Thursday, February 19, 2009

The Housing Crisis - What is being said and what needs to be said...

I came across an article at today that interviewed Sheila Bair, Chairman of the FDIC. It basically talks about how the effects of Obama's housing rescue plan will be felt within the next month. I don't know how realistic that is but that is not what struck me about the article. There are some recurring themes in all articles and news surrounding the housing crisis that I think need to be addressed. I will start with this excerpt from the article:

"Bair also said that the huge expenditure won't halt an avalanche of foreclosures, conceding that there are millions of homeowners who are now so far "underwater" -- their homes now worth less than their mortgages -- that they will inevitably lose their homes."

I have heard this underwater remark inexplicably linked to foreclosure quite often and I just don't get it. I am not tracking how being underwater in your mortgage automatically means you are going to lose your home to foreclosure. I will let you delve into the innermost personal world of the Badski as I illustrate what I mean. I bought my condo as the boom was cooling off, and right before the floor fell out of the housing market. I used the VA loan which is a no money down loan for military members. I bought my condo for roughly $230K. If I was to try and sell it today I would likely get around $210K-$215K even with the improvements done to the place. I have about $8K in equity in the condo so as you can tell I am technically "underwater" in my condo. Is it a good situation to be in? Not really. Am I bitter about it? No. Why you ask. Because as I have stated in my previous Money Tips posts gains and losses are only realized when you sell! Being underwater so to speak is only a temporary evaluation of your property's worth in the market. So my options are limited by being underwater but I will just have to utilize the right strategy for the right market. If I had to move tomorrow I would probably try to rent the property until values increased, or lease option it, or even raffle it off (not sure if its legal in NJ). The point is you are in control and must use the right strategies in the right market (read Dean Graziosi's book on my bookshelf for an excellent description of this concept). OK so how does this apply to the underwater/foreclosure connection? Well that is my question too. As long as you pay your mortgage there is no reason why being underwater in your mortgage should cause you to go into foreclosure.

OK so we have established that the only way to be foreclosed upon is by not paying your mortgage. Well first and foremost you must have a job. This is the vicious cycle that is hitting our economy so hard right now. As the economy gets worse more people lose their jobs and in turn more foreclosures occur. Which in turn floods the market with available properties, ultimately lowering property values (supply/demand 101). Another problem is the large amount of adjustable rate mortgages or ARMs. These loans typically start with enticingly low rates which shoot up to a much higher rate at a set date in the future. Many people are unable to afford their mortgages when the loan adjustment kicks in. Mortgages are securitized (packaged together in large bundles) to supposedly mitigate risk and are then sold in the market. The problem is that these were extremely difficult to value. This starts to lead into the credit and banking crisis so I will stop there.

I like to read the comments people leave on articles, which is one of the reasons I read a lot of articles on I like the comments because the people who post are typically on opposite ends of the political spectrum. It exposes the most passionate arguments on both sides of the coin. DISCLAIMER: Most of these people are complete morons. With that being said it is a cross section of what people across the country are thinking (which is a bit scary). When I read the comments on this article the two sides arguments are largely based around the following: "I pay my mortgage on time for a house I could afford...where is my bailout?" and "This crisis affects everyone. Many of these people were preyed upon to take on mortgages they didn't understand and couldn't afford. You should feel blessed it is not you and help out those who are in need." That is a big generalization, but is the gist of the opposing sides of the issue.

First off, every argument has some valid points and some elements of truth or else so many people wouldn't feel that way. But in this case I think we spend so much time bickering and pointing fingers that we push aside or skip over some things that need to be said. The elephant in the room if you will. When people go with the whole "Dude where's my bailout" approach they are missing the point. From my posts you can probably determine that I am generally against most bailouts. However, its not because I wont be getting what I consider to be my fair share of the benefit. It is because I acknowledge that the funding has to come from somewhere. There is no such thing as a free lunch and the government, much like a corporation, is merely a conduit that passes on financial burden to the consumer or in this case the taxpayer. So the mentality should not be what I am getting, but the question of what behaviors are we encouraging/enabling and at what future cost? The mindset that many of the foreclosure cases were due to people being preyed upon is another view that kills me. I think it's a total cop out. Like I said, I bought right before the market crashed at the height of the "creative mortgage application" craze. Incomes and debts were not validated and there are stories of lenders encouraging applicants to put down whatever it took to get them qualified. I don't doubt those stories are true and I know from experience that I didn't provide too much information validating the numbers that I gave my lender. But guess what? The numbers I gave my lender were accurate. Whether the lender encouraged you to lie/stretch the truth or not, it is still ultimately you who must tell the lie. And guess what? It is ultimately you who must foot the bill. No matter how much you wished your income was the amount you told the lender it was, you are only able to pay your mortgage with your actual income.

I think that many of these housing crisis issues would be addressed with the following acknowledgement from our government and its people. Owning a home is not a right! Just because you were born or reside within a free country doesn't entitle you to own a home. Owning a home is a privilege that comes with responsibility. There are always unavoidable situations that will cause people to go into foreclosure, and I don't want to sound insensitive to those people or their hardships. Who knows it might be me some day. However I think it is evident by the national housing crisis this was not the case. What the crisis has illustrated is the right to enter into a bad agreement. That is the price of living in a free country. If you hold yourself personally responsible it is so much easier to accept and to avoid! If you want the privilege of owning a home make sure to acknowledge the right to enter into a bad agreement. Make sure you can pay the mortgage, to the best of your ability ensure that you will have a job, in the event you are laid off, injured, etc. make sure that you have the ability to continue paying the mortgage until you can either sell the home or recover. When you take personal responsibility for your life everything else falls into place.

1 comment:

Matt Bader said...
Great article in the Economist, which is a great news resource that offers an outside (UK) view of current events. The article addresses some of the same issues that I wrote about regarding being underwater. It actually provides statistics and does a pretty good job analyzing competing views.