ATWT Series one: The Two-Income Trap by Elizabeth Warren and Amelia Warren Tyagi
Discussion of Chapter Six and subprime lending, and some unexpected Noticing
Chapter Six
This chapter opens with Warren discussing how Hillary Clinton worked to support a bankruptcy bill and then worked against it after receiving some donations from big banks. From there Warren is off to the races lamenting the rise of "deregulated" lending. She mentions that home equity loans increased by 150% in four years, that mortgage debt is higher than ever, and that people have lots of credit cards. She then admits that previously even middle-class families simply couldn't have that much credit access.
Curiously, Warren asserts that it was entirely due to strict legal regulation. It is curious precisely because the South Dakota credit expansion in the late 1970s that led to an overall expansion of credit in the 1980s and beyond stemmed from a massive increase in full-time female employment. There is no path to that credit expansion without the much larger pool of female earners, both married and unmarried.
After hammering on the glories of increased female employment in an earlier chapter, Warren is silent about its impact when it comes to declaring the banks and credit card companies big bads greedily driving middle-class families into bankruptcy. In one of those "harsher in hindsight" details, Warren analogizes South Dakota's higher interest credit exception to marijuana legalization laws. Go figure. Her argument about the credit expansion boils down to banks getting profit from the higher interest rates despite the higher risks of consumer default among the new credit pool.
Warren engages in some circular reasoning around this. Families use credit cards for emergencies and temporary cash crunches according to her, but they also take on second mortgages to pay down those credit card bills. Fundamentally the argument that all the credit spending is "necessary" never quite adds up. Warren mentions that about one third of bankrupts have an entire year's salary on credit cards. Warren harps on medical debt, but the metric for medical debt, as discussed at length by Megan McArdle in various articles, is $1000 or more in year 2000 dollars of medical debt when filing for bankruptcy.
It is not to say that families in bankruptcy are lying or misleading, but that based on the evolution and growth of the professional managerial class (PMC), the families Warren is lamenting are not so much middle-class as working-class who could not make the necessary financial leap into the new, higher-earning middle class consisting of well-earning married parents where one or both parents had four-year degrees. This is left entirely out of the book, but that's the underlying falsity of the text. The Two-Income Trap is primarily a failure of lower-middle class and working-class people to make a leap they were not being told was necessary.
The result is something Warren does mention in this chapter, the concept of being "house poor". The footnotes discussion will dig into that a bit, but Warren's response to the fact that many families are house poor in 2000 despite a drop in average downpayment from 18% in the 1970s to 3% is that the mortgage market should be regulated more somehow. She entirely blames deregulation for the failure of people to afford a mortgage that only had a 3-5% down payment. She mentions excessive fees and points as a factor in these families' 15-20x higher risk of default compared to people who put up 20% down.
Then Warren again engages in circular reasoning. She mentions subprime mortgages having 240% higher rates than traditional mortgages (15.6% vs 6.5%), but then says subprime lenders primarily target people with traditional mortgages via refinancing. Warren in fact keeps waffling back and forth in the text as to whether she agrees with subprime lenders that subprime mortgages are going to families who would not otherwise be able to afford a house.
For example, she mentions that perhaps 40% of people with a subprime mortgage would have qualified for a traditional one, but only after noting that 80%+ of all subprime mortgages are not first mortgages. So 40% of the 20% remaining is a small number of households who are being steered into expensive subprime mortgages. That would be a serious problem, but not quite at the scale she attempts to present.
Warren seems to recognize this when she uses italics on the correspondingly small absolute numbers of families refinancing into subprime mortgages: 1 in 9 middle income and 1 in 14 upper income. Unusually for this book, Warren finally mentions within the main text disproportionate impact on black households as being more likely to get steered into subprime mortgages. Up until this point, Warren had generally buried in the footnotes details that showed much of the housing and school safety concerns were those of black parents disproportionately.
Years later, Steve Sailer was to mention that steering was ethnically driven, which is not included by Warren (that is, that this early wave of black families getting steered into subprime mortgages were being steered by fellow blacks, often residents in their own neighborhoods, as the same phenomenon happened subsequently among Hispanics a few year later during that housing bubble and subprime mortgage crisis). But instead of considering that implication, Warren instead uses the worse outcomes for black households as another jumping off point to complain about greedy credit card companies and banks.
To a large extent, she is not wrong. Warren moves from subprime mortgages to credit card lending, noting that profits (75%, but Warren merely claims this without source) come from minimum payment payees who fill credit card company coffers with interest and fees. She also describes some astonishing efforts made by Sears to bully people into paying to avoid repossession of department store purchases like car batteries and mattresses.
Warren describes truly appalling behavior by low-level employees in securing cash from families with missed credit card or department store account payments. Yet at the same time, Sears was in such dire financial straits that they were already making more from credit (interest, fees, etc) than actual merchandise sales. Sears became a major credit card issuer itself to keep profit coming in.
Warren misses a real opportunity to dig into the significance of WHY financialization was suddenly so profitable for companies with actual products to sell beyond credit. Instead she frames the entire issue as one of big bad companies attacking hard working middle class families. This makes it harder to develop her later arguments for more regulation.
Warren's desire for all fees to be included in the interest "up front" and for mortgage and credit card interest rates to be tied to the prime rate all ultimately came true nationally *and were in fact in place regionally even when this book was published*. Yet credit defaults did not decrease and just a few years after this book was published, the Great Recession arrived in the wake of the 2007 housing bubble and subprime lending crisis.
Warren proposes reducing the interest that can be collected by requiring lower, non-usurious interest rates, but appears to imply that this will not reduce the number of borrowers. A bit of reality peeps out from the veil at last on page 148, where Warren finally refers to lower-income families at all. But ultimately she feels that reregulation as she terms it, won't reduce credit access for "lower and middle income families", but simply limit them to what they can repay.
This is a very optimistic belief. Warren in fact struggles with the reality that all her regulatory wishes would, if implemented fully, reduce working class, lower income, minority credit access throughout the rest of the chapter. It's just page after page of wheel spinning trying to reconcile a desire for tighter credit and stricter lending with wanting minorities and low income households to have the same credit access as, essentially, the new and growing professional managerial class that was overtaking married household formation rapidly.
Warren even alludes to the government backing "alternative credit" for those too poor to afford a tighter private lending market. This allows her to round out the chapter as she began it, lamenting the way in which banks were major players in developing and crafting bankruptcy and debt legislation.
She notes an interesting way in which banks were defeated anyway in 2002, which was a pro-life vs pro-choice dogfight about clinic protesters having large financial judgments levied against them. She uses this to argue that grassroots groups should mobilize for bankruptcy reform by framing it in terms of racism and sexism and for Christians social justice. That closes out the chapter, but ultimately when the Bankruptcy Reform Act of 2005 was passed, it did not really involve that kind of what we would now term DEI mobilization. It is notable that the framework and the conception of a coalition of the fringes (h/t Steve Sailer) was a narrative hook Warren threw into this book over 20 years ago.
Footnotes Discussion for Chapter Six
This section is pretty intensive because about 1/6 of all the footnote pages belong to this chapter. They begin misleading right off, with Warren relying on not adjusting for inflation to get the statistic that nonmortgage consumer debt doubled from 1993 to 2002. The footnotes also reveal that over 70% of first-time homebuyers in the 1970s came up with their 18% average down payments entirely from savings. Thus if down payments are smaller, even if the ratio of people using savings were the same, they'd be using a smaller savings to purchase with. All things being equal, this would still lead to a higher risk pool of borrowers. And the entire book is about how all things turn out to not be equal among the newer pools of home buyers.
Another round of misleading references is that credit card delinquency rates went from around 3 percent in the early 1980s to...4 percent in 2001 and 2002. This is a very different context in which to place Warren's inveighing against credit card companies squeezing the middle class. It's much more obvious that this is a marginal phenomenon happening to families already at the margins economically.
This is further backed by the references used for home equity statistics in the main text. The reality turns out to be that only 13% of all home owners have a home equity line of credit (HELOC) or a home equity loan and that by the late 1990s the HELOC was 65% of the total. This is important because in an earlier footnote, Warren admits the HELOC population is more affluent. Thus most of the credit use increases were happening with higher earning people in the middle class, especially with the home equity lending she uses in the main text to claim is crippling middle class families and sending them into bankruptcy.
Similarly, it turns out that Warren has no source for families having a year of income in credit card debt. Instead we find that half of all bankrupts have at least six months' worth of income outstanding in credit card debt. Warren just airily declares it is probably more, but that's just an assumption.
Further, despite what is claimed in the main text that people don't go bankrupt due to trouble managing money, it is in fact listed as a reason in bankruptcy filings the majority of the time (credit card debt or trouble managing money). Warren, in the footnotes tries to argue that since these two reasons aren't listed as the *sole* reason, it's not really about that somehow because many other reasons are listed in such filings. Well ok then.
We had to wait all the way until this chapter's footnotes to get definitions of what Warren considers middle class and house poor after these things were mentioned both in prior chapters and prior chapter footnotes with "gotta wait til Chapter six!" The answer is family households earning from $20,000-100,000 per year for 2001 and for 1975 $21,000-108,000 in 2000 dollars.
This range appears to have been selected so that single mother households (usually "Female householder, more than 1 person") would be included in the definition, as the median for them is about 20k, while for all other family households the medians are much higher. Notably, for 2001, the 25th income percentile for family households is 25,000-27,500. The cutoff Warren uses is below the 20th percentile. These seem like quibbles, but the bottom 15-20% of all families is no longer middle class by any kind of coherent definition.
House poor is defined as spending more than 35% of income on housing, the highest percentage comparable between 1975 and 2000. That number went from 2.8% in 1975 to 13.5% in 2001. But in the context of explicitly deciding to include poor households in the "middle class" or "middle income" pool in the main text, this increase is difficult to assess as a middle-class problem. Ironically we get yet another tip of the hat on this later in the footnotes about subprime lending in which Warren admits that 26% of low-income homeowners get burdened with subprime refinancing, a rate twice that of actual moderate-income homeowners.
Foreclosures, while a big deal, are nevertheless revealed to have gone from 0.15% of all mortgages (or about 1/600) to 0.37% of all mortgages (or about 1/280). Those are large relative changes, but still an incredibly small number of home loans. More footnote pages are spent on news articles about Sears being sued and having to pay for aggressive collection of small debts. Payday loans get a mention in both the main text and footnotes briefly, perhaps because focusing too much on them would expose that this is fundamentally a book about lower class earners running into financial trouble under massive credit expansions to high-risk populations.
In another unsourced footnote Warren reveals that bankruptcy filing rates were stratospheric for black homeowners at nearly 40 per 1000, 14.4 per 1000 for Hispanic homeowners and a mere 5.8 per 1000 for white homeowners. I was able to find a more recent study that backed up these numbers in proportional terms, so it is not out of left field. What is is a circular footnote on page 240 referring to chapter 1 regarding sex gaps in bankruptcy, but there is no there there.
Ultimately the footnotes are more like gossip and collations of news articles rather than backing up Warren's claims about predatory lending. It is true that there are clear signs of problematic lending to low income, black, divorced people disproportionately, but this is simply not the frame Warren uses in her main text, which tries to imply that all races are equally being predated upon under mass credit expansion.
Wrap-up of Chapter 6
Chapter 6 is in its way a grudging lifting of the veil that most of the bankruptcy, foreclosure and credit card default concerns that are supposed to mark le Two-Income Trap are not really from people with two incomes getting trapped financially but poorer, more urban, less married, less educated and thus much less middle-class people getting hustled by fellow co-ethnics in a loosely regulated credit environment. However, even with the footnotes, all of this must be teased out painstakingly from source documents and non-source documents referencing bankruptcy and foreclosure by other researchers. Warren, after conceding indirectly the minority skew of all this, moves to a financial advice chapter to close out the book. It is very funny, though not at all intentionally.