Wednesday, September 17, 2008

The reality of the American dream.

This is quite a bit more personal information than I'm usually comfortable giving out - but, I am just so frustrated with what is happening with the market right now. So.... here goes.

When Mr S. and I first got together we decided we wanted to buy a house. We both came from poor families and didn't have any savings to speak of. Mr S. wound up cashing in a 401k to put the 10% down for the house. Which, in California is what most families can bear. We never missed a payment. We were never late in paying our mortgage.

A few years later Mr S.'s company fell on hard times, and we wound up having to take out a HELOC. That line of credit was the only thing that saved us. We never missed a payment. We were never late.

A few years after that we sold that house and bought our current house and put 20% down.

A couple years after that we bought an investment property. The crapshack.

In the almost year we have owned the crapshack, I witnessed the most appalling business practices ever. Along with the people who just see snippets on the news and pontificate about things they don't really know a lot about. It frustrated me to no end. There is plenty of blame to go around. But, let me tell you - the banks really deserve the biggest blame. So much so, it takes a ton of effort to feel any sympathy for the loss of jobs in this sector. This is why.

A few months after we bought the crapshack is when the bank owned properties started showing up heavily. This was a direct result of incompetence in the banking sector. You see, people had been trying to get rid of their homes through short sales. This is where the bank allows you to sell your home for less than it's worth. The problem was....the banks took months and months to respond to these types of sales. Virtually guaranteeing a foreclosure. By the time a homeowner is in a short sale -they were dire straights. It got so bad trying to get any response from the banks on these properties the real estate agents finally refused to take any of their clients to those houses.

Banks didn't even have a department for short sales until more than a year after the glut of short sales were on the market. I don't have any numbers, but I would imagine most of these families eventually did wind up getting foreclosed on. It also sent a message to people hanging on by their fingernails that the bank would ignore you, and it's probably better to just walk away.

Then came the next crack in the system. Banks handing these properties off to a clearing house that had no investment in getting any reasonable return on the properties. Their only mandate. GET THEM OFF THE BOOKS. They weren't even sending appraisers out to the houses to see what their real value was.

This is when people started to not be able to refinance. The clearing houses had so undercut the market - disaster was imminent.

I contend that if the banks would have started readjusting interest rates a year ago, we could have had a much softer landing. But, it got worse.

Banks then started requiring 15% down. I even heard of cases of foreclosed houses having multiple offers, and the banks refusing to take over the asking price. Seriously. If you bid more than the asking price - you had to put that money up in cash. So, in some cases you had to pay well in excess of 15%. In very large real estate markets like California - most people are not able to put that kind of money down. Even at the depressed prices the market is currently at.

In the 4 months we had the crapshack on the market I lost count how many times the banks stopped lending. Then opened lending to the very blessed. Most times I heard it was almost impossible to get a loan. So instead of having a constant flow of revenue for the banks - even if there was slight risk (you know at those risky 10% down deals)- they refused. No matter how perfect your credit. We finally decided to move a renter in and wait the market out.

Now..I don't claim to be a financial genius - but I know what worked. 10% down. That model worked for decades. That is what the market will bear. Were there foreclosures? Sure. One of my girlfriends got a divorce well before any of this crap started happening and their family went into foreclosure. There are always going to be foreclosures. But most people had enough invested, that they tried everything they could to not walk away from a house.

Now.. you can blame idiots who took out adjustable mortgages. They do deserve some blame. But - it was the banking industry who compounded the problem so deeply, that now it affects people who did the right thing. Paid their bills on time. Never did anything but work hard. Families who if laid off - might have been saved just by being able to acquire a HELOC. It's always been the American dream that your house would double in value roughly every 10 years. That your house would provide security and comfort in old age. Now.. that dream is shattered for this generation. Not only for the risk the banks put into the market - but even given that risk, every single layer of the banking industry was broken and unable to function and recover. It's astounding really.


  1. Well, you might find the following YouTube analysis of the sub-prime melt down amusing.

    Inasmuch as Keyser has gotten burned with both Fannie Mae and now AIG, he is somewhat sardonic on the topic, but since the two choices are laughing and cyanide, the former seems the appropriate course.

  2. Mmmmm almond.

    Sorry for your loss. The whole thing is sort of stunning. You can thank Chuck Schumer for lighting this bomb.

  3. Now.. you can blame idiots who took out adjustable mortgages. They do deserve some blame. But - it was the banking industry who compounded the problem so deeply, that now it affects people who did the right thing.

    And then there are people like me, who took out an ARM because I had no savings, but didn't buy a McMansion and thus have also never missed a payment. Even when the market went whack and I wasn't able to re-fi like my broker swore I'd be able to when I reluctantly agreed to the ARM, even when the rate adjusted (to over 11%, thank you very much), I still make my payments. I have calculated what my payment could go up to if the maximum 14-and-change interest rate were applied, and while I would have to make some cuts to my budget I'd rather not make, I could (and would) still make the payments every month. I'll still re-fi as soon as I have the chance - I'd be an idiot if I didn't - but not everyone who took out an ARM was completely stupid about it.

    I don't doubt that a lot of the people who have lost their homes were conscientious borrowers who fell on hard times, but I think a lot of people also didn't look very hard at their budgets and what they could really afford before they bought. Sad, but true.

    I remember when I was applying for my mortgage, the lender made some comment about how he could approve me for a much larger loan than what I was applying for. I remember looking at the phone in disbelief - I had run my numbers, and I knew perfectly well that I shouldn't be spending more than what I was. I knew perfectly well I couldn't afford a $100K+ mortgage, and that my little $70K was as much as I should borrow.

    And I've been lucky: by buying partway into the housing bust here in Michigan and by paying a little extra each month, I've just about been able to keep the ever-falling value of the home on par with the total of the mortgage balance. It's not quite as nice as having equity, but at least I'm not upside-down.