Leverage is “Killing” Millions

Image by Ethan Bloch via Flickr

Teenagers’ pockets need to be lined with the newest iPods and iPhones at school. Seven year-olds demand from mothers the latest advertised breakfast cereals on tables each morning. And, parents just adore their shiny 2009 red Corvettes and black Mustangs in their garages.

Our nation’s and city’s “got’ a have it now” culture is the big train that drives consumer spending. The demand keeps the engines of our national and local economies running with sales, jobs and profits. Our capitalistic society constantly inspires entrepreneurs to innovate and introduce new products to market. It forges research and development, technological and health-care advancements. And, this is all good for our collective economic well-being and progress. But, our often times overzealous in-debt spending (or financial leverage) – is a big monster we’ve created. And it has recently destroyed the lives of millions.

Warren Buffett has declared on several occasions that the two things which have destroyed more lives than any other are “liquor and leverage.” He warns we should stay away from both. Most of us know alcoholism can cause a whole host of problems from health to financial to marital and familial. But leverage can create the same nightmare. We’ve been witness to it over the last several years with the crushing stock and real estate markets in L.A. and nationwide. Mr. Buffett shared last month at his annual Berkshire Hathaway shareholder meeting, “Leverage is what causes people real trouble in the world,” he said. “You don’t want to be in a position where someone can pull the rug out from under you or, emotionally, where you pull it out from under yourself.”  

Today, many reasons abound why we’re facing crumbling real estate values and the nationwide foreclosure crisis. The biggest reason is that millions have become far too “leveraged” – well beyond their capacity to repay their debts. The “American Dream” of homeownership was opened up to millions of families with the ease of credit through lax underwriting standards. Many bought too expensive homes with almost no money down with household incomes that did not justify the purchase to begin with. I should know – I’ve been in real estate lending in Southern California for about 25 years. Incomes appeared more believable on loan applications when gardeners became “landscape architects.”- gas station workers became “petroleum transfer engineers” and call-girls and lap-dancers became “professional consultants.” Calamity set in when adjustable rate mortgages reset to much higher rates and payments – forcing families to abandon homes which spurred a free-fall in real estate values. Foreclosure rates skyrocketed and unemployment numbers and lay-offs spread like “wild fire” nationally. Recently the only groups which have seemed to benefit from the economic downturn are mental health professionals, bankruptcy and divorce lawyers.