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MORTGAGING THE AMERICAN DREAM
By SHARI B. OLEFSON
Copyright © 2009
Shari B. Olefson
All right reserved.
Chapter One CULTURAL ENTITLEMENT, CREDIT, AND THE AMERICAN DREAM
Welcome to our foreclosure nation. This may be the first time you've realized you're a resident of the nation, even if you never personallty bought into the current real estate, mortgage, and financial market mess, and that can be a bit of a shock. Understanding what a foreclosure nation is is easier when you have an understanding of the culture that created it, namely, our culture of credit.
REDEFINING THE AMERICAN DREAM
For most of us, the "dream" in American Dream is about money and the lifestyle it buys. Making the dream uniquely American is the promise that ours is a country in which anyone can achieve that dream. But what happens when we want the dream and don't have the money to afford it? Let's see how we've come to arrive at this dichotomy in the first place.
Our Grandparents' Definition of the Dream
The phrase "American Dream" was coined by and about turn-of-the-century European immigrants, an industrious group who arrived on our nation's shores with little more than the clothes on their backs. In this country, through hard work and perseverance, they had the opportunity to transcend financial and lifestyle barriers that were insurmountable in their respective homelands. Their core values, including financial values, are precisely what we'd expect from a generation struggling with two world wars, a Great Depression, a polio epidemic, and other woes. Their reward was not merely a new car, a house, jewelry, or the latest clothes. After living under monarchs and dictators, success in the land of plenty was more internal. Their desire to reap the benefits of their own efforts and control their own financial future was precious to them. They strove to create a better life for their children. Their firmly established work ethic, self-sufficiency, perseverance, practicality, and devotion to saving for a rainy day defined turn-of-the-century immigrants.
Baby Boomers' Interpretation of the Dream
The children of these immigrants are our baby boomers, optimistic kids who grew up on the crest of a postwar wave. Although their early years were marked by a predisposition toward cautious sprinklings of peace and love, boomers at once modeled the work ethic exemplified by their parents while relaxing the emphasis on saving. They chose instead to exchange some of their parents' seemingly endless sacrifice for the security and control of a big stash of cash in favor of life's little luxuries: a weekend cabin by the lake, a European vacation or maybe a cute convertible. As products of a newly emerged American world military power, boomers quickly rose as economic market leaders, their boundless optimism further empowering our country's collective relationship with money and, in turn, unwittingly initiating an important shift in Americans' core financial values. Boomers worked, in part, to get a piece of the pie, their "fair share" of material things. That they were entitled to benefit from their efforts to control their own financial future and to take their families to the next socioeconomic level (at least in the more external, material sense) was a given. True to the boomer version of the American Dream, the US government implemented a succession of programs that ensured future generations easier access to that signature dream lifestyle. Veterans Affairs (VA) and Federal Housing Authority (FHA) home loans were born, and we no longer had to work quite as hard or persevere quite as long to buy a house. Workforce protections, welfare benefits, and similar programs aimed at ensuring equal access to the dream for one and all rendered self-sufficiency a less critical factor in how we defined success.
The American Dream: Twenty-first Century Style
Fast forward fifty years to the boomers' children and grandchildren, post-postwar immigrants, and their progeny-a generation raised on home loans, car loans, and the litany of guaranteed government jump-start programs that followed: student loans, employment benefits, food stamps, and, perhaps most significantly, credit cards. We seem to have inherited the drive for the external rewards our parents and grandparents earned, but not the internal pride and motivation in earning them. Certain aspects of our modern economy actually make it more difficult for us to control our financial destinies, to get ahead the way former generations did. It used to be that we paid our dues and worked our way up the ladder, but today that's not necessarily the case. Young, newly minted MBAs trump years of work experience. Less expensive, fresh workforces replace existing workers who have become expensive and expendable. In response, some experts claim, we've acquired a form of learned helplessness that places material things we think we can control or we think make us appear rich, hip, and successful in a more important position. The psychology of material things and their priority for so many Americans makes for an interesting debate. Whether it's learned helplessness, instant gratification, or a feeling of entitlement, the outcome is the same: our grandparents' work ethic, self-sufficiency, perseverance, practicality, and penchant to save are viewed as quaint, comical, and even absurd to many modern-day Americans who have come to expect the dream lifestyle but reflect a growing lack of responsibility for personal financial well-being. Our primary career motivator is not building value, wealth, and security, but acquiring things-or, more aptly, covering the minimum monthly payments for things we've already acquired. Generations X and Y have replaced working hard with "working smart," which is often subjectively equated with working as little as possible.
With help from Madison Avenue, positioning materialism as an entitlement and telling us we all deserve the best of everything, we've grown to believe our own rhetoric. We believe, for example, that because we're stressed out, or have been extra understanding or good about something, or maybe just because our neighbor has one, we've earned and can afford whatever it is we want at the moment as a "reward." For the majority of Americans, there is no reason to wait for anything. They view Benjamin Franklin's famous quote "A penny saved is a penny earned" as virtually meaningless, since a penny is worthless now anyway, right? Fast food, drive-thru banks and dry cleaners, instant download digital photos, text messaging, and the Internet reinforce the expectation that we can have everything now. Our worldwide reputation as Americans is for a love of flashy, material things. In short, the capitalism that defined our grandparents' generation-and indeed built our country's economy-has, over time, inadvertently bred a mentality of immediate material entitlement in which the end justifies the means. The view from the fast track to achieving the dream lifestyle is quite different from our grandparents' more traditional ride, when so much pride was experienced in the journey itself.
The Solution? Credit!
So we want lots of stuff, but we don't want to have to work and wait for it. It doesn't take a rocket scientist to see that the math just doesn't work. Unfortunately, for most of us, winning the lottery or having a rich uncle leave us millions is not likely. Enter the credit card: our fast-track ticket to the dream lifestyle. One often ignored reality is the fact that credit itself has become big business. Like most businesses, its goal is to sell, sell, sell, and make money, preferably as much money as possible. To do this, credit card companies have, over time, consciously aided in altering our society's core financial values.
There's nothing new about the concept of credit itself. It's a common thread throughout history. Some of our great-great-great-great-grandparents owed debt to lords and kings, and found themselves living as serfs in fiefdoms until the obligation was repaid. Seventeenth-century Americans regularly owed money to the blacksmith, the town doctor, or the banker. Why, then, is credit different for our generation?
For starters, look at who is granted credit today. Common sense tells us that credit card companies should lend money to those who can afford to repay it-and then, only as much money as they can comfortably repay. We tend to think that because a bank offers us credit, it must have verified in advance that we'll be able to pay back the debt. After all, banks are the experts at determining such complicated things. But that's not how modern credit works. The majority of credit cards today are sent unsolicited. In our grandparents' day it was the other way around: When Grandpa wanted credit, he went to the bank in his Sunday best, presented his case, and basically begged for a loan. Often the banker decided that Grandpa may not be able to repay the loan on time and turned him away empty-handed. Arguably, this system unfairly favored people of means. Theoretically, some folks who would have repaid their debts were denied the opportunity to better themselves. But lots of people who would have eventually found themselves in debtors' prison had they been granted the loan were spared the heartache of their own folly by prudent bankers.
OUTSMARTED BY CREDIT CARD COMPANIES
Today our senses are dulled by a constant barrage of mailings, televisions ads, and phone calls offering us credit. The average household currently has as many as thirteen credit cards, and most of these cards were issued without the cardholder having to prove even a modicum of personal worth or income. We don't need to have a job or demonstrate we're worthy of a loan to get a credit card. Only a fraction of credit card companies insist on any kind of background check, and a whopping two-thirds don't bother to see if we're employed. In fact, the credit card companies actually prefer when we don't pay our credit card balances in full. The industry's most profitable consumers are "revolvers," those people who carry a monthly balance. And credit card companies love late payments, since that translates to more profit in the form of substantial late fees.
Credit card companies are very much aware of human behaviors that influence us and generate more profits for them. Advertising is everywhere, suggesting that actual money is not really involved and equating spending with achieving favorable outcomes and emotions, like love and happiness. There is even an aura of respectability that comes with using credit cards and reaching the level of a "Gold" or "Platinum" card, even though we know in reality these cards are offered based on how much money we spend, not how much we earn or can afford to pay back. Who is not impressed when someone pulls out a "Black" card?
The credit card companies know that many of us associate "credit" with "free." They know we find "debt" distasteful, but "charging" is chic. Sadly, we aren't nearly as aware of our own behaviors as the credit card companies are. Some ads appeal to our desire for convenience: "Sign and drive. Leave your cash at home." Others appeal to a lack of accountability: "No Credit? Bad Credit? No problem!" What they don't say is that the reason it's no problem is that those cardholders with bad credit will pay the credit card company more by way of a much higher interest rate. A 2006 promotion for a credit line from the now-defunct Washington Mutual asked, "Just Can't Wait to Have It?" But what is really so important to own that we can't wait for it, and is it really worth paying an extra 25 percent in interest to have it now? What would our grandparents have done? It's no wonder that the number of banks issuing credit cards increased by 68 percent in 2007. According to Federal Reserve statistics, of the total number of cards issued, more than 20 million in each system carry a balance forward each month, meaning we can't afford to repay what we've borrowed.
LIFE, LIBERTY, AND THE PURSUIT OF GOOD CREDIT SCORES
Instead of approving or denying credit based on our true financial strength, today's borrowers' financial strength is evaluated in terms of a credit rating and our credit rating is used as a pricing mechanism.
Credit reporting originated more than a hundred years ago when small retail merchants started comparing financial information about their customers. This eventually evolved into localized credit associations that eventually consolidated into a few larger ones. Standardized credit-scoring systems were born in the 1960s. It was also during this time that controversy enveloped credit-rating associations, which were using credit information to deny services and opportunities to certain profiled populations. For example, credit reports tended to include only negative information and lifestyle factors such as sexual orientation. Credit reports weren't available to the public, so no one even knew what negative information their own credit report contained, nor could an individual contest and correct erroneous entries. In the early 1970s we gained the right to see, dispute, and correct our credit reports.
The advent of modern credit scoring propelled the credit industry forward by enabling companies to filter us into groups based on risk assessment, or the likelihood that we will pay our bills on time. This grouping provides the rationale credit card companies use to justify charging some of us more or less interest than others. Credit card companies believe those who are less likely to pay constitute more of a risk, and in return for taking this risk, the companies charge those individuals a higher interest rate. Today, creditors wanting access to the more than 1 billion US consumer credit reports issued annually must submit information about their own customers each month reflecting payment history and current unpaid balances to the Fair Issac Corporation (FICO). FICO uses this information in a formula that predicts the creditworthiness of each and every borrower, and awards each of us a corresponding score that ranges from a low of 300 to a high of 850. The median score is 725, and those who score above 770 usually get the best interest rates (meaning the lowest interest rates). A FICO score below 600 is subprime, meaning those borrowers will pay higher interest rates.
Amazingly, only 2 percent of us know our own credit scores, and even fewer of us take steps to improve our credit scores. We'll drive miles out of our way to save money at a sale and spend hours clipping coupons, but only a very few hardy souls take the time to study and improve credit scores that may be costing tens of thousands of dollars in interest charges year after year. The same thing can be said of the manner in which we treat our credit card agreements and monthly statements. Surveys have shown that fewer than 10 percent of us review our credit card statements for accuracy. Errors have led to a plethora of other challenges, since such errors may lead to higher payments or denied credit. Among consumers with the lowest credit scores, almost 8 percent have credit reports containing errors. Twenty-five percent of these errors could result in credit denial. More than 50 percent contain outdated information or information belonging to someone else. Resources like FICO.com and annualcreditreport.com are important consumer protection tools available to all of us. Credit scores will become increasingly important over the coming years as more and more companies make decisions about us-for example, our insurance rates, cell phone fees, rental car costs, and rental apartment lease approvals-based on this all-important number.
From time to time the US government has stepped in and forced the credit card companies to accept changes geared toward disclosing things more clearly to us or behaving in a manner that might be considered more fair. Judging by recent congressional hearings, we can expect to see a new series of credit card regulations soon. The challenge is balancing consumer protection with the fact that in our capitalist economy, credit card companies, like other businesses, are entitled to make money-theoretically as much as possible. In fact, they have an obligation to their investors to do so. So how can we logically expect a credit card company to earn less than top dollar? Certainly if we were the investors we wouldn't want to hear that our dividends had been cut so the company could give away credit! Some argue that credit card companies cross an ethical line with what they describe in the confusing fine print of the lending agreement, with misleading advertising, and with an overall lack of transparency. The credit card debt collection industry generates more complaints than any other business. And industry insiders allege that some reporting agencies even deliberately include incorrect or incomplete information in our credit scoring so their competitors won't want to pursue us as customers.
Excerpted from FORECLOSURE NATION by SHARI B. OLEFSON Copyright © 2009 by Shari B. Olefson. Excerpted by permission.
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