YOYO and WIT: A Look at the Mortgage Meltdown

A lot of what goes for mainstream news coverage continues to spin a decidedly libertarian view of public policy. The business pages typically feature the hyper-individualism of “you’re on your own (YOYO)” (plucky entrepreneurs who turn into gazillionaires and if you have no health insurance, tough luck for not being “responsible” or smart enough have $1000 a month to spend on insurance).

This is not the philosophy of “we’re in this together (WIT)” which is what most of us practice in our daily lives (pay a fair price for what you buy in the market and get treated fairly, pay a fair share in taxes and get a fair deal in good schools, livable neighborhoods, a helping hand in hard times, such as unemployment insurance) For much greater detail check out, All Together Now: Common Sense for a Fair Economy, by Jared Bernstein.

“Ownership society” is classic YOYO spin for dumping ever-increasing risk on individuals–and in the case of mortgage problems-letting the “free-market” run amok.

In a time of housing crunch (The Oregonian reported a few weeks ago that up to 25% of the homebuyers in the Portland area spend 50% of their available income on housing costs, a breathtakingly risky amount of committed costs), the February 3 Sunday Oregonian has a great YOYO story, “Foreclosure woes spreading in Oregon,” Business first page.

This is a bizzaro version of the familiar heart-tugging human interest “feature story.” You know the kind, where you feel some empathy for the subject. Instead, meet some of the least sympathetic “victims” of the housing bust you could possibly find: an out-of-state couple who wanted to flip a Portland condo 5 days after they bought it and haven’t sold it yet, a guy who peddled mortgages to these kinds of investors but who got caught up in condo fever and let his own high-price, high-rise condo go into foreclosure.

They may be great folks, but implicitly, this story is that these “victims” are as deserving of your concern or a tax bail-out as the imaginary “welfare queen” in her Caddy. Subtext: No real people with mortgage problems here. No renegade financial institutions. No enabling free market deregulation. Just some rich speculators who took a risk on investment properties, lost and now YOYO.

In fact, the last anecdote is about the guy is now a winner. He’ll make a bundle selling foreclosed homes for lenders . Sure, he had to take a few years off when foreclosures fell, but he chilled out, taking “six cruises." The market will now reward him. YOYO,

But what about the those 25% of homebuyers who are in way over their heads with 50% of income tied up in housing costs? It’s not clear whether the Oregonian was counting only mortgage payments and rent for its “housing cost” number.

Generally, to be a meaningful index of economic pressure, housing “costs” should include all basic shelter needs–such as utilities for space and water heating, cooking, storing food. That’s easily about $200 per month in the Portland area for gas and electricity (or heating oil in about 10% of homes).

Using an index developed by the Demos project at Brandeis University, a middle class household has one high risk factor for slipping into real trouble and crisis if housing costs are greater than 30% of available (after tax) income. Other risk factors are having anyone in the household without health insurance and having less than than 3 or 4 months of savings set aside for emergencies. Demos concludes a middle class household has a high risk of tumbling into disaster if it has 3 such risk factors. They have a pretty expansive definition of “middle class” – 2 to 6 times the federal poverty level (or currently about $40,000 to $120,000 year for a household of 4).

Looks like a lot of Portlanders have at least one big risk factor already. In Portland, the median price of a home is currently around $275,000. Even if you paid some money down, and have a fixed rate mortgage, your housing costs are around $28,000 a year (mortgage + property tax + utilities + insurance).

In order to be at a “secure” 30% of income and avoid the housing cost risk factor, a household of 4 in a median-priced home needs an after tax income of $80,000! Yet the median household income in even our wealthiest enclaves is about $60,000.

Sure, these are averages and medians, but don’t think the mortgage crisis is about that get-rich-quick couple or guys who package mortgages. It will end up hitting your friends and neighbors, even in solidly middle income areas.

Will the Oregon Legislature do anything to go after the systemic problems or can we expect some grandstanding and standing by?