We all were born into a native language, which beyond the finer points of grammar, usually comes to us naturally. As easily as we breathe for most. And so the same for our culture. It’s what we have known for the majority of our lives and is our norm therefore. I was raised in North Carolina in the ‘60’s and 70’s during integration and the height of racial tension during the Civil Rights movement of the day.
I slowly, sometimes imperceptibly changed over the years. It was not until years afterward when I read a book written by a former classmate that I realized how prejudiced I was; and probably still am at times. It’s hard work changing behaviors gained from years of immersion in a culture. The culture was as innocuous to us as the air we breathed. Like the water that a fish lives in- we don’t notice because it’s all we’ve known.
There is no shortage of news on the world’s economy today. Things are tough and may well get tougher for a while. The quickest route to a recovery is for consumers to do what they do best…consume. That’s the culture that we are immersed in; that’s the native language of the average American.
"The wise man saves for the future, but the foolish man spends whatever he gets"(Proverbs 21:20, LB)
I’m a money changer of sorts, and I work in around the temple as much as possible. I’m a Christian, and I am a Financial Advisor. The major difference for me is that I recognize that God has his own economy. It’s not in the news as much. Imagine an economist being quoted as saying:
"If we have food and covering, with these we shall be content" (1 Timothy 6:8)
God in fact knew we would be in this situation and warned us.
"Now these things [Lord’s discipline of Israel- (i.e. the original foreclosure crisis)] happened as examples for us, that we should not crave evil things, as they also craved" (1 Corinthians 10:6)
"He said to them, 'Beware, and be on your guard against every form of greed; for not even when one has an abundance does his life consist of his possessions' " (Luke 12:15)
While there is some validity to the demonization of Wall Street during these times, they should be characterized more like drug-pushers than addicts. We are the addicts. Our earthly greed drove the economy to unsustainable levels.
"You shall not covet your neighbor’s wife, and you shall not desire your neighbor’s house, his field (outdoor kitchen) or his male servant (butler) or his female servant (maid), his ox(Hummer) or his donkey(Lexus) or anything that belongs to your neighbor" (Deuteronomy 5:21)
The original crisis which was born out of greed and the need to "Keep up with the Joneses" has now reached well beyond to many an "innocent" bystander.
Among the best ways to learn a new language is to go among it’s people- to be immersed in their culture, and almost out of necessity one learns the language to survive. An essential first step is to desire deeply enough to learn, or change.
"For what does it profit a man to gain the whole world, and forfeit his soul? For what shall a man give in exchange for his soul?" (Mark 8:36-37)
Motivation enough?! Then seek out this new culture based on God’s economy. For many of us this will mean redefining what Wants are versus Needs. Turn the TV off for this one.
"Do not conform any longer to the pattern of this world, but be transformed by the renewing of your mind. Then you will be able to test and approve what God's will is—his good, pleasing and perfect will".
Turn less to God as we would an ATM with prayer as a passcode and set about the hard work of learning a new language.
As a financial advisor I believe in living life abundantly (not necessarily expensively) today and tomorrow- in balance. I encourage the building of wealth and organized management of money. The difference for the Christian is the means, end and purpose for which we save and spend. We are playing the game with much the same set of cards, but our winning hand is different from the one in the World’s rulebook.
"Commit your works to the Lord, and your plans will be established" (Proverbs 16:3)
"Instruct those who are rich in this present world not to be conceited or to fix their hope on the uncertainty of riches, but on God" (1 Timothy 6:17)
While we are to be in the world to reach the lost and in need; we are not to be of the world. I encourage everyone to seek out the resources available, like Financial Peace University, that operate based on God’s Economy. Become equipped and immersed; to renew our minds; to live in contentment and confidence. Then perhaps as visitors in the World’s Economy someone will notice; and we can provide The Answer.
A few thoughts on today.
There is a difference, Mr. President between spending and investing.
Adjustable Rate Mortgages can and do adjust payments downward. This is not uncommon given the low Treasury and LIBOR rates.
A large number of loan defaults are Sub-prime Loans; but a significant number are not. They include borrowers that have (had) good credit that the borrowers themselves overextended, of their own free (enterprise) will. Bankers accomodated, they did not coerce.
Derivatives are financing vehicles that created new pools of money that were secured by existing pools of money that were secured by real estate. Then, new pools of money were created that were secured by the pools of money that were secured by the money that was secured by the real estate.
In other words, lipstick was put on pigs, and then the pigs with lipstick were put into evening gowns. No new pigs, just made up and then dressed up. This was to accomodate buyer demand- not to create buyer demand.
Keeping up with the Joneses created the demand. Get rich quick by flipping property strategies created demand.
Lastly, you cannot reduce the principal owed on a loan without hurting the investors who put their money into mortgage bonds. If you do, investors won’t buy bonds, and the money won’t go back into the market to create new loans- UNLESS you increase the return (raise rates) to make up for the losses over time (a long time).
Now, as much as it scares me, we have to count on people that can make their payments, to make their payments- no matter how attractive the government makes it to default. This is where those who make sacrifices do so for the greater good when it isn’t fair.
We arrived at this place as a result of greed and our best chance for recovery is integrity.
By Michael Noel
It could be attributed to generational changes in how we have been raised. It could be attributed to jealousy, greed, or just human nature.
Whichever the case- we are where we are because of what we all did (do). What I'm about to say will likely never be said by anyone who is elected to office, because it points the blame squarely at the voters.
Today's scapegoats are mortgage companies, insurance companies, banks and Wall Street, and maybe a few sacrificial politicians. But the truth?
You and me. The average American.
Truly the average American is being redefined. "Average" as defined in America today is well beyond the reach of most Americans. This did not stop anyone from attempting to attain even average, but more often above average. That's right, not just keeping up with The Joneses- more like one upping the Joneses.
Since 1995 we have seen unrealistic gains in housing prices and securities values. Most of this financed in one way or another. Personal and corporate debt and derivatives.
Here is what a derivative us in the mortgage-backed securities world, in layman's terms:
A mortgage security is made up of many individual loans. The loans vary in quality, and are divided in to tiers. The quality of the tiers is measured and given a Rating by A Rating Agency (remember these agencies getting in trouble a little while back?). The best loans- borrowers with good credit, stable income, etc. are "A" loans. The loans with borrowers with no so good credit, less job stability, etc. go down to C, and D loans. This works well. Let's call this "Security M".
A derivative comes along when there is MORE DEMAND. I'll come back to this.
The derivative is the creation of a new security from loans 'derived" or pulled out of another security (or pool of loans that are lumped together). In the case of our current market, in order to satisfy INCREASED DEMAND, Wall Street pulled some of those "C" & "D" loans out and created "Security M Squared". The Rating Agencies then rated these securities from "A" (the best of the bad) to "D" (the worst of the bad). This is known as putting Lipstick on a Pig.
Investors bought these new securities for investment, which returned monies to the market to do more loans to satisfy INCREASED DEMAND. It worked so well that in order to satisfy STILL INCREASING DEMAND, Wall Street pulled some of the "C" and "D" loans out of the M Squared securities, to create, or derive, another security- "M Cubed"- which rating agencies then rated from "A" (best of the worst) to "D" (worst of the worst). This is known as putting Lipstick on a Pig in an Evening Gown.
These securities were then sold to investors and the monies were used to SATISFY DEMAND.
So here it is...Wall Street found a way to meet demand, by creating securities that were sold for money without much new collateral to be lent to PEOPLE who bought homes with little money down and much looser qualifying criteria.
PEOPLE wanted more than they needed and Wall Street found a way to finance it. Drug dealers sell drugs because PEOPLE are addicted to drugs and create demand. Drug dealers are not responsible for people becoming addicted- that merely facilitate it. The American addiction is Things (houses, cars, TV's) IN EXCESS.
American's have redefined "Need", as a synonym of "Want".
American's need to take responsibility for their actions. The solution from government to revive the economy is for individuals and businesses to spend...with credit. Thus the emphasis on "unfreezing CREDIT markets". Getting the banks LENDING again.
Any American who enters into a contract that he does not understand- whether explained poorly or with the most corrupt motivations of a sales person- is still responsible for their actions. Not the salesperson/broker; not Wall Street; not the bank.
And it's not that the American is not smart enough. This year the government authorized a first-time homebuyer "tax credit" of $7,500.00. Firstly, no licensed lender could legally advertise this program, because the lender would be guilty of misrepresentation and violation of the Real Estate Settlement Procedures Act. The program is a loan. The "credit" has to be paid back over time. It's a LOAN. This program has barely been used- because American's, without benefit of counsel, figured out that this was a LOAN. Americans were smart enough to understand this program for what it was, despite the Government's misrepresentation.
Surely then Americans are smart enough to read loan disclosures and conclude that they either DID, OR DID NOT understand them.
We are in a tough spot. Our economy needs for individuals and businesses to buy and sell our way out of the current downturn. But the most critical thing Americans need to learn is this:
The key is a working budget and balance between today and tomorrow. Despite the obstacles- the economy, the sales person who lied to you, Wall Street greed- it is your own ego, pride, shame and/or greed that has the most significant impact on your future. So, take your share of the blame. The decision is yours and the action has to be yours.
If I were to run for office my policies would reflect these opinions.
Can I count on your vote?
We would like to think that the worst is over. Certainly, we have seen a lot of trouble; but the residual of the current problems that are racking the market will be with us for a long time.
More than many know, we have modeled our finances after Biblical principals. Specifically, there was a time when every seven years, debtors were forgiven their obligations, and essentially given a clean slate.
The American homeowner has achieved this "Year of Jubilee" by means of selling their homes, and using the equity to pay off their consumer debt, make a down payment on another (larger) home, and repeat the cycle.
A typical first-time homebuyer owns their home for 3 years- the average move-up buyer? You may have guessed: 7 years.
So, what of our market today with no equity in homes and consumer debt rising? No Jubilee.
My goal as a financial planner is to build a comprehensive plan to equity, debt, and risk in the form of a balanced budget for my clients. The balance in the budget is not simply income/outgo (critical first stop!); but also short term/long term. We should enjoy (some woth more moderation) the lives we live today- but not to the exclusion of a sound retirement tomorrow.
In the coming years, in keeping up with the Jones we may find ourselves in the wrong neighborhood.
Watch for my 7 Step Program to Financial Recovery, coming to a blog near you soon.
Nothing.
Well, realistically, if you have steady income, decent credit (not perfect is okay), and some savings (even no savings), there is plenty of attractive financing available for you.
Rarely will the market not lend on reasonable risk factors.
Declining Property Values
Now this hurts if you are considering selling or refinancing. This is the factor that is locking people into their current home.
The return of the Short Sale (selling for less than the actual mortgage balance, with the bank's approval- as they are taking a loss- reserved for those who have fallen behind on their mortgage payments) has brought out the worst in some. There are instances of owners intentionally allowing their loans to go into arrears (late payments), even though they could make their payments. They simply have elected not to do so.
This is a flawed strategy, and unethical at best. Sorry.
So if you are in there- stay there- unless your work or family obligations require a move, and you simply cannot afford to maintain the home.
Trouble Ahead
Often the sale of a home results in a windfall of sorts during the typical real estate market. The appreciation of the home and the forced savings plan (zero rate of return) payments to principal result in cash at closing that is typically used for that next home purchase...and to pay off the other debt that may have accumulated since the last purchase.
Beware. Keep a handle on that credit card and installment debt (which statistics say most are not), because with home values haven fallen, there may not be that "get out of jail free card" coming with the next sale.
Nonetheless (finally to that good news), it is a great time to buy or build! Home values have dropped into a real value zone, and builders need to clear inventory, and...well, they are builders...they need to build some homes.
If you have questions about budgeting, building better credit, or buying a home, contact us for a free consultation.
Experience You Can Trust, For Your Best Interest...
888.795.2470 or email us.
While property values continue to show declines nationally; some areas are showing meaningful signs of a bottom.
Now is the time to shop.
Rates are bottoming also, as increasingly The Fed turns its focus toward inflation concerns.
First Stop - Pre-Approval
In busy markets the best practice of real estate agents is to have the prospective buyer speak with a Lender before seeing any property. First, this puts the buyer into the right price range for their budget; and second, it makes for a more efficient home search.
The real values in the market place are moving fast. Over priced homes where the seller is holding out and hanging on to a market-gone-by are the homes that are languishing and giving the impression of a sluggish market.
Unfortunately, some agents, (even with $4/gallon gas) are so excited to have a warm body in the car, that they skip the pre-approval process. This can end in much heartache when the home one falls in love with is beyond one's loan qualification; or worse, down the road the payments overwhelm the new owner's budget.
It's simple to get pre-approved, with an actual loan approval based on income and credit. The rest of the qualifying is reviewed once a property is found and put under contract and appraised. This actually assists in the price negotiation, because the buyer is ready to move quickly to closing.
Next Stop - The American Dream
It's not corny- owning your home gives you a sense of pride, security, and an investment foundation for the future.
It is a great time to look at real estate- just make sure you get the process in order to make sure your dream doesn't turn into a nightmare.
Firstly, I am not trying to put myself out of business.
America, America. We have so much and we push each other for so much more. Not always in a good way.
Homeownership, of which I am a fan, has been turned into an exercise of Vanity for many. The goal is no longer to provide one adequate shelter and a hedge against inflation, but in the minds of many it is an outward display of one's success. More often it is an outward display of the success we want others to think we have, whether we actually do is another question.
So, for outward appearances, we strap ourselves into this asset that is not liquid, can (and does) lose value, and we form emotional attachments to it. We do this to the exclusion of our long term financial wellbeing and more immediate risk management (adequate emergency cash and life insurance); not to mention the ability to tithe to our church or give to those truly less fortunate than ourselves.
I believe the problem arose with the invention of the combustion engine.
This was the invention that began the era of personal mobility. Sure we had the wheel- but the engine that was small and economically feasible enough for an individual multiplied the impact of the wheel exponentially. Now we get get away. Way away. The traditional family structure's end; the disbursing of our moral and social accountability from the intimately familiar to the superficially seen.
Now we build and buy edifices to impress the hundreds of people who drive by our home and take notice. Or, they fly in for the weekend, and we pull it together long enough to entertain and showoff our success. Then Monday, it's back to the bills and trying to make ends meet.
We are an enabling society. "If I don't sell it to them, then someone else will". And yet, each individual is still accountable for their own actions, despite all the attempts to blame others.
It is a great time to buy a home. Declining values in much of the country are essentially a price rollback to the late '90's. Mortgage rates are at historical lows.
A Recession is an economic correction that can be quite useful in getting people's attention. Let's hope that gas prices approaching $4.00 per gallon can slow down our combustion engines enough to return some reason to the way we decide to spend the resources that come our way.
Personally, I believe it is a great time for a qualified buyer to work with responsible professionals to secure adequate, even comfortable, housing to hedge against inflation; while advising that buyer to have a working budget, sufficient savings, proper levels of insurance, and a long-term savings plan to assure a successful retirement.
That's just how I roll.
The good news is that the system fundamentally works. The bad news is that most of the news that is printed isn't about that aspect, it's about the sensational breakdowns that are "newsworthy".
The fact is that there are adequate protections in place to inform the consumer. Likely, the protections have been over-developed and complicated as to compound the problem.
There are dusty stacks of pamphlets at offices across the country, and in peoples homes. They are produced by the writers at the FTC, HUD, and Treasury. When they are handed actually handed out, they land on top of a stack of no less than 18 other documents written in a language that most loan officers don't even understand.
The current Good Faith Estimate (GFE), contains suffcient information (when it is complete and accurate) for a consumer to make a comparative decision. The flaws are not in the formulas, but in the explanations.
Since 2000, at least, many inexperienced, sales-driven loan originators have flooded the market. Relaxed guidelines and complicated loan programs made disclosure to the lay person a real challenge, even for those equipped with the knowledge to explain.
And, yes- those consumers who really didn't want to be left out. If one lender wouldn't, another would. The consumer could be coached, or unintentionally taught how to work the system. Without guilt or remorse, but with a sense of entitlement- that for many became outrage when they ended up in default.
Wall Street and their appetite for securitizations are culpable; there are those whose practices are driven by greed; there are those who naively believed what they were told. Some in each category didn't know what they didn't know (and still probably don't). Some did.
Integrity isn't required in any profession unfortunately, because society has made this too difficult to assess and 'too expensive' to pursue. Too bad, considering the long run costs.
Consumers should demand that they understand, and should not lack the discipline to stop a process they do not understand.
If a lender simply points to the lines on the page and explains the cost the problem is less.
Realistically, the time and effort to provide a $100,000 loan is not much different than a $1,000,000 loan. This, as a result of automation & operational efficiencies and low overhead allow my company to have a set revenue ($2,500 or 1% of the loan, whichever is less). To do this also requires a reasonable profit motivation, considering most companies seek 1.5-2.5% of the loan amount as there target revenue, unless they can get more.
The current GFE allows me to disclose this as an upfront fee, or as a "rebate" from the servicing lender to whom I sell the loan. This "rebate" is referred to as Yield Spread Premium (YSP), and appears as a non-cash item in the 800 Section of the GFE. It is non-cash, because the client doesn't pay it in cash, it is paid out of the premium paid because the client takes a slightly higher interest rate, effectively financing the fee.
This isn't complicated, but it is foreign to the typical consumer. It just requires that someone explain it in plain English when pointing to the page.
Oh, and telling the Truth.
Michael Noel is principal of American Home Financial, a licensed Florida Lender. Mr. Noel is one of only a few Certified Mortgage Consultants & Certified Mortgage Planners in the country, and has been helping clients make smart decisions about debt and equity for over 20 years.
The scapegoat, with some culpability of course, continues to be “sub-prime mortgages”.
As usual, The Truth is more complex.
In 1991, our economy was just bouncing back from a slow down and record high foreclosure rates. This is a foggy memory for most of us. Great times ensued.
Post 9/11, the financial markets were rocked and cash flooded the ever reliable real estate market. Over development and rising prices didn’t dissuade anyone. More product, buy more. Prices rise, flip and buy more. Anyone can play, no experience necessary.
Wall Street seized this opportunity to restore its capital appeal with Real Estate Investment Trusts (REITs) and mortgage-backed securities. Their ever-growing appetite required “new” mortgage instruments to accommodate more buyers- now securities analysts were authoring guidelines for mortgages, not just mortgage bankers.
The frenzy drove prices higher creating a large gap of affordability for the homeowner. More accommodations to draw more buyers and investors. More development; more rising prices.
Rising property values translated into higher tax revenues. Short-sighted politicians planned budgets as if the trend would continue spending the tax windfall on long term spending projects and new jobs.
Insurers raise rates. (Despite fewer storms in Florida for two years). Higher home values- more risk, more return.
Higher home prices, taxes and insurances costs translate into higher wages to attract and keep employees near business centers.
And we should have seen it coming.
Home appreciation rates were unsustainable. We know real estate is cyclical, and yet politicians chose to ignore this. Then when faced with cuts into programs launched during the euphoria, they have the unconscionable gall to use fear tactics, claiming cuts would have to come in Essential Services. Were we so under-protected in 2001? How could politicians budget for new arenas and levy taxes to pay for projects that prudent private sector investor would not touch with a 20-foot pole?
Greed and a lack of restraint have brought us to this place, not simply “sub-prime mortgages”. We live in larger homes than we need; we speculate in areas outside of our expertise; we choose to use the facts that support our arguments and special interests; we seek to profit in the moment and ignore the consequences.
The cure is not a bail-out that transfers the burden back to tax payers (tacit socialism). Unfortunately the cure is for us to fail. To rebound and rebuild. To take the losses, and pay the cost. The market will correct at a large cost to us all as we absorb the ripples that Greed has created, and Fairness will not preside over the process.
Now is the time to consider preventative measures without a doubt, but the market will purge the obvious perpetrators; we need to look at the factors outside of market forces that allow this situation to manifest. Incompetence in government has exacerbated this problem with irresponsible spending and lack of restraint. Many a homeowner would be far more able to afford the adjustment in their loan payment if taxes and insurance had not doubled over this period.
Ultimately the public needs to understand the responsibility that give to elected officials and hold them accountable. We must ask the questions and not be satisfied until we understand the answer. If they can’t give a clear explanation, they are not qualified to serve.
I continue to be disappointed by experts not knowing what they don’t know. Each time one of these “experts” parrots the phrase “mortgage meltdown” in the media, it extends the life cycle of the problem. They stumble across the commercial paper aspect of the problem. Lenders are supposed to disclose according to the Truth-in-lending Act- why can’t we get some truth in reporting on lending. It would require some homework, or they could interview some real mortgage experts.
I heard one analyst as if he were doing an exposé describing how he repeatedly asked lenders if the had relaxed their underwriting standards over the course of the last couple of years- “And they said they had not”. I’m hoping as an analyst he was fired, because one cursory look at the lender’s matrices over the course of two years would have clearly demonstrated they had.
By the way, let me describe a loan program to you. 10% down required, payment rate of 2.5%, with an actual note rate of 8%, so the potential to defer interest (add back to the loan balance) is 5.5%, but this can change as often as month an annualized basis. The loan can grow to 125% of the original balance over a 5-year period, when the loan is subject to recast. Your experts they are probably thinking “Option ARM”, one of those new exotic loans that sprang up during the roaring 2001-2005 real estate boom. They would be right; but, they would also be right if they were recalling the mid 1980’s and a loan called the “Flex”, that had been very popular during the days of 14-16% mortgage rates in the day that sparked a refinance wave back then. History repeats itself?
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