Wednesday, June 30, 2010

Sub-prime, adjustable rate teachers’ contract

(Other Side note: what follows is an essay on the recently approved Brunswick teachers contract.  We hope you’ll bear with us as we set the stage for the heart of the issue.)

Much has been written and said about the great ‘housing crisis’ and/or the bursting of the ‘housing bubble’ in the last year and a half or so.  And it’s eminently arguable that this housing snafu, or more appropriately, the home financing snafu, was the underlying trigger and basis for the ‘great recession’ we now find ourselves in, and are having great trouble escaping from.

The story line in Washington and the mainstream media is that unscrupulous mortgage agents were pushing undesirable financing plans on home buyers who had no idea what they were getting into, and that the loans often involved skyrocketing interest rates and balloon payments.  Given the nature of home financing, where your property is your collateral, the deal is that you either pay up or you lose your house.

In most cases, the ‘loan paper’ was an adjustable rate mortgage, with a ‘teaser rate’ at the front end making for a seemingly painless entry into the glory of home ownership, which was seen as universally desirable.  By definition, the consequence of a very attractive front end with such loans is a far less attractive and predictable back end, with serious vulnerability to economic conditions.  This includes the possibility of rapidly increasing monthly payments, or even worse, the need to make balloon payments and refinance in the not too distant future.

While there may be some ‘unscrupulous’ mortgage agents, it’s most likely that in the overwhelming majority of cases, the details of the loan were spelled out in the relevant documents, since we have thousands of state and federal regulations demanding that copious paperwork be provided with home mortgages.

You simply had to read them, and if you couldn’t assess your risk and exposure, you should have asked for help before signing.  But you knew things would be better in a year or so, so what the hell, you just signed the papers and moved in and moved on.

While the borrowers may not have understood what the variables and risks of the loan were, at least they weren’t signing a contract that only specified the details for half of the mortgage term, leaving the rest undefined.

Those who signed up for these loans overwhelmingly believed their homes would be worth more with each passing year, and that their personal financial circumstances would be improving steadily, so the ugly little details of the loan were more or less irrelevant.

In Brunswick, we know, as certain as you can know, that in a year or two, things will be worse.  Besides the lingering effects of the recession, we suffer from Maine’s systemic aversion to economic growth, and even worse, the shutdown of the Naval Air Station, a major force of regional prosperity for the last half century.

No matter; our local government has entered into a contract, a financial instrument, that is wide open and leaves taxpayers exposed to completely unbounded risks.

Town officials got teased and tempted by a front end that made for good public relations, and allowed the budget process to move forward for the moment. Unfortunately, the back end of the deal is not in print; the details are completely unknown.

If that’s not ‘subprime’, and indicative of unscrupulous agents, I don’t know what is.  But then the payers in this agreement are not playing with their money, they’re playing with OPM – other peoples’ money; specifically, local taxpayers’ money.

Nothing – I repeat nothing – in the contract says we are obligated to come back to the table in the fall to discuss the second year.  In fact, there is no mention of the fact that the second year is TBD.  The only hint is the lack of a salary chart for the second year.

The obvious question before us is who has the leverage in this leap into the unknown?  And what are the limits involved?  Officially approved limits, that is.  What are the boundary conditions?  What are the obligations for coming back to the table? 

One doubts that the union was willing to go forward on this basis on a handshake.  They don’t work that way.  Which suggests that there is a written agreement distinct from the publicized contract that details additional conditions, commitments, and agreements.  What are they?  How do we find out what they are?

At the moment, Side is pursuing this through the Superintendent and the School Board Chair.  While we have nothing to show for our efforts so far, we will continue trying.

We’d be lying, however, if we said we don’t smell something amiss here.  Or denied that our officials look like patsies offering up a glass jaw for a second punch. 

If you think we’re wrong, or have proof confirming it, please chime in and let our readers know.

Until you do, or other facts come to light proving otherwise, we’ll go with the assumption that the teachers’ union has once again toyed with us, and that taxpayers will be compelled to fork over more and more of their diminishing assets, regardless of steep enrollment declines, an anemic economy, and completely unsustainable fiscal practices.  And that they’ve done so with detailed guidance from professional state and national union leadership that were preparing for just such a situation.

But that’s just me, and as you know, I’m not like the others.

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