A House of Cards (Credit Cards Mostly)
This is the first entry in what I hope will be a discussion forum about topics including the housing market and how it affects regular Joe and Joann; personal credit issues such as REALLY understanding how smart the credit card companies are and what you need to know when considering taking them up on their many offers to make your life easier and how in general to build your personal credit profile to be attractive and ultimately save money because you know how to handle money.
I won’t know the answers to all your questions as I am not a financial advisor but I hope we will attract other users who will and really start to cover a fuller spectrum of your questions.
To get things started I want to address what I think was the fundamental problem that caused the current housing crisis and mortgage melt down, lies. No one is without blame here, the customer who overstated their income to get a larger loan than was practical, the mortgage person who encouraged it to make the sale and ultimately even the real estate and building professionals that looked the other way because they too wanted to make a sale. The biggest culprit however were the Wall Street financiers that created the products that let people borrow beyond what was realistic for their income in order to guess what MAKE A REALLY BIG SALE!
Special disclaimer: Most of the mortgage and real estate people are very honest and upstanding people but this story shows how when just a small percentage of people “look the other way” it can taint an entire profession and contribute to a national crisis.
Let’s look at the cast of characters in our drama. The Wall Streeter is the ruthless drug kingpin who does not care who his product destroys, the mortgage and real estaters are the street level pushers “Hey buddy don’t you want to feel good? Why not buy a big showy new house or use the money in your old one to buy lots of new stuff?” and the consumer is the recreational user that just wants to feel good if only for a little while and tells himself “I am not an addict, I can stop anytime I want.”
The current run of our little drama took place generally between early 2000 and 2006 when the wheels really started to come off and the reality of the housing market excesses really started to hit home. As short term teaser rates started to reset (that was in the fine print of your mortgage papers that you were probably told at closing was “boiler plate”), people started to have a hard time making the new payments and started to look for a way out. As the whole thing started to collapse, because no one in the food chain wanted to be left holding the bag, access to these types of loans that fueled this SUV of a housing market began to run out and panic started to set in. As panic started to set in people who could not refinance put their homes on the market flooding it with new property driving prices down. The more prices went down the less people who were highly leveraged could even sell their home or what they owed on it. If you can’t sell it and you can’t afford it foreclosure starts to loom on your horizon. As more and more homes went into foreclosure guess what...prices continue to fall because the banks don’t want to own them either. Whew what a ride!
So as the say at the high school reunion ...where are the characters in our play now?
The Wall Street Guy got his money and now wants to government (that is you and me) to bale him out on the rest so he can keep his license to print money (stay in business)...remember Bear Sterns?
The Mortgage and Real Estate Guys if they were shady are long gone and now selling something else (rent the movie Boiler Room for a real good look at how many of these shops operated). The honest professionals are trying to stay in business and live to sell another day.
And Joe and Joanne Homeowner...well the high has worn off, the well has run dry and now the long road to recovery begins.
It is hard to feel good at the beginning of recovery but people will survive and hopefully come out of it wiser and stronger.
It all boils down to greed. You can blame Wall street, you can blame banks that over-lent, you can blame whoever you want. You can take ownership only of your own borrowing practices. The variable rate loan deals are actually a pretty good tool. It gives you a chance to buy a home. If you kept it simple, borrowed as little possible, bought a decent house as reasonably as possible, kept your credit up, you can refinance now at a decent rate and live comfortably. If you had to have the biggest, best house you could possibly get, if you had to have SUV's and boats and toys, all new furniture, and borrow to get them, chances are you are going down. This is the real world, most people can not have it all, and bad things happen to everyone sometimes. We have a society that thinks of choices as big, bigger, or biggest. What about, I really don't need it right now, wait until I can afford it?
And the amazing thing is, it's happened before. People learned nothing from the early 1990's, as soon as they got a little money they did it again. As soon as gas prices stabilize for six months, people will go right back out and buy bigger SUV's. Do they really think gas prices won't go high again? Do they really think houses won't go low again? This is where individuals drive the market - as long as we demand as much as possible, we keep losing it.
Credit at this point is a great deal if you are smarter than the card. You can get a reasonable loan, buy a simple house for a good price, you can take advantage of great credit card deals to make repairs or improvements on your existing home. To not overextend, you have to stop and think about what can go wrong, and make allowances. "If I lose my job, can I make these payments on less money." "If I have to sell my house, can I do so and still pay off what I owe?" "Do I really have to have an SUV that gets 12 miles to the gallon, or can we fit into one that gets 25?" It all comes down to "Am I willing to go without this to have that?"
It bothers me when I see people who have worked hard and gone without to get what they have, and compare it to people who had the best of everything and don't have the sense to keep it. Of course some people, just in the course of life, have a lot of bad things happen and can't hang on. These people have my sympathy. To those other people, stop doing it!