American Dream stretched too thin

I had an adjustable-rate mortgage, once. I fully understood that after two years, my low come-on interest rate would be reset at a more realistic level. But when the two years passed — Powee! It was still something of a shock.

The current mortgage crisis is about aggressive lenders, reckless borrowers and cheated investors. It’s also about psychology. The adjustable-rate mortgage has been the perfect enabler for an instant-gratification society.

The EZ early payments let homebuyers borrow more money to buy more house than they could with a stodgy fixed-rate mortgage. Thus, they spare many the chore of saving for a solid down payment. As for the rate spike on the horizon, well, tomorrow is another day.

The folks who made the loans grabbed quick profits by collecting big fees upfront, then dumped the risky mortgages onto securities sold to investors. The rating agencies, paid by the securities companies, bestowed their blessings on these iffy investments.

One can sympathize with many of the borrowers now losing their homes. Some are sinking under the weight of subprime mortgages with punishing terms. Some suffered a reversal in fortune — perhaps a job loss — that dried up the cash flow needed to meet monthly payments.

But there were also lazy borrowers who didn’t read the contract. There were magical thinkers who assumed that home values would always rise. And as always, there were greedy people who wanted a house they couldn’t afford and wanted it now.

Stockton, Calif., has become a national leader in home foreclosures. It is an “affordable” exurb, 90 miles east of San Francisco. Many of the mortgages there are subprime.

A story about a Stockton family in trouble shows a luxury kitchen that dwarfs the cooking facilities of some restaurants. Read on. The couple had bought a more modest house a few years earlier but decided to “move up” into a bigger model without waiting to sell their first home. They are now holding two mortgages and an equity loan for remodeling the newer house.

This is the American Dream gone nuts. A big part of the sales pitch is to portray home ownership as the most superb of investments. In truth, the return on residential real estate hasn’t been all that great.

From 1980 to 2005, money invested in the Standard &Poor’s 500 returned an average 12 percent a year, while home values even in the hot-hot markets of New York and San Francisco gained an average 7 percent a year.

Furthermore, explains Thomas Z. Lys, a business professor at Northwestern University, much of the real-estate gains represented mere inflation. And when you subtract the tons of money homeowners spend over the years on property taxes, mortgage costs, plumbing repairs and remodeled bathrooms, the return is even less.

Sure, we can factor in the value of leveraging (you might see your house price go up after putting only 20 percent down) and that people who don’t own homes have to pay rent. But in the end, Lys concludes, the chief value of the house is … as a place to live.

There are sensible responses to the current mortgage crisis — and they don’t include bailing out anyone. First off, let it be a lesson to careless borrowers and investors who didn’t consider the risks they were taking. Second, the federal government should tighten up consumer protections on home loans: Do away with overly confusing or abusive mortgages. Third, everyone should stop hyping homeownership as something that every red-blooded American must pursue.

History tells us that real-estate mania will return. But let’s now enjoy a few years of thinking about our homes as homes.

Froma Harrop is a Providence Journal columnist. Her e-mail address is fharrop@projo.com.