latest migration came with a difference. Because the rates on the adjustable sub-prime loans and other financing exotica that jump-started this movement began skyrocketing just as investors in securitized loans got cold feet about the sub-prime market. Almost overnight the pendulum swung back to "safe and sane" loan underwriting, back to the good old days when people who had money could get more and people who didn't couldn't. The result? Over-extended homeowners put their homes on the market just as potential buyers for those homes had their access to financing cut off. Inventory in entry-level neighborhoods soared just as demand collapsed. Home prices flattened, then declined, which made it impossible for many other over-extended cash-poor borrowers to refinance, which forced them to put their homes on the market, which etc. etc.
Then the moralists attacked in waves.
That's the story. Don't believe it? Just look at the real estate market in Silicon Valley today. Bank-owned sales and short sales are almost exclusively found in ultra-affordable predominantly minority neighborhoods and, to a lesser extent, in neighborhoods one or two price ranges higher. These homes are anything but palaces. I've seen them, and I doubt that any self-respecting middle-class moralist would live in one. Meanwhile, the middle-class enclaves are virtually unaffected. Well-established neighborhoods with highly-regarded schools are on fire, with hordes of buyers crowding open houses and swamping what little inventory comes on the market. And these buyers are the cream-puff borrowers who can still get loans easily. Yes, today it's good to be a seller in well-established cities like Palo Alto or in neighborhoods like San Mateo's elegant Baywood or in the areas of Sunnyvale with sought-after Cupertino schools. I have buyers who'll vouch for this. But sellers in cities like East Palo Alto or in the entry-level neighborhoods of San Mateo east of 101 or Sunnyvale north of Central, sellers who often need to sell, have few buyers to sell to and are dealing with lenders often unsympathetic and often themselves with little room to maneuver. How this social crisis plays out is anyone's guess, but my guess is that it could set these neighborhoods back ten years.
So we're back to the rich getting richer and the poor getting poorer and God's in His heaven and all's right with the world. Whew. That was close.
It still is. Because if ten percent of sub-prime borrowers are in default, it means that ninety percent aren't in default, at least so far. Which means that most of the traditionally under-served class so recently and extravagantly over-served are still making the best of their rare and fleeting opportunity. Which is a wonderful thing. Greed got the best, not of these borrowers, but of the lenders and securitizers who for a moment forgot to shut the doors on the traditionally under-served.
I can't speak for those traditionally under-served, but it might strike some of them, who we've decided are largely persons of color, that the moralists, who we've decided are largely white, well-educated and middle class, are sounding a little like they think the traditionally under-served got uppity and are now getting their come-uppance. People should know their place, wait their turn, all in good time.
Maybe, but I prefer to think that the moralists are committing a sin we all make, all the time: judging people with the tunnel vision of our own conditioning.
It's just as foolish to romanticize as it is to unduly condemn, and the homeowner who goes down in flames and takes a neighborhood with him isn't necessarily a person to admire. But optimism and appetite for risk are admirable. For better or worse, these are American virtues (and vices, when taken too far). It's what Americans have always been known for and accused of, just as Americans have always accused the jaded Old World of cynicism and complacency.
Maybe the conflict between Old World and New World goes on within America as well. Maybe it always has. The Old, paralyzed and riddled with ennui, condemns the New, too vigorous and naive to know it should be paralyzed and riddled with ennui.
Maybe it's about renewal. Out with the old. In with the new.