Loan Delinquencies Spread to Other Forms of Consumer Credit

The economic downturn and home mortgage crisis is being felt in other areas of the banking industry, and the result may be a second wave of bank failures, this time in regional and local banks. In an article entitled, “New Crisis Threatens Healthy Banks,” the Washington Post reports that delinquencies are up in credit card payments (which had been previously reported), home equity loans, and—most strikingly—construction loans (see the Post graphic below). Many smaller banks that avoided the subprime mortgage market are, nonetheless, mainstays of the home equity and construction loan business in their areas. As a result, this spread of delinquencies may lead to problems for these smaller institutions.

Although we were not hearing anything about it at the time, this graph also shows that delinquencies in construction loans actually led the foreclosure crisis. The uptick in construction loan delinquencies appears to begin in mid-2006, which is before the current crisis began. In contrast, the consumer aspects of the crisis hit a year later in mid-2007, just as foreclosures began to soar. The graph below, which comes from econoday.com, shows that mortgage interest rates bottomed out in 2005 and and began to rise in late 2005 and early 2006. New home sales fell accordingly, and delinquencies in construction loans followed.

All of this dramatizes the powerful role of the real estate market in stimulating our current economic difficulties. Of course, once these real estate trends got the ball rolling, our sleeping problems with consumer debt (home equity loans & credit cards) just made matters worse. Much worse.

How Do We Change Values?

On Tuesday of this week, David Brooks had a very good column called “The Great Seduction” about the America’s epidemic of personal debt. The article is based on a new report issued jointly by the Institute for American Values (which concerns itself with marriage and divorce, among other things) and a number of other think tanks, including Demos and the New America Foundation. The report and Brooks’ column make a number of very good recommendations, such as credit card reform, regulation of payday lenders, and programs to promote saving. But at the end of the column Brooks returns to one of his regular themes:

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

He is, of course, correct, but the difficulty is knowing how to change values. We can state our values and identify our chosen virtues, much as Franklin did, but merely calling for a kind of behavior does not always do the trick. Values often follow behavior, rather than the other way around. We acquire many virtues by practicing them. Parents model truthful statements, hard work, and thrift, and they reward us for following their lead. Our modern problem stems from those instances—and there are many—when our behavior is molded by commercial and technological developments, and a new and less virtuous value results.

Take, for example, pornography. Once a very seamy commodity consumed by only the most depraved members of the community. To find it, you had to go into parts of town most people preferred not to visit. Then came the VCR. With the introduction of videocassettes that could be watched at home in privacy, many of the social barriers were removed. Distribution took a further leap forward with hotel and home cable systems, and finally, the internet really brought pornography home. The result is that, despite our highly religious society (compared, for example, to Europe), pornography has become much more acceptable than it was thirty years ago. Jenna Jameson has written a bestselling book How to Make Love Like a Porn Star, and the line between acceptable celebrity and unacceptable celebrity has been blurred. Porn has come out of the closet, driven not by a change in values but by a change in technology. Behavior that is popular begins to appear normal. Today, only child pornography is truly beyond the pale.

So the problem with thrift is that debt is the new pornography. Actually the two have come along together. The introduction of credit cards, 800-telephone numbers, home shopping channels, and the internet have served to eliminate many of the natural barriers to indebtedness. We live in a consumer society that depends on spending and has made it easy to act impulsively 24-hours a day. Popularizing thrift as a virtue is important, but unless we also find ways to encourage virtuous behavior, we are unlikely to demonstrate those values. Brooks’ column—and the report upon which it is based—make many good suggestions, but we also need to acknowledge the powerful effect of the contemporary marketplace on our choices to spend and save. If we can make it easier to show virtuous behavior, the change of values Brooks seeks will follow.

Mortgage Bankers Association: Worst Quarter in Twenty-five Years

According to a new report from the Mortgage Bankers Association, fully 1 in 10 American homeowners are now in foreclosure or behind on their payments. Furthermore, the problems are not limited to the subprime sector but are evident at all levels of the mortgage industry. Many borrowers with previously perfect records are now falling behind on their payments. In the first quarter of this year, 2.47 % of homes were in foreclosure, up from 2.0 % in the previous quarter. The mortgage crisis has not yet hit bottom.

So where is the response? Where is Ben Bernanke? Where is Congress? Where is the President? Bear Stearns was an instant, over the weekend bailout, but when it comes to the problems of everyday homeowners, you're on your own. We’ve got an 800-number for you, but beyond that we’ve got a big nothing.