A client just left and I just have to tell you what she said.Elena (name changed) is a social worker. In 2005, she wanted to buy a house but couldn't afford one.
But then at work one day, she attended a presentation to the social workers by a representative of the quasi-governmental entity Fannie Mae. (Perhaps it was Freddie Mac; she wasn't sure.)
The presenter explained that the federal government wanted more minorities to own a home, so income, asset, and down payment requirements would be relaxed. It might only require 1% to 3% down--the borrower had almost no skin in the game.
Off the record, the presenter told the group that because banks want to stay on the right side of the government and because many banks package and resell their loans in bulk, lenders often weren't verifying income and employment.
Elena ran out and found a house she loved--for $470,000. She knew she couldn't really afford it but, if they weren't checking income and assets, she figured she'd lie on her loan application to ensure she got it: She claimed to earn more and have more savings than she really had. Her loan was approved, requiring just 5% down.
In 2006, the value of her home had increased and Elena took out a second mortgage to redo the kitchen and buy an SUV.
In late 2009, her house was worth $140,000 less than what she paid for it and she only had $35,000 of her money in it. So she simply stopped paying her mortgage, forestalled moving out as long as she could with coaching from a non-profit "homeowner's advocacy organization." Part of that was to start and drag out loan modification/renegotiations with the bank. In November, 2010, facing imminent foreclosure (the sheriff was going to take her keys,) she walked away from her debt and declared bankruptcy.
Elena came to me for career counseling because, "I need to make more money than I'm making as a social worker." Why? Because she wants to move from the apartment she's renting and buy another house!
No surprise, I told her I don't feel comfortable working with her.
The popular 2010 movie Inside Job blames the mortgage meltdown exclusively on bankers. Yes they share responsibility but despite it being politically incorrect, isn't it fairer and a crucial lesson to all Americans to describe the meltdown's causes more fairly: to add that Fannie/Freddie encouraged lending to unqualified borrowers, and that countless people knowingly bought more home than they could afford, often submitting fraudulent loan applications?
Hearing Elena's story makes me wonder whether greater good would accrue from replacing our government-run safety net. Perhaps it's just too hard for the government to develop and monitor a process that applies to 300,000,000 people without inordinate fraud, waste, and abuse.
Instead, building on a recent post, I'm wondering whether the many billions of dollars spent on the government safety net should be returned to the taxpayers tax-free if the taxpayer donates it to the charity of his or her choice. That way, the invisible hand of the market, millions of decisionmakers, would likely make wiser charitable choices and, in turn, provide a better safety net.
What do you think?
"Perhaps it's just too hard for the government to monitor a process that applies to 300,000,000 people without so much fraud, waste, and abuse.
ReplyDelete"Instead, maybe the countless billions of dollars spent on the government safety net should returned to the taxpayers tax-free if the taxpayer donates it to the charity of his or her choice. That way, the invisible hand of the market, 300,000,000 decision makers, would likely make wiser charitable choices and, in turn, provide a better safety net."
Bingo.
I learned a while ago to not make purchases, especially large purchases, that I could not afford. I have forgone many common things because of this, like my own house & car. In my opinion, it's better to keep your life in control & handle what you know you can handle, even if if it means you have to go without some of the things you think everybody else has.
And if what you wrote actually became law of the land, I would gladly donate every penny to the charities of my choice. I'm pretty certain that most charities are less wasteful with their donations than the government is with our taxes.
Another great example is one you always talk about: student loans.
ReplyDeleteStudent loans were started to help poor students who couldn't afford college. Sounds good on paper.
But the actual effect was that available loan money caused college tuition to increase to ridiculous levels, to where most students had to take out loans just to afford any college.
It also gave colleges a financial incentive to accept students who were not really higher ed material, and for fields that were not realistic as far as loan money vs. potential income upon graduation.
The ultimate result is that students like me have tons of student loan debt, more than we can ever repay. Ultimately, I would have been better off just not going to college -- because, bottom line, I didn't have the money.
And, as I hear you mention (thanks for mentioning this!), student loans are the only debt that can't be discharged in bankruptcy.
Just another example of how a "well intentioned" program can often do more harm than good.
And, yes, like the woman in your story who bought a house she could not afford, I was a guilty party in the transaction, knowingly taking out tons of debt that I was unsure if I could pay back. But the point is that a private lender would have protected me from my own stupidity -- they would have never approved a huge loan to a guy in his 20s with no work history, no credit history, no assets.
It would have momentarily broken my heart not to attend the college of my choice. But better that short moment of pain than a lifetime of debt.
"She knew she couldn't really afford..." and "I learned a while ago to not make purchases, especially large purchases, that I could not afford." Hmm...
ReplyDeleteBut how do you know for sure what you can afford or not? By following the same twisted guidelines that so called financial advisers' have come up with?
I too exercise extreme cautious toward large purchases, which actually does not make my life any happier.
Couple of months agoI read a funny calculation in one article published on sfgate.com. The article explained in simple terms what it actually costs to buy a laptop. It calculated how many hours you should work to pay. If take into account not only you hourly pay but your real hourly pay(if you subtract taxes, fixed living costs like rent/car/etc)it seems then that you need to work a ridiculous amount of hours to be able to pay for that laptop. It really made me think.
To Anonymous, January 8, 2011 9:19 PM:
ReplyDelete"But how do you know for sure what you can afford or not? By following the same twisted guidelines that so called financial advisers' have come up with?"
When I'm paying for something I want, and the bank isn't paying for it via loans or credit cards, then I know I can afford it. And while almost everybody needs loans & mortgages to pay for a college education or a house, there are ways to reduce those burdens for those willing to do careful planning before they begin. I wish I had done that before I went to college.
During the days of subprime mortgages, I knew I couldn't afford a house. Even with a subprime mortgage, I could not make a down payment on a house. So I did not attempt to buy one.
"I too exercise extreme cautious toward large purchases, which actually does not make my life any happier."
We do not agree there. When I was in debt a few years ago, I was not happy about that. I felt much better when I got out of debt.
It's been said before by others, but it's a point to consider here:
ReplyDeleteWere it not for the whole housing crisis, unemployment would be lower than it is; according to some economists, as much as 2 percentage points of unemployment is related to the housing crisis.
The reason? People are unable to relocate for jobs because they can't sell their current homes in a reasonable amount of time and and owe more than their homes are worth, can't afford/find housing where they plan to move, and if they do find a new job in a new place, they can't afford to move or their new job pays less than their old one.
To make a long story short, a downside of home ownership is being less mobile. If you rent, all you have to do is give a month's notice or less, and you can move in a few days, whereas selling a home can take as much as a year or longer.
It also goes without saying that home ownership means that you are limited to careers/jobs that pay a certain amount.
So before buying a home, think of its implications for your career.
And now with the "Keep Your Home California" program, unemployed homeowners may qualify for up to $3,000 per month to help them pay their mortgages.
ReplyDelete