Monday, October 12, 2009

The “Own Your Own Home” Policy

Next to our intuitive thirst for greed, the difficulty of keeping perspective amidst the epically long and complex evolution of the U.S. government-private sponsorship of "democratic" financialization is likely the largest contributing factor to our current and likely far larger decline.

Most individuals have, at best, a relatively brief exposure to most financial matters (somewhere between the years of household formation and household destruction) on which to base their knowledge.

And while they are mostly ignorant of the issues and controversies preceding their experience, they take the standards of their day as fact and foundation and operate by the “rules of the game” as they know them.

The problem is that the rules are ever changing and, more importantly, largely just human invention invented in that frail and ill planned manner that only humans can carry out.

For example, most today would consider the 30 year fixed rate fully amortizing home mortgage to be foundation, so important that it is almost tradition.

But yet, it is not.

It is, in fact, a relatively new invention forged during an “enlightened” period where the forces of both private and public interests united to unleash their vision of a more fair, democratic and consumption fueled American economy.

(NOTE: PLEASE please please read this 10 page article by written by Marc Weiss in 1989 entitled “Marketing and Financing Home Ownership: Mortgage Lending and Public Policy in the United States, 1918 – 1989)

It’s important to recognize that the practice of lowering the “barriers to entry” of home ownership, through either government legislation or private experiment represents mere policy… no more and no less.

The 30 year fully amortizing home loan was the “installment plan” for the post-depression U.S. homebuyer.

But what do we really know about the true legitimacy and soundness of the 30 year loan?

We have plenty of data since its introduction that appears to indicate that it is a sound product.

Throughout the ups and downs of the pot-war period, those with interest in the metrics and performance of 30 year fixed rate home loan debt (thrifts, mortgage insurers, the feds) could, with rare interruption, rely on as fact that the overwhelming majority of these loans would perform.

But therein lies a bit of the rub.

Most, if not all, of the data originated during a period unlike the period we are now experiencing.

The booms during the post-war period always bested the prior booms particularly for job creation and though the various busts and crisis were more than incidental, brighter days were always ahead.

In fact, in a sense, brighter days were almost fundamentally ahead as households transformed from single earner to dual earner status during this period.

Now though, the trends have clearly taken a turn for the worse.

Boomer retirement is the talk of the day.

Moreover, for almost ten years experts and the media alike have accepted the notion of a “jobless recovery” without apparently stopping to wonder what the phenomena of a steadily declining participation in the workforce with a steadily increasing work-age population really means for America's future.

Even further still, we have all literally witnessed a “lost decade” in the stock market yet not only is it not widely recognized (... like we easily recognize it when looking at Japan) our speculative spirits appear to be running as hot as ever.

We are clearly not operating in the same environment as the post-war period yet we act as though the rules are unchanging.

It’s important to understand that I am NOT trying to convince you that the 30 year amortizing home loan is a risky mortgage product.

I’m only trying to demonstrate that it is a relatively new product in the scheme of things and that its introduction, along with the introduction of numerous other schemes, was sponsored by a partnership between our government and private industry to promote their mutual interests many decades ago.

In all likelihood, 2005 represented the peak of this government-sponsored housing experiment and though long trending, there is a chance that this housing policy may ultimately turn out, in a larger context and with all costs considered, to be no more successful than the myriad of other failed government initiatives.