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Past Due
The End of Easy Money and the Renewal of the American Economy
By Peter S. Goodman Henry Holt and Company
Copyright © 2009 Peter S. Goodman
All rights reserved.
ISBN: 978-1-4299-1876-3
CHAPTER 1
The Credit Diet
"The money was always there."
In late 2007, Fran Barbaro, a white, fifty-year-old mother of two boys, with an MBA and a résumé full of six- figure-salary computer industry jobs, found herself confronting a previously unimaginable situation: she could no longer keep up with the mortgage payments on her three-bedroom house outside Boston. The bank was threatening to foreclose.
Barbaro had enjoyed years of enviable incomes. During the technology boom of the 1990s, the value of her stock portfolio had swelled beyond $1 million, giving her the financial freedom to purchase symphony tickets, original art, and tropical vacations. During the subsequent real estate boom, the value of her home in an exclusive suburb swelled to nearly $1 million, allowing her to borrow against this increase to continue her lifestyle of plenty. All of that money was now gone, her stock portfolio exhausted, and her home worth less than she owed the bank. Barbaro had moved into an apartment in the basement of a house owned by her parents in an effort to economize and avoid bankruptcy. Her two boys occupied the lone bedroom. She spent her nights on a pull-out sofa in the living room.
Like millions of other Americans, Barbaro had run through her money. She had shelled out again and again for what she considered the staples of upper-middle-class American life: special after-school programs for her boys, who suffered learning disabilities, which ran $25,000 a year; summer camp; a new kitchen. Not to mention the run-of-the-mill costs of keeping gas in the car, food on the table, and the lights on. "These were simple day-to-day expenses," Barbaro explained. "I always made a lot of money. The money was always there."
More than two centuries earlier, Benjamin Franklin had counseled those fortunate enough to enjoy credit to take care to distinguish between borrowed funds and income. "Beware of thinking all your own that you possess, and of living accordingly," he wrote. "It is a mistake that many people who have credit fall into. To prevent this, keep an exact account for some time, both of your expenses and your income."
Franklin had of course never confronted Internet stocks whose value doubled inside of a week. He had never encountered a variable rate mortgage, a home equity line of credit, or a zero-interest credit card — financial innovations with exotically lenient terms that made almost any purchase eminently doable for people of Barbaro's means. She never felt any compulsion to square her outlays against her income. In place of that seemingly antiquated accounting exercise, she had her stock portfolio, most of which was invested in technology companies. She could dip into her stock winnings at will, and that gave her a sense of security. It made every expenditure seem reassuringly manageable, even responsible. What parent would turn down a special program for a child struggling to read when the money was just sitting there? Why skimp on summer camp?
After the markets collapsed in the middle of 2000 and the Nasdaq ceased to function as a dollar printing machine, Barbaro's house assumed that role. The real estate speculation that unfolded over the subsequent years lifted the value of her home to heights that would have seemed absurd, except that the same story was playing out throughout Boston and in much of the country, from suburban Atlanta to the deserts encircling Phoenix. When her continued spending swelled her credit card balances to levels requiring monthly payments she could no longer manage, Barbaro was able to pick from a crowded buffet of mortgage companies and banks eager to turn her increased paper wealth into cash in hand.
In 2004, she arranged a new mortgage on her house to take advantage of low rates, and she tacked on a $44,000 home equity line of credit to pay off the credit cards. Still the banks kept stuffing her mailbox with offers for more money, right now, no documentation required, most of the come-ons wrapped in a reassuring veneer of responsible financial planner speak: "Consolidate your debts." "Put your money to work for you." Barbaro accepted their offers, taking on more debt in the belief that there was plenty of credit left.
Until there wasn't any more. By the end of 2007, her stock portfolio was exhausted, the proceeds shrunken by the collapse of the market in 2000 and the remainder spent on everyday living expenses while she recovered from surgery and a memorable trip to Belize with her boys. After she separated from her ex-husband in 1999, becoming the sole breadwinner, she pulled money from her 401(k) retirement account through a so-called hardship withdrawal, and she was on the hook for the resulting taxes. She had borrowed against the value of her home so aggressively that she could borrow no more. She owed more than $800,000 on her mortgage and home equity lines of credit, yet her house was worth less than $700,000. In the parlance of the time, she was "upside-down." The same banks that for years had been begging her to borrow were suddenly shunning her as an unsavory risk.
Barbaro's latest mortgage had begun with a promotional rate that made the monthly payment a manageable $2,600 a month. For reasons she could not understand — reasons buried in the fine print of loan documents she had not read closely — the payments were spiking to $3,300 a month. She worried that the next stop on her journey would be foreclosure.
Barbaro spoke in the demanding voice of someone accustomed to getting her way. She could be loud and confrontational, her words tinged with the nasal inflection of New England. She was no candidate for food stamps or a winter coat donated by a church. She still had a job that the majority of Americans would envy, bringing home $5,200 a month from a local software developer. But her monthly debt payments alone were absorbing more than $4,000. Like so many, she had become a reluctant participant in a lifestyle that recent times had rendered strangely quaint: she would have to live within the confines of her income.
She quit shopping at Whole Foods, with its high-end organic produce and European cheeses, and started buying groceries at discount supermarkets. She relinquished thoughts of another vacation. She rented out her house, moved into the basement apartment at her parents' place, and began to negotiate with the bank to try to lower her mortgage payments.
"You're sacrificing certain things," she said. "How do you salvage what you had and hopefully go back?"
That question was reverberating across the country. Ben Franklin's admonition was suddenly relevant again. The old days of being bombarded with alternative sources of cash were gone.
* * *
On the other side of the country, in Oakland, California, Greg Bailey had missed out on the spoils of the age of easy money. He had never owned a home or a stock portfolio, living paycheck to paycheck while people like Barbaro feasted on credit and technology stock proceeds. Yet, as the economy sank into a deep recession in 2007 and 2008, he was drawing an outsize share of the hurt.
Tall and athletic, with a neatly shaved head and a closely cropped beard, Bailey sat in front of a computer terminal at a downtown jobs center. He rearranged his body to take the pain off his back — the result of years of lifting and bending and straining — as he squinted at the screen in search of his next job. Then forty, Bailey had a cool air about him, the gentle sort of friendliness that often characterizes people accustomed to being physically larger than those around them. He exuded an inner confidence that testified to the high school basketball star he had been, and the ladies' man he clearly still could be, even as he rolled his eyes in beleaguered fashion when the subject of women came up. His broad shoulders more than amply filled out his lone sport jacket, which he wore on days he went to look for work.
For the last two decades, Bailey had worked with his hands, a life that seemed to him accidental, the result of his plans for college undone by a family crisis. When I first met him in February 2008, he had been almost continuously without work for the past eight months, arriving at the job center day after day, sitting in front of a computer, looking through listings and sending out fresh applications.
"There's no jobs out there," he said. "It's depressing."
Bailey had grown up in Oakland, a city whose very name — fairly or otherwise — carried the whiff of plans gone awry, hopes deferred, urban decay, and stubborn poverty, particularly among African Americans, who make up more than one-third of the city's roughly 400,000 people. As a child, Bailey had grown up comfortably. His mother earned $70,000 a year as a customer service representative for the local telephone company into the mid-1980s. She bought a house in East Oakland, a cozy orange stucco place on a dead-end street, allowing Bailey and his little brother to ride their bikes on the pavement and play basketball at hoops set up in surrounding driveways. Her wages were enough to bring home clothes, groceries, and plenty of toys at Christmas; enough to pick up the tab at seafood restaurants by the bay. His grandparents owned a home in North Oakland, in a solidly middle-class African American neighborhood. He never knew his father, who was somewhere off in Michigan, but he spent a lot of time with his grandmother — "She was beautiful," Bailey said. "Like Lena Horne" — and he felt no absence. "We got almost everything we wanted," he said. "I was a happy kid."
Bailey attended Bishop O'Dowd High School, a private Catholic institution on a well-groomed campus on a bluff overlooking the San Francisco Bay. Bishop O'Dowd was a perennial basketball powerhouse, and Bailey made the varsity squad, blossoming into a formidable player. His junior year, he came off the bench on a team that included the future NBA player Brian Shaw. They made it to the northern California finals, playing in front of some ten thousand people at the Oakland Coliseum. By his senior year in 1984, he was the starting shooting guard on a team that included two seven-footers. "I was a basketball star," he said, disclosing this status matter-of-factly, without bravado, but with pride, now tinged with pain about how it worked out. His senior year, the college recruiters began calling. At a Christmas tournament in Las Vegas, he played in front of three hundred of them, drawing attention for his scoring knack. They dangled scholarships to campuses near and far — San Jose State, the University of Alaska. Basketball was a means, Bailey understood, not the end. It was a ticket to college and the opportunities it would unlock for him. A college degree would give him access to the white-collar world to which his mother was already accustomed, and with far greater possibilities.
But that same year, Bailey's mother succumbed to addiction to crack cocaine, the pernicious drug then sweeping Oakland and much of inner-city America with the force of an epidemic. She lost her job. Then she stopped bringing home food. And then she stopped coming home at all, leaving Bailey and his brother to look after themselves. "I had two pairs of pants to start my senior year," Bailey said. "We'd wait for groceries and she'd never come. She was so far gone."
His mother settled in with his grandmother, who was then so frail she was unaware of the rampant drug use in her home. Bailey's brother, three years younger, soon moved out to live with his father. Bailey stayed in the house alone. As his senior year progressed, he turned down scholarship offers that would have taken him away from Oakland, so he could keep an eye on his mother. To support himself, he got a job as a gopher at a law firm, earning $8 an hour for three or fours a day after class. After graduation, he enrolled in part-time classes at a local community college. But the demands of work and school proved too much. He dropped out and got a full-time job driving a truck for a tile shop in Berkeley, the bohemian university town to the north, with its cappuccino bars and used bookstores. As the fall semester unfolded around him, with students bicycling to campus and attending parties in the scruffy bungalows off Telegraph Avenue, Bailey spent his days loading boxes of tile into the back of a truck at the warehouse, and then delivering them to construction sites, earning $7.25 an hour. Nights he spent back at his mother's house, alone, reading books by candlelight: the electricity had been cut off for lack of payment. Soon, the water and gas were gone, too. Bailey would wake up and drive to a nearby gas station to wash up in the men's room, before going to work at the tile shop. After about a month, he borrowed money from his boss and rented a small studio apartment in Oakland for $450 a month. His mother's house was relinquished to foreclosure.
He was nineteen years old, living on his own, and working a blue-collar job. In the story he told himself, this was a brief and unexpected detour before his mother regained her footing and his real life resumed on some college campus.
"I was happy to be making some money anyhow," he said.
But months passed, and then years. What had seemed like a temporary stint became Bailey's life.
In 1987, he tried to go back to school, enrolling at nearby Merritt College. He joined the basketball team, scoring twenty points in his first game. But his mother had listed him as a dependent on her taxes, so he could not qualify for financial aid. What savings she had were being drained by her deepening addiction. Between the costs of tuition and the tug of concern for his mother, school did not fit into the picture. So Bailey put his studies aside for a second time and concentrated on paying the family bills.
It was all sideways from there, a series of jobs delivering home furnishings, seafood, and plumbing supplies. He apprenticed to become an electrician — his grandfather's job as a young man — but quit in disgust when the white journeyman he shadowed ceaselessly cracked racist jokes. He worked as an appliance installer, delivering washers and dryers to homes throughout northern California.
His own home was a malleable concept, one that fluctuated with his relationship status and his tolerance for being around his mother, who was ensconced in his grandmother's house with a loose collection of fellow addicts. For a few years, he had lived in his own apartment in Oakland. Then he lived with a girlfriend in San Francisco, who didn't want him to work, suffocating him. In recent years, he had been shuttling between his grandmother's house and the apartment where he sometimes lived with his longtime girlfriend and their nine-year-old son, while trying to cadge together the security deposit required for a place of his own.
Yet, through the years Bailey had never lost the drive to make a better life. In 2007, he invested his time and hopes in a government-funded training program that was supposed to land him a job in biotechnology, a career with a future. He sent dozens of applications to the biotech firms clustered in Emeryville, next to Oakland, but one rejection yielded to still another. Not one to dwell on disappointment, he pragmatically adjusted his aspirations down. He would take any decent-paying job — even the sort of job from which he had hoped to escape for the sake of his back and the high blood pressure that the doctor said was the result of too much stress, too many hours driving a truck, hauling refrigerators up stairs; too many "energy drinks," the highly caffeinated concoctions he pounded down to keep working. He would willingly take another job that hurt his body and paid less than he made before, if that was all that was available.
He was trying to carve out a modest perch in a city where wealthy families mostly lived up in the hills, on landscaped spreads laced by flowering vines, their bay windows looking out toward the water — the postcard view he had enjoyed from his high school. Those lives were now as far from Bailey's everyday existence as the moon. The trickle of prosperity long promised amid successive tax cuts had never made it down to the flatlands of Oakland. But as the recession intensified, pain was pouring down with a vengeance. Even people with six-figure salaries were cutting back on their spending, and as banks stopped lending, the strains of the formerly comfortable were rolling downhill, assailing Bailey and the other unemployed people at the job center. The American economy was spooked. Businesses alarmed by the prospect of households tightening up were reluctant to expand or hire. Joblessness was growing — especially among African Americans like Bailey, and especially in cities like Oakland, where manufacturing had long sustained less educated people and was now mostly a memory.
(Continues...)
Excerpted from Past Due by Peter S. Goodman. Copyright © 2009 Peter S. Goodman. Excerpted by permission of Henry Holt and Company.
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