Monday, January 30, 2012

Bad Financial Choices or Government Malfeasance?

These poor folks bought a brand-new house at the height of the Real Estate Bubble, without selling their old house first.   Now they are screwed, so it has to be someone else's fault, right? 
 Note how close the neighbor's house is!  These new developments suck.

On National People's Radio this morning, an article about how NPR has "discovered" that Freddie Mac is  "betting against" its own borrowers in the marketplace.  NPR is apparently very proud of this discovery, touting it several times on the segment.  This just in:  NPR has "discovered" that the sun rises in the East. More after the break!

Well, any idiot knows that if your bank has you locked into a loan at a high rate, the last thing they want you to do is refinance at a lower rate.  If rates drop low enough, they might let you, provided you pay them a lot of fees - if the alternative is you going out and borrowing from somewhere else.   But thanks to tighter lending standards, even though interest rates are at an all-time low, few people, particularly those "upside down" on houses or late on loan payments, can afford to refinance.


But the poster child couple, the Silversteins, that they used to illustrate the problem, well, they've made a lot of horribly bad financial decisions.  Whose fault is that?

Jay and Bonnie Silverstein describe themselves as truly stuck in a bad mortgage.  They live in an unfinished development of yellow stucco houses north of Philadelphia. The developer went bankrupt.
The Silversteins bought this home before the housing market crashed, and then couldn't sell their old house.  They now say that buying a new home before selling the old one was a mistake — a painful one.  Stuck with two mortgages, they started to get behind on their payments on the old house. 
"It wound up taking us years to sell that house, so we had two homes and two mortgages for two-and-a-half years," Jay Silverstein says. "It burned up my 401(k) and drained us."

What did they do wrong here?  A host of things, over a number of years:

1.  They bought an overpriced house.  As soon as I saw the phrase "Yellow Stucco House" I knew exactly what it looked like - something like the nightmare below, perhaps not as ostentatious.  These are houses that are slathered in Dry-Vit brand synthetic stucco and look more expensive than they are.

Houses like this may look expensive, but often, they are cheaply built and thus overpriced. 
 Yellow Stucco - how 2000's!

2.  They bought at the height of the market.  Articles abounded, in the newspapers and on the Television and Radio, about how how overheated the Real Estate market was, back in 2005 or so.   All you had to do was read these and understand the market - and realize that when homes are unaffordable, no one will buy them.  The bubble was there for astute people to see.  Few bothered to look.   I did.  Where's my bailout?  Where's my hot meal?

3.  They bought the new house without selling their old one.  This is a colossal blunder of epic proportions.  Never, ever, ever, ever, do this.  Ever.  Never-Ever!  Why?  Because you end up having two mortgages to pay and like musical chairs, you want to be sitting down when the music stops.  It is also so, so, unnecessary, too!  You can write an offer contingent on the sale of your home, and then do back-to-back closings - it was done all the time.  No doubt, a Real Estate Agent pressured them into signing the deal, telling them that they had better jump on it before all the houses sold out!  We know how that worked out....

4.  They had a mortgage at an age when they should be debt-free:  It is hard to judge their age from the photo, but with all that white hair, they appear to be in their 50's, possibly early 60's.  At that age, you should be looking forward to a debt-free retirement, not making mortgage payments on a house, much less TWO houses!

5.  They dipped into their 401(k) to make mortgage payments.  Never, ever do this, either.  At their age, they can't rebuild a 401(k) as retirement is just around the corner.  It is silly to squander your savings to hang onto a "thing" like a house - particularly when the 401(k) is one of the few assets protected from bankruptcy.  They may have been better off just walking away from the Yellow Stucco Nightmare and moving back to their own house - which may have been protected in Bankruptcy (some States allow a "homestead" exemption, protecting your primary residence from judgments).

6. They bought a house they didn't need:  The article is silent on why they felt they needed to move to a new house.  Likely they had equity in the old one, and if they had stayed put, they would be quite solvent today.  Moving to a new home, just to get style points, is rarely a good idea.  A reader writes, claiming they were downsizing from a home that they lost $500,000 in equity on - more than double the median home price in America.  We are supposed to feel sorry for folks in million-dollar homes?

7.  They are "Hanging On" to a house that likely will be under water for a decade or more.  You hear this all the time - people say "well the market will turn around any day now, and then I can sell my Mini-Mansion Nightmare for a ton of money!"  But if the 1989 Housing Bubble is any indication, housing prices will remain flat for the remainder of this decade.   The Silversteins will be living in an half-finished development for many years - and for what?

I am not picking on the Silversteins.  I feel sorry for them!  They made not one, but a series of really bad choices in life and now they are paying for them.  They should be debt-free by this stage in life.  Was the Yellow Stucco House worth all that grief?  Or was it a status symbol that is going to bankrupt them and make their retirement a decade of penury and want?  And whose fault was it that they made this series of bad decisions?

Well, according to NPR, it is Freddie Mac, of course.  Those bastards loaned them the money on easy terms, and now won't refinance an upside-down house, where the debt-to-equity ratio is beyond the limits set by national law, and their credit score is in the tank, thanks to the late mortgage payments.

(Note: A late mortgage payment, by the way, will tank your credit score.  Even one late payment is enough to drop your score below qualifying level for a reasonably-priced mortgage.  Never be late on a mortgage payment!)

Again, it is easy to externalize our own problems and foist them off on government, political parties, minorities, big corporations, Wall Street, or whoever.  But the bottom line is, your decisions in life are far more relevant that the actions of these conveniently unseen "others" that we like to blame.

It is too late for the Silversteins now - they have sold their first home and already are tapped into the 401(k) to make mortgage payments.  They are stuck with a high mortgage payment on a house in an unfinished development that likely will never be worth what they paid for it, in their lifetime.

I can only wish them the best, but frankly, their future is not a rosy scenario by any means - so long as they are stuck in the Stucco.  Myself, I'd rather live in Florida in Park Model and have money in my pocket, than stucco on the walls.

A better approach, if you are in this situation is this:

1.  NEVER tap into bankruptcy-protected assets, such as your 401(k).  If you do this, you may end up bankrupt anyway, as making a mortgage payment on an upside-down house after you have lost your job is just delaying the inevitable.   Once you do declare bankruptcy, you lose the house AND you now have no 401(k), because you squandered it trying to hang onto "things".  Better to emerge with your savings unscathed than to be bankrupt AND broke.

2.  THINK about where to go with this.  The mini-mansion is upside-down.  Yes, it is a fancy house and all, and it sure would stroke your ego to be able to "keep it".  But it is the big financial drag on your life - not the older, smaller house.  Personally, I would try to walk away from the mini-mansion, by doing a short sale or otherwise disposing of it, and move in to the smaller home (less costly to maintain, less taxes, etc.).

3. Don't fear Bankruptcy, and don't delay if you need to.  If you are tapping into your 401(k) to pay your mortgage, chances are, it means you are living beyond your means and are heading for financial ruin.   Destroying your retirement plan so you can live in a house for a few years, is not a good idea.  Better to declare Bankruptcy early on, get rid of the white elephant, and then move on with your savings intact.   At least you end up with SOMETHING this way.

Unfortunately, the Silverstein's story is repeated all across the country today.   People made bad choices, and stick with them out of foolish pride.  And I count myself among them, although I came out largely unscathed.  Why?  I let go of pride and stopped trying to hang onto "things" when it became apparent that they were costly to own and raised my cost of living to a level that required a fire-hose of cash.

If you are cashing in your 401(k) to make loan payments, think about where you are going with this.  Sit down and "do the math" on where you are headed.  How long can you keep this up?  Is the idea that you will get another high-paying job realistic (if you have been laid off?).  Is the house really going to appreciate in value enough to offset the losses to your savings? (likely not).  Are you robbing Peter to pay Paul - squandering your future so you can not make hard choices today?

Of course, if you are asking yourself these questions in 2012, and not 2009, then it may already be too late - you've already burned through tens of thousands of dollars of retirement funds.  But better late than never - and it is never too late to start over.

A lot of people will be doing just that, I'm afraid!