Everyone, well at least everyone I know, loves the movie It’s a Wonderful Life and understands that Mr. Potter is the villain. Unfortunately, off of the silver screen and out here in the real world, Mr. Potter is winning. Below are two sadly compelling examples which are in the process of devastating many of my friends and family.
Mr. Potter would love the way the home equity lines of credit (HELOCs) were designed and marketed. During the draw period, typically 10 years, you can borrow money and pay back just the interest. People were allowed to borrow money until their mortgages reached 95% of the home’s value. At the end of the 10 year draw period, the HELOC is due in a balloon payment. No one has this money, so generally speaking the only recourse of the borrower is to try to combine the HELOC with their primary mortgage and refinance.
While there can be good reasons to have a HELOC, many people I know used it just to manage expenses. So consider that at the end of the 10 year period, there is often no equity left in the house. Furthermore, after the refi process the total mortgage payments usually go up, so the borrower no longer has any equity left in his/her biggest investment, a house, but now likely has a cash flow crisis. And this paragraph describes the best case scenario. If the borrower has had a crisis which damaged his/her credit e.g. a divorce, job loss or health crisis or the value of their home has dropped then foreclosure may be looming.
It’s not uncommon for criticisms to be hurled at people who took on some much debt in their HELOCs, but there are other factors in play. Readers of this website will know that starting in 1980 with the advent of Reagnomics that wages stopped increasing along with productivity. Over the intervening decades the middle class, “the people who do most of the living, working, and dying” has been hollowed out and broken. Viewed from this perspective, borrowing against one’s house to take care of one’s family makes much more sense.
Approximately 50% of all current HELOCs were established in 2004 and 2005. Therefore, all of those balloon payments are coming due. It’s sort of like Uncle Billy leaving the cash in Mr. Potter’s newspaper again.
Mr. Potter would also likely cheer the demise of the pension. This trend took off in the 80s as well. Rather than the defined pensions that our parents received and which created, along with social security, the entire concept of the Golden Years, we got the 401(k). Initially the 401(k) was intended as just another way for the rich to get even richer. With time companies realized that it was less expensive for them to offer a 401(k) to all employees and drop their pension plans and that’s what they did. We were all supposed to get rich.
Except it didn’t turn out that way. The advent of the 401(k) came along with the stagnation of working and middle class wages. With time workers had to divert more and more money to gas, food, and lodging and their 401(k) plans languished. So now, for those of us approaching “retirement” there is no pension, no home equity, and a paltry 401(k) balance. There won’t be any Golden Years for us, we will work til we die. Here again, this is likely what Mr. Potter would have wanted for his “thrifty working class.”
In a perfect world (for reference google Scandinavia) there would not be employer sponsored pensions just as there should likely never have been employer sponsored healthcare. While sometimes all of this gets me a bit depressed, I am often heartened by remembering that we can fix all of this. We can still listen to George Bailey instead of Mr. Potter. Nothing prevents us from establishing a national health care system and expanding social security, except that people keep voting for Mr. Potter on Election Day. Someday they will stop.