As mentioned in my last post the Washington Post presented an excellent article highlighting some of the difficulties faced by families in the current market.
The article shares the story of Robin Bohnen, who purchased a 1.16 million dollar home in Riverside County, CA. The home came with a $6,400 monthly payment (thats right, she was paying $76,800 annually!), and Robin's income came primarily from her furniture store which rode the boom selling to new homeowners. With climbing equity in her home and great sales what could go wrong?
Now her sales have dried up and her family can no longer afford to make payments on the home. She can't sell it either though, since falling prices mean the mortgage loan is higher than the value of the home. When the wave broke on the housing market Robin and her family found themselves first swamped, and now thoroughly under water.
The article noted that one family in five is now upside down on their loan. Considering that our home ownership rate is in the high 60's percentage wise, that is a great many families who may have to find other accommodations.
It is important to point out that she was not a subprime borrower, but she certainly should never have obtained the loan she did. Robin and her husband opted for an interest only loan for the first five years and used a Stated Income (meaning they did not have to prove what they actually made) loan (known as as Alt A mortgage). While they had a hefty down payment (more than 200K, money pulled from their first home that never sold and is now also in foreclosure) with the loss of Robins furniture income and fewer sales commissions from her husbands job the payment became unaffordable. Now that the property has lost value as well, they cant sell it without taking 200K in losses.
In the meantime they have maxed out their credit cards trying to make ends meet and in Robin's county unemployment has soared to 10%, hampering her ability to obtain employment that will save her home.
The article pointed out that beginning in last October more prime loans were in default then subprime.
This doesn't mean that the prime loans were good, many families acquired regular loans that were unsustainable, but many of the loans we will see in default over the next year and a half will be Alt A, Interest only, and prime ARMs. The Washington Post was quick to point out that many of the loans issued were only appropriate for high asset high credit borrowers and were instead issued to mediocre credit asset poor borrowers in an effort to keep sales high. Robin and her husband acquired an
The article gave a couple more great examples of other families who got in over their heads and indicated that some opt for keeping their car over their home, thinking they can take a ding on their credit and buy again a few years later.
What do we do about it? Is if fair to force mortgage companies to refinance existing loans for the current value of the home (forcing them to take a huge loss)? Forget about fair, do we really think the banks can afford to do that?
Is it the governments responsibility to tell families what they can and cannot afford?
Take a look at the last couple of paragraphs in the article that share an exchange of views between Robin and Shane (her husband). What kind of impact are we seeing on the family? Should the government be looking into an increase in funding to family counseling agencies/providers or do you think these problems will go away when the hard times are over?
How do we help those who may have lost their home, maxed all of their lines of credit, lost their job (or have truncated employment), and now can't even afford a deposit on an apartment?
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These stories of business failures and home loss are gut wrenching. It would be wise for new home purchasers to "buy down" in this economy. I know that's what my wife and I plan on doing. If you own a business, in a lot of ways it's part of your family. If the business dies, then so do a lot of your family's dreams (lose a house, have to move and possibly shack-up with other relatives, kids get ripped from their school, etc.).
ReplyDeleteThe banks can't afford empty houses all over the country either. I think renegotiating with mortgagees may create a loss in the long run that surely would require business income from another source, but I believe it is a better option than delapitated housing causing even additional depreciation and complete losses. I'm looking for smart creative leadership in the mortgage industry right now to come up with some viable solutions! Or perhaps it's time to invest in rentals again....
ReplyDeleteI think it would be interesting to compare average home prices with the average income of a particular state or region. Now the numbers seem more diffiuclt, for example it seems that Utah workers are at or below the national average for income (about $40/year) if that is the case, then how does anyone afford a $400K home, let alone a "starter home" at $200K?
ReplyDeleteAlthough I am worried and saddened by the down turn of the economy. I take the stance of 'it serves them right'. Harsh, yes. But why did those people need a 1.16 million dollar home in the first place? Our country has become so selfish and individualized to the point that no one thinks of how their actions will effect those around them. Not only is an over-priced home that just sits empty bad for the owners who can't pay the payments, it is bad for the neighborhood who may see an increase in crime because of an unprotected home.
ReplyDeleteThis story illustrates the false faith people place in a current economic cycle, and the lack of thinking ahead to prepare for a downturn. My mother-in-law could be viewed as pessimistic by some, but in a downturn she will be prepared. It reminds me of the words of a well-known church leader, Thomas S. Monson, who said, "When the time for performance arrives, the time for preparation is past." I know I am not prepared, but I hope to develop the habits to be prepared.
ReplyDeleteDan: Personally I think it is always worthwhile to buy down, until you have sufficient equity to be able to buy up without increasing your house payment. For example: Buy a house starter home for $100,000 instead of the one you "really want". Pay on the home as if you were in that more expensive $150,000 home that you really wanted. Without taxes and insurance the principle and interest payment is around $600 ($599.55) on $100K over 30 years. The payment on $150K is of course, $900 ($899.33). By paying your normal house payment of $600 over 5 years you would have paid $6,945.63 in principle. Paying what you thought you could afford, $900, on the $100,000 mortgage means after 5 years you will have paid $27,908.01 in principle! If you assume a 5% appreciation on your original home you are looking at a new home value of roughly $128,000 in five years. Between appreciation and payments you are probably sitting on $50-55k in equity. When you trade up, you look to purchase a home that gives you the same payment. So now you buy a home that costs $150,000 and make the same $900 payment on the $100,000 in actual loan. (Chances are this won't be that home you wanted, remember it has probably appreciated above $150k at this point as well.)Pay on this home for 5 years, same gains in principle, but in home appreciation at 5% annually a $150k home is at $191k in 5 years. Now, ten years down the road, you are sitting on $118,908 in appreciation. Now you can trade up for the home you wanted using your $118,908 in equity as money down and buying taking $100,000 in loan. If you made extra payments when you recieve a third monthly paycheck (as you do twice a year if paid biweekly) and or put your tax returns towards the house you would shave a couple of years off that 10 year time frame. The question is are people willing to live like they can afford to now, so they can live like they dream in the future?
ReplyDeleteMarci: Agreed. But future profits are not the concern of most banks, since most of what they carry will be passed on rather than held in portfolio (some banks excepted). Investors are the ones who lose out in the long run rather than banks.
ReplyDeleteJames: In this case, I am mostly with you ;). I am all for building smaller and smarter. At the same time I cannot deny that a $1.12 million dollar home is within the budget of some families. Perhaps if there was a luxury tax on large homes instead of a tax deduction we wouldn't be as keen to buy a mini castle. Whether they can afford it or not, the excess consumption in heating and water is a genuine waste, one that impacts all of us.
Paul: Sounds like me and your mother in law would get along just fine. (She must be cut from the same cloth as my mother in law. More the pity all mother in laws were not the same).