A comment on a podcast caught my attention the other day and reminded me that it seemed like every time one turns around, you would hear someone say the time when a person spent their life working for one company is over. This is a major shift from the run through of the (baby) boomer era whereas many folks did work their “30 and out” to spend the later years watching the sunset in Florida.
In the day, the paradigm said you would work with a company for 30 years or there bouts and therefore your home, the largest single investment for the average American would be paid off in the same time. This in turn solved two problems, as first it removed a big payment thus allowing the new retiree to live on less money. Second then was the home, typically a “family” home which was larger in size and therefore provided a salable commodity to support the retiree as they downsized.
In fact I remember the day when my parents, after 30 years took part in what had become a rite of passage for the pre-apex (those born before 1954) boomers of “burning the mortgage“. It was through this “ritual” the working class man after toiling for 30 years could give it to the “man” (the bank in this case) as he lit fire to the ultimate symbol of Americana indentured servitude.
Well today, “the man” (bank) is getting it for sure and not in a good way as these people instead of burning a piece of paper after years of toiling, are just “burning” the banks by walking away from their mortgage. There are several dynamics here which made this interesting to me. One of the first things after burning that paper; they did what most other Americans did and took out a home equity loan! Ok, if the base model was to pay off the home for retirement, yet all these boomer’s where heading back to the bank to borrow more. What’s my point with going here and what does this have to do with the death of the 30 year mortgage?
The answer is simple, as it was a “sign”. Yes a sign that the paradigm was shifting, a “tell” if you will of the things which where to come. As the purpose of these posts are to help point out the obvious and the facts most of the time is hiding in plain sight as all answers do. You simply have to be able to see the trees for the forest save you will step on the bear trap. Back on track now and given that there was this as well as many other “tells” taking place as the paradigm started it slip. However the world just kept moving forward with their blinders on. Hey if the wheel isn’t broken, don’t fix it right?
One of the things, these blinders did cause however was the mortgage collapse as if the “30 and out” model was gone, then what was the purpose? Not only did the socio-economic model not hold true because folks where no longer working for a single employer for 30 years. However, the fundamental “risk” model also was disruptive. Imagine in your mind’s eye for a moment you have a million people working in a “30 years and out” paradigm and all of them basically have a mortgage. Now with that said, what is your risk profile? Guess what, you don’t need to be an MIT Quant to figure it out as it’s going to be extremely low right?
However, as the paradigm shifted in mass, the game changed. It didn’t just change by a little, it changed by a landslide! Here the “old school” banks missed the “tell“, as the handwriting on the wall was for not, as no one wanted to read it. No one cared for the facts as the fiction sold better on the streets and we had CDSs (Credit Default Swaps) to protect us right?
Well that’s all history; however the question which remains today is why do we still have 30 year mortgages? The majority of Americans will not be working in one place for 30 years. In fact this issue creates a “twofer” as not only do we have the risk issue as discussed above. We also have the added need for mobility as a result of outsourcing as there is a scarcity of “within” class of jobs as if it is non-location dependent then it’s going to be outsourced period.
Thus, to maintain employment, one has to not only be willing to be mobile, however also be “capable” of the same. Therefore holding a 30 year note is just craziness as it is setting us as a society up for failure again. Please keep in mind I am not overly advocating an ARM (Adjustable Rate Mortgage) either as the greed of the “machine” has bastardized these also. As they started out on the right side of the tracks, however where there’s a buck to be made, the specter of greed will be there and in the case of the ARM it was the huge upsides on renewal rates and ridiculous conditions which were laid at the feet of the ill equipped borrower verses the bank.
Keep in mind if you cut me I will bleed capitalism, however in this same vein (pun intended). Believe that capitalism is built on an honest day’s work for an honest days pay. In saying this, the point is the financial institutions have a responsibility to provide a product which works for it’s consumers. In turn the risk will be self managing as it was in the prior paradigm, the key here is knowing the “tells“, rolling with them and developing new paradigms…