Free Lunch by David Cay Johnston

Author:David Cay Johnston
Language: eng
Format: mobi, epub
Tags: Progressivism, Politics, Business, History
ISBN: 9781101216514
Publisher: Penguin Group
Published: 2007-12-27T00:00:00+00:00

Chapter 15

SELLING THE FURNITURE

THE STUDENT-LOAN BUSINESS IS JUST ONE ASPECT OF A GREAT transformation in the balance sheet of America. When students graduate and start paying off their loans, many will find they cannot qualify for a mortgage to buy a home because of the money they borrowed in school.

Home ownership used to be the key to a secure future for the middle class, although African Americans, Hispanics, and other minorities were often excluded. Government programs after World War II encouraged widespread home ownership and low-cost housing. No more. Now home ownership is for millions a pathway to a life of endless debt.

Americans owned about two-thirds of the value of their homes in the sixties and seventies and owed the rest in mortgage debt, according to Federal Reserve data. In 1981 and 1982, for every dollar of home value in America, equity represented 70 cents. But by 2006, the equity share of homes had fallen sharply while mortgage debt grew to almost half the total value of American homes. In fact, for each dollar of equity people had added, they took on almost two dollars of debt.

Debt likely accounts for more than half of the value of homes in 2008. That is because in many communities, home values are falling, in part because the debt burdens are so high that the owners cannot cover the payments and there are no new buyers to take over for them at current prices. Many of these mortgage loans were made to people with poor histories of paying back their debts, and often based on inflated appraisals. The failure of subprime loans has become so widespread that it wiped out many lenders and devoured two hedge funds sponsored by the Wall Street firm of Bear Stearns.

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