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Chapter 13
* * *
NO, THEY DIDN’T LEARN ANYTHING
* * *
By and large the mortgage bailout effort has failed, perhaps reflecting the inherent difficulties in trying to turn the unaffordable into the affordable simply by government fiat or intervention. Nearly 60 percent of the delinquent mortgages that were modified by banks were in default again within the first year.1 As it turns out, not surprisingly, reckless deals can seldom be transformed into viable ones, even by acts of Congress. It was not, however, for lack of trying and tens of billions of dollars of taxpayer money.
In February 2009, President Obama declared that his $75 billion Home Affordable Modification Program (HAMP) would “enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.”2 The idea was to provide an incentive for lenders to modify troubled mortgages. Within the program’s first year, 40 percent of the 1.5 million people who tried HAMP were booted from the program altogether, and the whole process became known colloquially as “extend and pretend.” Rather than saving homes from foreclosure, the program only delayed the inevitable. As two financial writers for The Huffington Post explained, by “extending the process by which homes enter foreclosure” banks were allowed to carry the loans on their books at full value, which “allows unhealthy banks to appear healthy, staving off costly bank failures.” Or, in other words, pretend to be solvent.
But there comes a day when all fairy tales and attempts at financial self-deception come to an end. Or at least you’d think so.
No Down Payment, No Income
Even as the economy was trying to crawl back from the subprime lending meltdown, the taxpayer-funded Wisconsin Housing and Economic Development Authority ran radio ads touting no-money-down mortgages:
WHEDA … We do … So you can buy your first house with no money down! Coming up with a down payment prevents a lot of renters from becoming homeowners.…”
What if you also have no income? Not to worry. There was a bailout for that, too. WHEDA promised that the taxpayers would even pay your mortgage for six months if you lose your job. At first, the new loan program known as Affordable Advantage was offered in just three states: Massachusetts, Minnesota, and Wisconsin. Because the states unloaded the mortgages to Fannie Mae, The New York Times noted, “taxpayers are on the hook if the loans go bad.”3
That includes loans in which homeowners paid as little as 67 cents down. One of the early borrowers under the Wisconsin program was a couple named Matthew and Hannah Middlebrooke, who bought a $115,000 three-bedroom ranch house with a down payment of just $1,000. But because the couple also got a grant to cover closing costs and insurance, they ended up at the closing writing out a check for just 67 cents.
Commenting on the return of the government-sponsored virtually-no-down-payment loans, CNBC’s Diana Olick noted that the program “seems contradictory in its fundamental premise. The buyers in the Affordable Advantage program have no skin in the game from the start, and no guarantee that the home won’t lose value over the next year.”4 One of the directors of the Government Accountability Office reminded The New York Times that “loans that have zero down payment perform worse than loans with down payments.… And loans with down payment assistance”—like those being marketed by the housing agencies–“perform worse than those that do not.”5
Isn’t this how we got into this mess in the first place?
TARPing the (Upper) Middle Class
In March 2010, the Treasury Department announced yet another attempt to beef up its bailout program by throwing even more cash at it. The Treasury hoped that with a taxpayer subsidy, some lenders might provide mortgage relief for homeowners who were underwater on their mortgages. One provision required mortgage providers to write off a portion of mortgage loans to get them down to “a manageable level.” As The New York Times reported, “To lubricate its efforts, the government plans to spread taxpayers’ money around liberally.”6
Who was eligible for this latest round of taxpayer generosity? The Treasury Department explained that you could tap the HAMP if you:
live in an owner occupied principal residence, have a mortgage balance of less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners.7 (Emphasis added.)
Pause here, and then reread that.
Economist Keith Hennessey was flabbergasted. Even by the ever-eroding standards of the bailout tsunami, this was stunning. Under the government’s plan, calculated Hennessey, homeowners with annual incomes of up to $186,000 a year would be eligible for the assistance. The price tag: $50 billion.
Asked Hennessey: “Does it really make sense for the Administration to use taxpayer funds to subsidize someone making less than $186,000 per year to stay in a home with a $700,000 mortgage balance?!”8
“This isn’t even a middle-class entitlement,” commented finance writer Lawrence Kudlow, “it’s an upper-middle-class entitlement.”9
Hennessey challenged the premise behind bailing out “underwater” homeowners. Many of those homeowners had, of course, suffered traumatic losses in the value of their homes, but if they had fixed-rate mortgages, their actual out-of-pocket costs wouldn’t be affected. The homeowner could stay in the house and wait for the price to edge back up, just as an investor might hold on to an undervalued stock.
Why, then, Hennessey asked, should the taxpayers subsidize a homeowner who has lost money on a real-estate investment any more than taxpayers should subsidize someone who lost money on a bad stock bet? “Why do policymakers (on both sides of the aisle) think we should make taxpayers (some of whom struggle to make their own mortgage payments, and others of whom rent housing) subsidize someone who lost money on an investment?”
He suggests this scenario: “Two twin brothers each make $180,000 a year. One rents, and the other has a $700,000 mortgage on a home that declined from $800,000 in value to $600,000 in value
. Both brothers lose their jobs. Why should the renter pay higher taxes to subsidize his brother’s mortgage payments?”
Hennessey offered this kicker: Imagine a third brother (who also rents) and who loses $200,000 in the stock market, “and explain how your policy applies to him.”10
Part Five
MIDDLE-CLASS SUCKERS
Chapter 14
* * *
THE BANK OF MOM AND DAD
* * *
Tucked inside the massive health-care reform bill of 2010 was a symbolic cultural declaration: The new law allows children to stay on their parents’ health insurance plan up to the age of 26. In a sense, the law was simply catching up with the trend toward delayed adulthood as more twenty-somethings fail to launch.
But the bill also was a milestone: It codified in federal law the dramatic shift in the age at which young people should be considered independent by legally extending the right to continue to mooch off Mom and Dad for an additional half-decade. As more and more young people take a leisurely journey to adulthood, the ages of 18 and 21 increasingly lack relevance for the actual path to independence. With a stroke of the pen, 26 has become the new 18.
In an earlier book, I wrote: “Previous generations crossed the frozen Bering Straits, rounded the Cape of Good Hope, discovered the New World, traveled the Oregon Trail, climbed Mount Everest.” The Greatest Generation included teenage boys who went off to liberate Europe, island-hop through the Pacific, and defeat the Japanese Empire.1
“So far, though, the great pioneering move of Generation Me is to move back home to live with Mom.” This was perhaps somewhat unfair, but the failure to launch among young adults has become so widespread that it has inspired its own euphemisms: “emerging adults,” thresholders, twixters, and kidults. None of them should be taken as compliments.
Somehow previous generations were able to grow up more quickly under far worse conditions. So did their parents, who not only didn’t have the Internet and cable television, but may have felt themselves lucky to have their own bedroom and indoor plumbing. But they grew up, and if they did live with their parents, they were probably helping to support the seniors, not the other way around.
A great deal of impressive scholarship has been arrayed to explain why the younger generation is delaying adulthood into their late twenties and even into their thirties. Traditionally, young people couldn’t wait to get out of the house, get their own place, and experience the freedom and pride of self-sufficiency and self-reliance. But now so many are failing or refusing to leave home that sociologists and demographers have had to redefine adulthood itself. In 2004 a team of social scientists concluded that “it takes much longer to make the transition to adulthood today than decades ago, and arguably longer than it has in any time in American history.”2
Explanations abound: Changes in the economy, the increasing importance and length of higher education, and delays in marriage and childbearing certainly play major roles in the postponement of adulthood. Even though most Americans think the age of 21 remains a key milestone, the MacArthur Foundation’s Network on Transitions to Adulthood notes that in reality, by age 21, “few young people today would actually be considered ‘adult’ based on the traditional markers—leaving home, finishing school, starting a job, getting married, and having children. More youth are extending education, living at home longer, and moving haltingly, or stopping altogether, along the stepping stones of adulthood.”3 In the 1960s, 37 to 40 percent of young adults finished school, left home, got jobs, married, and had children. Today the routes are more idiosyncratic. According to the Network on Transitions study, the number of young adults who follow that path had dropped to 25 to 29 percent in the 1990s.*4
The “more ambiguous and extended path” they are taking means that many young adults who are technically past the age of majority have no idea what to do with themselves. The study found that “fewer young people at age 22, much less someone in their teens, know what they are going to do in the next 10 years than they did even a few decades ago.”
Sooner or later, of course, they will have to grow up, stop mooching off their parents, and actually move out of the house. But apparently not yet.
The number of so-called boomerangs—adult children between the ages of 18 and 24 who move back home—is up by 50 percent since 1970. Census figures suggest that 56 percent of men and 43 percent of women between the ages of 18 and 24 continue to live with a parent. Even more continue to rely on the bank of Mom and Dad, well past the age when grown-ups were once expected to pay their own way.
Send Money
“Helicopter parents” have made themselves unavoidable presences throughout academe and even (cringingly) in the workplace. So called because of their tendency to hover and overprotect their children, the helicopter parent has become an iconic figure of postmodern culture, representing a new sort of parent who never … lets … go. A plague on college administrators, these parents are so omnipresent at orientation sessions that some schools have had to develop tactics for shooing them off campus so that their children can get on with the business of higher education.
But just as helicopter parents are reluctant to let go simply because a child goes off to college, many parents seem reluctant to encourage or even allow their children to become financially independent. Understandably, many young adults are fine with this. Increasingly parents do not merely follow their children on Facebook, but also routinely pay their bills well into their thirties.
According to the MacArthur study, adults between 18 and 34 receive an average of $38,000 in cash from their parents, “and … this support has increased substantially in the last decades.”5
The cash, reported The New York Times, “helps to pay for housing, bills and travel expenses, and the support has been increasing for the past two decades as education is extended, marriage is delayed and young people take the scenic route from adolescence to adulthood.”6
Researchers Robert Schoeni and Karen Ross put this in perspective: Middle-class parents can spend $190,980 raising a child through age 17, according to 2005 government statistics, but they will probably spend another $42,280 (in 2005 dollars) over the next seventeen years. Obviously that includes the cost of higher education, but it is not limited to tuition. Their research found that on average, middle-class parents were paying $2,323 a year to subsidize offspring 25 and 26 years old.7
The contributions are not limited to cash. Nearly half of young adults (18 to 34) who live away from home report receiving noncash assistance from their parents in the form of time, such as “driving them home to the city after a visit, doing laundry, taking care of grandchildren.”
According to Schoeni and Ross, this parental time assistance amounts to an average of 367 hours, the equivalent of nine weeks of full-time mommy and daddy work.
“The bottom line,” noted the Times, “is that the assumption that financial obligations to children ended after graduation from high school or college is going the way of the pay phone.”8
Extending Dependency
Not all of this is bad, of course. The delay of childbearing and more and better education are often good choices that ought to be encouraged, but there are troubling implications as well. The delay of adulthood suggests a declining premium on independence among the young, for with the parental subsidies come strings. Avoiding those strings has long been the goal of young people leaving the nest. For many, however, the lengthening path to adulthood means the extension of parental involvement, and ultimately control. Most young people of previous generations were reluctant to make the tradeoff, but an increasing number of the younger population appear quite comfortable with it.
One result is that adults—even those in the middle and upper middle classes—spend less time being economically independent and a larger portion of their lives dependent on others.
This shift has significant demographic and political implications: If 30 is the new 20, the time a worker will be economically self-sufficient can be
cut by nearly a fourth unless they stay employed a decade longer. As the younger generation takes the “scenic route” to adulthood, the burden of supporting the economy will be pushed onto an even smaller slice of productive taxpayers. (This was the generation that boomers were counting on to support them in their retirement. Disappointment seems inevitable, although they may get their revenge when young adults make the transition from moocher to mooched upon.) Statistics on income and wealth will also be skewed as the number of people (even those from affluent backgrounds and with expensive educations) who will be counted as “low income” is inflated.
Politically, the delay in adulthood means the shift of millions of individuals, who would otherwise have experienced the joys of tax withholding, into a prolonged period of dependency—not just on Mom and Dad, but also on programs that enable them to pursue what Fred Siegel called “dependent individualism.” (See “Hungry Hipsters” in Chapter 6.) Such dependency establishes not only a habit but also a constituency for programs of support by expanding and extending the pool of takers.
Chapter 15
* * *
MIDDLE-CLASS SUCKERS
* * *
Three stories:
• In Wisconsin, if a single mother with two children who makes $15,000 a year marries the father of her children, who makes $30,000 a year, a legislator calculates, “she will lose government benefits totaling $37,000 per year.”1
• Two classmates both take out $40,000 in student loans. Student A takes time off to find himself and then takes a minimum-wage job at a nonprofit group devoted to saving the iguanas. Student B gets a job in engineering and makes $70,000 a year. Student A pays $47 a month on his student loan; Student B pays $672. Student A is also eligible for the Earned Income Tax Credit program and food stamps and gets free medical care. After ten years working for Save the Iguanas, Student A also will have his loan completely forgiven under the “public service loan forgiveness” provision of his loan. Student B will have to pay off the full balance of his loan, plus interest.2
A Nation of Moochers Page 16