The End Of Consumer Credit As We Know It (generations, economy, retirement)
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In an article this week that examined the troubles brewing in Citigroup's mortgage business, the Wall Street Journal focused on Natalie Brandon, a 51 year old married woman from Granada Hills, CA, who is currently unable to make the payments on her $625,000 adjustable rate home loan from Citigroup, despite the fact that the rate will not even reset higher until June of next year. Amazingly, the Journal reported that Mrs. Brandon bought the house in 1985 for just $105,000, but had chosen to refinance five times over the past seven years, borrowing more than $500,000 and spending every single penny. While this may be an extreme example of American profligacy, it is by no means unique. Unfortunately this type of behavior typifies everything that is wrong with the modern American economy.
Had this homeowner behaved responsibly, as was typical for Americans of prior generations, her current monthly mortgage payments would likely be less than $600 and the remaining balance on her loan would be about $40,000. In eight more years she would have owned her home free and clear, and would likely be on track for early retirement. Instead, after 22 years of making mortgage payments, she is now $625,000 in debt. The article stated that she had recently tried to refinance into a 6%, forty year, fixed-rate mortgage, but it fell through. Even if she had qualified, she would have been obligated to make monthly mortgage payments of close to $4,000 until she was in her nineties.
For years, Wall Street and the media have been singing the praises of the heroic American consumer. To that end Mrs. Brandon could be portrayed as Wonder Woman. She did her part to power our consumer driven economy by borrowing and spending to her heart's content. Her last refinance even allowed her to buy a brand new Lexus.
Everyone makes bets on an unknowable future all the time. Interest rates, exchange rates, trends in labor mobility...you name it. Last I checked, it was not a considered a character flaw to be unable to work a crystal ball.
Unfortunately I know of a couple households who manage their equity in this way. The thinking is/was that the house is appreciating faster than they are borrowing against it, so they get the best of both worlds in making current purchases such as nice vehicles and vacations while still having greater equity.
Obviously that isn't still the case, but they were able to pull it off for an extended period of time (well in excess of a decade).
Shielding men from the effects of folly is to fill the world full of fools.
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