Credit/Debt Recovery

Housing Bubble Bursting?

Is the housing bubble bursting in San Diego? This article suggests it's starting, but I'm not too worried about this story.

For one thing, SoCal is very different from the rest of the country in this regard. Even if the bubble bursts in San Diego, that doesn't mean it'll have any effect on real estate markets nationwide; in fact, I'm saying it won't. San Francisco's real estate market suffered tremendous losses when the dotcom market went bust, as formerly rich silicon-valley types tried to unload everything they'd purchased with their imaginary money, including outrageously expensive places in SanFran. That didn't affect the rest of the country; neither will a long-overdue real estate market correction in Southern California.

Also, as Jim Kramer says, even if the housing bubble bursts, you can still sleep in your house; you can't do that with any of your other investments.

Any correction in the housing market, even a serious one, will be temporary. In the long run, property values will continue to grow. And with all those baby boomers on the verge of retirement, condos are a smart purchase no matter what fluctuations we see in individual housing markets.

The End of Homeownership?

I've long advocated buying a home as THE key step toward building wealth. In every seminar I have presented (hundreds? I've lost count) I tell people that their financial goals should, without exception, include homeownership.

There are a million good reasons to become a homeowner. It's a great way to build wealth while enjoying the practical use of that asset every day--and real estate has outperformed the stockmarket with near-total consistency.

And that message was getting out there. More and more people were learning the power of homeownership. Time Magazine did a cover story on the housing boom.

Then the Supreme Court ruled against homeowners everywhere last Thursday, declaring it consitutional for cities to sieze private property, affirming the assumption that the "best" use of property is the one that makes the most money.

A very brilliant friend of mine argued that "strip mining is more profitable than less environmentally intrusive mining methods, so by all means, let's take mines away from even slightly environmentally sensitive mining companies and give it back to strip miners..."

And there are a million other ways the faulty logic of this ruling breaks down with even a few minutes' desultory consideration. But the side effect of this ruling, the one that bothers me that is consistent with the subject of this blog, is what this does to the notion of homeownership.

Already, people are reacting. Here's a blog questioning the logic of becoming a homeowner. This guy is very smart; I'd like to be able to tell him that it's still a good idea, that ownership still has all the advantages, but given the fact that all of us now only own our homes at the pleasure of the government, I can't make that argument. Does homeownership mean anything anymore?

And check out this column by Neil Boortz His analysis is excellent, and contains this particularly relevant passage:

Considering this ruling, how likely are you to invest in real estate at this point? If you saw a tract of land that was placed squarely in the path of growth, would you buy that property in hopes that you could later sell it for a substantial profit? I wouldn't. I wouldn't be interesting in investing in that property because I know that when it came time to sell, the potential purchaser would lowball me on the price. I would never get a true market value based on the highest and best use of that property. And why not? Because the developer wanting that property would simply tell me that if I didn't accept his lowball offer he would just go to the local government and start the eminent domain process. This ruling also means that virtually every piece of raw land out there has decreased in value. The threat of eminent domain for private economic development has severely damaged in most cases, and destroyed in many others, the American dream of investing in real estate.

See, the title of my post, "The End of Homeownership," is not an exaggeration. If you're fortunate enough to live in a wealthy neighborhood with a high property tax base, then you probably won't ever run up against an eminent domain ruling. But the rest of us, we've lost our right to property. And that makes any argument I make in favor of homeownership completely hollow.

More on homeownership

Some of the debate surrounding debt and credit centers on responsibility. Thinking people agree that the debtor bears most of the responsibility for the debt they incur. The serious debate centers on how much responsibility the creditor should be assigned.

I'm on record saying the creditors should do more to help indebted Americans. That's true. But they should really help consumers before they get into debt.

My house payment is just under 50% of my gross pay.

Anybody would tell you that's too much. Hell, I wrote a book stressing that very fact, and here I sit with a house payment that's too high.

Of course, I have no other debt. Not even a car payment. No student loans, no credit cards, nothing. (That's why I had no credit score, as long-time readers will remember.) So I can handle this house payment for now, but I wouldn't advise anyone else get a loan like mine.

Should my mortgage lender have even given me this loan? Ultimately, they'll never have to foreclose on me (knock on wood), but how can they know that?

I've been saving to buy a home for years. I have a lot in my savings account. In a year I'll refinance to a fixed rate, pay down my balance, and lower my house payment. So that big house payment will be temporary. But if I were someone with lots of personal debt, I doubt I'd have gotten the loan, and if I had, it would have been irresponsible of the lender.

A reader hit me with this:

we're going to see that every American that wants one gets a home with a big mortgage.... even if we have to foreclose on 25% of them to make it happen.

A friend of mine who works in collections is continually frustrated with his bosses' attitude; "20% of the loans are going to go bad. That's just how it is. We just have to count on the other 80%."

Is 20 or 25% acceptable losses? What other industry would tolerate that? Should creditors screen more carefully before granting loans? You hear a lot about credit scores, and not all of it good, but sometimes I think they don't go far enough in screening out applicants who can't handle a debt.

Rethinking Homebuying

I'm feeling guilty the last couple of weeks.

Over the past few years, I've told thousands of consumers to waste no time in becoming homeowners. "Buy a house!" I've said. "It's the best first step toward wealth creation!"

Well, I've bought a house. And the whole experience has been draining and stressful--I had ZERO comprehension of the ancillary costs associated with home ownership. Ceiling fans and light fixtures alone drained my vacation savings fund. And I'm not even close to finished.

I've sort of felt like apologizing to all of those consumers I urged into home buying. Of course, I know that in a few weeks I'll be settled in and all will be well, and it is for the best, but right now I can't help but think I bit off more than I can chew (and I've taught First-Time Homebuyer Workshops).

A very insightful reader sent me an email:

The logic goes: Homeowners make good citizens. Bull! That's like saying that standing in a garage makes you a car. Good citizens make good homeowners! You can take that one to the bank.

I think I had fallen into that logical fallacy. I've been urging people to buy houses, when it's really more important to have one's finances in order before shopping for a home.

I'm still a believer in homeownership, but I urge careful self-reflection before taking that step. It's a BIG responsibility.

The Nightmare is Over!

I've cleared the last hurdle, and I am now a homeowner!

What a horrible process it's been. I apologize to anyone who couldn't get through to me this week; I'm simply exhausted. The Labor Day break is coming at just the right time.

I should amend one of my previous posts... Apparently, not all HUD home purchases need be as painful as the one I just completed. I'm told that the title company that handled my case was uniquely horrible; apparently it's run by a control freak who likes to make everything twice as complicated as it needs to be. I won't name the title company, but its initials are "Mississippi Valley Title Company."

My earlier advice about purchasing a HUD home still stands, though. Enter with caution and get the help of someone who knows what they are doing; dealing with HUD is WAY more complicated than the traditional homebuying process, whether you have a lame-brained title company or noit.

HUD = ugh

My adventure in homebuying continues to be, well, an adventure. I will get my financing; not exactly how I wanted it, but I'll get the loan. The plan is to refinance in sixth months after I've established a new credit rating.

The new problems this week involve HUD, from whom I'm buying the house. (Yeah, it's a HUD repo; it's been vacant for a while, but it's in great shape and I'm getting a great deal on the purchase price.) All the utilities are off, and I found out yesterday I have to have the home inspected after all (HUD inspected it less than two months ago, but I'm being required to have another inspection anyway) and that can't happen with all the utilities off. So I have to have them all turned on, in my name. Then I have to get the inspection, and then I have to turn the utilities off again. All this has to happen within two days. Then in a week or so, when we close on the property, I'll have everything turned on again.

I understand this is all because the house is currently insured by FHA, but what a hassle. The utility companies are going to hate me before this is over.

What's the point of all this? If you're looking at HUD properties, think twice. Unless you're getting a great deal or you really love the property, you should think carefully before going forward. It's borderline nightmare dealing with all the rules and regulations and complications that come with purchasing a HUD home. If you do go through with that kind of purchase, find someone with experience to help you out. I'm supposed to be some kind of smart-ass author, and I'm hopelessly befuddled by all this.

Hopefully I'll have this minefield navigated by September 1st or thereabouts. (I'd better; too much longer than that and I'll have to start paying penalties for not closing on the property within 45 days of signing the contract.) Dealing with government bureaucracy is keen.

GMAC and Ameriquest get a big thumbs up

American Banker recently published a feature on GMAC's initiative with the Credit Counseling Resource Center. I'd link to it, but you'd just end up at a retarded registration screen that would force you to sign up for spam from ABonline until the end of time.

Note to all online publications: information wants to be free. Registrations don't work, and everybody hates spam. Come up with something better.

Anyhoo, I was going to spew some bile at a couple of credit card companies today, but instead I thought I'd do something more positive; I'm going to praise a couple of mortgage lenders.

From American Banker:

GMAC Backs Counseling to Prevent Foreclosures

For the last two and ahalf years GMAC Residential Funding Corp. has been supporting several programs that provide free credit counseling to delinquent borrowers.
...
Borrowers trust independent counselors more than they trust a lender's employees... The credit card industry has long been recovering 50 cents or so on the dollar by hiring counseling agencies to help delinquent borrowers pay at least part of their debt.
However, unlike card issuers, GMAC RFC pays counseling agencies a flat fee instead of a commission, so the agencies have an incentive to provide the best financial advice and not just act as debt collectors...
Ameriquest Mortgage Co of Orange, CA, itself a leader in anti-predator initiatives, has signed on to use the center.
At a New York Conference last month... an Ameriquest senior executive Vice President said it pays the credit counseling agencies "regardless of what they tell the borrower." This setup ensures the agencies act in the borrower's best interest and that the borrower does not feel undue pressure to pay.

GMAC-RFC and Ameriquest are doing big things here. They're way ahead of the pack when it comes to looking out for their customers. Contrast them with the nightmare stories you hear about Wells Fargo's Mortgage Division (when it comes to collections anyway)... I'd say GMAC and Ameriquest are far better options for those looking for a nonconforming mortgage.

If all lenders set out to create win-win scenarios like GMAC has, they'd put a lot of wretched "consumer groups" out of business. That I'd like to see.

The Day After Tomorrow 2: Foreclosures Are Coming!

I blogged the other day about the dangerous new trend of dipping into Home Equity Lines of Credit with debit cards. I sort of feel like one of those environmental crackpots who's screaming about global warming and no one will listen.

Now, I'm not much of an environmentalist, but I feel their pain. I've screamed myself blue in the face warning people about this wave of home refinancings and the ticking timebomb it has created. And just like the people who've moaned about the melting snows of Kilimanjaro, I haven't been listened to.

The difference is, I won't have to wait until 2020 to see the fallout. Current research indicates that mass foreclosures will begin in late 2005. So many people refinanced their mortgages and paid off other debt over the last couple of years that they won't have any recourse when they get behind on their mortgages. They certainly won't be able to refinance again. It's going to get ugly.

Yeah, it's a lot like global warming. It's happening before our eyes, it's obvious, and no one's doing anything about it.

I told a colleague in the debt industry about that statistic, the "late 2005" estimate, and he said "That long?"

Yeah, I expected it to happen sooner, too. It's thought that consumers will tap out their credit cards and other lines of credit first, between now and late 2005, and then we're going to see bankruptcies and foreclosures like never before.

I don't even know what the banks are going to do with all those houses; my sense is that the situation will be so out of hand that homeowners will be given extra leeway before foreclosure. Some foresighted mortgage lenders are already working with credit counselors to figure out a new way to help borrowers who fall behind (without resorting to foreclosure).

The lending industry isn't completely blameless, of course. They had to know that refinancing someone's mortgage without offering them any education about money management would lead to disaster.

But maybe I'm being too pessimistic. Maybe the millions of homeowners who refinanced and paid off all their debt will be disciplined and responsible. Maybe they'll live within their means instead of beyond them. Maybe they'll be able to manage their consumer debt while keeping up on their mortgage, securing adequate health care, keep their cars in good repair (and filled with high-priced gasoline), and paying for their kids' education.

You think?

Great Information on Reverse Mortgages

This report from California's Department of Real Estate provides great information on Reverse Mortgages.

At CoB, we're believers in Reverse Mortgages. If you match all of the criteria, a Reverse Mortgage may be the best loan available to you.

How to know if you match the criteria? Read the DRE report, and seek Reverse Mortgage counseling from a HUD-approved housing counselor. That's the nice thing about Reverse Mortgages--counseling is required, so you'll have all the facts before going forward. If only they'd do something similar for bankruptcies! ^_^

As for whom to seek a Reverse Mortgage from, we're kind of partial to Wells Fargo.