Third World America (9 page)

Barry Bosworth and Rosanna Smart of the Brookings Institution found that the catastrophic collapse of the 2008 subprime mortgage market resulted in the disappearance of $13 trillion in American household wealth between mid-2007 and March 2009.
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Bosworth and Smart also found that “on average, U.S. households lost one quarter of their wealth in that period.”

The abrupt meltdown of the subprime mortgage and financial markets dramatically changed the lives of millions. Once-attainable goals like owning a home, achieving financial security, and being able to retire were suddenly out of reach. And, as we have not yet hit bottom, millions more may soon find their standard of living lowered—and their dreams of a brighter future dashed.

We are facing nothing less than a national emergency: 2.8 million homes faced foreclosure in 2009, and an estimated 3 million more are expected to be foreclosed on in 2010.
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If there was ever a middle-class Katrina, this is it. Yet even modest attempts to loosen the trap that snapped shut on so many have had a hard time getting traction in special interest–dominated D.C.

Take Senator Dick Durbin’s attempt to allow homeowners
in bankruptcy a so-called cramdown, a means to renegotiate their mortgage with the bank under the guidance of a bankruptcy judge. Currently, mortgages are exempt from bankruptcy proceedings.
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Until 1978, allowing cramdowns was standard practice. Subsequent court battles eventually eliminated their use.
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The mortgage industry, not surprisingly, has been vehemently opposed to bringing the cramdown back. The banks scored a lopsided victory in late April 2009 when the Senate rejected Durbin’s measure, which would have helped 1.7 million homeowners keep their homes and preserved an additional $300 billion in home equity.
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Given the tidal wave of foreclosures that so destabilized our economy, this seemed like a no-brainer. There had already been more than eight hundred thousand foreclosures in the first three months of 2009.
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But even after major concessions that diluted the bill, the Mortgage Bankers Association (whose members’ subprime schemes helped bring our economy to the brink), the Financial Services Roundtable, and the American Bankers Association fought tooth and nail against it.
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And won.

Making matters worse is the fact that America’s banks and mortgage lenders are often so disorganized that people are being erroneously foreclosed on.

As ProPublica’s Paul Kiel reported: “Sometimes the communication breakdown within the banks is so complete that it leads to premature or mistaken foreclosures.
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Some homeowners, with the help of an attorney or housing counselor, have eventually been able to reverse a foreclosure. Others have lost their homes.” Kevin Stein, associate director of the California Reinvestment Coalition, told Kiel, “We believe in many cases people are losing their homes when they should not have.”

You want an economic nightmare? How about a foreclosure bear trap that snaps shut on your leg even when you haven’t stepped in it?

America’s foreclosure crisis is being made even worse by the shortage of legal assistance available to beleaguered homeowners. According to a study by the Brennan Center for Justice, “the nation’s massive foreclosure crisis is also, at its heart, a legal crisis.”
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The vast majority of homeowners face foreclosure without legal counsel.

In New York’s Nassau County, in foreclosures involving subprime or nontraditional mortgages (which are disproportionately targeted at minorities), 92 percent of homeowners did not have a lawyer.
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Having legal help can be the difference between families keeping their homes and being evicted.
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A lawyer can stop foreclosure proceedings or put enough pressure on lenders to convince them to rework the terms of the loan. A lawyer can also intervene in other ways, such as enforcing consumer protection laws or spotting legal violations by banks and lenders.

The barriers keeping homeowners from obtaining proper legal representation are twofold. The first is funding. In 1996, the budget for the Legal Services Corporation, the primary agency that provides help for low-income Americans in civil cases, was cut by a third.
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At this point, to match the funding level the Legal Services Corporation received in 1981 would require an increase of $753 million.
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If Goldman Sachs or Bank of America needed that kind of cash (or even ten times that kind
of cash), Washington wouldn’t think twice. But low-income homeowners have no clout in D.C.

The second barrier is that restrictions to adequate legal help have been deliberately built into the system.
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Remember the 1994 “Contract with America”? It turns out that one of its provisions severely limited the ability of homeowners to get legal protection from predatory lenders. Homeowners represented by the Legal Services Corporation are barred from bringing class-action suits. Nor are they able to make the other side pay attorneys’ fees, even when the law would normally allow it. The chance to recoup attorneys’ fees when a defendant wins his case is critical in discouraging lending companies from dragging out proceedings merely to exhaust a defendant’s financial resources. The Obama administration has asked Congress to remove many of these limitations, to no avail. The $789 billion stimulus plan didn’t contain a single dollar for foreclosure-related legal help.
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Although Americans losing their homes are being treated like an afterthought, foreclosures are actually a gateway calamity. Every foreclosure is a crisis that begets a whole other set of crises. When families lose their homes, they are forced to move in with relatives, or into a motel, or live out of a car, or on the street. Meanwhile, the home sits vacant. Surrounding home values drop. Others in the neighborhood move out. In many communities, squatters move in. Crime goes up. Tax revenues plummet, taking school budgets down with them.

Almost forty-one million homes in the United States are located next door to a foreclosed property.
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The value of these homes drops an average of $8,880 following a foreclosure.
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This translates into a total property value loss of $356 billion.
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And
vacant properties take a heavy toll on already strapped local governments. A 1 percent increase in foreclosures translates into a 2.3 percent rise in violent crimes.
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But the collateral damage of the foreclosure crisis is even more grave and far-reaching. It has a huge impact on future generations and on our children. A September 2009
New York Times
story by Erik Eckholm on the surge of homeless schoolchildren caused by the foreclosure crisis haunts me to this day.
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A photograph that accompanied the article showed nine-year-old Charity Crowell of Asheville, North Carolina, modeling the green and purple outfit she intended to wear on the first day of school. The previous spring, when her parents lost their jobs and their car, she received Cs on her report card. She vowed to bring her grades back up. “I couldn’t go to sleep,” nine-year-old Charity said of her last semester. “I was worried about all the stuff.” As a result, she often fell asleep in class.

The family had been evicted and forced to move into a series of friends’ houses, then a motel, and then a trailer.

The National Center on Family Homelessness estimates that 1.5 million children in the United States are homeless—that is one in fifty children.
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San Antonio, for example, enrolled one thousand homeless students in the first two weeks of the 2009–10 school year—double the number during the same period the previous year.
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The National Center on Family Homelessness also found that homeless children are four times as likely to get sick and twice as likely to have learning and developmental problems as non-homeless children.
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“We see eight-year-olds telling Mom not to worry, don’t cry,” said Bill Murdock, who works with homeless schoolchildren.
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It’s hard to hear stories like these and not feel outraged that
we have given hundreds of billions of dollars to save Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, and yet those same banks are turning around and refusing to modify mortgages so that families can stay in their homes.

Moreover, despite common perception, most of the people losing their homes today are not recent buyers with crazy subprime mortgages, or families who took out massive loans they couldn’t afford. They are middle-class Americans who have lost their jobs and are struggling to make ends meet.

The foreclosure crisis hasn’t gotten the attention it deserves because the public’s interest—people being able to keep their homes—is not aligned with corporate and financial interests. Banks don’t want to adjust nonperforming mortgages down to their actual values because that would lead to marking down the value of the massive asset pools they have rolled the mortgages into.
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The four largest banks (Bank of America, Wells Fargo, Chase, and Citibank) service two-thirds of all distressed mortgages.
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These banks collectively hold about $477 billion in second liens.
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When it came to the foreclosure crisis, Obama’s audacity to win morphed into a timidity to govern. Bolder action earlier by the administration and our paralyzed, polarized Congress would have kept millions of families in their homes and cleared the decks more quickly for an economic revival on Main Street. But that, of course, would have meant giving the public the same sort of breaks the gluttonous bankers got.

“The banks are too big to fail” has been the mantra we’ve been hearing since September 2008.
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But apparently it’s okay when American homeowners are thrown out of their homes and out of the middle class—perhaps forever.

Mortgages, of course, are far from the only kind of debt Americans are saddled with. Indeed, we have become a nation fueled by plastic and financed by revolving credit.

The numbers are stunning:

• As of January 2010, U.S. consumers were carrying $2.46 trillion in consumer debt; $864 billion of that was made up of revolving credit (98 percent of which is credit card debt).
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• There are more than 576 million credit cards in circulation in America, and another 507 million debit cards.
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  We used those cards to make more than 56 billion transactions last year.
  
• The average credit cardholder has 3.5 cards, and of the households with credit card debt, the average debt is $16,000.
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  During 2009, 56 percent of consumers carried an unpaid balance.
  

Americans no longer use their credit cards just to buy the things they want; they use them to make ends meet. “For much of America,” says Elizabeth Warren, “the credit card is now the health insurance policy, the unemployment insurance, the way to deal with a child who’s off in college and you haven’t got enough to cover expenses.”
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For more and more Americans, credit cards have become a plastic lifeline. In fact, in 2007, even before the economic crisis began, 14.7 percent of American households had debt totaling more than 40 percent of their annual income.
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In 1958, American Express pioneered the use of widely accepted credit cards.
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BankAmericard (later to become Visa) followed in 1959 with the first general-use card that allowed balances to be paid over time. MasterCard (originally known as Master Charge) launched in the late 1960s.

But the modern credit card industry really kicked into high gear after a 1978 Supreme Court ruling allowed banks to charge the top interest rate permitted by the state where a bank is incorporated as opposed to the borrower’s home state.
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Hoping to lure banks’ business, states such as South Dakota and Delaware repealed their usury laws—which had kept interest rates in check—and we were off to the customer-gouging races.
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The arrival of nationwide banking, combined with bank deregulation and the tech revolution, sealed the deal. It also opened the floodgates on banks soliciting our credit card business, and the creation of all manner of tricks and traps designed to separate consumers from their hard-earned money. “In 1980, the typical credit card contract was a page and a half long,” Elizabeth Warren says.
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“Today, the typical credit card contract is about thirty-one pages long. The other twenty-nine and a half pages are the tricks and traps. I teach contract law at Harvard Law School,” she continues, “and I can’t understand my credit card contract. It’s just not designed to be read.”

As a result, for years the credit card companies have been fattening their bottom lines with an ever-widening array of fees: late fees, cash-advance fees, balance-transfer fees, over-the-limit fees. Fees now account for 39 percent of card issuers’ revenue.
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In fact, last year, lenders collected more than $20 billion in penalties and fees.
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And even with the passage of the new credit card regulations that took effect in early 2010,
banks are coming up with sneaky new ways to soak customers, including (if you can believe it) an “inactivity fee” for
not
using their card!

One of the best things the new credit card regulations do is make it harder for credit card companies to go after customers under the age of twenty-one. For years, the companies have aggressively, recklessly, and successfully targeted young consumers.
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As a result, according to
CreditCards.com
, 76 percent of all undergraduates now have credit cards: “Undergraduates are carrying record-high credit card balances.
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The average (mean) balance grew to $3,173, the highest in the years the study has been conducted.… Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also up from the last study.” Half of all college undergraduates have more than
four
credit cards, and more than a third of them are unable to pay their balance in full.
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And, of course, this credit card debt is piled on top of their student loans. According to FinAid, 66 percent of college graduates ended their four-year bachelor’s degree in debt—owing an average of $23,186 in student loans.
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These middle-class students—young, educated, and maxed out—will have a difficult time getting out from under the crushing debt as they start their careers. Priceless.