Cash-Strapped Homeowners Can't Make Payments

[Judi Lynn]

Cash-Strapped Homeowners Can't Make Payments
For Many Homeowners With Subprime Loans, the American Dream Has Become a Nightmare
By ERIC NOE

Dec. 7, 2006 — In the next 24 hours, Dave Washburn has a decision to make about the dream home he and his wife built on a barrier island off the Florida coast: Deplete his retirement savings by nearly one-third, or face foreclosure.

To come current on his mortgage payments, Washburn will likely cash in about $18,000 from the $60,000 in his 401(k) account and pay a significant penalty for withdrawing that money early.

If he doesn't, the bank that holds the mortgage will start foreclosure proceedings.

It's a difficult decision to stomach.

"It's no easy job to boost yourself out of $18,000 in debt," said Washburn, 49. "But we built the house, and we want to live in it."

The Washburns fell behind on mortgage payments last summer after a series of unforeseen financial problems — family emergencies that required extra money and the shutdown of the trucking company where Washburn earned $55,000 a year working as a manager.
(snip/...)

http://abcnews.go.com/Business/Housing/story?id=2704915&page=1&CMP=OTC-RSSFeeds0312

[madinmaryland]

1. It IS going to get worse.

With the decline of house prices, the raising of interest rates on the Adjustable Rate Mortgages, there are going to be a lot of people falling into foreclosure and bankruptcy.

Great Economy :sarcasm:

[notadmblnd]

24. I've heard of people refinancing to take the money out of thier homes and walking away

and letting the bank have it back. Things are not looking good.

[pitohui]

30. isn't this fraud? EOM

,

[notadmblnd]

88. It sure is

nt

[theHandpuppet]

77. Looks like Congress passed those bankruptcy laws just in time, huh?

They saw this coming. They knew.

[Eurobabe]

2. Here we go, fasten your seatbelts

a boatload of ARMS are up for readjustment in 2007. This is going to implode the housing market.

[elehhhhna]

3. OMG how much is his mortgage payment? 18K since summer...

must be like 3,000 per month. Ouch.

[Warpy]

19. There are a lot of people out there in his boat

You know, people who bought the most house they could afford at the time because they thought their jobs were secure, that they'd be able to live on their pensions plus a little part time work on the side, that interest rates would stay down, and that the world would continue on in the same way it'd been going for the past few years.

I know people now who feel trapped in big houses they can no longer afford to heat and cool, even if they bought those houses more than ten years ago and don't have insanely high mortgage payments to cope with.

Dreaming about the good life and aspiring to achieve it are great things. Thinking we can afford it is not so great unless we've hit Powerball.

[elehhhhna]

100. Godo point--our gas & electric have TRIPLED in 9 years...

THANKS, DICK CHENEY!

There's much to be said for living beneath ones means. Always worked for us.

[phantom power]

4. And then what, I wonder.

So he brings himself up to date on his back-mortage. And in another six months, what then? Take the next third out of his retirement, and then the last third? Then he will have no home, no retirement and no job.

Of course, he might find employment again. But that's what will happen to more and more people. Squeezed like a mouse in a python, until they have nothing.

[modrepub]

9. What's more frightening

the debt or the fact he has only $60,000 saved for retirement at age 49? Or is it that he's probably doing better at retirement savings than most Americans? I have no idea how we sleep at night.

[Oreo]

18. Raised alarms for me too

He builds his dream house but only has 60K saved for retirement in 15 years?

[pitohui]

31. he only earns $55K a year

i don't think we are being realistic about what people can afford to save for retirement

any 49 year olds on that income who can honestly say they have much more?

[modrepub]

43. I do

I make ~55k, am 39 and have ~85k in various retirement schemes. I don't want to brag, it's not a lot and I could be hurt badly if I get sick, the stock market crashes, or my state pension gets slashed.

My point is as pitiful as this sounds, this guy (and I) are probably doing better than 50-60% of the people out there. I'm a realist. When I retire I expect to have between 5 and 10 time my final salary saved. It won't be enough but I bet I'm doing better than most others. That's why I get fumed at the Wall Street crowd for lecturing us on saving for retirement. If I'm having trouble and I'm making a modest income and saving 5-10% like I'm supposed to then how the hell do they expect others to do it? There just seems to be a huge disconnect from reality on all sides of the equation.

[wryter2000]

91. I know what you mean

I see red whenever they say things like "If you pension goes away, you'll need to make other plans." If I only make enough to cover reasonable living expenses (including a mortgage on an insanely-California-priced house), what the hell kind of other plans am I supposed to make?

[OrangeCountyDemocrat]

80. I Can

I'm 40. Admittedly I'm single, so perhaps that helps. But I already have about double what that guy had saved up in my various retirement accounts, and only a small portion of that is in stocks. I learned my lesson on that 6 years ago, and won't repeat it.

[quiet.american]

83. Well -- yeah.

I'm not 49 yet, but two years ago I started my 401k with $342 and now it's at five figures. Of course, I completely ignored all the standard advice about "diversifying into one-third stocks, two-thirds bonds," etc. I watched the markets and funds and worked that baby for all the returns it was worth. (Of course, NO oil or energy stocks in my portfolio.) -- Oh, and I make less than $55k. It's all paper money though, as even though I have a healthy balance, we all know what happens when you want to take the money out before you're "of age."

Not to say I don't have any sympathy for the fellow in the story -- and for all we know, he may only have $60k because he borrowed against his 401k to finance the house....

[madinmaryland]

52. It's all a big gamble..

He built the house gambling that it would continue to appreciate in value. If that happened AND his job situation stayed stable, then he would look like a genius.

On the other hand, that is not what is happening and he and his family are f'ed.

[Tellurian]

111. You're right on that score..

The one most important lesson they do not teach in school is financial education.
His only chance for survival was keeping his mortgage up to date and refinancing before he ruined
his credit rating.

He could have qualified for what is called an 'exotic' mortgage, a temporary fix, @ 1.25% reducing
his pmt considerably. Giving him time to scramble for gainful employment. That would have been the
best use of his reserves to maintain his credit profile. The only other alternative would have been
to sell his house, while keeping up his mtg pmts,pay off his cc debt, then start all over again.

Time is always of the essence with banks. It's hardball all the way.

[alarimer]

99. I have NO savings for retirement at 38

so he's doing better than me. I mean I have a state pension but beyond that nothing. My salary is barely enough to feed and house me. Savings are nominal at best. Time for a new job I guess.

[stevenleser]

103. Last recession wiped me out completely

I had almost 100K in savings. Was out of work completely or limited work or took low paying jobs to get by for 30 months. My retirement was the only thing that kept me off the street. The consequence is, now I have nothing and am in fact in debt. Thankfully I have a pretty good job, but I have no safety net now at all. I am also 38, btw.

[alarimer]

104. Same thing happened to my dad

Several years ago he was laid off after working for GE for over 20 years. I think it was age discrimination personally but who knows? He was out of work for maybe 5 years. He worked under the table for some people and eventually hired on permanently as a foreman. Now he's the comptroller of the company! But I am sure it affected his savings; I don't know how they are situated. My mom went back to work too during that time so I am sure that helps.

It's scary out there. Especially if you are on your own and have no one to depend on if things get rough for you. I don't anticipate ever getting married, for example. At this point I just have to assume I will live alone the rest of my life. I do not like to think of the future where I am old and sick, with no one to help me. It's too frightening. I have decided that I am going out on MY terms. I'll jump off a cliff before I will die of old-age related illnesses.

[pitohui]

29. well he buys himself time

if he doesn't yet have another job, in his shoes, i would still borrow the money and pay the note but i would also sell the dream house and live more modestly

you can't retire on $60K anyway

$55K although it sounds like a large salary to you and me is nothing on a florida barrier island, i would ask how he even affords to insure the place, let alone pay the mortgage

on that salary, unless the spouse is earning too, they shouldn't be living in a dream home, they should be living in a modest manufactured home so they can build up their retirement

another problem is, at age 40 or 50, depending on the job market, you are not likely to get another "good" job again from many employers, age discrimination is real, so he may never again earn even that much

so my vote is save the house from foreclosure but immediately be working on trying to sell it so i could move to a modest home, not just cheaper to pay for, but cheaper to insure, cheaper to heat/cool, cheaper to furnish, hell, you could sell half the furnishings in the big house on craig's list and still have enough left for the modest home

not that he asked my advice obviously

[calimary]

49. My God - the insurance! Good point. I just read a long article a couple

of days ago about how insurance for homes and businesses along coastlines (especially East Coast) is going to be horrifyingly expensive, if not impossible to get, in the coming months/years, because of climate change (global warming, Hurricane Katrina, etc). I'd feel better about trying to keep the house if I'd built it on a mountaintop or some such place. At least high enough above sea level. YIKES!

[karlrschneider]

57. Maybe, but it's possible he could end up owing more than it's worth.

That is happening to a lot of people around here as prices are dropping and even still many homes are sitting on the market for a year.

[Missy M]

5. The article states he also has $40,000 in credit card debt...

over and above the $18,000. Seems impossible for him to climb out of all that debt. I can't imagine what they have to dole out every month for the credit card payments.

[Marie26]

6. This case is a good argument for bankruptcy. nt

[Missy M]

7. Yes, it seems the only way out for them...

because (I'm not sure) I think his retirement can't be touched.

[Dhalgren]

10. Can he file for bankruptcy? With the law passed a couple of years ago,

he may not be able to declare bankruptcy? :shrug:

[Warpy]

20. If his income is under $40K, he'll be able to file under the old law

If his income is over $40K, he'll have to jump through hoops to see if he can be put on a budget that will allow him to pay off all his debts.

[judaspriestess]

75. He can file a bk. He has to be working though

and it has to be a ch. 13 repayment and throw his arrears into the bk. His cards will probably not see a dime so they will probably get zeroed out, meaning they will not get any money in the repayment. They would have to be zeroed out at the end of his bk. His plan can go for 3 years or 5. He will have to make his mortgage payments too.

[greccogirl]

13. So now he's got tons of credit card debt and a huge

mortgage on a $55,000 salary?

[pitohui]

34. nope, he lost his job, no $55K salary

apparently he was actually able to keep all of the balls in the air as long as he had the job, but the job went away, and he worked 4 months w.out even getting paid

[greccogirl]

67. That's my point. Obviously he bought more house than he could afford

on his 55,000 salary, plus what, 40,000 in credit card debt? Someone is living way above their means.

[Javaman]

45. Perhaps he was a victim of our wonderful health care system...

with his statement..."a series of unforeseen financial problems — family emergencies"

this is why the New bankruptcy bill is a blight upon the American population.

Most people, I think the percentage is something like 65-75% are in debt because of health care costs.

with this new crappy bill it relegates a huge portion of the population into indentured servitude to the credit companies.

Aside from it being totally unconstitutional, it is possibly one of the most criminal laws foist upon the American public in the history of this country.

[Missy M]

54. I agree the new bankruptcy law is criminal.....

and hurts the very people it is supposed to protect. I know about health care costs in a big way. A family member getting sick cost $500,000 the first year and with insurance having deductibles and co-pays for medicine it still costs us an additional $400.00/month plus the insurance premiums we have to pay each month. We manage to absorb the costs but have to give up other things to do it. My sympathy is with the people who have to use credit cards to manage. That will do you in everytime.

[OrangeCountyDemocrat]

81. $40,000 In Credit Card Debt?????

That's what I get for not reading the article. If I had, and read that, I would have:

:puke:

[filer]

8. Hating to appear insensitive, but...

it seems this fellow, Washburn, has made a series of remarkably bad financial decisions. His prospects do look grim.

[Dhalgren]

16. I hate to say it, too, but he appears to have been living way beyond

his means. He is one of those people who can't come to grips with being a peasant. If you can accept your peasant status, then you are much more likely to live within your means. The article doesn't say what his wife's income is, so it would appear she has none. They were living pretty high on the hog for someone with a $55,000 annual income. Washburn says he knows how to work a calculator, but I have my doubts...

[AnneD]

41. Remember....

(before we trash the guy's finances)he wasn't paid for several months and he had an undisclosed family emergency. In other words, he is like any average American.

And there it is in a nutshell-life happens. The average worker was screwed when they passed the Consumer Debt Reduction Bill. He would have easily qualified. It was your friends, the Credit Card companies that asked for that bill and your GOP congress and President that gave them that (And be sure and remind your wing nut friends about that)._Most folks are one disaster away from a meltdown.

Before you go off buying a home you have to plan. Don't go near a credit card. Have all your debts paid off. Have a cushion of at least 1-6 months of expenses set aside in savings. It is easy to get a standard fixed loan. And for God's sake, don't use your home like an ATM.

I am a big believer in the Dave Ramsey total money make over. I am on the debt snowball. I am starting to see mine go down now. Call me crazy, but I own everything I have, am paying my debts, and will own a home soon enough and have my retirement squared away. And I haven't owned a credit card in 4 years.

[filer]

51. With all due respect,...

I think you might have me mistaken for a Republican. I have only contempt for the credit card companies, the GOP congress and the monkey in the White House. Also, the last time I looked around, I didn't see any wing nut friends. Other than that, I agree with everything you've said. My only point is that as individuals, we have to take responsibility for our financial decisions and do what we can to live within our means. :)

[AnneD]

58. I am speaking in general terms....

rhetorically if you will. I have mentioned the new bankruptcy bill to my RW friends and that tends to remove a lot of cobwebs for them. You can see them actually thinking!

And yes, we do have to live within our means-but I still can have compassion for this guy. Folks can get conned into anything and the guy that says he can't be conned is the first one that will be. I'm sure the guy thought it would work. Sadly, through a chain of events, it didn't and now he has some tough choices to make in order to salvage his finances. I hate to see it happen and feel some conning went along with his initial decision. I just can't judge folks too harshly because a lot of folks have been conned into ARMs.

And your point is respectfully well taken here:)

[Dhalgren]

60. Personally, I have NO RW friends, period.

By saying "you" in your response you were making a statement as to the political attitude of the person you were addressing. That sucks big-time (to quote your favorite VP). I'd change the way I wrote if I were you, or are you just looking to insult people and get their dander up?

[sarcasmo]

73. Don't forget, Dave says to tithe your Church ten percent if you can.

[NashVegas]

90. Regardless

In spite of what real estate brokers and mortgage bankers were telling us for the last 6 years or so, the basic formula hasn't changed: you can afford to buy about 2x your annual income.

If these people were $18k behind, they went way, way over that.

The name of the game is supply and demand. If more people demanded housing that didn't go beyond 2x, we'd not be in as much of a mess as we are right now.

[Midlodemocrat]

95. What is a 'debt snowball'? I don't believe I have heard of that before.

[AnneD]

101. So many responses

so little time....
A debt snowball means you pay off smallest debt first (not the highest interest rate first). After paying the smallest debt off, use that money you used for the small debt payment and apply it to next smallest debt and when it is payed off use those 2 payments and apply to the next debt. It creates a snowball effect. There are many that say pay off the high interest. But I think they ignore human nature. I am very happy when I complete a debt payment-I get to scratch one off the list. I have talked to my creditors and have got them to lower the interest-and I play hard ball with some of them. Their getting paid, I'm living my life, and I haven't used a credit card in 4 years and we have survived all kinds of emergencies. I'll finish paying another creditor this year (this is the 4th one now in 3 years and I have 4 more left). I will be taking another job to speed up the process.

I'll give some folks grey hair but I don't contribute much to retirement at the moment. I have a pension (defined benefit) accruing but I drastically cut my 403B to pay off debts (from $500 per month to $100). By the time I calculate payoff-I will have been underpaying 403b for 6 years BUT I will have everything paid off. I will have saved pretty penny in interest and can more than make up for the moratorium. My money will go to buy a house, basic living expenses, and retirement. I can't wait for that day, and it is not too far off.

And yes, I tithe my 10 percent and then I gift more to those in need. Tithing is as important as paying you debts. It is not to curry favour with God or others-you do it because it makes you a better person. No matter what you pay-tithing is important, one should always remember the 'widows mite'.

And no, I do not stir pot....I have enough on my plate as it is. If, after a carefully worded explanation of a post-if some folks still don't get it, they either need to 1)get a dictionary 2)engage in some reflection 3)engage in a constructive activity, or 4)go somewhere else and pick a fight.

[qwlauren35]

108. I have to admit,

I agree. When I decided to downsize my life and cut my salary by about 60%, I knew I had to kill my debt. Killing the little ones always felt like a victory, and eventually, I "felled" the bigger ones, but killing the little ones gave hope.

I didn't quite do it your way, I tended to weight interest rate vs. size. But when it was something I could pay off in a month or two, I definitely squashed it first.

[greccogirl]

11. His mortgage payment is something like 3 grand and he

makes 55,000 a year? Do anyone else see something wrong in this scenario?

[meegbear]

12. Thank God the repugs passed the Bankrupty Reform Act ...

now his creditors won't have to worry about getting screwed over and not get every last cent from this guy.

Compassionate conservatism in action folks.

[Roland99]

46. Along with the Corporate-Whore Dems

[greccogirl]

68. What is wrong with paying

your debt?

[Wednesdays]

82. Go watch "It's a Wonderful Life" sometime

No movie screams "extenuating circumstances" like that one. An honest, hard-working man who spends his life bending over backwards to help people, facing bankruptcy and ruin because of something out of his control.

I'd rather not see George Bailey jump in the river.

[meegbear]

89. Nothing, but if the debtors can legally screw you, I have a problem ...

I'm one of them thank you. I got laid off thanks to the great bush economy and took a job at half the salary. When the law passed, I had 3 credit cards. They said in November that I was late paying in August, so they could legally, and did, raise the card rates to 31%. I had to go into debt consolidation to bring it down.

I'm one of the lucky ones. If those fucks can do that to a schmuck like me, because "they can", then they can fuck off.

[napi21]

14. You're right, more and more of these cases are going to occur.

There are lots of reasons too. Outsourcing of jobs, & Shrub's failed economic policies, but the biggest reason is because many people actually believed they can and should buy that dream house, even though in their heart, they knew it was beyond their means. The zero down, adjustable ARM's, interest only loans with balloon payments due in 5 years, and all the rest. Then there's the temtation that is NOW being dangled out theretouse your home equity to pay off your credit card bills!

I know a family who bought a fairly average house, zero down, and a 40 year mtg. Both the husband & wife couldn't resist the "I want it all now" belief, and everything went on the credit card. Then, of course, he got THREE home euity loans to pay off the cr. cards...which they kept using. he makes a decent $65,000 a year, and his wife works at Pizza Hut. Well, it all finally caught up to them. He has been selling off all the things he bought (log splitter, generator, chain saw, professional pressure washer, etc) at less than half of what they cost, and was only paying his mtg and nothing else. His wife has filed for divorce, his one financed car has been repossessed, and hehas nothing left to sell to pay his mtg, so that will be gone soon. It's a sad story, but one that is not all that unusual.

[greccogirl]

69. Exactly. I don't have but ONE FRIEND who lives, as I do,

within her means. All the rest of them are like this guy. Our best friends just built a 500,000 home ono a 150,000 lot. She works for the post office and he's a middle manager with no 401K, retirement, or degree, and they are both in their 50's.

VERY SMART, eh?

[AlCzervik]

15. if you buy a house/condo etc please get a regular fixed loan and don't

buy more house than you can afford, also factor in utilities and upkeep into your monthly housing budget.

[Lydia Leftcoast]

33. Yes, that's why I am still NOT a homeowner

I did that math, and I'm better off renting. What good is the almighty equity if I'm "house poor" due to monthly payments 50% higher than my rent?

[pitohui]

37. well in many areas rent is higher

certainly the case in new orleans metro, it must be a regional thing although it is not intuitively obvious how rent can ever be lower, since the renter must also provide for the landlord's profit

always run the numbers for YOUR situation, because our intuition and accepted knowledge is not always right, as you discovered for yourself

[Lydia Leftcoast]

42. In my case, I get a large apartment in a pleasant, convenient neighborhood

for 50% less than it would cost to buy a smaller apartment in the same neighborhood.

I could probably afford to buy if I went and lived in the outer edges of the exurbs, but what would be the point of that?

[AlCzervik]

38. i was a realtor until last year and when i would sit down with clients

i would have a "Reality" session with them about the total monthly cost of owning a home, my broker hated me but i refused to try and sell someone an overpriced american dream that would turn into their own american nightmare.

[greccogirl]

70. Exactly - you're smart.

[kestrel91316]

36. In most respects, financial counselor Dave Ramsey is a RW

religious nutcase, but I tend to agree with his take on home ownership: minimum of 20% down, and ONLY a 15-year fixed mortgage. If you can't afford that, WTF are you doing buying?? And on top of that down payment, have 3-6 months of takehome pay in a money market savings in case of emergency, and no credit card debt, and pay as you go.

I will own a home only when I can do that (when I retire I'll move to some little town in the Midwest with reasonable rainfall and 4 seasons and I'll get me a low-end fixer-upper 2-BR home built in 1900, $25k or so). I will never be able to afford the sort of homes I grew up in, but I am ok with that. I like old houses. And I'll be sure to put a wood-burning stove in mine, so if I can't afford lights at least I can heat the place, lol.

[pitohui]

40. a traditional 30 yr mortgage is okay

i don't agree that it MUST be a 15 yr mortgage, i think this depends on your age, we got a traditional 30 yr mortgage (we were low income) with no pre-payment penalty, this allowed us to get in a house at the bottom of the market and when we had some good years we were able to go ahead and pay it off

but i think the point of a 15 yr old mortgage is that you do NOT want to be worried about paying rent or mortgage in retirement, so if you are younger, 30 years is okay if it will be paid off before you retire, if you are older, absolutely, 15 years is the way to go

look at what you are likely to get from social security, if you have not paid off your mortgage by retirement, rent/mortgage will likely take it all if you were a lower income wage earner

so that's the reasoning behind going with the shorter mortgage, i think

not sure, the only book i read of ramsey's was a skim of the first one, some decent ideas, but wrapped up in too much religious superstition that didn't belong in there

[AlCzervik]

47. also many mortgage companies will let you make principle only payments with no penalties

so you can effectively turn your 30 into a 22 year or less if you have some extra cash and are so inclined.

[llmart]

50. Also, the conventional "wisdom".....

that it is such an awful idea to ever pay off our house is a crock of bullshit in my opinion. Of course, I never listen to conventional "wisdom" since it usually isn't very wise, but most people are convinced you should never pay off your mortgage.

We did and we take the mortgage payment we were used to paying and invest it in retirement.

I don't feel sorry for this guy. Yes, some people lose their modest homes through no fault of their own, but I think the majority of Americans want everything now, don't save a penny for a downpayment but they have all the latest technological gadgets, etc. and can't see why they shouldn't have it all right now. They want a house the minute they're married - think it's beneath them to live in an apartment for a few years to save up their money.

The people I know in this situation have made financial decisions without any common sense.

[CreekDog]

59. But that paying ahead on your mortgage cost you earnings on your retirement

Example:

Mortgage:
Earn $1000, pay $250 in taxes then take the remaining $750 and pay down your mortgage. You save the monthly rate of your mortgage times $750, probably $45 on a 6 percent loan.

more negatives on mortage: as you pay down your loan, the amount you save by paying ahead decreases. So this $45 per month savings will only go down!

Retirement option:
Earn $1000, pay $0 in taxes, take that $1000 put it into 401. A conservative investment strategy earns 6-8% or perhaps $70 per month.

more positives on putting into retirement not mortgage: the $250 net per month to retirement will compound and and as the principal grows, so do your earnings yielding increasing returns. Paying ahead on a good mortgage yields diminishing returns.

and if your extra money into retirement yields an employer match, consider that free money. This is the money you can be less conservative with by putting more heavily into stocks. If you are not getting your full match on a 401k and paying extra on your mortgage, I'd like to sit down with you over coffee and a calculator. :O)

[Gormy Cuss]

76. Not everyone has 401K or similar plans.

You are right that paying down the mortgage should not be done by shorting retirement savings but if the amount you have available for tax deferred retirement savings is small it may be a better strategy to pay off the mortgage and plan to sell before retirement to realize the tax-free capital gain.
Calculators are needed, for certain. One size does not fit all.

[shrike]

106. Amen

People have been brainwashed -- "never pay off your mortgage," my eye!

I'm 46 and I paid off our mortgage four years ago, with inheritance money from my (much-lamented) late father. Best thing I ever did. Talk about a stress-free life.

[qwlauren35]

109. I think the conventional wisdom changed

When 401K's and IRAs were invented. I sense that for a long time, a home was the only tax benefit going, i.e. writing off the interest, AND "automatic" appreciation. Moreover, the stock market was both incomprehensible and inaccessible to most people.

As those things change, sinking all of your money into your house no longer makes sense. But I sense that there was a time when it did.

[Gormy Cuss]

55. It's best of all to start with a fixed rate 30 and treat it like a 15.

That way you retain the flexibility of being able to pay it off faster but if someone's job disappears there is still the option to pay it off at the 30 year rate without trying to refinance.

The mortgage lending practices of recent years are set up to maximize profit for the mortgage brokers and lenders with insufficient regulation to protect consumers, in my opinion. Yes, we are all responsible for our own debt but it's a bit foolish for the larger economy to have a system that makes it so easy for people to get so far in debt with home "ownership" and no equity. We plan to retire with a paid off house for just the reason you cited.

[greccogirl]

71. Yes more people SHOULD know this.

Our first home - 39,900 - 15 year mortgage - sold for 79,000 at 12 years. Put 60,000 down on a 95,000 house in 90, took 10 year 45,000 mortgage, lived there 12 years, sold for 194,900. (Paid for when we sold).

Downsized to a 1600 square foot ranch with a full basement and extra garage for 130,000 in 2002, had about 30,000 left for a nest egg. Now no mortgage payment.

[hatrack]

94. True, but how many people who bought in the last 3 yrs have a 30-year fixed?

Fewer than you might think.

I saw a set of absolutely horrifying statistics on Whiskey and Gunpowder yesterday.

In 2001, 0.6% of new home mortgages and HELOCs were interest-only.

In 2005, 32.6% of new home mortgages and HELOCs were interest-only.

43% of first-time home buyers in 2005 put no money down, 10% of all mortgage holders have zero equity and 15.2% of 2005 buyers have negative equity.

And 2.7 trillion in ARMs will reset this year and next.

http://www.whiskeyandgunpowder.com/Archives/2006/20061204.html

[CreekDog]

96. Refi into a 30 year fixed or get one off the bat by...

Buying a house you can afford BASED ON A 30 YEAR FIXED LOAN.

Unfortunately lenders will qualify you based on future winning lottery tickets. This guy was irresponsible, yes, but his lender actually "qualified" him to do this. He clearly shouldn't have.

Many times people buy with other than a 30 year fixed loan because they don't qualify for the payments.

It also doesn't help that mortgage brokers and lenders push the non traditional mortgages. The bigger commissions go to those brokers that get you to use the ARM.

I had to get an ARM because I was selling my house while buying another and could only get a loan on stated income, but I had a big downpayment thanks to sale proceeds. Within 6 months, rates dropped and I refinanced into a Ditech 5.5% 30 year fixed. But the key was buying a house whose payments based on a 30 year fixed loan I would qualify for. That meant that I could refi into one of those right away if I felt the need (initially had a 5 yr ARM at 5.625 --what crap!).

[Gormy Cuss]

98. Not fewer than I think -- in this state the rates were much higher

I believe close to 60% of first mortgages were interest-only in Calif.
The bottom will drop out of the housing market disproportionately for buyers who have no equity and who bought beyond a reasonable affordability. That is why I think that a look at mortgage lending regulation is long overdue.

[AnneD]

44. I part waves with Dave on most things....

But money is green, not blue or red. Following his advice has kept me out of hot water. Kestrel-your plan sounds good to me.....

[CreekDog]

56. Nah, take the 30 year fixed mortgage not the 15

Invest in retirement accounts first (not your mortgage) at least enough to get the maximum employer match, then enough to max out your allowable contributions, build savings reserve of 3-6 months, then pay down your high interest rate credit cards, then your auto loan and then, ONLY THEN
pay extra on your mortgage.

Any dollar into 401k is pretax and worth 25% more to you when placed there. Your employer match may add 50% to the value of that investment too.

Any dollar payed ahead on a good fixed rate mortgage is after tax, meaning that it is equivalent to earning the interest rate of the mortgage minus your effective income tax rate. Additionally, there is the opportunity cost of investing in paying down your mortgage (probably equal to less than the rate on government bonds) versus say 7% on a conservative investment strategy and high contributions to your 401k.

The other reason to build retirement first is you need to build up substantial sums in your retirement in order to get the growth on principal that you need to have to generate the growth which will grow your account enough to help you to retire. The key is having that money grow on its own more than based on your own contributions. The principal, compound interest and dividend reinvestment become far greater than your own contributions. In fact, if you are not maxed out on your contributions and your contributions are less than your account's growth, you need to be putting much more in there to get to that point.

And this is the final point...since a mortgage is a poorer but necessary investment for most, get as small a mortgage as you can initially by buying modestly. All the basic interest in a mortgage is still a cost to you and represents most of a dollar you will never see again and extra money on a mortgage is a poorer investment than nearly anything else. Keep your mortgage payment to a minimum and use what extra you have to get the most bang for the buck, and you will be gaining dollars every month simply from that decision.

No, not everybody can save what they need to, but if you can, use this strategy and keep your fixed costs down each month so that there is leftover money that you can put away for the future and make sure what you put away will grow and compound.

My two cents.

[stanwyck]

17. Georgia's foreclosures have increased 99%

according to today's Atlanta Journal-Constitution.
A 99% increase in foreclosures.
But, hey, the Bushies say the economy is booming.
Booming!

[CountAllVotes]

22. cool!

They can return all of that foreclosed land to the Cherokee! :D

[stanwyck]

27. Don't we wish

but apparently what is happening is there is a mad rush to the courthouse by the hordes who buy up the foreclosed houses.
The photo on the front page of the paper looks like the "running of the brides" when Barney's has their designer wedding dress sale.
Except, they're mostly male.
(and I don't think they're Cherokee...but I could be wrong.)

[Marie26]

48. For the banks & credit companies, it is.

And wasn't that really the point?

[greccogirl]

72. Hey other areas

have increased 500%.

[displacedtexan]

21. There's another catch to that guy's story...

The contract language may have included a "change of status" clause.
If you lose your job or change jobs (even if you have the
cash to make the payments, you could be forced to
pay a lump sum (points) to the mortgage co.

I remember filing an annual "income status" form in Michigan, and
when I read the fine print, it was really scary.

[HughBeaumont]

23. Guy, that whole "building your dream house" thing when you can't even afford the door . . .

I mean, $3000/month mortgage on that salary? And with all of that consumer debt?

BUT . . . there are people who live well within their means that are in the same damned boat - one unforseen illness, job loss or (insert freak bad circumstance) away from financial ruin/bankruptcy. There is no "good life" any more. Many people live paycheck to paycheck and have little saved for anything. It's not that they don't want to . . . it's that they CAN'T.

Yet, true to the posters above, there are still some couples who want everything their parents with the stable jobs got because they feel they're in some race or their entitled to it. They hold on to the fantasy of attaining the bill of goods advertisers have sold us for decades and wonder what happened when the margin call comes.

[OrangeCountyDemocrat]

84. My Fundie Secretary Fits That Bill

But she's religious and "conservative," so as she puts it, she HAS to vote repub.

She asks for her paycheck first thing on the 15th and 31st. They live so paycheck to paycheck in their 2 BR condo, that she sometimes has to deposit the paycheck that afternoon, just to have money to pay the end of month bills.

I'm sure george would help them out, after they've been so supportive of him and his wonderful economy. I NEVER talk finances with her, because her level of savings and intellect when it comes to money, is on another continent compared to mine.

[Hawkeye-X]

25. Funny thing.. I went to a orientation last night

to possibly buy a house in spring or summer of '07 for limited income group (since my wife and I don't make enough) and we found a Land Community Trust program.

What they do is that gives us an opportunity to buy a house only (not the land, we pay the "99-year" lease) and keep costs down. They told us that they *WILL* buy back the house if we are in a jam and cannot make a payment, because the lenders often let the Land Community Trust know first and they give the seller a opportunity to sell back the house and keep some equity built into it. THey said since they have started this program, they have never allowed a foreclosure to happen.

So I'm thinking about it (the application is front of me) and if the ARMS goes up, I'm going with this program.

Hawkeye-X

[OrangeCountyDemocrat]

85. Land Community Trust?

Is this like the Building & Loan in "It's A Wonderful Life?"

If it sounds too good to be true, I'd be worried. This sounds too good to be true.

I love this quote of yours:

They said since they have started this program, they have never allowed a foreclosure to happen.


There's a first time for everything. Do you really think they'll be able to withstand the potential crisis which is on the horizon? I wouldn't. Trust? HA!

[Hawkeye-X]

105. They have the resources to protect themselves

They are quite aware of the multiple forclosure (we are ranked #1 in the country on foreclosures)

[ms liberty]

26. I feel bad for him but...

He's made some really bad decisions. All that credit card debt. Building his 'dream house' when he was only making 55k a year - on a BARRIER ISLAND off the FLORIDA COAST???? How much is he paying for his homeowners insurance? Jeezy Creezy!

[kestrel91316]

28. I looked up home forclosures through yahoo a few days ago

and the lists of foreclosures in towns in the Midwest just listed in the past WEEK was really really long everywhere I looked.

The American Dream has turned into a nightmare for huge numbers of Americans. For the wealthy non-tax-paying inheritor class, it's a great time to pick up rental real estate for next-to-nothing. Of course, whoever was holding all those mortgages has to be in financial trouble now too.

[leftofthedial]

32. the middle class is being destroyed

methodically and completely

[LeftHander]

35. Ok...dream home on barrier island on 55K....

Not too smart.

Typical American over consumption...combined with predatory lending deregulation by the Repuke congress....

[The Backlash Cometh]

64. I really need to know if he voted Republican before I get too worked

up about this guy. Reminds me of John Stossel's interview when his coastal home was washed out and he thanked us all for paying for the insurance to have it rebuilt. That Stossel is a prick, isn't he? No sense of the future for his grandkids. What a horrible world he's created for the next generation.

[nosillies]

39. The problem, especially in FL, is not just with non-traditional mortgages

Our property taxes increased by $4000 this year. A seriously flawed homestead exemption program will only make the property tax situation worse, not better.

Also, most people's insurance rates are rising through no fault of their own.

So, even with a fixed rate mortgage, my monthly payments will probably increase by a few hundred dollars per month. I would be happy to sell our house and move into something cheaper, but I'd be lucky if it sold in four months.

I fully expect to be working the graveyard shift somewhere starting in February so that we can pay the bills, and finding a way to live on four hours of sleep or so a day!

[The Anti-Neo Con]

53. Yes, a $3K mortgage on his income is insane!

My wife and I together maybe make $50K/yr., and we would not even consider a mortgage that cost us anything over $900-$1,000 per month.

[Tellurian]

112. Yes, and wise for you..

as a first home, purchase a multifamily with passive income to assist you, until you are ready to move up.

[olddad56]

61. What is this guy thinking.

I earn $90K a year, live in a small home in a nice neighborhood, owe under $60,000 on the house worth about $400k, have about $250k in retirement savings, and will get a pension of worth about 75% of my annual salary when I retire in a year. I don't feel secure at all. I know that what I really have is a home, a car, an income that gets me by and some money set aside for when my health fails.

I'm in a better spot that the average guy, and I know that I will have enough to get by as things get worse, until they get to the point were my heath starts to fade, and the cost of living gets out of reach. But I won't be traveling and golfing everyday and enjoyinglive the way I had dreamed. That american dream is gone for most of us.

[formercia]

63. He did not choose wisely

He was in way over his head from the git go.

[The Backlash Cometh]

62. He built a home on a barrier island in Florida?

I'm not sayin nothing. Okay, I am. It's obvious that permanence wasn't part of his plan.

[DuaneBidoux]

65. Okay, I know things have been rough under Repukes, but...

I still believe people must take some responsibility for their own situation. He has racked up $18,000 dollars of payments in six months? What kind of mortgage did this guy have that is racking it up that quickly? And his income was only $55,000 for that kind of payment?

One thing about it, at least in my opinion, is that even though a lot of the 2000s the economy has sucked for the middle classes they have continued to buy ever bigger homes with ever bigger mortgages. Americans generally have been living beyond their means for one hell of a long time (including the government that is running up a massive debt right now).

I think there are many things the government can do to help the middle class, but one of those things would be to start a huge education program to help consumers learn to keep themselves out of big problems and resist the marketing of the banks and realtors (as much as possible, obviously there are exceptions).

[jannyk]

66. In Sept my neighbors bought

a fixer house for $640k. They should never have qualified for a loan. They got a 95% loan and paid the 5% down with their credit cards!! The closing costs (roughly $10-12k) they borrowed from another friend.

This couple are in their 30's and run a small business from their home, so they are self employed and currently semi-profitable when they really work it.

And I don't even want to try to explain the type of mortgage they got - sounds like interest only, maybe a balloon payment in 5 years, but they couldn't really explain it well. Besides, they plan to re-fi in 2 years and they'll have all that equity - right?

I really nearly came to blows with them over this, so vehemently did I try to argue against it. I tried everything I could think of to talk them out of it to no avail. All I got was 'but the realtor said if we do this, this and this, it'll be worth ....". "We have to get in the market now or we're be shut out forever...???"

So they bought it and don't have a pot to piss in. First rains last month and the roof leaks - they can't even afford drapes never mind a new roof and any of the other fixes needed (it's a hundred year old house).

I'm terrified for them, as is one of their mothers, but they are so blase it's scary. I know they will have got their prop tax bill and that has to be paid by Dec 10th - it has to be around $3500 for the half year. I don't know what they are going to do - charge it perhaps?!

It used to be that your housing costs could be no more than 30% of your annual income to qualify. Also, I remember we had to prove that the downpayment belonged to us and was not a loan or temporary gift. Anything under a 20% down used to be subject to rigorous and stringent checks on income and other debt. Now, apparently, you can buy a house with a credit card and no visible means of constant income.

There's probably tens of thousands with loans like my neighbors and they are a time-bomb with a short, lit fuse.

[sarcasmo]

74. Keeping up with the Joneses means living beyond your means.

Pay those credit cards off, pay off the car, don't owe anyone, especially the credit card companies.

[TexasLawyer]

93. scary story

thanks

[OrangeCountyDemocrat]

78. "Not Enough Lifeboats"

It was thought they would clutter the decks.

Not enough lifeboats by half.

Half of the people on this ship are going to die.

"Not the better half."

[hedgehog]

79. Is this article some cleverly disguised propaganda?

The profile is that of someone who would probably have ended up in trouble even in good times. Building a dream home on a barrier island? Pay $3000 a month for a mortgage while making $55,000? People hearing about this wouldn't do anything that foolish, so they think they are safe from foreclosure.The specific example blunts the overall message that the middle class is in trouble.

[electron_blue]

86. I agree. this guy is not very representative of the avg american.

This is just priming the pump for the rest of Americans to say "that would never happen to me - I wouldn't do anything that foolish". As long as most Americans are convinced that wouldn't happen to them, little is likely to be done to work on the real problem of the middle class living so close to poverty.

[sadiesworld]

87. Once again the whore press finds a rather unsympathetic example

of the financial damage caused by the deflating housing bubble.

Color me shocked. :eyes:

[dapper]

92. 4 months=18k in debt?

My company Outsourced and I was out of work for 6 months and even with Mortgage Payments, Child Care, my wife driving up the credit card bills, my debt did not come close to 18k. If that is based on Mortgage alone, that is 4,500 per month. Wait... he also has 40k in Credit Card Bills!??!!? Hello?!??!! Did he have any savings?

Although I can relate, you simply cannot justify getting yourself in so much debt. It sounds as if that house on the barrier island was a luxury they couldn't afford and at 55k?- they must have been putting much of there expenses on those credit cards.

I was doing -okay- in NY but the housing market and taxes were skyrocketing. Being fiscally responsible, being realistic about the future, I sold in that high housing market, paid off the mortgage, paid off any debt I had and bought a newly built house in a market I could afford and had a job prior to moving to the Mid West --- and had a little money left over.

I know my parents lived within their means and I did without many things growing up. Early on I learned how using that credit card can get you in trouble. It took me a long time to get my wife to understand that you can't keep paying "the minimum"

So... this guy had 18k of debt in 4 months, has 40k worth of credit card debt for a total of 58k, yet the guy only made 55k? The finance charge on those credit cards must have been tremendous! Based on his debt and based on the mortgage he recieved, it sounds like he has a history of credit issues. If he didn't learn the first time, I can't feel sorry for him.

What he needs to do is, take out the loan from his 401k or take out a money from it as a "hardship"- Sell the dam dream home and pay down his debt, pay the 30% tax on the 401k withdrawl, buy a home that is more affordable based on his income (and what he has left from the proceeds from selling his home)- Maybe his wife can get a job if she doesn't have one.

Again, I cannot feel sorry for people who do this to themselves. We as a nation need to be fiscally responsible! The banks are more than happy to put you in debt because it makes them money.

Sorry for the rant but my wife will tell you, I'm pretty passionate about finances now.


Dapper

[IndyBob]

97. I'm convinced I want a house

but am 2 years from the plunge. Going to try to get 20% down saved up, and will insist on a fixed rate loan. Will (hopefully) have no debts then either.

I keep running the numbers, and have tried to cut back expenses. It looks very doable. However, I'm still a little paranoid.

I couldn't sleep at night having a 3k mortgage on a 55k/year earnings, never mind any other debt.

[Jcrowley]

102. Denver housing market in free-fall as foreclosures eclipse record

Denver housing market in free-fall as foreclosures eclipse record
  Sara Gandy  Web Producer

Created: 12/5/2006 7:35 AM MST - Updated: 12/5/2006 7:35 AM MST

DENVER (AP) - Denver's 2006 real estate foreclosure rate is now officially the worst on record.

With one month left in the year, foreclosures have already eclipsed the record set during the 1988 oil industry collapse which sent Colorado's economy into a tail-spin.

Experts are saying Denver's spiraling market should serve as a warning to the rest of the country.

An analysis shows many of the year's nearly 18,000 Denver metro-area foreclosures fall in what is being called the "foreclosure belt" of Adams and Weld counties and north Aurora, while upscale neighborhoods are nearly unscathed.

http://www.9news.com/acm_news.aspx?OSGNAME=KUSA&IKOBJECTID=530a883b-0abe-421a-0036-0dce0e9d44c1&TEMPLATEID=0c76dce6-ac1f-02d8-0047-c589c01ca7bf

[qwlauren35]

107. I think a lot of people don't see the simple solution

Segment the home into apartments and rent it, or rent rooms. Or rent the basement. Live-in landlords have tremendous flexibility over whom they will rent to. Many of these homes could probably house 3 families.

Heck, take in some families from Katrina!

I am harsh here, but I have little sympathy for those who buy more home than they can afford. I don't think i've ever bought a home that was more than 50% over my gross salary. (But perhaps some sympathy - SOMEONE convinced these people that they could handle these horrendous mortgages. Probably the same SOMEONEs who convinced people that they could handle $25-50,000 in credit card debt. Barnum is probably laughing from his grave. Too many American people have been "hustled" and don't even realize it until their bills are unpayable.)

To have created an "American Dream" around single-family home ownership (not to mention living beyond our means) is going to have disastrous consequences for many years to come, just starting with our complete inability to harmoniously live with others.

Oh... and can SHE get a job?

[shrike]

110. Refurbishing a house into apartments

Can be expensive and can also violate local zoning laws. It really depends on the municipality. Most single-family homeowners are scared to death of rentals and don't want multiple families next door. Hence, there will be building codes, zoning laws and one's own neighbors to overcome. And even if apartments ARE allowed, it will still cost money to put in toilets, stoves, etc. And you will have to pay permit fees and such to put them there.

Renting out rooms is much easier, but that has its own set of problems. I have rented rooms and rented OUT rooms and believe me, it's sounds much easier in theory than practice. Room-renters tend be quite transient, and if you have children in the home you have to be VERY careful whom you let in the door. So there's police checks to consider, credit checks, all that stuff.

Then there's the market you happen to be in. This guy actually has an advantage and could maybe pull it off, given where he lives. He would still have to deal with the transient market, but could probably get a better quality of tenant than the average person letting out a room.
So it could work, maybe. I'd need to know more about the market. Although, on a barrier island, with all those expensive homes, you'd better believe someone's going to howl about the parade of roomers going in and out. His best bet might actually be to cut his losses, get rid of the home or at least make an attempt to get out from under.