The Mortgage Mess – Caused by US Labor Politics?

German workers have considerable job security (See Upjohn Institute’s Labor, Business, and Change in Germany and the United States, 2001). Not only do German workers have labor unions, they also have labor union representatives who make decisions right along with management. When the financial crisis hit, many German companies, with the approval of their unions reduced overall work hours for each employee rather than resorting to layoffs.

And German banks did not have a mortgage mess. Mortgage problems in Germany were mostly due to foreign banks.

Business and economics journalists point to Germany’s “surplus” or lack of government debt as the reason it survived the financial crisis so well. Could there be another reason? Could the reason for Gemany’s success actually be the job security of its workers?

US government policies

For over a century, politicians in the United States have steadily worked to destroy any kind of job security for workers. They’ve fought labor unions and are launching new campaigns against public employee unions. They’ve opposed unemployment benefits and other “entitlements.” They’ve attempted to undercut and dismantle the Social Security American workers themselves pay for. And they now oppose “Obamacare” health insurance for workers.

The consequences of their faith in the efficacy of the “invisible hand” to take care of all are that American workers have less and less job security. As a result, American workers are more and more at risk of defaulting on their debts.

It’s no wonder that even legitimate mortgage service companies and banks did not want to look too closely at the finances of their loan applicants. American workers these days truly have no guarantees they will be able pay back any loans they get.

A few years before the crisis, I had the shocking experience of obtaining a car loan from my credit union with only my signature. I was surprised because they’d turned me down for another loan for far less money previously because, as a self-employed person, I had no wages they could rely on for repayment. It was no surprise when my credit union was the first one n the country to fail at the beginning of the financial crisis.

But even with proper loan documentation, how can banks, credit unions, and mortgage companies tell which American workers can pay their debts? How can American workers know they can pay their debts? In America, unlike Germany, no one’s job is secure, and no one can count on getting a job.

Who holds the risk in homeowning?

The mortgage crisis proved what Robert Kiyosaki said in his first book, Rich Dad Poor Dad: What the Rich Teach Their Kids About money-That The Poor and Middle Class Do Not! A house is not an asset; a house you live in is a liability. It’s a liability because it has to be paid for each and every month. Debt in the face of uncertain employment is risk. And that risk is entirely borne by the homeowner.

Homeowners bear the risk in mortgage loans because form the start, banks and mortgage companies use most of the mortgage payment each month to pay themselves first. The homeowner accrues significant equity in the house only after years of paying interest to the bank.

This system of loan repayment on  mortgages almost guarantees that many new homeowners will quickly wind up “underwater” whenever a downturn in the economy occurs. David Reilly of the Wall Street Journal claims, “Obama Can’t Fix Housing Without [a] 30-Year Mortgage War” [to preserve long-term 30 year mortgages.]

In light of Germany’s lesser mortgage crisis than ours, it’s interesting to note that Germany requires a 35% downpayment on mortgages, and German pubic policy doesn’t support homeownership as a goal as much as US policy does. The result was that fewer Germans were underwater.

Being underwater, however, is not what the mortgage crisis was really about; the mortgage mess was about the fact that, unlike German workers, so many Americans no longer have job security.

American employees have very little in the way of “entitlements” to ride out economic downturns. Their mortgage, health insurance, and utility bills have all stayed the same, or even gone up, while wages of American workers have declined or for 1the unlucky 10 percent, even disappeared.

American wages have been eroded by inflation for decades. Now wages are being undercut by oversupply of labor in a corporate market that can pay as little as it wishes to hire new workers. Sudeep Reddy, covers the scope of the “Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages” in the Wall Street Journal (January 11, 2011).

“Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.” Another WSJ reporter wrote that “More than eight million Americans lost their jobs during the recent recession. Many are returning to the workforce–but in jobs that pay them far less than they used to earn.”

The banks, however, are doing next to nothing in the way of cutting their prices for mortgage loans. The “write-downs” that banks are taking in the billions of dollars are for investments of “their own money” in mortgage backed securities. In other words, banks gambled away homeowner’s money on risky derivatives and lost.

In the world of employment, contracts can be broken at will; in the world of banks, contracts can’t even be bent, let alone broken.

Workers and bankers are at an impasse, an impasse largely created by US labor policies. Something has to give somewhere. Until it does, our mortgage mess is not going to go away on its own.

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1 comment so far ↓

#1 Raoul Martinez on 02.19.11 at 2:04 pm

Thanks for your interesting article Nancy. I find Germany’s labor union participation in the labor market quite revealing. Their take in the home ownership and mortgage situation seems to be a healthy one also.

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