Mapgirl’s Fiscal Challenge

Hate the data it contains.

As someone with a professed love for visual representations of data, I was looking at this post by real estate analyst Jonathan Miller at his real estate blog, The Matrix.

I didn’t have time to read his analysis, but scroll down and look at the maps of the US. Note the dates of the data (always important) and then look at what the maps show. I’m kind of amazed at what’s going on around the country. The data seems to have been gathered over the last 4 years, but the data display is interesting. It’s kind of frightening what’s expected of consumers trying to buy their own home in many metropolises. Did we have to piggyback our mortgages? In doing so, did we create a false demand pressure not truly representative of the price of the real estate? Of course we did, but the bubble markets in all the press have related correlated data to go with it in terms of foreclosure trends, etc. Just take a look!

I feel kind of bad. One of my friends is a mortgage broker and I told him I would give him a call after he got back from vacation about possibly refinancing.

That was a month ago. I feel like a jerk for dangling some business in front of him and then not calling.

But since that call I had dinner with another mortgage broker. We had a casual chat about refinancing and the current mortgage situation. Turns out this guy is doing about 1 mortgage or refi a month right now, whereas a year ago he was doing 5 or 6. Because of this, he’s going back into telecommunications on a short-term contract to bump up his income this year. I didn’t ask the other broker at dinner how he’s doing, but I am sure he’s also doing a lot less business as well this year.

I mentioned that I was going to call this friend of mine about a refinance, but the guy at dinner asked me about my current rates and stuff. He told me that my primary 7/1 ARM at 5.75% with a fixed 7.18% HELOC is still pretty good. He basically advised me that it’s not worth it to refi now since I would have appraisal, closing costs, and opportunity costs of my free time to do this. He told me to wait till rates fall another full percent before trying to refinance. Before I told him about how much equity I had, he told me the HELOC was quite high at current rates of 1% above prime. Then I told him I have less than 20% equity and he backed off that position.

Since I have 3 years left before my mortgage adjusts, I think I’ll just wait out the current situation. Per my earlier post about my goals and HELOC, while not upside down on my mortgage, I certainly do not have enough equity built up in this declining housing market to make up 20% equity in my condo. I’d still have to have a 2nd trust to avoid PMI. (And I’m one of the lucky ones. Because my condo shot up 25% at the peak of the Northern VA housing market, my valuation had room to fall. I’m still valued much higher than my purchase price.)

So for right now, unless Ben Bernanke makes a slew of cuts again with the FOMC in Q2 2008, I think I will hold steady and focus on paying back my credit cards for now.

So, how many foreclosures are you on your block?

My knitter friends and I were talking and one of them has pulled her house off the market. They were going to relocate, with with a baby on the way, they decided to stay put since the house was so hard to sell. This snowballs into another conversation about mortgages and what people could afford.

One of my friends tells me that there are 6 foreclosures on her block! SIX!

*smacks forehead*

Whoa!

This turns into a revealing conversations about mortgages and money management. I learned a lot from her. She just turned 50 and on her last refinance signed a 15 year mortgage refinance for a sickly low rate under 5%. She wasn’t going to do the refinance till her mortgage company offered to do it for a dollar because they wanted to retain her and her good bill paying habits. Imagine that!

I don’t know if I have any foreclosures on my block, but the creepy guy and his mom moved out of my building this past year. Their place was sold at auction. I think they couldn’t afford it. I feel bad for them, but not really. He used to sneak up on people thinking that it was his mom coming around the corner and scared the bejesus out of me once. One time of that happening and I avoided him always.

And no, I didn’t write them. *sticks tongue out*

Aside: I am not so grouchy anymore today. Halloween was slightly more than I wished to spend, but still coming to about $38.00 including appetizer, dinner, beers, safe metro and bus rides, and then someone else buying some more cider and a shot. The conversation ended up being key as my friend was also a grouch and boy, did we need the drinks. (Piratz Tavern in Silver Spring is highly recommended. Service is still a tad slow, but the bartenders are excellent and the kitschy pirate decor is fun. Get the cod fritters and the bison burger!)

Anyhow, onto the articles:

The first is from Free Money Finance and how he’s sick of hearing about burdensome student loan debts. I agree that I’m sick of hearing about it as well. I agree with FMF taking on student loan debt is foreseeable and preventable. There are a great many ways to make undergrad and graduate studies more affordable. But if you read my comment, you’ll also see that I agree with some of these former students and I would like to know why the heck college is getting so expensive. Even in-state tuition is getting expensive, thus taking away an affordable option for many students for a first-rate education.

The second is from Justin McHenry at The Personal Finance Weblog and how he’s sick of hearing about ARM sob stories. Again, I agree with him because I’m a Ranty McRant Pants, but also because he has a point. Why isn’t his rate getting lowered for being a good borrower and paying his loan promptly? Why are we rewarding bad behavior? So what if Countrywide renegotiates the terms of the ARM? What if they extend favorable rates for 24 months? Does that mean the borrower will still be able to cope with a mortgage that readjusts in 2 years? Probably not. If they were foolish enough to take on the mortgage they couldn’t afford in the first place, who is say they have learned their lesson and will be able to pay an ARM with rising rates in the future?

Now I understand why on a macro market level why we need to do something about lots of defaulting mortgages. But very few people have said that we need to ensure that borrowers truly understand what they are getting through sound education.

Very few people have said we need to crackdown on liar loans and shady mortgage brokers. Fraud charges need to get filed against people who have knowingly duped the banks. Having been part of a federal fraud investigation by a flipper, I believe there isn’t enough oversight to catch collusive business practices between borrower, broker, appraiser and settlement attorney.

I think the banks are idiots for not reviewing their risk models more closely. Is everyone an effing Yes Man there? It’s a known fact that in real dollars, wages are falling, so why on earth would a bank think that making extremely risky loans to people who will be earning less in the future is a good idea?

I’ll right. I’m done.

I love the Washington City Paper. I was at the Yarn Harlot book signing event last night. As I waited for my friends to get their books signed, and deliver her a beer, I flipped through the paper and found a lovely ad on page 49.

Financial and Credit Literacy Day
Hosted by the Washington Area Community Investment Fund

Saturday, September 29th
9am-4pm
Kellogg Conference Hotel
Galludet University
800 Florida Avenue, NE
Washington, DC

RSVP: 202-529-5505

FREE ADMISSION and FREE PARKING!!!

The financial literacy seminar/workshop list looks very good. (link goes direct to an Adobe PDF file) There are seminars on targeted to teens/youth and women. Topics include Small Business Management (including federal contracting), Homeownership, Selecting a Mortgage, Managing Foreclosure, Credit Scores, Budgeting and Consumer Rights.

The ad says, “Bankers and housing counselors available all day.”

I do not know very much about this organization, but they do have an impressive list of sponsors. They were formed out of Arlington with the help of the local Catholic diocese, which if you don’t know, has one of the craziest liberal parishes in the US, St. Charles Borromeo. I actually have worshiped there because one of my closest friends used to attend. If you know their ministry, they’re very into social justice, often to the chagrin of the archbishop. I mention this because St. Charles is very active in low income housing initiatives in Arlington County and I could definitely see them supporting an organization like this.

It’s technically a non-profit loan fund, with 501(c)(3) status. I’m going to look into investing in it.

As I reflect more and more on what happened to the guy in Maryland who can barely afford his housing costs as taxes and insurance costs rise, I am wondering how he got into this mess.

I’m a big proponent of radical personal responsibility. As much as I whine on this blog, I know that my spending is MY problem. It’s not something I can blame upon anyone else as I make my choices. S.A.D.D. used to stand for “Students Against Drunk Driving”, but now it stands for “Students Against Destructive Decisions” because it applies to all areas of life. I think financial literacy is a life skill that should be taught at home and at school since destructive financial decisions can have just as much long-term impact as taking drugs or drunk driving. Unlike chronic alcoholism, where your liver could be permanently destroyed, usually poor credit can be repaired in two-three years.

CNN had an article about who to blame for the current mortgage crisis (which unfortunately I can’t find right now). Of course they said borrowers were to blame, but then they went into a litany of other parties like mortgage bankers, appraisers, and the Fed, etc. It was cutting a wide swath, but really, it boils down to the people who sign all the freakin’ papers at settlement. I admit, the Truth-in-Lending sheet you get is still pretty damned confusing. Even for someone with a higher level of education, I sure was still confused. However, the first people and the people who MUST acknowledge their part in the a mortgage debacle are the buyers themselves.

The American Dream of owning your own home is powerful and strong. The government encourages it with a huge tax incentive on mortgage interest. The notions of ‘Home Sweet Home’ and carving out a space of your own are psychologically extremely potent. No wonder it’s easy to get sucked into buying a home when everyone else is doing it and seems really gosh darned happy about fulfilling their dreams of owning a home.

In 2004, when I bought my home, I think 7 of crowd had purchased properties in the same year. Planning housewarming parties was a b*tch, let me tell ya. All of us were in our late 20’s-early 30’s and starting to slow down and cocoon, etc. I watched my friends buy places that were way bigger than mine. I was envious. But I didn’t let my house envy show by buying something comparable or better. I bought a place I could afford. I still have the smallest place of all. When it looked it I was having a hard time affording it, I got off my duff and pursued more income, which ultimately was a great long-term career move. But it was me. All me. I am the one who asked my parents for financial help and its attendant cultural burdens. I am the one who pays the bills monthly. I am the one who knows what the cash flow is for making the payments. I alone signed the condo documents. I am the one who pays the insurance. I am the one who lives in it. I am the one who decorates it. I am the one who loves living within its walls. I clean it up. I make it a mess.

I return though to the notion that our financial decisions are about our egos, psychology, vanity, black box of issues, whatever you want to call it, whether it’s an aspiration to a lifestyle, an acknowledgment that of our means, or disregarding our means. Buying my place was a bit of fantasy fulfillment for me. I felt that I would be more at peace if I could live without roommates. I felt that I could stand more own my own if I was the solely responsible for everything, rather than splitting costs. It’s been scary and somewhat trying. I was sleepless knowing that I was entering adulthood so completely by signing at settlement. I really don’t know what all these people were thinking when they signed huge mortgages. It had to be more than the money that drove them to these decisions.

I admit freely to being irrational about my financial decisions. Part of why I blog is delve a little into why I do what I do. But when it came to purchasing a home, I tried to be as coldly rational as possible. I ran a LOT of spreadsheets, doing the math. Cutting different scenarios for down payment amounts, interest rates, ARM terms, etc. I couldn’t afford to eff things up. My parents could help with the down payment, but sure as sh*t they couldn’t bail me out if I couldn’t make a payment. I vowed I’d never take another dime from my parents because it was now my turn to give back.

Maybe I am a pessimist and all these people are optimists. I don’t know. All I know is that sometimes I can be really good getting off my lazy butt and taking action when I think things are going badly. It doesn’t happen overnight (well, maybe if you are laid off). A foreclosure proceeding starts happening after 2 missed payments.

A commenter wrote to me that I’m really defensive about comments that aren’t full of praise. Well, whatever. I didn’t write this because I wanted people to tell me how great I am. I wrote this because I really don’t get it. Taking care of business is important and forecasting your future ability to pay is part of getting it done. The numbers don’t lie. I cut a long list of figures trying to assess how much money the man in the article made, and realistically what kind of mortgages could be written on a presumed salary and I couldn’t do it without getting creative and using really unusual loan products. It was really difficult and that’s when it dawned on me that he was really in trouble and he and his mortgage provider brought the situation on themselves. From ten different ways, I just couldn’t get the numbers to add up.

There will be another post shortly about owning up to your actions and making choices.

Hat tip to Boston Gal for pointing out an article in USA Today about homeowners who can barely afford their homes.

The person in question is Sydney Lasry of Severn, MD. After doing a public records search and checking Google Maps, I know where this guy lives and I can guess who his employer is. It’s not that hard since the US Government is one of the largest employers in the state of Maryland. (Apologies to Mr. Lasry for using him as an example. I don’t mean this as an attack on him. It’s more to further my understanding of the math surrounding mortgages and the mortgage crisis in America.)

With that in mind and some of the statistics in the article let us do a quick analysis.

1) He’s paying 70% of his gross pay towards housing.
2) His property tax bill is $3,200.00.
3) His insurance bill is $1,100.00
4) His home is $400K.
5) Guess: He works for the Federal government.
6) He is a ’systems engineer’. N.B. I put #5 before #6 for a reason to be explained.
7) The tax rate in his county is 89.1 cents per $100 of assessed value.

Alrighty. I have confirmed, his home’s sale price was $400K. His tax bill is actually closer to $3300, so I will adjust for that. Given 20% down and standard 30-year mortgage at 6.25%, per Bankrate.com’s calculator, his mortgage payment is principal and interest at $1969.80. His monthly escrow and insurance is 274.30 and 91.67 respectively. The total is $2335.77 per month in housing.

If that is 70% of his gross income. He’s making $40,041.80 a year.

Now here’s what does not add up about this at all.

That salary would make him a GS-6 or a GS-7. Now this is where it’s very weird that his title is ’systems engineer’. I am considered a systems engineer, but basically I write Oracle reports, making a very decent salary. My pay grade is more like a GS-11 and higher. But when I search USAJOBS for ’systems engineer’ at GS-6 to GS-12 in his neighborhood, I actually found a listing for an electronics engineer that is GS-5-GS-14, i.e. $33K to $104K a year. What kind of range is that?

So yes, it’s really crazy, but he could be making $40K a year in the DC Metro area as a systems engineer. It’s shocking to me, but I guess that’s what happens when you work as a civil employee.

Moving along, there was an assertion in the comments that even before the rise in his property taxes and insurance, he was paying 60% of his gross income to housing. My analysis shows that a mortgage payment of $1969.80 a month, by itself is 59% of his gross salary.

A lot of this analysis is contingent on the mortgage payment. I played it really conservatively and wrote that his mortgage was as traditional as possible, 20% down, 30 year fixed, reasonable rate. But I think that assumption was wrong. He’s paying PMI. So he probably put down less than 20%. What if he had really crappy credit? I ran the numbers again with a 30-year fixed at 9% and his gross salary is then $50K. Hm. I don’t know that I would have bought a $400K home while making only $50K a year. I mean, I was making about $45K a year when I bought my condo for under $200K. I just didn’t think I could afford a bigger home than that. And the bank didn’t think I could either. They pre-approved me for a mortgage around $190K.

So with that further information, I started running numbers at 5% down payment, same terms and rates as before (30-year fixed at 5%, 6.25%, 7.5% and 9%). The highest salary range I get is almost $60K. Now taking that number and punching into the mortgage affordability calculator, with $40K downpayment, and 5% rate, I see that he can afford a mortgage of $300,794.26. Now I’m starting to think this guy has a creative mortgage. I think he might have an interest-only ARM because I don’t know how he can afford to have this home whatsoever.

Ok. I’m done thinking here. But very fascinating stuff. This guy has a mortgage that he can barely afford right now. If he’s lucky, the assessment will fall and his tax bill is reduced. However, then he’ll be holding the bag on his place because the mortgage might be more than the home is worth. If he really does have an ARM, he’s toast.

I hope he has some roommates, because someone is going to have to pay for the electricity and cable bills around that place. (From what I can tell, his home is quite spacious and could handle a few extra people living there.)

Hat tip to Rob for pointing this article out. It’s been a work-focused week for me and I’m not generating enough story ideas on my own.

The Wall Street Journal Online has a short story about American Home Mortgage Investment Corp. and Freddie Mac.

In documents filed with the U.S. Bankruptcy Court in Wilmington, Del., Freddie Mac said it seized $7 million that homeowners sent to American Home to cover principal and interest payments, property taxes and insurance just before the company’s Aug. 6 collapse. American Home quit making payments to tax authorities and insurance companies Aug. 24….In an interview last week, Ginnie Mae’s senior vice president, Theodore B. Foster, said Ginnie Mae had seized from American Home some of the insurance and tax payments collected from homeowners. “What’s occurred is that we have the money, but AHM hasn’t been able to or willing to pay the taxes and insurance, and they have the loan records,” Mr. Foster said. “Therefore, we don’t know who to pay, and we don’t know how much.”

This is very bad.

1) If you are a borrower of AHM, you may be delinquent on your property taxes because they aren’t paying them through your escrow account. Try to find out what you owe the county by going directly to your Tax Assessor’s office and paying the bill. Same goes for your home insurance or PMI. (I couldn’t figure out what kind of ‘insurance’ was meant by the article.)

2) If you don’t, your local government may seize your property and auction it off at a tax foreclosure sale, even if you are paying your mortgage on time. It’s better here to actually over pay your taxes because at least the county can’t come and get you.

When Rob first sent me this, all I could think was that this doesn’t effect me directly. I don’t have AHM. I don’t own stock in Freddie Mac. (I digress for a deep irony, my friend works for Freddie and he lives out of his van! He’s literally homeless! LOL! By choice. “Strictly by choice.” - Say Anything)

However, the greater implications really frighten me. County governments could have short falls in revenue. It could be a sign of a recession coming. Rising homelessness. Not fun. I have vague memories of the recession of the early ’80’s and I don’t relish the thought of tough times ahead.

Which would you rather lose?

I am kind of shocked by this article in the Washington Post about homeowners who are current on their credit cards, but not on their mortgages.

They opted to let their mortgage payments go while keeping current on all their cards. “I would rather be late on one thing than on several things,” said [Teesa] Rossman, who works at a local church, pointing to the “very high interest rates” on their cards and the need to keep accessing credit.

I don’t have a lot of deep thoughts on it since I’m super busy at work at the moment, but it does occur to me that folks figure that her logic has some merit. Only one creditor after you, rather than 5. But you’re losing your house? That seems crazy to me.

I don’t understand why they thought they could buy a house going in with no money down. It seems like a poor financial decision on their part.

Greetings! Sorry for the late post, but I had to come home on short notice. Some how ‘perforated eardrum’ doesn’t translate well in Korean and I couldn’t understand how serious my mom’s operation was going to be till she told me that some funky gunk was running out of her ear. Anyhow, she’s fine, but I’ve been running all over town today helping out. Not sure what posting will be like this week.

But I digress! Onward to the 114th Carnival of Personal Finance. Trent did a bang up job with his intro to the Carnival and his editor’s picks. It takes a really long time for hosts to read all the submissions and bother with highlighting the best of the week. It’s hard work on the eyeballs to read lots and lots of posts in the last remaining hours of the deadline.

Sorry, I had to state the obvious and remind folks that we PF bloggers are for the most part only bloggers and not personal finance/investment professionals.

The first listed editor’s pick, is great. It’s from a relatively new blogger, Chica with Issues. You’ll figure out why when you read her post about educating her younger brother about money matters. She feels it’s her role to do it since her folks didn’t teach her much. She rocks for learning by the seat of her pants, but trying to save her brother from the same hard lessons. My older sibling and cousins did a lot to teach me how the world of money works and I am really grateful to them for it.

I’m picking NoCreditNeeded’s buying decision flowchart over his actual carnival submission. It really is amazing to see each step of the logical thinking process. If you aren’t asking yourself ‘Do I need this item?’ at the beginning of a purchase cycle, think again!

Queercents’ Sleeping with Money series is great. This week it’s “You did WHAT with our money?” And how to have that confrontation with a minimum of pain and suffering. The conflict resolution advice is excellent for any fight, not just about money. Boy is it good for me to remember that and to STFU when my boyfriend is expressing himself.

Golbguru on the Weight of Stolen Money. Intriguing. It reminds me of Suze Orman’s 9 Habits to Financial Freedom. It’s the small things that mold us into the human beings we are. D at Divorce to Financial Freedom unburdens herself for us in response. Very thought provoking of Golbguru. Blogs can be so cathartic.

Being Frugal blog on buying health insurance independently. It just sounds like a lot of work, however the post implies there is great savings to be had and a wide variety in levels of coverage, so this is one area where doing the research seems like excellent advice.

Harrison at Journey to Financial Freedom writes his steps to getting out of debt. Some of the steps are interlaced with personal stories. I really like tip #5, “Outsource your problem”, or acting as a third party. I run a side personal organizing business and one of my clients called me to help his folks with their finances. Just by sitting down with a stranger and looking at the numbers, it helped wake them up to reality. It’s why I think that Larry Winget show could be really cool. (I only saw half of an episode, but it was interesting.)

The Finance Buff on what will happen if your mortgage lender goes under. Interesting information and probably useful for people in today’s uncertain market. The good news is that your loan is a contract which shouldn’t be effected too much. But you’re probably going to write and mail your checks to a different place. (This reminds me to call a friend of mine at Countrywide. I hope she doesn’t get RIF’d into a new line of work. Lucky we’re both computer geeks and not mortgage people. So she’ll land ok.)

Jim at Blueprint for Financial Prosperity on using Lending Tree to find a mortgage. The comments are very interesting stuff and it looks like I did the right thing by shopping around at individual banks versus going to a broker.