An Appeal to Septuagenarians

As portions of the mainstream media continue to hammer away at unsound lending practices and other factors driving the speculative frenzy in today’s real estate market, senior citizens must look on in amazement at what young people are doing these days.

ABC World News Tonight ran two pieces in the past week about interest-only loans - one a South Park style commentary by Robert Krulwich, and another on Saturday night's broadcast by Gigi Stone and Mellody Hobson. Both segments were stern warnings about the perils that interest-only loans present to those who choose them - most strikingly, the danger of what happens if home prices go down as monthly payments rise.

A Look at the ABC News Reports

While the Krulwich piece was excellent - a dumbed down, very entertaining cartoon which really should have made the issues comprehensible to just about anyone - a search on the ABC News website was unsuccessful and Tivo obediently followed prior instructions to jettison this program to make room for new ones. So, unfortunately, this segment is now just a memory.

The Saturday night piece was aired in two segments, with the first segment Home-Ownership Boom Fuels Risky Loans available online. During the second segment, anchor Dan Harris interviewed ABC News Financial Contributor Mellody Hobson - it is provided here:

Harris: Let me ask you your take. Are these ever a good idea, these loans?

Hobson: I actually don't think they are a good idea. One of the things to keep in mind is you're not building up any equity during the interest only period, which isn't great. It's like having a credit card where you only pay the minimum balance, but in this situation, none of the money goes to principle. More importantly, I'm really concerned that people are stretching, buying way more house than they can afford. In the beginning the payments are very small, they look very affordable and attractive, but within three to five years, those payments jump dramatically, in many cases doubling. And it scares me, because I think in a few years, people are going to be looking at foreclosures.

Harris: Do you think lenders are being irresponsible pushing these products on people?

Hobson: I think lenders are giving customers what they want. But I think they're doing it in a very aggressive way.

Harris: So, for customers who want to buy a house and don't have that much money are there alternative loans that they should be looking at?

Hobson: The best alternative is a traditional 30-year fixed rate mortgage. Right now you can get it for 5.62%. A year ago that number was 6.28%. If you can't afford a house at this interest rate, you can’t afford a house. But before you get discouraged, keep in mind that renting, in many parts of this country, is the more compelling value because housing sales have been so red-hot.

Harris: In other words, buy what you can afford.

Hobson: That's right.

Well, it seems that Mellody has hit the nail squarely on the head - "payments jump dramatically", "looking at foreclosures", "renting ... is a more compelling value". And we can only hope that, in the first segment, the exhilaration of the calculated risk made by Emily and Marc Duffy doesn't turn out to be just an ill-advised gamble at the peak of a speculative bubble, where, in a few years they find themselves upside down in their dream condo, as their monthly payment ratchets upward.

They may look back and wish they had been content to rent, as Mellody advises.

Then again, their $300,000 condo may be worth $600,000 in a few years, and they will look back at their calculated risk and marvel at how astute they were.

We'll see.

Did the right people see these?

Looking at some of the demographic data for network news broadcasts, one finds that the median age of network news viewers is around 60. Not surprisingly, the thirtysomethings who seem to dominate anecdotal accounts of the current real estate mania seem to prefer Cable TV News to Nightly Network News by roughly a three-to-one margin. And then of course there is the internet, offering such fare as this [in defense of the Monaco Corporation, while they do claim to be a "solutions-based firm", they don't claim that these are "good solutions", just solutions].

So, the answer is probably no - the people who would most benefit from seeing these segments on ABC World News Tonight, probably did not see them.

What is ABC's Motivation?

So what's the motivation on the part of ABC News to air warnings such as these? Surely they know their own demographics. While there may be some sixty year olds taking out interest only loans, they likely make up only a tiny portion of the total.

This can be nothing other than an appeal by ABC News to septuagenarians all across the country to protect the younger generations from themselves. It is clear that the banking industry, the government, and most importantly the banking regulators, are doing little in this regard.

ABC News is kindly urging grandparents to get on the phone and call their children and grandchildren. To relate to them stories of a different era, when real estate purchases required 20% down payments and 30-year fixed loans - when prices didn’t double every three years - when homeowners didn't borrow against their home to buy boats and jet skis and granite countertops.

Perhaps, the eighty year olds will relate what it was like being a teenager during the Great Depression - when people who were lucky enough to have a job saved money, but didn't trust the banks.

Maybe the septuagenarians can do the work of the banking regulators.