If you can’t say something nice, it’s going to be virtually impossible to talk about what’s happened to the middle class, which “has endured it worst decade in modern history,” according to a Pew Research Center report.
“It has shrunk in size, fallen backward in income and wealth, and shed some – but by no means all – of its characteristic faith in the future,” the report, based on a survey of 2,500 households, concludes.
Shrinking incomes have made it more difficult for middle-class families to sustain their living standard while declining home values have drained their net worth, resulting in what the report describes as a “lost decade” for this segment of the population. The mean net worth of middle income households declined by 28 percent over the past 10 years; upper income households, by contrast, managed to hold their own, increasing their net worth by 1 percent – largely because their assets were more diversified, and less reliant on housing.
Upper income households also claimed a larger share of the nation’s income – 46 percent in 2010 compared with 29 percent in 1970. That increase came largely at the expense of the middle class, which saw its income share decline from 62 percent to 45 percent during that period.
The demographics of the middle class have changed as well, Pew reported, with whites now representing only 70 percent, compared with 80 percent in 1971. Blacks and Hispanics have gained some ground, now representing 11 percent and 13 percent, respectively.
Not too surprisingly, households struggling to retain their foothold in the middle class, or losing it, have become less optimistic about the future. Only 43 percent are “very confident” they will have sufficient retirement funds, down from 51 percent in 2008, and 26 percent expect their children to be worse off than they are, up from 19 percent who held that negative view in a 2008 survey.
While more Black families have climbed into the middle class over the last decade (see related item) they have also been damaged disproportionately by the subprime lending disaster and the recession it triggered. Because blacks were a prime target of many subprime lenders, they held more of those loans than whites and have suffered proportionately higher foreclosure rates. The resulting negative impact on their credit scores is impeding their economic recovery today and could hamstring them financially for years to come, according to economists and policy makers, who note a widening gap between the credit scores of white and minority households.
The most recent and most comprehensive comparison by the Federal Reserve found that fewer than 25 percent of Black households had top tier credit scores in 2003 compared with 65 percent of whites. Although no one has done a similar follow-up study, an analysis by the Pew Research Center found that the net worth of blacks plummeted by more than 50 percent during the recession, as the housing market tanked and unemployment levels for this population segment soared. Those two factors – declining home ownership and rising unemployment – are reflected in declining credit scores. It’s one more way that credit scoring . . . sort of sets in stone income and wealth disparities between minorities and whites,” Chi Chi Wu, a lawyer with the National Consumer Law Center, told the Washington Post. “The playing field,” she added, “was never level.”
Blacks did not suffer alone, consumer advocates acknowledge. Credit scores declined by more than 20 points for more than 50 million people at the depth of the downturn, although scores generally have recovered considerably since then. But for black households hardest hit by the financial reversals, “we’re talking about a 20-year recovery for some [of them],” the Rev. Anthony Evans, director of the Black Church Initiative, told the Post. “I think it’s very clear that we will call this the downgrading of the black middle class.”
The Federal Housing Administration (FHA) is in the news – and not in a good way. Housing industry executives are furious about the agency’s announced plan to increase mortgage insurance premiums on multifamily new construction and substantial rehabilitation projects. The increase —from 45 basis points to 65 basis points —will provide a larger financial cushion for the FHA’s insurance fund, generate additional revenue for the government and “will encourage private lending to return to the market by ensuring FHA is not underpricing its risk,“ the agency said in the public notice announcing the change.
Industry trade groups think otherwise. A letter signed jointly by nine housing and mortgage finance trade groups, led by the Mortgage Bankers Association, the National Association of Home Builders and the National Multi Housing Council, questioned both the purpose of the premium increase and its likely impact.
The impact, the groups warned, will be overwhelmingly negative, short-circuiting the recovery in the multi-family market, increasing construction costs and pushing apartment rents higher. As for the purpose, the letter asserts pointedly, “Our organizations do not believe that HUD has provided compelling justification for the increases.” That statement, highlighted in bold, constitutes a none-too-thinly veiled threat that the groups may challenge the rule for failing to meet what is a threshold requirement for new regulations.
Some industry executives have suggested that the increase is designed not to offset risks in the multifamily sector, as the FHA has argued, but to bolster the single-family insurance fund, which has been devastated by delinquencies and foreclosures.
“What do you think?” a recent article in the industry trade publication, Housing Finance News,” asked. “Is this another instance of the multifamily industry being shaken down to pay for the sins of the single-family industry?”
Whatever the accuracy of that charge, a recent analysis by Fitch Ratings suggests that the single-family fund faces continuing problems. The FHA increased premium rates for single-family mortgages in February, but that increase may not be sufficient to handle a new surge in mortgage delinquencies, Fitch warned. The agency’s current capital cushion is 0.24 percent of liabilities – perilously close the Congressionally-mandated minimum of 2 percent.
“While delinquency rates for nonguaranteed loans have been improving steadily [at major banks],” the Fitch report noted, “the trend for FHA-guaranteed loans is starkly different….This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency’s funding status worsens and U.S. home prices fail to rebound quickly,” Fitch analysts said in a press statement.
FEELING BETTER AND WORSE
Community bankers are feeling a lot better about the mortgage lending outlook, but not so well about mortgage lending regulations and compliance costs. More than half of the industry executives responding to a survey by Ellie Mae cited increasing regulation as the major challenge they face, even as they are reporting an increase in their mortgage origination business. Bankers expressed equal concern about regulations mandated by the Dodd-Frank financial reform act and those being promulgated by the Consumer Financial Protection Bureau – many of which are related to Dodd-Frank requirements.
More than 40 percent said new regulations will increase their costs and more than 20 percent said the rules will make it more difficult for them to originate mortgages. On the other hand, many of the bankers said they expect to benefit from reduced competition, as the regulatory environment forces some lenders out of the market.
“Regulation…has become overwhelming for smaller players that were only able to do a handful of deals a month,” one respondent said. “Business might flow to larger-size banks [initially],” he predicted. As smaller institutions that feel they can’t handle the regulations get used to them, he suggested, “they might re-enter the business, or they might not.”
UNDER AND UNDER
“Under 40 and under water.” That describes the plight of younger homeowners, who have not recovered from declining home values as quickly as older homeowners, and who still struggle in larger numbers with negative equity that is preventing them from selling their homes.
Nearly half of all younger homeowners who have mortgages are under water on those loans – about double the rate for older borrowers, a recent study by Zillow found. “Negative equity is trapping young people in their homes,” the Zillow report explains, preventing them from moving up the housing ladder, and reducing the supply of starter homes for first-time buyers. The resulting “gridlock” is impeding the housing market recovery, Stan Humphries, Zillow’s chief economist, said.
Mark Zandi, chief economist for Moody’s Analytics, sees long-term as well as near-term implications for the housing market and the economy. The trapped homeowners, who bought at or near the peak of the housing boom, have seen the value of that investment decline, leaving them without the down payment they need to trade up to a larger home (even if they succeed in selling their existing one) and without the equity cushion that might help them weather a future financial storm. “For those in their late 30s, this is going to be a big problem,” Zandi told CNN-Money.com.
Setting aside for a moment the plight of under 40 homeowners (probably easier to do if you aren’t one of them), the financial condition of American households overall has been improving.
The Consumer Distress Index, published by CredAbility, hit 71.3 in the second quarter, the first time the index has climbed above 70 since the third quarter of 2008. (The higher the reading on this 100-point scale, the lower the stress level, with anything below 70 indicating financial distress.) That’s a 1.4 point improvement over the first quarter and a 4.6 point year-over-year gain, fueled largely by increased savings rates, a decline in mortgage delinquencies and an increase in mortgage refinancing, which has enabled many homeowners to reduce their monthly housing payments.
Among large metropolitan areas, Boston had the highest rating and lowest stress level (77.42), followed by Washington, D.C., Minneapolis-St. Paul, Dallas-Fort Worth and Denver. Three of the five large cities with the highest stress levels were in Florida – Orlando (59.47), Tampa-St. Petersburg (60.13) and Miami-Fort Lauderdale (63.09). The least distressed states were North Dakota, South Dakota, Wyoming, Nebraska and Iowa.