Everyday Life

Ga Young (Gina) Jeon

Blog post topic: Credit Card Delinquencies Reach Record Level

Author: Yves Smith

                We have stretched our limits. We are finally experiencing the “feared crash” that the finance sector hoped and prayed wouldn’t come.

Hello Reality.

                Smith constructs an analysis from the Financial Times composed on Thursday, February 5, 2009. The outcome has simply been what we had feared, yet foreseen years ago. The whole economy deteriorates as the economy slows down and unemployment increases significantly.  We are now seeing visible proof:

                1. Payments at least 60 days late rose almost half a percentage point last month to a record of 3.75 per cent

                2. Credit card lenders increased “charge off” rates in January by 40 percent than a year ago… and were expected to increase more in the second half of 2009.

                3. Late payments and defaults on credit cards have been closely linked with levels of unemployment, which have risen dramatically.

               4. Rising late payments and defaults on credit card loans would hurt the performance of securities backed by credit card receivables, Fitch said, but downgrades would be limited in the near-term because of lower funding costs.

                5. Securities backed by credit card receivables have rallied in recent weeks because of such lower cost funds

The economic deterioration continues to manifest.

I have constructed an easier model to enhance your understanding of this complex situation.

Let’s take manufacturing for instance:

Manufacturing

Revenue                                                                         ($10)

– (minus amount of $ to produce                               ($2)

Gross Income                                                                 ($8)

= pretax income

Net income

The Bank

(Functions in a similar way)

One of the main sources of revenue for a bank is interest.

Smith says that credit card lending has historically accounted for between 15 and 25 percent of pretax income at JPMorgan, Bank of America and Citigroup, according to Moody’s Analysts expect these businesses to shrink as lenders tighten credit standards and cut credit lines.

So, out of 100% revenue, 15 and 25 percent were from credit card interest; while 75 to 85 percent of the revenue came from loans, mortgages, and much more.

In money terms,

BEFORE:

If there was $100 revenue, credit cards made up an average of $20.

NOW:

If there is $100 as revenue, credit cards only make less than $10 or $15.

OUTCOME:

Not only are credit markets failing, the housing market, and everything else is crumbling as well.

My analysis is that the banks are now experiencing the exhaustion of the market. The credit industry in particular has created this fictitious capital that ultimately caused the bubble to burst. Now, banks, credit companies, housing markets, the government, investors, and many others are trying to clean up the spilled beans. The documents presented in the beginning passage above clearly shows the outcome of the destructive competitive market field. So many people are unemployed, without homes, facing foreclosures, and most importantly, in SO MUCH DEBT! Our complacency has driven us directly into the shackles and chains of the large financial storm that is preparing to swallow all of us as a whole!

Ga Young (Gina) Jeon

Blog post Topic: Quelle Surprise! Credit Card Companies Opposed to Proposed Regulation

Author: Yves Smith

                To whom does the power belong? The tables have turned as the push for power has shifted.

                A continuous imbalance in the financial sector has brought upon greater burden on the financial life cycle as a whole. As a matter of a fact, its creditability was clearly on the risk of becoming endangered. Foreseeing the detriments of their choices the credit card companies continued to savagely eat away at everything that they were able to lay their hands on. It was a war where every weapon of destruction was used to destroy its enemy; in our case, hidden charges, bumped interest rates, “gotcha” fees, and much more. This destructive pattern continued to wrap its complacent citizens under their web. It continued on and on… eventually showing some of the financial sector’s major weaknesses. It was time for the government to intervene. “Gee, I wonder what took them so long.”  In every effort to construct a method in which they could save the financial sector, the government began “imposing stringent controls” ( so they say…..).  I’ve come to reach the conclusion that ultimately, money is power.. and those who have it have full leverage to control. That being said, changes and implements made by the government that seemingly targeted the credit issuers actually targeted low and middle class consumers.  But it became a different situation this time, because those who have once held hands realized that the downfall was soon to come. Smith mentions the MBNA bankruptcy law that was imposed on 2005, which actually drained another $100.00 out of the people who filed for bankruptcy, making another profit of $85 million per year.  He said that this time, maybe the credit card companies will be at their knees giving back the money collected during this time frame. This way, the government is hoping for a more strict regulatory policy on credit lenders from lending carelessly to those who cannot afford it.

                In addition, the frequent flyer offers that the credit card companies have promised are very close to dying due to the imbalance of oil prices. (Many customers who were in for this treat will no longer stay.)

                Smith quotes the New York Times (June, 2008) that now card holders are beginning to recognize their inability to pay back such large amounts of money that have accumulated over time from fees and high interest rates that the financial industry received a smack in the face. Now, they foresee many more regulatory changes on which they had never enforced before.

                Before, credit card companies and banks literally pulled interest rates and fees out of their butts. However, this is the reason that our economy has plunged. Many have been pushing for government regulations in which the government would spell the specific regulatory standards for all the banks. Smith mentions that the two regulatory branches: the Office of Thrift Supervision and National Credit Union Administration (Federal Reserve) to formalize the legislation and bring these measures to the table.

                The few solutions have been at hand; (and Smith quotes):

                                1. The “double-cycle” billing, in which interest is charged on some already repaid debt, and all would extend the time required.

                                2. Lenders may only increase interest rates if payments are more than 30 days late.

                                3. Protecting younger consumers by not offering loans to them, unless they are fully capable of paying it off.

                The problem is recognized, but the credit companies refuse to comply.  In the following, I will discuss a few of the credit card company’s argument against legislation, and express my reasoning to why they are flawed: (the following content will be directly quoted followed by my personal opinion.)

                1.  Capital One Financial Corporation testified in House hearings in March that “it would be unwise-especially at this time- to enact broad legislation that sets payment formulas in statute, redefines critical product features and limits the tools of risk management for consumer credit.”

                My analysis:

                Long-term solution is not generally sought after, but regulation is needed in order to stabilize the financial sector as a whole. Because we need consumers to be stable just as much as any credit card company, it is necessary to promote safe market conditions; not risky ones. Surely, the term “risk free” does not exist in our market today; however, the term and conditions of “low risk” must come into play, even if it means short-term losses on the bank’s behalf. Thus, I feel that is the best, if not the wisest of all times to enact laws that would promote stability.

                2.  Ken Clayton, senior vice president for card policy at the American Bankers Association, in Washington, contended in an interview that “regulation can have unintended consequences, including reductions of popular low introductory-rate balance transfer offers and higher prices for prime borrowers.” Fewer balance transfer offers could stifle job creation by entrepreneurs who use credit cards to borrow at the lowest possible cost.

                My analysis:

                In response to this, firstly, we would not be feeding off of fictitious capital as we are now; and secondly, regulation will only bring about “unintended consequences” if the federal government leaves margins for the banks to make unstable market decisions of their own. Nevertheless, credit card companies will be making money; and in enacting these regulations, we will see an overall change in the stability of the market.

( A Different Perspective)

                On the contrary, a professor at the University of Maryland and a bankruptcy expert, called lenders’ warnings about unintended consequences “severely overblown.” Nothing in the proposed legislation would prevent the card industry from continuing to be profitable, Professor Ausubel said: “One can even tell stories where it enables more consumers to emerge from one financial trouble without declaring bankruptcy, so collections might go up and profits improve,” he said.

BUT. . . Those Stinky Selfish credit card companies are SNEAKY SNEAKY!!

                Adam J. Levitin, an associate professor of law and credit specialist at Georgetown University, said the proposed rules don’t go far enough. He continues by saying that credit card companies will find a way out of it. Here’s the funny metaphor he uses: he says it becomes a game of Whack-A-Mole, where they put the kibosh on one, the industry finds another way out.

Mr. Levitin continues by saying that they impose certain regulations upon them, and then let them compete their hearts out. The flaw is here. Where they don’t propose enough legislation upon the banks and credit companies… and they DO NOT intend to do so any time soon.

Ga Young (Gina) Jeon

Blog Post: 2005 Bankruptcy Law Changes Have Worked to Detriment of Credit Card Companies

Author: Yves Smith

            The ongoing battle was coming to reach its stretch point. Smith addresses some of the many reasons for the credit industry and its suffering debtors.

Seemingly, the monstrous banks and its partner, politics have learned to function in any way possible to keep themselves alive, while the rest of the citizens suffered helplessly at the cost of their luxuries. The law passed in October, 2005 proves my hypothesis to be true. After months of effective lobbying, the result of this law became largely favorable to the credit card issuers.

“MBNA estimated that passage of the bill would enable it to collect an additional $100 per month per bankrupt, which would increase its profits $85 million a year (Smith, 1).”

Smith expresses that the credit card companies took these “newly enhanced rights (1)” to lend more money (fictitious capital) to the ones who were bound for bankruptcy as a means to extract every last penny out of them, and to increase their own profits.

This was the very seagway into the credit card’s deterioration process; and most certainly, the credit crisis we see today. Smith states the following reasons:

1. Credit cards lenders expanded their business with hope to somehow make fictitious capital become real in their favor, despite the foreseen crisis.

2. Irresponsible borrowers continued to engage in conspicuous consumption in hope of fulfilling the American Dream, which ultimately shackled them into invisible enslavement to the banks and work.

3. Credit Card companies “milked every dollar out of their preferred customers,” ( the ones who carried some balance, and make some payments) while raising their fees and interest rates.

4. Some banks, like Amex, use methods to clear out their risky customers; ofcourse, in favor of their status and safety.

Smith constructs a conclusion that the crisis was foreseeable. Smith says that:

“Credit card companies have purposely dumped layers of fees and excessive interest rates on their borrowers. Instead of addressing the consequences of high, complex, poorly understood credit card costs, though, the high default rates were simply explained away by declaring defaulting borrowers as deadbeats. Now that there won’t be another round of bankruptcy reform that could be sold as salvation, credit card lenders will have to come to terms with the fact that their practices were actually detrimental to their own financial health (Smith, 3).”

My analysis:

Metaphorically, we can think of it as the environmental deterioration we are experiencing today. We’ve abused and exhausted so much of nature’s ecosystem that we are now experiencing its downfall. Similarly, in attempt to win in this market field, credit card companies have exhausted the consumer’s wallet, and literally pushed them to their limits. Now, the whole market is trapped as a consequence of everyone’s mistakes.

I believe that everyone wants to know more about staff that ruined our economy. Here is one called Credit Default Swaps which I will explore more using an article called Credit Default Swaps: The Next Crisis?

Credit Default Swaps (CDS) are second cause of the credit hurricane in financial crisis. Credit Default Swaps, which were invented by Wall Street in the late 1990’s, are financial instruments that are intended to cover losses to banks and bondholders when a particular bond or security goes into default – that is, when the stream of revenue behind the loan becomes insufficient to meet the payments that were promised.

“CDS were seen as easy money for banks when they were first launched more than a decade ago. Why? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economy times.”

Even though CDS appear to be similar to insurance, it is not a form of insurance.  Rather it is an investment that “bets” on whether a “credit event” will or will not occur.  CDS do not have the same form of underwriting and actuarial analysis as a typical insurance product rather is based on an analysis of the financial strength of the entity issuing the underlying credit asset (loan or bond).

“(…) Commercial banks are among the most active in this market, with the top 25 banks holding more than $13 trillion in credit default swaps – where they acted as either the insured or insurer – at the end of the third quarter of 2007”

There are no regulatory capital requirements for the seller of protection. Credit default swaps can be written by just about anyone, but usually it’s insurance firms or investment banking house. American International Group (AIG), the large insurance corporation had bought many CDO and had written many CDS to protect investors against default of the CDO. By purchasing the CDO, AIG has eliminated the need for insurance contracts against their default, thus reducing AIG’s risk of needing to make insurance payments.

“AIG recently reported the biggest loss in the company’s history largely due to an $11 billion write-down on its CDS holdings”

Whether greater regulation would have prevented this crisis isn’t certain, but AIG was allowed to take these risks in the absence of regulation. Because the “credit-default swaps” it sold as a form of insurance that were not regulated, AIG wasn’t required to set aside money in reserve to cover potential losses from the mortgage-backed securities. The investment strategy was based on the belief that housing prices would only go up. When housing prices fell, there was nothing to cover the losses.

When you look at fashion magazines today you see that there is more emphasis on luxury high priced items that are equated with quality. However, a lot of clothing has a dark side to it. Now not only do the rich have access to the luxury fashions but so do the middle class. The middle class has access to these fashions through credit cards and at the expense of exploiting laborers.  I read an article called “MEET THE ECOSTYLISTS” by David Hayes and it focuses on how to stay up with trends while keeping a clean conscience.  It goes into the uprising popularity of “green, eco-friendly clothing”. But one might wonder are companies also selling “green” to us?  If going green was not going to be profitable in any way for the company I doub’t they’d be doing it. According to “MEET THE ECOSTYLISTS”:

“Ethical fashion is a broad catch all term for  clothing and accessories that tick one or all of the following criteria: items from a traceable chain made at a factory that treats it’s workers fairly; uses fabrics created from sustainable sources; is organic and Soil Association approved; uses dyes and finishes that don’t harm the enviromnent and does not create a huge carbon footprint getting to the shop rail.”

In my opinion this definition is very broad.  There is something called “greenwashing” and that means when companies advertise themselves to be more green than they really are.  If the fashion companies strictly cared for the environment and weren’t trying to make a profit on “go green”, then why do they need to label their products? Its because they are marketing it so that people can feel better about buying their things. It seems like more of a trend because even Wal-Mart is jumping on the “green” bandwagon however according to another article called “Is Wal-Mart going green?” (http://www.msnbc.msn.com/id/9815727/) Wal-Mart refuses to raise wages for labor groups that are below poverty level. This tells us that they aren’t addressing all aspects of going green. So what concerns me is the reason behind why the companies are going green. Fashion has become mostly about following trends and spending money instead of it being creative and individual. In the article it also mentions free alternatives to consuming really expensive “green couture”.  Websites such as freecycle.com allow you to exchange items or get them for free. If you ask  me this is the most “green” fashion I’ve heard of. However very few people know of it.

After reading the New York Times article “Steroid Report Cites ‘Collective Failure’” by Duff Wilson and Michael Schmidt I began to wonder to myself was releasing the Mitchell report a smart thing for the game?  There are names on that list that changed peoples lives forever.  Once your name is on that list the image that you had created throughout your entire career is wiped clean.  What stood out to me in the article was that not all players wanted to cooperate with Mitchel.  One would make the infrence that if you did not speak to Mitchel then you would be guilty one way or another.

“Of all the active players tied to the use of steroids and human growth hormone, which are illegal without a prescription and banned by baseball, only Jason Giambi of the Yankees cooperated with Mitchell’s 20-month investigation. The Toronto Blue Jays’ Frank Thomas, widely known for his antisteroids stance, was the only other active player who agreed to talk with Mr. Mitchell’s investigators.”

During this groundbreaking report Brian McNamee describes in detail how he and Roger Clemens would train and how he would inject steroids and Human Growth Hormones into his body.  Which Clemens adamantly denies.

“In the report, Mr. McNamee is quoted describing how he injected Mr. Clemens with illegal drugs at least 16 times from 1998 through 2001. Mr. Clemens, 45, adamantly denied the report’s accusations of his use of steroids and human growth hormone, his Houston lawyer, Rusty Hardin, said in a telephone interview Thursday night. Mr. Hardin said he had been told Mr. McNamee was pressured to give up names or face prosecution by the I.R.S. Special Agent Jeff Novitzky, who has led the Bay Area Laboratory Co-Operative and Radomski investigations.”

What makes this document a bit questionable is that Mitchell admits that his research was inhibited without the power of the government behind him.  He was not allowed to use any sort of subpoena to reprimand any of the accused.

The purpose of this document was to recognize the failure in the system and to fix the problem before it got much worse to the point of no return.

“There was a collective failure to recognize the problem as it emerged and to deal with it early on,” Mr. Mitchell said. He recommended that the players on the list not be disciplined, but instead said that baseball needed to “look ahead to the future” and establish stronger testing.”

Since Mitchell’s report many more players have been disciplined for using steroids.  The imperfect Mitchell report was the beginning of the end of the steroid era.  With more knowledge than ever before Major league baseball has been cracking down on steroid use.  Hopefully in the next few years it will be gone for good.

In my academic career and path to understanding the American financial system and the economy in general there was a question that had always perplexed me. I have gained a better understanding of why this is and in my research for my paper I came across this great article from the radical perspective site called “Financial realities after the dollar” by John Clegg. How is our beloved country considered to be the biggest superpower in the world despite our enormous debt? Or perhaps a better way to phase the question is why is America so comfortable with a debt of $12 trillion and growing. This careless attitude has contributed to the credit dependent lifestyle of everyday Americans as well. Our society is sold on the predominantly reigning belief that debt is “okay”. I mean if my government has a liability of $12 trillion why can’t I buy a house on $30,000 salary, hell its become the American way of life. Plastic money has become so readily available to everyone, and Average Joe is comfortable with making the minimum payment just like his government respectively.

The core of this problem is the overwhelming strength of the American dollar. America rose from the ashes of WWII as the richest country in the world and they didn’t waste any time in establishing a stronghold over the rest of the world.

The US emerged from the second world war as the richest power. Britain was weakened by debt; France was exhausted; the Soviet Union had been bled dry. US dominance was formalised by the Bretton Woods accords, named after the New Hampshire town where the new financial rules were laid down in July 1944. These affirmed the pivotal role of the dollar (in place of sterling) and created the two institutions that became Washington’s wings: the International Bank for Reconstruction and Development (IBRD, subsequently part of the World Bank) and the International Monetary Fund (IMF). The Marshall Plan for Europe was funded in dollars to consolidate the strength of the dollar and guarantee opportunities for US producers.

China is the biggest holder of U.S. government securities followed then by Japan and Russia respectively. The beauty of the dollar is that it has entangled these countries to the point where they can’t be indifferent to the fate of the U.S. China holds over two trillion dollars in their reserves and if the U.S. government were to collapse, China’s wealth would be diminished to worthless pieces of paper. And to be quite honest thats what the dollar really is. It’s just a piece of paper! Back when the gold standard was around, an American Dollar could be converted into gold that was held by the reserve. Therefore cash was an asset backed security. Today the only thing backing the dollar is the good will of the American government. So if tomorrow China came to claim their debt needless to say there would be a shit storm. China has to be careful because the prosperity of the dollar is closely tied to the prosperity of the global economy. This is also the reason that China recently proposed the implementation of a new global currency that would not be enslaved by the ups and downs of the U.S. economy.

The government believes that it can casually handle debt and that is why an unrgulated free market system can work so potentially well here (Notice that i said “can”). So the whole idea of Capitalism is based on excess spending, people making money and pumping it right back into the economy. The more you make the more you spend, and eventually you start spending even more than you make. This is not the case globally however. In the case of a country such as China, the personal savings rate astronomical.

But it takes more than increased purchasing power to drive consumption: some of this increase is squirreled away (China has the highest savings rate in the world) as families put money aside for sickness or retirement. So the government must increase incomes and build the current embryonic system of collective social security into something effective.

However to a certain extent a high savings rate can hurt the domestic growth of an economy. But the point of this comparison is not to suggest that Americans should save 40% of their income, rather my point is that they should save at least a little. The savings rate in this country has lingered around 2 to 3% and in 2005 that rate dipped into the red zone. That’s right; the people of America actually had a negative savings rate. Not only had we maxed out our existing resources we collectively went ahead and spent money we didn’t even have. In essence consumer spending also serves as a hedge to inflation where the interest rate will fluctuate in accordance with the demand of money. Had a weaker economy suggested a budget scale in line with ours their economy would collapse overnight.

In relationshp to my paper, “Credit as a life style” the overwhelming power of the American dollar has contributed to a way of life that revolves around credit and deficit spending both federally and personally.

This was an article i read for my paper on education, written by Jack Gerson and Steven Miller, from an independent newspaper which tackles the idea of privatizing education in order to help improve the standard of education, especially here in new york. The article was based on a commission given in December 2006 by the New commission on the skills of the American workforce who are trying to push for the privatization of education. This campaign has actually generated support from individuals such as Bill Gates who in fact helped fund this report given by the commission. This idea of privatizing education is a very serious and important one, especially as it is getting more attention and support. Supporters argue that by privatizing education, the overall value and standard of education would rise and therefore translate to a better educated workforce that can compete in global markets. But as we seen with private health care systems and private businesses, the only individuals that generally benefit from this are those that can afford it.

Tough Choices or Tough Times,” published by the National Center on Education and the Economy, is the definitive corporate statement on public education. The report calls for, among other things, making all public schools into “Contract Schools”; ending high school for many students after the tenth grade; ending teacher pension plans and cutting back on health benefits; introducing merit pay and other pay differentials for teachers; and eliminating the powers of local school boards by turning “public” schools to private companies to be regulated at the state level. These measures would cut the heart out of public education, severely penalize students and deal a heavy blow to teacher unions.

So the proposal is to massively overhaul the education system currently in place. This means created stricter criteria to be met by both students and teachers. But what i don’t understand, is how do they expect such a plan to work if they are also severely punishing teachers, and taking away many of the benefits of teaching. As many of us may be aware of, there is an increasing shortage of teachers, especially highly qualified ones. Such as overhaul would seem to deter individuals from wanting to teach. I could understand wanting to penalize students for lack of performance. Many young individuals these days aren’t pushing themselves to perform well academically, but it is also important to assure that student get the help and attention they need in order to do so.

 First, the role of school boards would change. Schools would no longer be owned by local school districts. Instead, schools would be operated by independent contractors, many of them limited-liability corporations owned and run by teachers. The primary role of school district central offices would be to write performance contracts with the operators of these schools, monitor their operations, cancel or decide not to renew the contracts of those providers that did not perform well, and find others that could do better. … The contract schools would be public schools, subject to all of the safety, curriculum, testing and other accountability of public schools.

So schools would basically be run as private corporations and not have to deal with much regulation by local districts and boards. This sort of deregulation is what led to many of the problems faced in the current financial crisis. Many of the corporations weren’t given much oversight and were allowed to run “freely” leading to massive problems in the long run that these businesses never saw coming. Such a situation would inevitably happen with these privatized schools.

The significance of the report is that the march toward privatization of public schools is now completely out of the closet. Evidence of this shift is already seen across the nation where the public schools of New Orleans were almost completely privatized, the mayor of Los Angeles favors charter school corporations and New York City Schools Chancellor Joel Klein sits on the (private) “Skills Commission”.

The privatization of public education already results in the transfer of tens of millions of dollars in public assets into corporate hands without a discussion of compensation or, still more fundamentally, whether society should allow public education to fall into private, corporate hands.

So this shift towards privatization of education is slowly occurring with instances all over the country. Whats frightening is that there doesn’t seem to be much public outcry over this happening as i feel individuals don’t think that such a thing would happen in this country, where not all individuals would be given access to education. Corporations are playing an increasing role in the funding and accessibility of education and this trend seems to have no end in sight. Public schooling was used to combat child labor, but what will happen when only the rich can afford to get an education. A scary thought indeed.

My research paper is about the general American dependency on credit has resonated into normally accepted lifestyle. Post WWII America has been looked on in fascination and envy by the rest of the world mainly because the opportunity to rise from gravel to marble is entrenched into our social fabric. So if you find yourself on the outside looking in you see a world where the growth potential is unlimited, and popular sovereignty reign over socialism and glass ceilings. Of course once you become a member of the elite club that is America you begin to see the glaring deficiencies. The dream comes at an expense that only a “few” incur, in other words one man is only rich because another one is just that much poor. Unfortunately the American culture has become one in which a person is judged by the standards of a materialistic society. So what follows is a constant cycle of redefining needs and wants. I came across the article “Chasing the American Dream” by Larry Kaagan in which he explains the phenomenon that is the American Dream.

How have the dramatic economic developments of the past decade transformed the American ideals of opportunity and self-fulfillment?

The answer is quite complex, and it would take a vigorous historical analysis to map the changes in the American lifestyle but I might be able to give it to you the ten dollar version. At the beginning of the 19th century the American dream followed the path of something along the lines of Maslow’s hierarchy of needs. Aside from civil rights, Americans craved for upward mobility, equity, home ownership, and a comfortably lifestyle.  After the Great War the stock market offered Americans a get rich quick scheme, as millions of people invested their money not knowing what they were investing in which led to the catastrophe we now know as the Great Depression. At which point the American Dream was to just be able to survive. The point being is that the Dream is not written in stone, rather it is a manifestation that is subjectively transforming as the world changes.

It was post WWII when the dream began to truly evolve. There was a flurry of economic activity coupled with low unemployment which led to a prosperous economy. The extension of credit became easy to come by, and societal standards were on the rise. You were defined by the things that you owned. That’s why the need for a car turned into a couple of luxurious cars, a regular home to a mansion, things to a lot of things. That is also the era in which marketing strategies began to adapt to the information revolution.

And the Dream has been leveraged as a powerful marketing tool, to sell everything from cigarettes to prefab houses to political candidates. It resonates in marketing and advertising in ways that are so ingrained as to be barely detectable.

So the problem is how far is Corporate America willing to go to sell us a fantasy. The answer is the recession we find ourselves in. At the heart of this problem is the credit crisis, and even the financial system has really collapsed because unworthy borrowers are unable to handle their end of the bargain. But perhaps the problem is not the people who spend more than they have, but the dream merchants themselves. The people that have worked so hard to make sure that Average Joe is stuck in a credit battle for his entire life.

In an era controlled by the information revolution the American Dream is constantly evolving and is therefore contributing more and more to the deterioration of a reasonable lifestyle. It is inappropriate for us to faithfully believe that we can keep spending money we don’t have and at the end we’ll get away with it.  It is time to fight back against the people pushing on us a material lifestyle that comes at our expense.

The face of the American Dream at the beginning of the 21st century is decidedly different than that of fifty years ago. It’s a weathered face, with lines of experience. But no matter how it ages, it seems to retain one aspect through thick and thin. It still seems to have a smile on it.

It is our job as American to keep the real American Dream alive, and that dream is not a get rich quick scheme.

I thought most of us would like to learn the history of mortgages and I reasearch little bit and learn all this about the mortgages. History of home mortgages go far back . Even thought  this system is pretty old , the basics have never changed – the real estate  had hight value  for decades and it made very hard to own for most people. So the only way to buy property is to borrow money. And that’s what they did as far back as the year 1190.

Mortgages started in “merry old England”

The beginnings of a mortgage system have been found, as mentioned, as early as 1190. English common law included a law that would protect a creditor by giving him an interest in his debtor’s property. According to this law, the mortgage was a conditional sale. Although the creditor held title to the property, the debtor could, in the event the debt wasn’t paid, sell the property to recover his money.The history of the actual word “mortgage” is very interesting. In the word “mortgage”, the “mort”- is from the Latin word for death and “gage” is from the sense of that word that means a pledge to forfeit something of value if a debt is not repaid. So mortgage is literally a dead pledge. It was dead for two reasons, the property was forfeit or “dead” to the borrower if the loan wasn’t repaid, and the pledge itself was dead if the loan was repaid. Here’s another interesting piece of trivia: originally, ownership rights extended from the center of the earth to the sky. Of course, now they’re generally limited to surface rights only.

Mortgages came to the Americas

As pioneers moved from Europe to settle in America, they brought their systems with them. As land ownership increased, so did the need for mortgages; so much so that by the early 1900s, they were already widespread and readily attainable.However, not everybody could get a mortgage. In those days, those seeking to buy property were often required to pay a 50% down payment on a 5-year mortgage. So, to buy a $10,000 house (wouldn’t that be nice today), the borrower had to have a $5,000 down payment and pay interest for 5 years. At the end of that 5 years, the unpaid (and unchanged) balance of $5,000 would have to be either paid or refinanced.This system continued through to the Great Depression, when lenders had no money to lend, and borrowers had no money to pay. The whole system collapsed with thousands of foreclosures. Mortgages were just not available.

Franklin D. Roosevelt’s New Deal was a established to help  consumer

Roosevelt’s election as President of the United States brought with it a turn towards a more consumer-friendly nation. He wanted to stimulate the economy by making it easier for people to buy. His government introduced laws and institutions designed to make this happen. Under these new laws, the securities and banking industries were kept under tight supervision, which in turn revolutionized the way mortgage loans were structured and made available to average Americans. In 1934, the Federal Housing Administration (FHA) was created to insure mortgage lenders against losses from default. Now that the risk had been taken away from them, lenders were more willing to give people mortgages. The FHA also developed the 30-year fixed-rate loan program, providing homeowners lower payments and more stability. So the system was working. However, lenders didn’t always have enough money to lend. And loan terms and interest rates were set according to the local economy, which varied around the country. More money, and a more consistent plan was needed.

Fannie Mae

In 1938, to make this money available, the government established the Federal National Mortgage Association (FNMA), better known as Fannie Mae. It bought FHA-insured loans and sold them as securities on the financial markets. This kept the pool of mortgage-lending funds full, in effect, creating the secondary mortgage market.Another advantage of Fannie Mae was the introduction of more fair and efficient mortgage-lending practices. Now that lenders were going to a central source for their money, loan terms, interest rates and underwriting guidelines became similar. And lenders had to follow Fannie Mae’s guidelines and restrictions if they wanted to sell their loans to the secondary market.

After World War II

World War II dramatically changed the mortgage scene. War veterans were coming home and entering the workforce. They became avid consumers who wanted to buy – the economy boomed. And with it, so did the demand for mortgages. In 1944, the Veterans Administration, in a similar program to the FHA, was given the right to guarantee mortgage loans made by private lenders, but this time, to veterans. This program enabled veterans and active military personnel to buy homes without making down payments. The demand for housing was incredible. This triggered a massive economic boom which was heard far into the real estate market. The mortgage industry had come a long way towards becoming efficient and stable.

In 1938, the Canadian government, not to be left out, introduced the National Housing Act (NHA). In 1954, they followed the United States’ example by insuring mortgage loans. The Bank Act was also amended to allow Canada’s chartered banks to lend money for mortgages. Everybody was recognizing the growth the housing market was contributing to the economy.Then, throughout North America, as baby boomers entered the workforce, including women, double-income families became the norm. They wanted larger, more expensive homes to fit their income and lifestyles. More mortgages were needed.So in 1970, U.S. Congress chartered the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac, to increase the supply of mortgage funds available to commercial banks, savings and loan institutions, credit unions and other mortgage lenders, thus making more funds available to more Americans.

Mortgage lenders and more

In the 1950s and 60s, most mortgages were 20-30 years. However, in the 1970s, interest rates rose rapidly, and the system had to adjust. Mortgages were reduced to 1, 3 or 5 year-terms, although even the 5-year mortgages were rare in the early 1980s when interest rates climbed to more than 21%. By 1998, the 5-year mortgage rate had fallen to an average of 6.99% and the 1-year rate to 6.5%. Banks, forbidden to lend mortgage money before 1954, had written about 63.6% of the more than $381 billion worth of mortgages that were outstanding in the third quarter of 1998.So you can see the amount of money floating around in the mortgage industry today. And with that amount of money at stake, you can understand why the credit business is so important – for both sides. The credit bureaus monitor your credit report; you monitor the information the credit bureau has on you. So, credit monitoring ties in very closely with the history of home mortgages.The home mortgage industry is constantly changing, constantly looking for ways to expand homeownership among lower-income and moderate-income families and individuals. One of the latest developments in the last few years has been the reverse mortgage, where a homeowner borrows against the value of a house to receive a line of credit or monthly payments. New programs are constantly being created.There are all kinds of possibilities when it comes to ways to create cashflow. The mortgage industry is looking for new ones every day. There are thousands of financial programs available for every consumer in every financial situation. There’s a right program for you. And now that you’re familiar with the history of home mortgages, you can see that some things never change – you still want that property – and you still need that “dead pledge”.