Bad mortgages: To walk or not to walk? That is the question…

April 21, 2010

Is it wrong to walk away from a mortgage because your house is now worth far less than you agreed to pay for it? And is it even more wrong to do so if you can still afford to make the payment?

Technically the answers are probably yes and of course.

But common sense, the kind that many money makers use, would tell you no, circumstances may well make it the right thing to do.

The story on the TV I was watching said that the Mortgage Bankers Association was urging underwater homeowners not to default. “Think of your neighbors” , they said. It depresses property values, they said, but the narrator of the story pointed out that, paradoxically, the bankers association defaulted on the mortgage for its own skyscraper because of the lost value of it.

So there you go.

If you can’t afford to make the payments anymore there is really not much recourse.

I know from personal experience and from that of some people I know that the banks, contrary to what many so-called advisors will tell you, are not willing to listen to any renegotiation talk, and besides, you may well have nothing to offer them anyway.

Interestingly, a high number of the relatively few people who have managed to get assistance from the emergency rescue program from the Obama administration have wound up re-defaulting.

Defaulting is essentially just an unofficial bankruptcy.

Now as to willingly defaulting when you have the means to pay just because you make a gamble and lost, that does seem a tad immoral. But then again it’s human — it’s what people do to survive. And the big boys on Wall Street did get bailed out by the taxpayers on their gamble and on their crooked dealing — so there’s something to at least rationalize with.

Part of me says or wishes the government would have bailed out the homeowners, not the investment bankers, but part of me says neither was a good idea.

Consumers and big time investors were operating in a phony, corrupt market. The consumers should not have tried to take on more than in their hearts they knew they could handle and the high finance people knew what they were doing was wrong and could lead to no good. There was a collective lapse of judgment and morals and now so many are paying the price — not all. The shameless, such as Goldman-Sachs, are probably snickering as they stuff their pockets and rationalize away all their thievery, blaming any wrong doing on a few bad apples and ignorance of what was going on in the next cubicle or office.

When we get back to strict oversight in financial dealings, aimed not at protecting investments but rather insuring honest dealing, and when we let it be known that bailout is not an option, our economic vigor will recover.

And then maybe we an go back to producing things and services people really need rather than trying to make wealth out of nothing and winding up with nothing in the long run.


I list some secrets of financial security…

March 10, 2009

Here’s some remarks aimed primarily at young couples or maybe anyone who is not on Social Security yet, and you might file it under do as I suggest not as I did.

It’s all about how to handle money.

What makes me an expert? I’m not. But I have a life time of frustration to look back upon and can see the error of my ways.

I realize most who even bother to read this will soon forget it or reject it outright, but I have nothing else I want to do at the moment so here goes:

Definitely create a household budget. You don’t need a computer program for this. What you do need at the minimum is a pencil (pen) and paper.

Write down your unavoidable expenses.

Housing – (rent probably, but a mortgage payment of course is the same thing – you don’t own that house until the lender gets paid off.).

Utilities – Where I live, if you don’t keep current on your utilities the city actually has the power to evict you.

Food – you have to eat, but the good thing here is that you have wide latitude on how much you have to spend.

Clothing – This is difficult. Not everyone has the same clothing needs, but again, you have wide latitude on this as well. The best you can do on food and clothing is see what you are spending now and then arbitrarily cut back a few percentage points.

Transportation – I will assume here that you will depend upon a personal vehicle. If you have convinced yourself that since there are two of you you need two vehicles you’ve already fallen in to the money pit trap. My advice is to make one vehicle work for you until you get financially secure enough to expand if need be. If I sound unrealistic, then you probably don’t want to read any further. Good luck! But on that transportation, count everything – fuel, tires, general upkeep, and payments if you are buying a vehicle on time (but if you are, I think you’ve already gone wrong, but that can be debated).

Now that you’ve added your expenses comes the easier part. Add up your income. There is no getting around it, your expenses have to come out below your income. In no case should one, even temporarily, try to live beyond his or her own income.

And the best piece of advice I have ever heard is from an extremely shrill and annoying infomercial when the idea of buying property for nothing and then flipping it was in vogue (maybe those ads still run). But the sage piece of advice was this:

“Watch what the poor people do, and don’t do it!”

Poor people always live beyond their means. They do things like go to check into cash and pay a thousand percent interest to borrow on their next paycheck or their next welfare check.

Up until recently banks were sending out guaranteed approved credit card apps willy nilly. So poor people, and soon to be poor people, just charged it all to the max, thereby eliminating any chance they might have had to get out of the financial hole.

The lesson here is don’t buy on credit. Don’t buy on time (same thing). Always, always, buy cash. If you don’t have the cash right now, guess what? You don’t need whatever it is right now.

This may sound pathetic, but some of the happiest moments in my life have been when my wife and I bought something for cash. A few years ago we bought a new clothes dryer. Paid cash. We had something we needed at the time and no worry over how to pay for it.

For my whole life prices have been driven upwards because merchants have pushed credit to induce customers to overspend creating a bigger and bigger demand (well until recently). If everyone paid cash, prices could be kept more in check.

So for instance, how does one purchase a home without taking out a mortgage (borrowing)? You don’t. I’m thinking the idea that everyone should want to invest in a home was a false notion all along. It does work for some. But rent is a straight forward deal. I pay you the money and I get to live in your house as if I owned it, but I don’t have to worry about the upkeep. If you, the landlord, do not live up to your end of the bargain, I move. If I don’t live up to my end, you evict me.

Houses can be a good investment (well in the past), but they require tremendous upkeep (money), insurance payments and taxes. Think of all the things one could do with the money that is sunk into a house. Sure you get that mortgage deduction (but even that is threatened by the need for tax revenue), but that is a kind of slight of hand. You would not need it if you did not have all those extra house buying expenses and had a lower rent payment. It’s kind of like not claiming deductions on your payroll tax throughout the year, thus lending your money for free to Uncle Sam and then pretending you are getting some type of windfall when you receive your refund. Congratulations, you’ve loaned out your money for free. I guarantee no one, but maybe your folks or a rich uncle, is going to loan you money for free. You just flunked introduction to business or consumer finance.

Buying a car is a subject all in itself. There are many ways to look at this, so I think I will address that in a future post.

And here’s something: you might say that you have to buy certain things otherwise you will not be able to keep up with your contemporaries and you will not be happy. I’m sorry, you may have a neurosis. You probably need counseling or better yet, snap of it, or just ignore all of what I have said and again, good luck!

Just as you need to get a handle on your income and outgo, you need to above all sock some money away in some type of interest bearing account that pays you compound interest. Just read up on the basics of compound interest (even if you are math challenged). A lot of unsophisticated people have made a lot of money over the years because they understood the benefits of compound interest. And this savings is a way of making continued earnings on your money and is a safety net should you lose your job. It is not a Christmas Club.

And it just keeps coming to me. If you are still young enough, you owe it to yourself to learn a skilled trade or profession or better yet, both. Don’t relegate yourself to unskilled or semi-skilled worker status. Skilled people are always able to demand good compensation (or at least better than what everyone else is getting). And don’t let yourself get stuck in a profession where your worth is measured in a totally subjective manner (a journalist, an artist). And in this day and age you have to have broad knowledge and be flexible and maybe even continue your education or training on the job.

Not everyone can do all of this. And not everyone can be financially secure and secure in themselves either. But maybe you can.

P.s.

If you are single, I would suggest checking out the military. If you are already married, no. The ancient rule in the military was that you did not get married until you attained career status. They should have kept it (I know, these days a lot of couples are in the service together – can’t see that one). While the military is fraught will peril, so is life in general. Do your own research. Do not depend upon recruiters. Unfortunately they are pressured into at the minium stretching the truth and too often into outright lying.

I would talk to career military persons, the more the better. And go for the top. Be an officer or warrant officer or at least strive to make it to the top of the NCO ranks. But you have to accept the military way. It is not the civilian way. Be honest with yourself. The military offers great opportunity. It offers great peril, as well (you need to realize that even if statistics are with you, you have to be willing to lay down your life for the cause). So it may not be for you. You also have to realize that you cede many of your personal rights to the military. You will be under the Uniform Code of Military Justice. You might want to take time to study that and read some history on how it’s been applied before you sign on the dotted line and raise your right hand.

(Copyright 2009)


I resolve some of the issues of the day…

March 6, 2009

(Copyright 2009)

I have some ideas on how to resolve some issues of the day:

THE MORTGAGE CRISIS: President Obama has announced his program, but as far as I can tell it only offers help to a limited few. While at one time I leaned toward thinking he ought to get the foreclosure problem solved first to bring stability to the financial system since we found out nearly our whole economy was tied up in bundled mortgage securities, I no longer feel that way. Let the market sort it all out and somehow get back to a realistic system of financing housing that would probably look like the way it was done thirty years ago or so. Hefty down payment, fixed-rate mortgage, the likelihood one would have the ability to pay a prerequisite.

California, the state that is broke, has an asinine new program to pay a gigantic tax credit for anyone buying a brand new (just built) home. Thousands of empty homes, and we need new ones? That’s the California mentality. (There is also a similar federal program, but I understand it is not limited to new homes.  But here’s the question, why the tax incentives? Finally there are bargains galore out there — except no one knows the future of a home investment now. But we do know the government needs the tax money, to pay off the national debt if nothing else. ) 

THE BANKING CRISIS: Please! Stop the insanity! Let the too big to fail banks fail, because like the small town no government bailout bank official said on ABC News, “they’re not too big to fail, they’re just too big.

Okay, so I’m not an economist, but it would seem to me that eventually some element of capitalism will fill the void left by banks too fearful or too greedy (they want to see how much they can extort from the government first) to do what it is they are chartered to do – loan (not give away) money.

I think all along what we should have done is go around the high flying investment bankers and let them stew in their own juices. Perhaps the bailout money should have been put into a temporary government loan entity.

The government using taxpayer money has showered trillions of dollars on those boo hoo babies who can only fly in private jets away from the riffraff (I feel some of their anticipated pain – in my own world far lower down on the totem pole I find myself going to the freak show that is the low cost supermarket). The Wall Street bankers must use government bailout money to wine and dine at plush resorts because, well in their world that is the way business is done. Of course back in the not-so-old days what happened if you made bad business decisions is you slipped out of that privileged world and, well, went into real estate. But things got so out of hand in the financial industry that the piles of bad debts worked their way into the system like a cancer. But the upside for the investment bankers was that they realized they now had leverage to blackmail the government and the people.

But it’s all a bluff. Call’em on it.

THE DOMESTIC AUTOMAKERS: They were going the wrong direction way before the current economic crisis. They were not flexible enough and let their production costs soar too high. And why would any company be saddled with paying people who no longer work for it? Let poorly managed companies fail and make way for better managed ones.

Actually that does not have to mean the end of the domestic auto industry. It does mean different players, and if the United Auto Workers don’t see reality, it may push the industry into the southern states where the foreign auto makers have found willing and appreciative workers.

I realize that as long as the Big Three were rolling in doe the UAW simply took the opportunity to get in on the action. But when market share plummets, what’s left?

HEALTH CARE: Some Republican lawmaker was quoted in a blog I read pronouncing that health care is not a right. Who said it was? Well, okay, many have, but I support universal health care of some type, but I would never hold that it was a constitutional right. But that does not mean that we as the people cannot provide for ourselves some health security through the structure of government. I have some hope now that the demand from the people is going to outweigh the selfish interest groups who stood in the way of this need for so long. I saw some little sign on the news that the private health insurance industry is in more of a compromise mood now that it has seen the true power of the people and their call for change as was witnessed in the last election. Financing will be the big stumbling block. Making the “rich” pay doesn’t work because that still doesn’t get the amount needed. I hate to say it, but the late conservative William F. Buckley Jr. and the more liberal ousted former Democratic governor of California Gray Davis agreed on one thing: the bulk of the taxes always have to come from the middle class (and don’t ask me for a precise definition of that) because there are more of them. But, although they struggle, all the other industrialized nations of the world finance some form of universal health care. But we wouldn’t want to see how they do it, would we? Okay, I’ll give you a hint: they pay for it by somehow spreading the costs. And why the business community (not really a homogeneous group, I suppose) is not solidly behind universal health care, I don’t know. I realize small business people have to have mixed feelings. That’s because they go to local chamber of commerce meetings where they wear white shoes and start out their presentations with the standby Republican right wing sarcastic joke: “Hi I’m from the government and I’m here to help you.” So the point is, government help is something to shun because it comes with strings attached, that is unless it is a small business loan or a tax credit for hiring foreign workers or moving production overseas. But in reality, employees covered for health insurance without any liability on their (businesses) part would seem manna from Heaven. Then again we could just write off the part of the population that can’t or no longer can afford health care and leave them to get sick and die, thereby saving tax expense and giving us more air to breathe.


One family’s loss another’s opportunity…

February 19, 2009

(Copyright 2009)

I felt kind of embarrassed watching my television screen seeing reportedly desperate American workers losing their homes to foreclosure after losing their jobs. Embarrassed because these homes I was seeing on my screen did not look like modest working people homes, they were two story, upper middle class or professional class edifices with new super-sized pickups and giant SUVs parked out front.

(We have a higher class of poor people in America.)

That of course does not make the plight of these beleaguered homeowners any less desperate than someone losing a more modest home with smaller and older vehicles parked out front, but there does seem to be something incongruous about this picture.

Credit, way too much credit, has allowed a much larger portion of the American workforce to live as if they were upper middle class (sorry for using the class terminology, but how else do I describe it?) over the past couple of decades or more.

It is often said that most American families are about one pay check away from losing everything, and apparently that is so from what we are witnessing now.

I have a thought. In the neighborhood where my wife and I lived until recently, many homes are being left vacant. Others are being rented out, but the precarious lives many renters live leads to a lot of moving in and out. Yard and home care in many cases is suffering, although overall, things are not desperate yet (maybe).

It is said that homeowners who are current with their payments and are not in danger of losing their houses, and ones who have been careful and played by the rules of prudent finance will nonetheless benefit from President Barack Obama’s administration’s move to bailout distressed homeowners, because blight in neighborhoods could be prevented or curtailed and the market could be restored.

Many or most of those distressed homeowners were not terribly responsible, taking on mortgages they should have realized they could not handle (unless the price of homes continued forever on their rocket ride up and they therefore could leverage themselves into upper middle class into infinity – but even rockets often come crashing back to earth). Some may have been bamboozled by real-estate salespeople, but we have to demand of everyone, to include ourselves, a certain amount of buyer bewariness. We do have public education (although personal finance is not emphasized), use it.

But here’s a thought, just a thought:

Okay, so the lenders take over homes in my old neighborhood. They will, or should, either eventually be sold to someone else (and there are bargain hunters out there) or they will be rented out. If neither is the case, there must not be much of a demand or need for housing (and could folks rent the homes they are losing for the short term? I know, only if the rent payment was a lot lower). I always wonder why the push to get homebuilding going in the local area when apparently we now have an oversupply. I know the answer here too, carpenters want to work and I don’t blame them. But one of my now retired carpenter brother-in-laws said that when there weren’t new homes to build he did remodels. He was never out of work during his career and he never (with one short, very short, exception) moved out of the local area. 

I guess part of what I’m trying to get at here is that letting the market itself correct the problem might work somewhat more efficiently and even equitably (I know, too late for that).

I have to think that as bad as unemployment is around my area (about 10 percent – not unusual for here, though) , that means 90 percent of the workforce is busy (that’s how conservatives interpret unemployment figures, so I thought that even though I am a moderate, I would steal that from them). That means there are a lot of people who could take advantage of much lower home prices. There may be a lot of working people living in apartments who could now afford to move into a home, either to rent or buy (although, reality tells me that most apartments in my area are either occupied by the never or seldom working class nurtured by the welfare system, which was never really reformed, and retired people on fixed incomes).

The big problem around my area (and everywhere, I suppose) is speculation. Speculation is what drove up home prices around here into the stratosphere before they came back down to reality (and I think in my area at the going rate one could use the old, old fashioned rule of 25 percent of the household income for a payment, as opposed to the outrageous modern rule of 50 percent or more). The easing of lending rules (like can you really afford to take on a mortgage) led to a rush to buy homes. Outside and even inside spectators took advantage of the situation and gobbled up homes, not to live in them, of course, but to flip them. I have a nephew who actually did buy a home to live in, fixed it up, and then flipped it (with the help of his retired carpenter dad). He got out just in the nick of time; it was breathtaking. He’s an extremely hard-working fella and I don’t begrudge his speculation and I suppose it is hard to impossible to limit speculation. But make no mistake, speculation hurts. It drives up home prices way above what average working families can ever hope to afford (unless we drop prudent lending rules like we did – but now we know the outcome).

So I’ve kind of gone around in circles. Just some random thoughts. No real conclusions, except: “a penny saved is a penny earned”, “let the buyer beware”, “don’t take any wooden nickels”.

Add 1:  Hopefully Obama’s forclosure rescue plan will fare better than attempts so far by lenders. I heard on TV that the current rate of  re-default on adjusted mortgages is 50 to 60 percent. A Wall Street Journal editorial pegged it at 50 percent.

P.s.

I know of a good home buy in a certain neighborhood.