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Bitter medicine we sometimes take

So I’ve been sick the past couple weeks.  Nothing serious, just a cold.  I was a little dismayed that Zicam, which usually makes miracles didn’t seem to work this time.  I want to say that I love Zicam, but that’s not strictly correct.  It’s hard to love something that tastes much like the packaging it comes in, and something you only take when you are sick.  I take the melt-aways at the first sign of a cold, and my symptoms usually subside for a while and quickly go away.  Maybe this time I stopped taking it too early, or maybe my cold was a little stronger than usual– who knows.  I’m still going to take the medicine I need to take in order to get better.

Once again, last week was huge for economic news.  President Obama unleashed his plan to prolong the depression “fix housing” for as many as 9 million “homeowners”.  The plan, in the President’s own words:

• Make people who are otherwise ineligible for home loans “eligible”
  • Change underwriting restrictions on Freddie Mac and Fannie Mae from 80% or less loan to value to over 100% LTV
• Any bank or financial institution that takes government money will have to modify loan agreements with borrowers who couldn’t afford to pay their mortgage in the first place.
  • When a lender changes the terms of the mortgage to something that the borrower might be able to afford the government will pay the difference between what the borrower pays and what is owed to the lender.
• Changing Bankruptcy laws.
  • Bankruptcy judges can make a bank or lender reduce the principal on a loan to match what the house is actually worth, rather than what it was worth when the loan was taken out.

Now, I know that my target audience doesn’t have a mortgage, and shouldn’t even be thinking of getting one for a while, but this is important for you to understand because you are paying for this! Let me say that again.  Even though you don’t have a mortgage, you are paying for other people who shouldn’t have had mortgages so they can keep their mortgage.

I’m going to ignore some of the political problems and realities of the plan as stated, and focus on the financial implications and problems.

• Make people who are otherwise ineligible for home loans “eligible”  One of the problems that got us into this mess was people who weren’t eligible for a mortgage getting mortgages.
  
  • Change underwriting restrictions on Freddie Mac and Fannie Mae from 80% or less loan to value to over 100% LTV  Historically, people who wanted to get a loan for a home had to put in at least 20% as a down payment.  Putting down this much money keeps people from walking away from a loan during temporary down swings.  At the beginning of the housing bubble, this restriction, along with others, was lifted.  This also caused the bubble.  Also, if this requirement were never waived in the first place, fewer people would be in a position where they owed more than their house was worth.
    
• Any bank or financial institution that takes government money will have to modify loan agreements with borrowers who couldn’t afford to pay their mortgage in the first place.  So now banks that have gotten themselves into trouble to the point that they need to take money from the government are forced to change their policies so that they are making less money (and still more loans), which will mean that they won’t be able get out from under the government’s “help”.
  
  • When a lender changes the terms of the mortgage to something that the borrower might be able to afford the government will pay the difference between what the borrower pays and what is owed to the lender.  What we’re talking about here is the percentage of income that housing expenses should make up.  I’ve always told you that you should spend between 25-30% of your income on housing.  This plan says that if you have a mortgage payment that is higher than this amount, and the bank has gone through all the other restructuring options that they can, they can only collect the 31% from the borrower, and the government will pay the difference.
    
• Changing Bankruptcy laws.
  • Bankruptcy judges can make a bank or lender reduce the principal on a loan to match what the house is actually worth, rather than what it was worth when the loan was taken out. When a company is told that the contract they made is now being changed against their will, they will stop entering into this type of contract.  What this means is there will be less mortgage money available.  Imagine you lending me $50.00.  I spend the $50.00 and buy something.  Really, you own whatever it was that I bought.  Now let’s say that like every other asset, the thing I bought isn’t worth $50.00 anymore.  Let’s say its worth $20.00.  I’m not paying you anymore because my thing is worth less than I paid for it.  We go to a judge who tells you that you can’t charge me $50.00 for something worth $20.00 and now you can only get $20.00 of what you lent to me back.  Sound fair?  That’s what the government is talking about.

The reality is that these plans are worse than I’ve made them out to be.  What each of these plans do is to force more people into needing help from the government.  When I say “help”, I’m talking about money.  When I say “government”, I might as well be saying you.  You are going to have to pay for years to make up for the money that our government employees are planning to spend.  The worst part– it won’t work.

See, when I started sniffling and sneezing a couple of weeks ago, it was a result of months of waking up early, staying up late, working on a lot of schoolwork.  I had overworked my system, and it wasn’t strong enough to fight off an infection.  I could have stressed out about it, stayed up late worrying, and woken up early to figure out what was wrong, taken no medicine, and I would have gotten worse.  Instead, I took some nasty tasting medicine, wore long pajamas, went outside wearing a coat and rested more.  This is what America needs now.

We need to rest more.  Instead of worrying about the hypothetical, possible, hint of a suggestion of what may happen, we should work on what is happening and take the medicine we need to get better.

1. Stop spending (your) money that hasn’t been made yet to keep people who are making millions of dollars a year in their jobs.  If they were earning the money they are paid, they wouldn’t need to be bailed out.
2. If someone can’t afford the house they are living in, they need to look for somewhere else to live.  Somewhere they can afford.
3. Remember that 25-30% range.  Don’t live somewhere that costs more than that much of your annual salary per year.
4. Save money when you can for things that you want to buy.  When you buy a house, have a large down payment and live in a place that you can afford.
5. EVERY asset loses value.  People forgot that a house is just like a car, or any other asset.
6. Most importantly.  When you buy a house, treat that house as a place to live, to raise a family, to build memories.  Don’t treat it as a piggy bank or an ATM.  If everybody who “owned” a house right now did that, they haven’t really lost any value.  Value is only lost when you sell.  As long as you are living in a place where you can afford the payments, it doesn’t matter how much its worth.

So, Did I miss anything?

Wow!  The past six months or so have been really difficult.  Just to give a brief update of what I’ve been up to…,

• I quit my job to do my student teaching
• After two or three weeks, the school I was at decided that they weren’t ready for a student teacher from a school like mine
• I sat for about a month trying to find a new school to teach at
• I wrote thousands of pages of reports
• I found a new school
• I wrote more pages of reports
• Somewhere I might have slept, although I don’t remember it
• I tried to maintain some sense of normalcy in my life

Not a bad list, but really not much there.  What has the world been up to?

• New president
• Economy tanks!

Really, that is enough, so I’ll ignore six months of other stuff.  Let’s look at these two items, which are really connected.  I have tried to keep politics out of this blog, because I think they are two separate issues that don’t always mix well together.  But this is a new world, and one cannot talk about one topic without talking about the other.

44th President Barack H. Obama

I really don’t care what a person’s political views are on this one, the election of Mr. Obama is a historic event.  Although I think it would have been of greater historical import to see a female than a sort of slide into a president of a different race.  Had Mr. Obama not had a white parent, my views might be different.  I think that the Democratic party took what they believed to be their best chance with an “ethnically diverse” nominee because they felt they couldn’t win with a woman.  That being said, the election of our new president is still monumental.

I was teaching US History when he was elected and I remember hearing some things that made me proud to be able to witness, and some things that scared the Bejeezus out of me.  One of the latter came from a peer.  Another teacher actually told the class that George W. Bush will be seen as the worst president ever, and that the day Mr. Obama assumes the Office of the President will be the best day in the life of every American.

Wow!

As I said, President Obama’s election was historically, a great day.  History books from this day forward will have him on the cover.  Great day!  For me, not the greatest.  There are a few that pass it.

In no particular order, here are some days that I think are greater in my lifetime.

• My wedding day
• The day I decided to go back to school
• The day I paid off my first car
• The day I graduated High School

There are others, but my point is this- That teacher told students that nothing in their lives will ever be as important as the day some other guy gets a new job.

I have A LOT of catching up to do, with a lot of events that have been really important to cover, but I won’t throw it all out there today.  We will be talking more about this new political world, the first 100 days, and other events as time goes on.

The Economy Tanks!

Over the last few years, I have been telling people that the economy was not nearly as good as it was portrayed to be.  Last year I told people that banks were going to be going away and working to help people to survive.  After I left to student teach, I knew that the rest of the economy was starting to nose-dive.

We are in right now, what will eventually be called the Greater Depression.  There, it’s been said.  There are some many economists that will tell me that I’m overreacting.  They will tell me I’m wrong, and worse yet, scaring people.  These are the same economists that used to tell people that real estate never loses value, the same ones that encouraged people to make purchases on credit that they couldn’t afford to pay back, and the same people that said this was going to be a short recession that would fix itself quickly.

Now these people are debating whether we can ever get out of it without either massive tax cuts or massive spending increases.  When I say massive, let me give you an idea of what I mean:

$2,000,000,000,000

Let’s put that into perspective.  The population of California is about 36,500,000.  If every man, woman, and child in California ponied up about $55,000.00, we’d reach two trillion dollars.  Just for fun, I’m wondering how much everybody would have to make where you live.

Let’s talk about some issues.  Yes, we are in really bad financial times.  This doesn’t mean that there is no hope or chance of survival.  Sticking to the Qualities of Success will help you.  Taking time and thinking before spending large amounts of money or mouthing off to your boss will help you.  Having planned ahead would have helped, and may have helped many of you, but even if you haven’t, you are not totally screwed.  Listening to and watching news from several sources without fully believing all of them will help you.  In the future, we will also talk about other things that you can do to help you through this time, and how to avoid problems the next time.