Monday, February 23, 2009

The American Dream Turn Nightmare?

Last Wednesday, President Obama announced a $75 billion plan to provide relief to up to 9 million homeowners facing unaffordable mortgages that can ultimately lead to foreclosure.  According to the Urban Institute, 43% of all foreclosures is a result of subprime adjustable -rate mortgages.  The millions of borrowers who fell for these alluring teaser-rate mortgages are now seeing their "American dream" evolve into a foreclosure nightmare.  

District homeowners are not exempt from the national housing crisis.  In fact, foreclosures in Washington DC has doubled between the years of 2005 and 2007.  While the highest number of foreclosures have been reported in Ward 5, the greatest percentage of sub-prime mortgages are found in Ward 7 and 8 (River East).  Given the foreclosure trends, this can mean one of two things: 1) homeowners with sub-prime mortgages in River East were more prepared to deal with fluctuations in the housing market or 2) homeowners have yet to reach the interest-rate adjustment period which makes  new monthly payments unaffordable. 

Because of the interconnectedness of each sector of the American economy,  the housing crisis has led to a nationwide economic downturn: banks are failing, businesses are cutting jobs, and almost every state in the Union is running record deficits.  There's plenty of blame to go around.  We can not control how markets perform, but we can control our own behavior.  And many of our problems are self-inflicted.  In many cases, it's not the mortgage that's causing the problem. It's the additional debt on top of the mortgage that makes homes unaffordable once interest rates increase.  For example, did you really need to charge the trip to Brazil on your credit card?  Did you really need to trade in the 2005 Corolla for a new Volkswagen? Do you really need 120 cable channels - how much TV can you watch? After doing a self- assessment, one is likely to realized that our own day-to-day decisions, made on an incremental basis, has led to the mess we're in.

The President's solution to dealing with this hiccup includes: helping homeowners refinance at lower interest rates, providing incentives for banks to modify loans, increasing Fannie Mae and Freddie Mac's ability to provide mortgages, and amending bankruptcy laws to allow judges to modify mortgages.  This sounds great, right?  Well the problem here is that this all costs money. Taxpayer's money.  Homeowners like many of us in River East have difficulty understanding why responsible borrowers like ourselves have to subsidize irresponsible homeowners who bought condos in Dupont Cirlce - even though they knew they couldn't afford it.  Is this policy fair to the conservative homeowner?  Not really.  Is supporting this policy the American thing to do? Absolutely. 

Yes, socialism is definitely necessary in the short term. However, moving forward, we have to find a way to prevent this from happening again.  Here is some advice friends, family, and professors have shared with me over the years:

  1. If an offer sounds too good to be true - it usually is.
  2. Refrain from signing anything you don't understand.  You are educated and you have common sense.  If you don't understand it, and if the person sitting next to you doesn't understand it - it's probably sketchy. In this situation, have an attorney review the documents.  If you can't afford a private attorney, visit a free legal clinic usually located on college campuses.
  3. Don't live within your means - live beneath your means.  Just because Chevy Chase Bank approved you for a $300,000 loan doesn't mean you have to buy a house at that value. Instead, live beneath your means and buy a condo at half the cost.  Use the rest of the money to repay student loans, contribute towards retirement, or simply save for a rainy day.
The above tips have worked wonders for my friends, family, and self.  I hope they work for you too.  Please feel free to add to this list in the comments section.  We're all in this together, and we need to convene not only to share our wealth but also share our financial wisdom. This is the only way we'll create a foundation of financial security for ourselves, children, and grandchildren.



The Advocate said...

Another excellent post!

The really sad thing is that once this crisis is over (which will most likely be years) the backlash is going to that it is going to be extreemly hard for working class people to purchase a home - even a reasonably priced one within their means

Braveheart said...

THANKS! You know, I think about that often. We were so fortunate, and a few of us ruined it for the next generation. I wonder how this has affected funding for DC first time home-buyer programs? I think I heard the Council was putting moratorium on funds in order to balance the budget.