It is sad to see empty driveways, streets littered with trash and debris and abandoned houses in a neighborhood resembling a “ghost town” but this is also the “new” norm in America. The question can be asked as to what has happened to that golden ‘American Dream’ of owning your own home? Well, the answer is a lot simpler than most people think and it can be answered in one word, “greed”? You see, there was a time long ago in this country when one of the main goals in life was to purchase a home and live in it to raise your family; which usually meant until your children graduated from college, got married and had the grandchildren come visit until their teen years, or so.
It wasn’t too unusual for three generations to have lived in the same house at some point in time. A home was thought of as a kind of a permanent symbol so you won’t be a forgotten memory and you can bequeath a lasting legacy for future generations. In a way it is like the Native Americans connection to the ‘land’, it is your own sacred place on the earth. Generally, the times when a house was sold occurred when an occupant died or an elderly or infirm occupant was relocated to a Nursing Home, or as property settlement in a divorce proceeding. Mortgages were usually held on the property for twenty years but sometime during the late 1970’s there was a strategy being circulated where you could pay off your house sooner. Instead of the standard twelve monthly installments per annum [year] the homeowner could remit three extra payments to be applied toward the principal amount of the loan and not have it sent into the escrow account. This usually resulted in mortgages being paid off in thirteen years or so. It may not have a big deal if only a few homeowners did this but when thousands of people began using this technique, then obviously the holder of the note began to be a little concerned.
After this practice went on for some time, penalties were assessed for paying off the loan early and in some instances, loans were not granted unless the applicant agreed to make payments for the duration of the loan. The Banks and S&L’s who financed mortgages for twenty years made most of their money off the interest payments in those first seven years or more and then the homeowner started to chip away at the principal amount. When it was all said and done the homeowner usually ended up paying at least twice the original loan amount over the two decades. Next what came on the real estate market radar were those adorable and appealing ARM’s (Adjustable Rate Mortgages), whereby you can move into a home and make affordable payments and then a few years later your mortgage payments will increase gradually. The thinking was that if a person was still employed then they would probably be getting a raise during the time and should be able to afford the note. Even with a merit and COLA (Cost-of-Living-Adjustment) increase, it was not enough to pay that balloon payment which increased the payments by 50% and sometimes double what the premiums were previously.
In theory, the ARM’s were supposedly adjusted to interest rates, the yield on T-Bills, the rate of inflation or long-term corporate bonds. It seems rather, that this was more like those companies that offer interest-free financing for five years, which is great, but if you are late or miss making one payment, you are charged all the accumulated interest for those five years. This was really the handwriting on the wall because people started defaulting on their mortgage loan payments because of the ARM’s but despite the alarm bells and red flashing lights, financial institutions were heavily leveraged in residential mortgage securities and loans, with backing and approval by the federal government.
Now here is where it really gets interesting: During this time also there were books written by multi-millionaires who acquired their wealth in real estate and seminars sprang up in cities throughout America teaching people on ‘Main Street’ how to make money like the fat cats on ‘Wall Street’ and that is through a technique known as “flipping.” What is was basically is someone buys a house [not for the purpose of a homestead] and hold onto it for a short while and then puts it up for sale when the value of it appreciates beyond what his loan obligation is; usually to the tune of several thousands of dollars. This is, in my opinion, what sounded the death knell in the Real Estate market; and for this simple reason: A house or residential property appreciates in value over time based upon equity and escrow balance. Of course, the federal government through the IRS fed this frenzy through its tax law which stipulated that proceeds resulting from the sale of a primary domicile [residence] was not taxed as ordinary income.
In a typical mortgage payment there is PITI [principal, insurance, taxes {escrow} and interest] and all of this is tied into what is called the “Time value of money.” If a home loan is renegotiated after a couple of years due to the county tax assessors property appraisal there is no real increase in appreciable ‘equity’ or value in the house as well as very little escrow beyond what is sufficient to pay property taxes and prevent the mortgage payment from increasing. The thousands of homeowners who did this over the decades ‘”only” exacerbated an already growing problem [mortgage foreclosures and bankruptcies] along with complicity from: banks, S&L’s, credit unions, and the federal government, including Fannie Mae, Freddie Mac and Ginny Mae.
So, what can be done about it? Perhaps the first thing is to start depositing money back into savings accounts instead of allocating most or all of our discretionary income [cash minus bills] into a 401-k plan or an IRA for retirement. One of the two main reasons that banks don’t like to loan money is because the average American has a zero balance in their savings account and banks loan money based upon a ration of deposits [cash and cash equivalents] that they have on hand. Although the housing market for residential real estate is in a slump, commercial property investiture has been steadily rising year after year. The reason that banks are more apt to fund a merchant account is because the particular business has deposited money into its account or offered some form of collateral that can be converted into cash that the bank uses to make a profit.
If the average commercial account was like the average individual depositor with a zero balance and nothing of monetary value as collateral, then no business loans would be made. The other thing is major credit cards belong to a bank and when someone is delinquent on their payment obligations and files bankruptcy, then guess who has to absorb that loss-the same bank that you go to and apply for a mortgage loan. Thousands of Americans can’t just conveniently treat credit cards like its “free money” and then turn around and just wash your hands of any further financial responsibility just because you can’t afford to pay on your account anymore, because one thing affects another and the crisis we are in is just “the chickens coming home to roost.”
Lastly, before even considering buying a house, take inventory of your personal motivation for buying a house in the first place-is it as a ‘homestead’ or are you in it for “profit?” The next thing, which is probably the most important, is for the federal government to get out of the mortgage business by insuring or guaranteeing residential loans. The government is not a business or company that manufactures, produces, or sells goods and services, but rather all it has the authority to do is tax and print money.
The financial lending institutions should use “common sense” when it pertains to establishing guidelines for loan applicants. No person or family should be approved for a home loan if it exceeds twice their annual income and the down payment on a house should not exceed 5% of the loan amount. In the present climate of a depreciated real estate residential marketplace and weak economy this should spur more home-buying and free up money sitting idle in the bank vaults or at the Federal Reserve. The thinking here is that it is better to get a person into a house that they can afford with as little financial stress as possible, because they just might stay in it long enough without defaulting on their obligations for the holder of the lien or title to make their money back with interest during the first 7 to 10 years on a 20 year mortgage loan. The one stipulation though, is that the homeowner has to promise to stay [homestead] in it for the duration of the loan unless some unexpected circumstances intervene. In this way it would seem to be a “WIN-WIN” situation for everyone involved.
Robert Randle
776 Commerce St. #B-11
Tacoma, WA 98402
August 3, 2011
robertrandle51@yahoo.com
