Thursday, October 2, 2008

The Bailout: Bitching and Moaning

I don't know jack about the banking industry, finance or economics. I am, however, a voter. I am also tax payer and a homeowner. Having skin in the game gives me the right to an opinion on the subject, whether or not I understand all the technicalities.

The first time I was involved in the purchase of a home, banks had certain criteria for lending money to buy a house. A bank would not loan a potential buyer more money than the borrower could afford (on paper) to pay. It is my understanding that the general formula was that the mortgage payment should equal no more than one week's pay. That seemed reasonable. There were other factors as well having to do with the buyer's employment history, credit rating, etc. In all honesty, other factors such as race, the location of the property and the social class of the borrower played an inappropriate role as well. But, the bottom line was the borrower's ability to repay the loan. Under that system, the banks would often refuse to loan money to some people for inappropriately discriminatory reasons; it was right and appropriate for regulatory agencies to crack down on that. Regardless of all other factors, banks would not loan a buyer more money than he/she could afford to repay.

When my husband and I bought our first home, the bank hesitated to loan us the money because he had not been with his employer more than two years. At the time, we had more than the value of the house in a savings account on deposit with the lending institution where we were seeking the mortgage. I suggested we simply take our money out of the bank and pay cash for the house. The loan officer did some fast calculating and announced that he could give us a loan after all. I came away with a bad taste in my mouth about the whole process, but we had a nice house.

After moving to Florida we rented for a year or so until we made the decision to stay here. At that point we started looking for a house. Neither of us had been on the job for more than a year and we made very little money. We wanted to get away from paying rent, but we seriously doubted we could get a loan. We were somewhat fearful that we might have to use a lot of our savings in order to buy a house. We found a tiny house and negotiated a great deal (we bought our house just before property values in Florida went crazy). I personally thought we might not be able to get any kind of a loan because our income was so low. I was surprised when the bank agreed to loan us the money. I assumed the fact that we had our nest egg in the bank was a factor; now I wonder.

My husband elected a 15 year mortgage instead of the standard 30 year loan. The size of the house payments scared me, but he promised if we had a problem making the payments we could refinance. He wanted to focus on paying down the principal. Having been a realtor, I thought he knew what he was doing, so I went along with it -- with a lot of trepidation. There were months when it was very uncertain whether or not we would be able to meet the mortgage. Somehow we managed to make the payments regularly. Even more miraculously, once we got settled in decent jobs, we managed to make extra payments that allowed us to pay off the mortgage early.

Ours is a cracker box ranch house with no frills whatsoever, but -- so long as we are able to pay the taxes -- it belongs to us, free and clear. Achieving that point was a struggle, but we did it by making payments to the bank that often caused us some personal sacrifice. We did it because we believe in personal financial responsibility.

I have ZERO (nada, zilch, negative) sympathy for people who bought bigger houses than they could afford, simply because the banks were willing to loan them the money. I have less sympathy for the banks who lent money willy-nilly to borrowers who, according to well-established criteria, were not good credit risks.

There is a lot of talk about how the lending institutions "took advantage" of the ignorance of consumers, more or less inducing people to borrow more than they could afford. I'm sure that's true to an extent. One of the first things people should do when they want to buy a house is to go to their bank and have a loan officer work up their credit rating to see how much money they can afford to borrow. That way they know to look for houses within that range. In recent years the amount of money the banks told people they could borrow was vastly inflated. That was the fault of the banks.

BUT, come on people! If a family earns $50,000, it can't afford a $400,000 house -- even if the banker is stupid enough or greedy enough to be willing to loan the money. You don't have to know anything about economics to know that. Do the math!

The combination of borrowers seeking loans they could not afford to repay and banks loaning too much money to risky buyers has resulted in a crisis that supposedly threatens our entire economy. The government believes the solution is a bailout, paid for by the taxpayers. That may even be correct. I am not convinced there was not another way to handle the situation, but the government has made its decision, so I will have to live with it.

As a person who has worked hard my entire adult life to pay my bills on time, pay off my house, and try to put aside some money for my kid's education and for retirement, please excuse me if this whole situation pisses me off to the Nth degree. I bought a small house I could afford and made every last fucking mortgage payment I owed the bank, at some degree of personal sacrifice. We decided to focus on pumping the extra disposable income after we paid off the loan into funding a college education and saving some for retirement. Thanks to a lot of factors, now exacerbated by the current banking crisis, the stock market has plummeted, so both our retirement savings account (which is in a mutual fund indexed to the S&P) and my 401K at work are in the toilet. We hoped to retire in our mid 60's. At this point, it's looking like we may have to work at least until we are in our 70's.

Maybe a bailout is the "right" thing to do. Maybe it's the economically sensible thing to do. But, once again, the middle class is getting screwed. The rich bankers and financiers will perhaps not get huge golden parachutes (supposedly), but they're not going to have to hock their Rolexes or start driving KIA's instead of Mercedes. A lot of the people who bought houses they could not afford will benefit from relief of various types.

Those of us in the middle are seeing our savings dwindle while still being expected to meet mortgage and other financial obligations on time, with no forgiveness or assistance. At the same time, we will be paying taxes to support the bailout.
Notwithstanding all the political jawing on the subject of not raising taxes on the middle class, I fully expect to pay higher taxes in the near future to pay for the government's vast expenditures on the bailout when it was already strapped for money.

The political candidates are out there yammering on and on about how they are going to help the middle class. What I want to know is: When?

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