Sunday, October 21, 2007

Who is Responsible for Your Finances?

Hit By The Boom Real Estate has a long way to go before it hits bottom.

Foreclosure disasters are never good for real estate prices. Lenders are the biggest sellers in some markets, and they need to get the houses off their books.
"I've been in this business for 17 years, and I've never seen the bank be the No. 1 seller," said Armstrong, president-elect of the West Pasco Board of Realtors.

Homeowners who want to move or those seeking to avoid foreclosure by selling can't compete, he said. And every time a lender cuts prices dramatically to move a home, values in the neighborhood go down, he said.

"Lenders can afford to go much lower in price than homeowners can," Armstrong said. "The banks don't want all these homes, so they'll sell them for whatever they need to."
It will be at least a year before foreclosures peak (and prices hit bottom) in greater Tampa Bay.

But don't worry too much about people being out in the street.
As many as 69 percent of the 381 homes in Carriage Pointe are owned by people who don't live there, county officials estimate.
The article loves to talk about "investors" but these folks were speculating.
For example, one investor in Carriage Pointe purchased six homes. All of them are now in foreclosure.
The reason that it is hard to get good numbers, is that some people lied on their mortgage documents.
"One lender recently told us that many of their loans in foreclosure were supposed to be to people living in the home," [Doug] Duncan [chief economist at the Mortgage Bankers Association] said. "But when they investigated, they learned some were actually investors."
That is called fraud people. When they ask you if you intend to live in the home, and you say yes, and then rent the home out, you are committing fraud. Homeowners (people who actually live in the home) get much different lending deals than investors.

I almost said that homeowners get "better" deals, but the truth is, they also get worse deals. All of these sub-prime deals (or most of them anyway) were only for people intending to live in the property. Investors almost always have to put 20% down. There are exceptions, but very few.

But the biggest part of this problem is people who are overextended and in debt up to their eyebrows.
The couple bought the home four years ago and took out a second mortgage nearly two years later. They had equity at the time and wanted to upgrade their home. Two months after signing the paperwork, [the wife] discovered she was seriously ill and no longer could work.
It doesn't say, but it sounds as if she didn't have disability insurance. (Do you? What will happen to your family if you can't work?) It certainly sounds like the couple had no contingency plan. If everything worked out perfect, they would have still owed more than the house was worth, but you can't expect life to be perfect. It isn't. You always have to have a contingency plan - or contingency fund. As they say, you should save something for a rainy day.

I would also guess that they have absolutely nothing saved for retirement. But that is another essay.

You should never consider your primary residence to be an investment. It is not an asset, it is a liability. You should never listen to a real estate agent about what you can afford to own. They will always try to sell you the biggest house you can get a loan for. That is not the biggest house you can afford. That is the biggest house they can sell you. You can afford less. It is up to you to be an adult, and take responsibility for your own life and financial well-being. But that isn't very popular today.

Americans are really very financially illiterate. They accept debt without knowing the repercussions, they sign contracts with the blithe assurances of someone who is only trying to sell them something - without any real understanding. They are proud of the fact that can't even do simple math, and have probably never heard of an amortization table. They have nothing saved for retirement, their kids education, etc. They are in worse shape than they know, and as this whole lending episode proves, what you don't know, can hurt you.

When the salesmen turn out to be only selling, and math turns out to be more important than who won American Idol, these financial illiterates whimper and cry that the world is unfair, that the fault is not in themselves but in the evil bankers, and they want Big Brother Nanny to take care of them and make the world a safe place. To all those people I say, "Grow up!"

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