The Right Place

Section: Real Estate And Home Life Date: 09/28/07 Page: 1 Headline:Let's talk sex -- don't you wish!; Ah! The sound of sweet zero balances on your credit cards Byline: Sally Duros Credit: The Chicago Sun-Times

'People would rather talk about their dysfunctional sex lives
rather than reveal publicly their financial state."

Ain't that the truth.

That quote comes from Elizabeth Warren, a law professor at Harvard
University and teaching attorney, when last spring we were
discussing the movie "Maxed Out," which features Warren
prominently. "Maxed Out" filmmaker James Scurlock set out to make a
satire about America's love affair with debt but quickly uncovered
a horror story about the lucrative debt industry.

Warren studies what she calls typical American families and
bankruptcy.

"I wanted to expose the fraud and the abuse in the bankruptcy
system," Warren said. "That plan fell apart. The data didn't
support it."

"The real problem was not that these families spent too much at
the mall, or that they really could have repaid their debts if they
tried a little harder," she said. "What I discovered was that more
than 90 percent filed for bankruptcy after they lost their jobs,
someone fell sick or there was a breakup."

"They were people who were too responsible," she said. "These are
people who worked hard and played by the rules."

In her research, Warren found about 85 percent were hiding the fact
of their bankruptcies from close friendly members.

Warren shared a few facts with me. "The greatest growth in credit
card debt was among low- to moderate-income families: Their debt
grew 121 percent between 1989 and 2005," she said. The second
highest increase was among moderate-income households -- that was
95 percent.

"We are on a train barreling down the tracks without brakes and it
is picking up speed," Warren said.

Just one generation ago, the median American family had only one
income and they put away 15 percent in savings.

"What has happened to the middle class?" Warren asks.

And it begs the question of what homeownership will look like in
the future.

We already have seen clues about how things are changing for some
people. For instance, Experian, the consumer credit agency, passed
research on to me last spring that took a look at the debt payment
behaviors of some 40 million U.S. borrowers with Experian credit
scores of 620 or less -- in other words, subprime borrowers.

Experian found that these Americans are 30 days or more delinquent
on mortgage debt more often than they are delinquent on unsecured,
bank card obligations.

This flies in the face of conventional wisdom that says pay your
mortgage first at whatever cost. Americans historically have paid
mortgage debt over bank card debt as they traditionally view their
home as their most valuable asset that should be protected at all
costs.

During our interview Warren had said families today face a
different economic world than their parents a generation ago. "If
someone got an average job and bought an average house they would
do well for the rest of their life," she said. "But that's not the
case today.

"Job security is down, fixed expenses have gone up and the family
is caught in a vice," she said. "They don't save because they don't
have the money."

So when something goes wrong they go to credit cards and second
mortgages to pay for mortgages.

"What's wrong with that?" I ask, begging for an argument.

Warren swoops to her point. "Then you are a renter," she said.

Does it matter if you are renter or a homeowner?"

"Sure it does," Warren answers. "For an earlier generation,
retirement meant paying of the house and living off Social
Security," she said. "But some will face retirement owing a
mortgage payment that is larger than what they have to retire on."

"The second part is that if a family is not building up principal
in the home then the house is not really a savings device. It is
nothing more than an expensive rental. They have nothing to fall
back on in an emergency," she said.

The family has used up their safety net. "Many people financed and
refinanced their homes," Warren said. "The mortgage payment is no
longer fixed and now it is a source of financial frailty when
payments skyrocket."

"We have never had a period in American history like this," Warren
said. Although she admits there are plenty of families who have
been irresponsible, still the last five years of "experimentation"
in the real estate market have had unexpected repercussions for
some homeowners.

"A generation ago when someone lost a job or got sick, the house
payment was a steadying influence. It was a number that had been
established years earlier and with rising incomes, it was more
affordable," Warren said. But today things are different.

"Having assets in overpriced housing does not make a family as
safe as having cash."

So the lesson for all of us, folks, is shop smart. Buy low and sell
high, in real estate as in all investments. And hide the plastic in
the furthest reaches of your dresser drawer where it won't tempt
you.

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