“The reason they call it the American Dream is because you have to be asleep to believe it.”
–George Carlin
Mortgage loans have been around for centuries. In the late 1700s, colonists used loans to encourage settlement and economic expansion on federal lands. The leaders of the new world parcelled out land, while encouraging lower classes to settle and build. Ironically, these lands were calculated, bought, and sold as if these new owners always laid claim to the land — denying Native Americans the right of ownership, executing them, and pushing them further and further West.
Nonetheless, the colonies and post-Revolutionary War period in America included basic mortgage loans. Eventually, in the 1900s, these loans grew in popularity and necessity. Homes, condos, and bare land was more expensive and unaffordable for the working classes. Increasingly, people needed financial support to invest in real estate — to find shelter.
Thankfully, banks were available to help everyone out. Without financial institutions and their mortgages, it’s unclear what would’ve happened. In today’s economy and real estate market, most people are unable to afford a house without credit. On the surface, it seems that many Americans would be homeless or forced to forever rent — unable to own. We’re forced to choose mortgages without a substantial alternative.
But let’s hypothesize for a moment. What would happen if mortgages suddenly disappeared? What if they weren’t an option for the impoverished, working classes, or even middle classes of America? What if banks were unable to write even one more loan?
For starters, it’s likely the entire real estate market would collapse. The decimation of domestic markets would domino throughout the world, and cause an economic meltdown. People would be unable to eat, shop, or pay for their continued existence. Landowners would quickly benefit from skyrocketing rental prices, but huge swaths of population would be forced to seek shelter elsewhere. The working classes would need to leave en masse from cities.
The end of mortgages would spell destruction and terror for the financial institutions that profit from their existence. Banks — big and small — would go belly up. Insurance companies would cease to exist. And a slew of related industries would (i.e., from appraisers to real estate agencies to utility companies) struggle to continue. The stock market would follow the steep declines elsewhere as the economic engine would slow to a halt. Money would be stuck. Over time, trillions of dollars would disappear — poof! — from the world markets. They wouldn’t return, either.
My, how powerful a few documents can be! Imagine how one contract prevents global catastrophe — end times. Moreover, that this agreement separates people behind walls — street and shelter.
Mortgage loans make little sense, though. The continued propping up of home prices through financial instruments ensures working classes spend the rest of their lives working. Renting isn’t much better either. With little incentive to build affordable housing for working classes, builders have increasingly constructed luxury condos for upper middle classes and beyond. A recent Yahoo Finance article highlights this shift:
“…a growing number of Americans must spend more than 30 percent of their income on rent — a level that the government considers financially burdensome. Over the past decade, that number has jumped from 14.8 million to 21.3 million, or 49 percent of all renters.
“A surge in apartment construction has done little to help address this problem because in many metro areas, a large proportion of new apartments are concentrated at higher-income levels. The median rent on a newly built apartment was $1,372 a month in 2014, about $500 more a month than what about half of renters could afford without being financially burdened.”
This story exemplifies the catch-22 for working classes: either fork over astronomical, burdensome amounts in rent or “purchase” a home through mortgage loans. Either way, banks and other financial institutions are complicit in the bubble. They own your future. Unless you’re independently wealthy, you lose.
Increased access to capital through mortgage loans encourages people to buy bigger homes than need at prices they can’t afford. Homebuilders respond by building bigger homes and charge more for new developments. Families and households buy more to fill bigger homes, as well. The cycle is vicious, expensive, motivated by consumption, and facilitated by an endless supply of cheap money via the Federal Reserve. It’s the antithesis of minimalism, frugality, and simple living, but we have little choice than to participate.
As the story continues, wholesale gentrification of vulnerable communities can occur. Those with poor credit and/or unable to make down or monthly payments must vacate. To refuse the paradigm means leaving good neighborhoods and schools. Home prices are propped and buoyed by the continued investments of the masses. Banks encourage people to spend more than they can afford on spaces larger than they need. And all I can think is, “Who were these mortgages meant to benefit?”
A mortgage is less a contract with your bank, and more a contract with your employer. To take out a 30-year mortgage loan is a financial conscription to work. It’s a benefit to your employer and guarantee for decades. You can’t stop working, as the consequence would be disastrous. Mortgage loans are the perfect economic engine for the wealthiest of our economy. They can make vast sums from borrowers and sit back to watch their money multiply.
Sadly, we’ve accepted these rules. We’ve cozied up to banks and pledged to pay them back for half our remaining lives.We’ve played the game by repeatedly checking FICO scores. We’ve shown them our good credit (when possible) as examples of personal responsibility, when it says nothing of systemic bias, racism, and uncontrolled job loss.
We are left with few choices. I dream of resisting the system and regularly think about living in a van or tiny home, but I’m afraid my partner and family wouldn’t care for this reality.
As a future psychologist, I’ll be lucky to make $65,000 to $75,000 to start out, which would necessitate participation in the mortgage loan game. And this says nothing of the student loan debt that would be necessary to pay off six years of doctoral education.
No house could be purchased outright unless I worked for decades and lived in a passenger van in the meantime. Yet, one of the most fundamental psychological needs is shelter. Without it, we cannot talk about saving money, cooking at home, or living well. People need the safety of shelter, but over the centuries, our homes have ballooned in price and size. Our inflated budgets have been decimated by a simple financial tool that we accept as a necessity for existence.
Nobody seems to bat an eye. Nobody says this is senseless. Nobody resists the status quo. Rent or “buy,” the same trap is set.
So, as preposterous and provocative as it might sound, what if we killed mortgage loans?
InsiderAccountant says
I think you’re right about what would happen if mortgages were abolished – the financial system would completely collapse. They’ve become such a part of our world, no one even notices that the price of things is only maintained because of the availability of credit such as mortgages.
Sad as it is, by taking away mortgages, you would also effectively lock the lower classes into a state of permanent poverty. Not every one of them of course, but many of the lower classes who can’t manage to save only build equity/net worth through paying off a property over a long time and hopefully seeing it appreciate in value.
It’s quite an idealistic post, and I remember dreading the idea of buying a house with a mortgage too. Eventually we bit the bullet and bought a home that we could stay in for a long time, and we paid it off in 11 years. Yes, the system sucks sometimes, but if you’re committed then you can make it a lot less burdensome.
Justin says
I kind of like mortgages. For those that buy *when it makes sense*, they are fabulous ways to stake a claim to something concrete (literally and figuratively). Mortgages certainly helped us when we didn’t have the cash but had the earning power to pay over time. We didn’t take anywhere near 30 years to pay ours off (more like 10) but without the mortgage we would have had to rely on saving for 10+ years while paying someone else rent.
Although I think in some areas taking on a huge mortgage is a fools game and I would choose to pay rent. SF and NYC, I’m looking at you. 🙂
Bette says
I guess I agree with Justin — I could never have afforded a house without a mortgage. I don’t see any other alternative. For new buyers, I would advise saving for the largest down payment you can afford, finding a fixed rate, 15-year mortgage, and striving to pay it off in 10.
murielchesterton says
Hey you forgot the collapse of the 22 billion dollar storage industry too, you know to store all the stuff that doesn’t fit in the mortgaged house 🙂
Kelkey says
I think if you are a frugal person and want to take out a ** reasonable ** mortgage that can be paid off in ten years or less you’ll be on the winning side of the mortgage game. It’s kind of like the automotive industry that relies on thousands of other suppliers/ industries to maintain its existence. If a car company goes belly up, so too do many of the jobs that supply them with parts, advertising, etc. It is a vicious cycle in many ways.
Aaron says
I see some potential in natural building on community land trusts as a way to sidestep the mortgage trap. Nearly all homes on the market are already money pits before an expensive mortgage gets added to the mix. They are extremely poor value for the amount of labor that people pore into them through wage earning and in how little the home returns due to inefficient design and poor construction.
bilby05 says
A consequence of the current system? If you live long enough to pay off your home odds are pretty sure that it will be sold and the proceeds will go to the medical community for end of life care and the government for whatever governments want, thereby preventing the average home from staying the “family home.” That way the system is perpetuated.
The total change of the system could only come from a paradigm shift from what we are told to want, by the media, to what we really need. Highly unlikely. Which is why we see so many predictions of societal collapse.
Doesn’t look like a pretty future.
FF @ Femme Frugality says
I think the tie to mortgages is insightful, but all of this points to the bigger problem of wealth distribution. I don’t really want to see the market collapse, although the revolutionary part of me sees the merit in the argument.
We have a major battle going on in our city right now over gentrification… Propagated by one of our sports teams who purchased property in the low income neighborhood they have their arena in. They’ve set aside a small portion of units for section 8, but it’s not enough, and they argue that allocating more would cause the property to not be profitable. Haven’t kept up on the latest news for this story, but it’s disturbing to say the least.
Dr. Penny Pincher says
I think eliminating mortgages would result in wealthy individuals and entities who could pay cash owning almost all of the homes and renting them out to middle class and lower class people who would no longer have a way to afford buy their own house. People would be paying $1,000 a month to rent their house instead of $1,000 a month to own their house someday. This sounds worse than the current situation to me…
moneycounselor says
Rather than abolishing mortgages, a less radical strategy might be to greatly improve financial education. Encouraged by realtors and lenders, when house shopping most people choose a home that fits with the biggest mortgage for which they’re approved, rather than choosing a home priced at a sensible level that fits with long-term financial success. Ditto for cars. Why leave any room in your budget for saving money when you can better impress your friends by spending more!, is the effective philosophy.
cariesky says
Wow! I’ve not thought of this at all — I’m a mortgage holder, haven’t been able to work because of illness and feel trapped. What if? INDEED!
abc@gmail.com says
Very thought provoking. What are your thoughts on no longer allowing traders to trade on margin? Do you think that equity/bond markets are over priced due to the ability to borrow to buy these assets as well?
What about the ongoing loan duration creep for autos? Does the loan duration justify the higher price of cars? Certainly the loan duration for homes helps people justify the price of the home.
Northwest Arkansas says
If you look at how much interest you pay over 30 years it may make your stomach turn. If you put it in perspective of the mortgage would cost less than it would to rent then from a cash flow standpoint it can make total sense.