Monday, May 15, 2006 | I’m not going to talk too much about the real estate market today but our reporter Will Carless recently got a hold of a truly amazing statistic that helps tell a bigger story about us San Diegans.
The stat was simple: Fully 26.7 percent of all the mortgages secured in San Diego in 2005 were “negative-amortization” loans. In 2004, only 9.9 percent were. And in 2003, that percentage was just barely above one.
In the old days, of course, nearly all mortgages were regular fixed-rate loans in which the buyer paid all the interest of a loan along with an ever-growing portion of the money they actually owed. As these homeowners paid off the loan, they built more and more equity in their home – assuming that the house or condo didn’t lose value. If it gained in value, obviously, they ended up with even more equity that they could cash out by selling the home.
Then, however, people wanted to buy evermore expensive homes, particularly in places like San Diego where the housing market took off. Since they weren’t making that much more money, however, they had to do it by lowering the payment on their mortgages and the “interest-only” loan became popular. The thought of many buyers – if they even thought about it – was that they would only keep the loan they took out from getting larger for a set amount of time after which the terms of the loan demanded they start making inflated payments to catch up and actually pay off the debt.
So, houses kept getting more expensive because people could get larger and larger loans without actually having to pay more money out of their pocket. But then houses got so expensive that in order for people to keep buying them, lenders started to offer negative-amortization more widely. These loans allowed people not only to avoid having to pay the loan down – they could actually only pay a portion of the interest they were being charged to have the loan. So as time went on, their debt would actually grow.
Not only are these people now just hoping that their home goes up in value, they are banking on it. Because if their homes lose value, they will owe more money on them than they’re worth. That’s fine, of course, if they don’t have to, or want to, ever sell it. But loans can’t just keep getting larger. At some point, the homeowners will have to start paying it off with much larger payments than they are making now.
Unless they are saving for the future payments or unless they plan on making a lot more money than they are, there could be a world of hurt in store for them.
The consequences of this situation may be brutal for the housing market. But we talk enough about that.
I have a broader question: How is this OK?
It’s not just the housing market. This city, this county, this state, this country, all of us are fully addicted to debt.
Debt is not even a means to an end anymore – going into debt is actually considered an achievement itself. Look at the governor and the Legislature’s recent “victory” of bipartisanship: They passed a measure that asks voters to allow the state to take out $37 billion in loans and invest the money in the state’s crumbling infrastructure.
Yes, for the Legislature and the governor to come to terms on something that big was interesting, but it’s not “special” or worthy of any of the glowing compliments the governor and the Democrats by his side heaped on each other. The reason the two sides were able to meet on this proposal is something that is very familiar to people around here: Taking on massive debt allows you to live the kind of lifestyle you want. You have all the houses, the cars, the roads, the schools, the happy firefighters, the parks and the dams you want without having to do anything really difficult.
The real difficult thing to do is to pay off the debt. That’s what should be considered the achievement.
In San Diego, our local Republican leadership has a unique interpretation of “fiscal conservatism.” They don’t think – or at least they don’t act like – it means making government as efficient and cheap as possible. Instead, they think it means keeping the same old government, just not paying for it with taxes. It’s much easier to pay for it with massive debt. And Democrats, like those on the state level, are very happy to oblige.
They also succumb to the seductiveness of providing everything voters want without actually having to pay for it.
Just like at the state level, going into debt in San Diego is considered an impressive accomplishment. In 2004, the county borrowed $450 million and gave the money to its employee pension fund. They printed one of those enlarged checks – like the ones people get when they win the lottery – and officials from the county handed it over to their counterparts at the retirement system.
Sure the bond was considered a good deal as it refinanced debt that could have grown at a much higher interest rate and the people who secured it worked furiously and diligently to get it done. But it was no cause for celebration.
Now, San Diego Mayor Jerry Sanders has similar plans to refinance debt in the city’s employee pension system. When and if the city is able to ever prove that it is worthy of borrowing money again – that it won’t lie anymore on its loan applications – the City Council will celebrate along with Sanders.
Scott Peters, Jim Madaffer, Brian Maienschein and Toni Atkins will undoubtedly sign off on a new package of loans and they will act as though the new borrowing will pay for their previous decisions to sink the city into massive debt by promising employees more benefits than the city had money for. They will claim that more borrowing somehow solves the problem they hardly admit they created.
They may even try to celebrate the same way thousands of local couples are celebrating the “purchase” of their new home: using a creative borrowing plan that threatens to tie their hands so tight that it cripples their fiscal future.
Don’t let them. We should save our celebrations for the days when we get our government out of debt. And we should save our praise for the leaders who make the tough decisions needed to do that.
Scott Lewis oversees voiceofsandiego.org’s commentary section. Please contact him directly at