A Fighting Chance

Although these loans often erode the family’s primary foundation for developing financial stability, and they increase the risk of foreclosure, pundits and industry leaders nonetheless have widely encouraged people to take out these loans. For example, former chairman of the Federal Reserve Alan Greenspan discussed the many benefits of homeowners tapping their home equity and the subsequent boost to the economy. See, for example, “Remarks by Chairman Alan Greenspan,” March 4, 2003, http://www.federalreserve.gov/boarddocs/speeches/2003/20030304/; also Alan Greenspan and James Kennedy, “Sources and Uses of Equity Extracted from Homes,” The Federal Reserve Board, March 2007.

One advertising agency concocted the slogan “Live Richly” for Citi, which was designed to encourage people to take out home equity loans. See Louise Story, “Home Equity Frenzy Was a Bank Ad Come True,” New York Times, August 14, 2008. In my own work, I tried to discourage borrowers from putting their most important asset at risk by engaging in these types of loans. In The Two-Income Trap we argued, “Refinancing their homes to pay down other bills is the single biggest mistake made by homeowners in trouble” (168). In All Your Worth we noted that according to the data at the time, one in eleven families bet their house and lost, as they ended up in foreclosure. Elizabeth Warren and Amelia Warren Tyagi, All Your Worth: The Ultimate Lifetime Money Plan (2005), 150. Sadly, the odds only worsened in the years that followed.

home prices caught fire: “Seventy-one metro areas, accounting for 39 percent of all single family housing value, were deemed to be extremely over-valued.…” “House Prices in America,” Global Insight/National City, June 2006. See also Martin Wolk, “Housing ‘Bubblettes’ May Be Rising,” NBC News, February 14, 2005.

speculators jumped into the game: “Real Estate Speculation Raises Prices, Concerns,” Associated Press, June 20, 2005. Also Paul Krugman, “Running Out of Bubbles,” New York Times, May 27, 2005.

more than their homes were worth: Jonathan Stempel, “One in Five Homeowners with Mortgages Under Water,” Reuters, October 31, 2008.

most valuable asset: “Owning a home has long been the most accessible way to build wealth in the United States.… The wealth acquired through homeownership has been a key source of economic mobility and financial security in this country for decades.” The loss of middle-class wealth due to the housing crash has been dramatic.” M. William Sermons, “The State of Lending in America.” “Many families have experienced a precipitous loss of wealth because of the housing crash, which was sparked by high-risk subprime mortgages … [there has been] a loss of wealth by households of all races and unprecedented wealth disparities between white households and African-American or Hispanic households.… The impact of these economic circumstances has been devastating for the typical American household.” “… the Pew Research Center used different data sources and found much larger declines from 2005 to 2009 in net worth for African-American (53% decline) and Hispanic (66% decline) households relative to white households (16% decline).” M. William Sermons, “The State of Lending in America.” See also Ylan Q. Mui, “Americans Saw Wealth Plummet 40 Percent from 2007 to 2010, Federal Reserve Says,” Washington Post, June 11, 2012. See also Jesse Bricker, Arthur B. Kennickell, Kevin B. Moore, and John Sabelhaus, “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin 98, no 2 (June 2012). Binyamin Appelbaum, “Family Net Worth Drops to Level of Early ’90s, Fed Says,” New York Times, June 11, 2012.

committed a whopping $172 billion: TARP was passed on October 3, 2008. Within a month of TARP’s passage, Treasury had pledged $172 billion to a total of fifty-four banks. See David Goldman, “Where the Bailouts Stand,” CNNMoney, November 12, 2008.

In the month of October, Treasury had disbursed $115 billion to eight top Wall Street institutions, including, among others, Bank of America, Goldman Sachs, JPMorgan, and Citigroup. See “Bailout Events for October 2008,” ProPublica, October 2008, http://projects.propublica.org/bailout/events/list/2008/10. By November 21, Treasury had given an additional $36.5 billion to large and medium-sized banks, including, among others, U.S. Bancorp and Capital One, and had committed at least $20.5 billion more to helping out the banks. See “Bailout Events for November 2008,” ProPublica, November 2008, http://projects.propublica.org/bailout/events/list/2008/11.

halls of Treasury as “Citi-weekend”: On November 24, 2008, Treasury struck a deal with Citi whereby it would invest $20 billion in Citi preferred stock and guarantee $306 billion of its assets. See Dan Wilchins and Jonathan Stempel, “Citigroup Gets Massive Government Bailout,” Reuters, November 24, 2008.