Bitter medicine we sometimes take

Posted: February 23, 2009 in Banking, Blogging, blogroll, Community, Consumer Issues, education, Family, Financial Institutions, Life, Politics, Relationships, Rip-off, Saving

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.
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