Blub-Glub!

by Dennis Green

Fifteen million American homes are “underwater.” Their buyers owe at least 120% or more of their current worth on mortgages which have not tanked along with real estate values. (In California, prices are still 30% below their high of May 2006.) Many of these owners are simply walking away from their debt, leaving the keys in the mailbox, and defaulting on those mortgages.

When they do, and the house is abandoned, even for a short time, there goes the neighborhood. When the bank sells the house in a distress sale, that will lower neighborhood property values even further. With fifteen million homeowners underwater, the recent slide in property values can only get worse.

These are not, for the most part, people who bought homes they could not afford, or who fudged on their loans, getting sub prime terms. They may be struggling financially, have changed or lost employment, or may simply not see any sense in trying to hold on until home values are inflated again to the price they paid. Their research may even tell them that will never happen.

The old reliable expectation — that home prices could only go up and that their rate of inflation would exceed other cost of living increases — is no longer true. These people simply paid too much, taking the word of the seller and the real estate agent that the home was worth every penny. And perhaps, aside from the vagaries of price cycles, it really was, except that the median price was out of reach of more and more earners.

Many homeowners who bought after 2002, and especially between 2005-2007, paid more than those properties are worth today, or perhaps ever will be again. “Flipping,” speculation, and all the shenanigans by Freddie Max and Fannie Mae, let alone Bank of America, Lehmann Brothers, Goldman-Sachs, AIG and many others contributed to the collapse of an over-leveraged market. But some realtors, brokers and loan officers must have also known how overheated the market was.

Of course, many people, including brokers and agents, got out of the industry, and even the country, just in time. For those fifteen million homeowners who are “underwater,” Blub-Glub, at least a million real estate professionals and nearly fifteen million home sellers got rich! Your money or your mortgage!

There are people serving time in prison for stealing far less. In Victor Hugo’s Les Miserables, a man goes to prison for stealing a loaf of bread, and in America, many people are in prison for selling, or growing, less than a pound of marijuana, a roadside weed. The boundaries of justice have been bent so far out of alignment in this country that it’s no wonder so few Americans have any respect left for the forces of “Lawn Order.” When that happens at the highest levels of government and law enforcement, watch out!

When the Roman Empire began its decline and fall, one of the first things that went was civility, rapidly followed by justice that applied equally to all Roman citizens. When privilege and favoritism toward the ruling classes becomes so obvious, the very underpinnings of civilization are weakened.

So the underwater mortgage holders are not just some weird freak sideshow in the American economy. They represent, very clearly, a breakdown of civility and justice on a scale we haven’t known in this country since the early 1930s. And yet this time, reform and re-regulation are nowhere in sight. We may be witnessing the end of more than one American Dream.

©2010 Dennis Green