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.95 The value of these homes drops an average of $8,880 following a foreclosure.96 This translates into a total property value loss of $356 billion.97 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.98
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.99 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.100 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.101 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.102, 103
“We see eight-year-olds telling Mom not to worry, don’t cry,” said Bill Murdock, who works with homeless schoolchildren.104
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.105 The four largest banks (Bank of America, Wells Fargo, Chase, and Citibank) service two-thirds of all distressed mortgages.106 These banks collectively hold about $477 billion in second liens.107
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 2008.108 But apparently it’s okay when American homeowners are thrown out of their homes and out of the middle class—perhaps forever.
A HOUSE OF CARDS
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).109, 110
There are more than 576 million credit cards in circulation in America, and another 507 million debit cards.111 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 $16,000.112 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.”113 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.114
In 1958, American Express pioneered the use of widely accepted credit cards.115 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.116 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.117
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.118 “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.119 In fact, last year, lenders collected more than $20 billion in penalties and fees.120 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.121 As a result, according to CreditCards.com, 76 percent of all undergraduates now have credit cards: “Undergraduates are carrying record-high credit card balances.122 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.123 And, of course, this credit card debt i
s 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.124 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.
Our country now stands on the verge of a major credit card crisis. Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care—the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don’t, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties—all of which makes it even less likely consumers will be able to pay off their mounting debts. It’s a vicious cycle, as Janet H. recounted:
“Back in 2008,” she told me, “we had just a few minor credit card balances less than $1,000, which we would pay off within a couple of months. It was what we used for vacations or maybe for an extra Christmas splurge.
“When I lost my job as an office manager, however, we came to live off of credit cards—we had no other choice. Gas and groceries were a large portion of that, as gas was almost $4 per gallon and my husband commuted 50 minutes each way to work.
“Now our interest rates, which a couple of years ago ranged from 2.9 percent to 12 percent, have risen as high as 29.9 percent, even though we continued to make credit card payments.
“At the same time, each credit card decided to lower our credit limit and that, in turn, gave us a higher debt-to-available-credit ratio. A couple of months later, another credit card company would see the higher percentage and then they, too, would lower our credit limit. This is a cycle and we are now at the point where our credit card with a $16,000 credit limit has a $3,000 credit limit, thus giving us the dubious distinction of looking like we’ve maxed out all of our cards. These days we do not use credit cards often because, since all of them are maxed out, we cannot make a purchase without going over the limit.
“We have more debt than we can handle now, no savings, a house going back to the bank. All I hear is people saying that people in my situation ‘are just bad with money’ or ‘overspend’ or ‘should never have bought a house if they could not afford it.’ I do not want a handout; I do not want to file for bankruptcy. I make less money now, my husband makes less money now. I am getting pretty fed up with people who judge us like we are of a lower class due to circumstances that really were beyond our control. Meanwhile, the banks get bailouts and pay large bonuses.”
Credit card experiences like Janet’s contribute to the growing anger, as well as to our economy’s downward spiral. Many experts feel that as more and more Americans default on their credit card debt, banks will find themselves faced with a stomach-turning replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street “creativity,” credit card debt is routinely bundled together into “credit card receivables” and sold to investors—often pension funds and hedge funds. In 2008, securities backed by credit card debt added up to a $365 billion market.125 It motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. So how are the credit card companies trying to offset the rise in bad debts? By raising rates and fees for the rest of their customers, causing more of them to fall into arrears. And round and round and round we go.
Americans are encouraged to spend in order to help get the sputtering economy humming again. But the problem is, many Americans are broke, or barely scraping by, so the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off. Getting dizzy yet?
Elizabeth Warren worries that the credit card crisis “could be the knockout blow to the middle class.”126
FEAR, ANXIETY, DEPRESSION, ANGER … OTHER THAN THAT, AMERICA, HOW ARE WE DOING?!
Americans everywhere are anxious.
In March 2010, a FOX News poll found that 79 percent of voters—including the vast majority of Democrats, Republicans, and independents—think it’s possible the economy could collapse.127 An April 2010 Gallup Poll revealed that only 41 percent of Americans think their financial situation is “good” or “excellent”—the lowest percentage in the past ten years.128 And 21 percent of workers think it’s likely they will be fired during the next year.129
This pessimistic outlook can have a profound impact on the American psyche, shaking our celebrated self-confidence. As reported by Don Peck in the March 2010 issue of the Atlantic, University of Warwick economist Andrew Oswald believes that “involuntary unemployment lasting six months or more is the worst thing for a person’s mental health—just as bad … as the death of a spouse.…130 And the psychological effect is lasting—lingering even after a new job has been found.”
Researchers at Rutgers University interviewed one thousand unemployed people in the summer of 2009.131 By the spring of 2010, 80 percent of them were still out of work. Of the people who did find work, only 13 percent had landed full-time jobs. To deal with the extended unemployment, “70 percent of the people dipped into retirement funds, 56 percent borrowed money from family or friends, and 45 percent turned to credit cards. Forty-two percent skimped on medical care, 20 percent moved in with family or friends, and 18 percent visited a soup kitchen.”
“The cushion’s completely gone,” says Cliff Zukin, one of the authors of the study.132 “It’s a much deeper economic gash this time.” And no occupation, at the middle-class level, has been spared.
Henry Chalian was a vice president and relationship manager at JPMorgan when he was laid off in May 2009. “It was a shock to everyone, in every way possible,” he explains. “That said, the year before had been an unsettling one where every morning we came in, we said to each other: ‘We are still here!’ ” Chalian, who has a master’s degree from the London School of Economics, worked for Bear Stearns before he was hired by JPMorgan. “I managed relationships with some of the top independent research firms in the country,” he says. “A lot of changes occurred in the last year, but we thought our jobs were secure. I was laid off on the last day Bear Stearns’ severance was in place.”
Chalian considers himself luckier than most: His former company has an in-house career center for displaced workers for up to one year. He has access to career counselors on a weekly basis, and the center offers classes on networking, speaking, and interviewing skills. He even participated in a six-week seminar on using social media for job searches. “I have joined a number of LinkedIn groups associated with finance, prior employers, and school alumni,” he says, “I follow discussions, ask questions, and make comments.” Chalian has also been using Twitter, which he discovered can be a powerful job-searching tool. “There are a lot of smart and helpful career advisers, bloggers, and recruiters that I have discovered and now follow.”
He has participated in a variety of programs offered by his city and state to assist newly unemployed individuals, such as JumpStart NYC, which is a combined effort by Mayor Michael Bloomberg and the New York City Economic Development Corporation for displaced financial service employees; he attended a one-week boot camp with educators from Harvard Business School; he spent six months at a digital media and e-commerce start-up incubator as part of an unpaid fellowship and consulting program; and he used a National Emergency Grant to participate in a two-week “Columbia Essentials of Management” program at Columbia Business School. He also contributes to a blog on WSJ.com called Laid Off and Looking, and he appeared in a CNN Money segment entitled “Castaway Bankers.”
It has now been a year since Chalian was laid off, and, despite all these efforts, he is still looking for a job. His severance package exhausted,
he is now relying on unemployment and has cut into his retirement savings. “I have been very frugal,” he says, “but that goes only so far. I’m in a constant state of worry about money and the future. As busy as I have been, it has not been easy.”
One of the offshoots of this undercurrent of fear and anxiety is the anger building up across America.
In April 2010, hot on the heels of an outbreak of threats against members of Congress, came word that an Oklahoma Tea Party group was planning to form an armed militia to help defend the state against the perceived encroachment of the federal government—this in a state where, fifteen years earlier, Timothy McVeigh’s rage had turned deadly.133
The FBI was investigating an antigovernment extremist group that was sending letters to America’s governors demanding they resign or be “removed.”134 This followed the arrests of members of the Hutaree group, a radical Christian militia organization in Michigan that was plotting to kill police officers.135
When Tea Party members gathered for tax-day protests across the country, we were treated to a fresh wave of debate about whether these groups are fueled by anger, fear, racism, or class divisions.136 There was also talk about how much responsibility media outlets and certain political figures bear for inciting Tea Party crowds with violent rhetoric. (Sarah Palin urged her supporters to “reload,” and U.S. representative Michele Bachmann said she wants her constituents “armed and dangerous.”)137, 138
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