Friday, September 14, 2007

Don't Blame the Little Guy

Hi, folks. Been awhile since I've posted, due to other priorities in life (busy summer). I've had some thoughts rolling around in my head for awhile, and thought that I'd better get them written down while I have some time.

There's been a lot of talk in the media lately about the credit crunch. The housing market balloon has exploded, and has caused major troubles in the market. Lenders have failed, mortgage foreclosures have skyrocketed, and people with adjustable rate mortgages are in big trouble. Many lenders have been forced to try to find a way to get bailed out, such as Countrywide. The latest one was a British lender, Northern Rock, who had to go to the Bank of England for emergency credit. This was the first British bank to be affected by the credit problems at home, and has caused stock markets in England and Europe to shudder from this buyout.

I've heard a lot on the news about what caused this credit crunch, and each time I hear an analysis, I hear these pundits blame the homeowners who have failed to make their mortgage payments. Fair enough. If you can't make your payments, the bank will foreclose on your house. I'm sure that's the main reason why this all happened, but isn't there another reason why these people cannot make their mortgage payments? Maybe it's time we examined the reasons why things have gotten so bad.

First off, the majority of the people who are having trouble making their mortgage payments had A.R.M's, or adjustable rate mortgages. Many of these people bought these homes with the adjustable rates, thinking they would save a lot of money, and banked on the rate staying low. They were then able to buy houses that would normally be out of their reach. In some areas, it is common to have homes that start at $200,000 and go up from there. Now, I'm no banker, and I don't pretend to know much about interest rates and such, but to me, (1), buying a $200,000+ home sounds like a mansion, and (2), buying it on an adjustable rate sounds insane (all apologies to those who have done this - I'm simply stating my opinion). Where I live, a house in that range would be more than most people would need. Areas north and south of here have homes in that range.

Builders and developers took advantage of the housing boom in the last decade, and shot the price of the homes skyward. In turn, banks had to find attractive ways to convince people that they could afford them...even if they really couldn't. Lenders came up with A.R.M's, to entice people to buy the home with low interest. This sounded good when the rate was low. However, rates don't always stay low. This the lenders failed to warn them about...all they wanted to do was make a sale. The economy gets shaky, rates go up, people start to struggle with payments. Pretty soon, people start to default because they can't make their payment. The ground gets shaky, and the rates keep going up. More people default. It's a cascading effect, and it's effects are being felt right now.

Why is the economy shaky? Why are people unable to make their payments? One reason that no one wants to talk about is the one thing that is damaging this economy and many others...the subject our President and his buddies don't want to hear about....yes, you guessed it, high gas prices. I know this subject is taboo with this administration...heaven forbid we blame their blessed Big Oil for the problems we're having. Well, I'm going to give you an analysis as to why high gas prices are to blame for our problems.

When people took out these A.R.M.'s over the last decade, gasoline was less than $1.50/gal. The economy was humming along pretty good, till 9/11. Gas started to climb after that. We dealt with the price, and were able to withstand the rise. People still had money in their pocket. Along comes Katrina and Rita, and suddenly the price skyrockets. Futures traders panicked over concerns of loss of supply, which sent the price skyward. Gas continued rising through 2006 and 2007, with no relief in sight. People who used to have money in their pocket to pay for that adjustable mortgage suddenly didn't have it anymore. It went into the gas tank. They have no money to buy other things, so business starts to slow at retailers. Food prices rise, because the cost of transportation has to be passed on. More money out of the pocket. A family that once was able to afford a very nice home, several cars, etc., now has to start watching every dime they make to live from week to week.

As things continue, and the family continues getting squeezed, they fail to make their payments on time. Maybe they live an hour from work, and have to spend most of it on gas to get there, or they have to spend a larger chunk on food and clothing. There's not enough money to go around. The interest rate begins to climb on the A.R.M., which only makes things worse. They are still forking out a lot of money on gasoline, which they have to have in order to drive to work, but now their check is going mostly for gasoline to get there. They find themselves in a vicious cycle: it's too expensive to drive to work, but they can't afford not to go, for they must still eat. The cycle continues until they can no longer keep up the payments. The house is foreclosed on, and a family is forced to live on the street. The lender can't sell the house, because no one has the money to buy. Others follow suit, and the lenders are suddenly faced with a crisis: a lot of homes standing empty, with no one to buy them. The lender can't make any money, so they go bankrupt. This, in turn, causes ripples in the stock market, which begins to falter. The economy slows, jobs are lost, etc. Get the picture?

Now, before you go saying, "Well, these people have poor credit. What else would you expect from people like that?", think of this: the banks were loaning money right and left to people who had poor credit, all the while promising them blue skies. What they didn't warn them about was the storm on the horizon. Many people who did these A.R.M.'s had good credit to start with, but they fell for the hype about "borrow $300,000 for 3.6% interest", and when things went sour, they fell in the hole.

Before you blame the little guy for causing this crisis, take a look at what the big guys did to cause it. You can't expect someone to be able to make extravagant payments when they are paying $3.00/gal. for gas, and their income is not rising. Because of the greed of lenders, builders, and the oil companies, America is facing a housing crisis unlike anything seen since the Depression. People are losing their homes at an alarming rate, and the price of gasoline just keeps rising. Many more will lose their homes before this crisis is over. The only way to solve this crisis is not to blame the little guy, but to fix the problems that the big guys caused. The little guy is getting squeezed, and if we continue to squeeze him, the dream of home ownership will remain just that...a dream.


teelee said...

I disagree with your comment on the $200,000 homes. I live in one of your "mansions". It's a 3 bedroom brick bilevel with 1800 square feet that cost me $190,000. I assure you it's not a mansion. It was built two years ago with all the cheapest products the builder could buy. The builder told me he only made a $10000 profit on my home. The price of building a home has gone up drastically. If you purchased a home 20 years ago then the $200,000 price tag looks tremendous, but it's really not.
I agree with most of your other comments, but would like to add the credit card factor.
Along with high gas prices in the last year our government has decided that at the rate credit cards are paid back by borrowers, using the minimum payment,the average consumer will never pay the credit cards off. So, in their great wisdom they passed legislation demanding the minimum payments on credit cards be raised. Add that factor to an ARM, high gas prices and no raises available at work and you have a huge problem!

Southern Indiana Dem said...

Thanks for your comment. As far as the $200,000 home goes, I'm simply stating that homes go for a lot less around here. $200,000 homes here are pretty large, with some very nice features, unlike in other sections of the country, where it will buy you an average size house (or less). I guess it sounds like a lot because I can't afford a house like that :). It is amazing that it costs that much to build a home, and still have only 1800 sq. ft.

You are correct on the credit cards. When they changed the rules on how they were paid off, it had a huge impact on people who could only afford the minimum payment. If you had a budget, with several cards, and were barely getting by before, the change was devastating. People who were able to keep up their payments before suddenly found a large increase in the monthly payment. Talk about a budget buster! Increased monthly payments, increased gasoline prices, and increased ARM's would be enough to force some into bankruptcy. Oh, let's not forget that they changed the bankruptcy laws to make it more difficult to file, just about the same time the changes were made to the credit card laws. Seems like someone decided to squeeze the little guy for everything he could, then tell him, "too bad...sorry you can't make your payments, and you're losing your house. How did you get yourself into trouble? You make good money." Not if you're not getting any raises! It's enough to make your blood boil. It is a huge problem...I just wish someone would solve it.