Friday, February 13, 2009

A Simple (and Less Expensive) Solution to The Economic Crisis

How to Fix the Economy Without Giving Away The Store (or the U.S. Treasury)

Here is an example of why people aren't spending money. It isn't because the gas crisis took their disposable income. It isn't because the banks aren't loaning money. (Well, they aren't, but that's not the reason.) You can add it all up on ten fingers (each representing one thousand dollars a month) and see it plainly. All the tax cuts, construction of DOD buildings, Pell Grants and Watershed Projects won't make any impact on it. You have to hit the problem at the core. Bottom Line: People have to have money TO SPEND!

Stefanie and James Smith of Santa Clarita, Calif., fear they may need the
help of a bankruptcy court if they are to keep the subdivision home they bought
for $579,000 in November 2005. Stefanie, 37, a university human resources
coordinator, and James, 40, a federal law enforcement agent, borrowed the entire
amount in two subprime loans that required a total monthly payment of $3,000. A
representative of their lender, Countrywide, told them not to worry, says
Stefanie: They would be able to refinance in a year.
By mid-2007 they were running late on payments, and refinancing options had dried up. With their monthly bill scheduled to jump to more than $4,000 this January due to a rising mortgage rate, Stefanie contacted Countrywide last summer. She asked for a loan modification so they could avoid default. In December the lender said it would be willing to increase their payment by $600. That was better than the scheduled rise of $1,100, so the Smiths agreed. But now they are struggling to pay the higher amount. Countrywide's parent, BofA, declined to comment, citing the
Smiths' privacy. After BusinessWeek's questions, though, Countrywide called them
to discuss cutting their payments.
"We knew when we bought that the payments
would be a stretch," says Stefanie. She regrets assuming they would be able to
refinance at a lower rate. "We are not deadbeats," she adds. "All we want is a
mortgage we can afford."

I live in Ireland but my home is still in California. This is commonplace all over my state. People bought homes, under pressure with loan officers promising the hope of refinancing at lower rates late, only to discover the bubble had already burst on the housing market. Yes, these are critical times, but a stimulus is window dressing. What has to happen will be painful, across the board, because housing prices have to get back to a workable mortgage payment amount. There is another option, so hear me out. There is a light at the end of this long tunnel.

People bought houses when I was a kid in 1971 for about $25,000 to $33,000. These were modest but not cracker boxes. The square footage, in a 'burb of Los Angeles, ranged from 1500 to 1800 sqare feet. They had reasonable yards, upwards of a tenth of an acre, and a reasonable interest rate of 5.25 to 6. The payment for a 30 year fixed mortgage was about $182 a month. Taxes and insurance would add another 75. At most, you were paying $250 a month and your monthly median household income was about $11000 a year, or 916 gross a month. That meant you were only paying a little over 30% of your income for your mortgage.

Flash forward to 2005. Home prices range at $524000. At 7% interest, the payment is $3486. The median income is $53629, (this comprises 82% of American households or $4469 gross a month. At the peak of the Housing Bubble, Americans buying homes for the first time were paying approximately 80% of their GROSS monthly income on their mortgage!

I am not an economist, or a banker, or a genius, or even a math major. I am an average American who is looking at the numbers and even I can see why we're in trouble!!! 20% of your gross income is what most people pay in payroll taxes!

In other words, the bankers bled the system for all they could get. Homeowners selling during that time made an unmitigated killing, but it was a fleeting opportunity. They maxed it for what they could, but like a plane going up at a 90 degree angle to the sun, it reaches a point where it ceases to go up and it starts to tumble down. Gravity is inevitable. People have to EAT!! (You moron loan officers!)

I am going to stick my neck out, but here goes: All the spending in the world won't change the fact that people can't pay more than they make for a house and living costs! And even more, until the banks get out a calculator and take their heads out of their asses, they will continue to face HUGE losses until equalibrium is acheived. In other words, until the average mortgage payment goes back to 30% of monthly, they will find people not making their payment and going into foreclosure. To make it worse, if the average American does NOT have their heads up their asses, they will get a little calculator out (they are pocket size now) and figure out that they must have money to eat. They will figure out that food, gas, utilities, and daily living expenses usually amount to about 50% of their income, and they will avoid purchasing a home until they can afford to do both.

President Obama can only do one of two things: Either mandate a minimum wage of at least $14 per hour, or LET THE BANKERS BITE THE BIG ONE! Since I take great offense to the idea of a teenager who fries my burger making as much as me, the only solution is for President Obama and Timothy Geittner to acknowledge that the situation mandates underwriting all the homeowners who have loans above $225000. Either force the banks to write down all loans to the actual value of the properties as they stand now, then supplement their losses based on the TARP funds the Treasury has already given the banks, or supply those homeowners directly with a low interest loan (based on the lending rate they currently offer banks) at .5% for the full value of the principal. This would take a loan of $524000 to $1568 a month. Hell, just so we give the taxpayer a return on his investment give it to 'em at 2%.($132,840...This is a little better than a 20% return on the original investment.) The payments would be $1937 a month. That puts percentage of a person's income to the mortgage at roughly 40%. Not exactly what it was in 1971, but a helluva lot better than 2005.

Oh, and if the asshole bankers want to offer the same thing, they are welcome rework the loans. In fact, if they are determined to maintain their investment value and see home prices stay where they are or go up, they should think about offering that rate to everyone...PERMANENTLY!!!

Otherwise, watch the housing market fall back to earth.

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