Resistance Begins at Ohm!

Monday, August 10, 2009

Why the mortgage crisis?

Because of all the variable rate mortgages, they say. People who bought houses with no money down, interest rates guaranteed to go up, and not enough income to pay when the bill comes due.
OK, some people probably did go out and get way more house than they were ever going to be able to pay for, even in good years. Some people signed up for ARMs that were destined to be painful. Without having the hard data, I'm finding this isn't adding up. They say 1 in 10 mortgages is at risk of foreclosure. I am not able to believe that 1 in 10 home buyers got into a mortgage they couldn't pay, all other things except interest staying the same. Here's what doesn't add up:
1) Mortgage companies and banks don't want to own real estate. Their business is to loan money. A foreclosure really messes up the balance sheet. They don't make money selling the real estate - not in ways that improve their bottom line. So they don't want people to default.
2) People don't put their hard earned money into a house if they don't believe they can keep it. Even if they don't have a lot of down payment, the process of buying a house, taking care of a house and moving is expensive, financially and emotionally. Some people may be flipping, but no way it's anything like 1 in 10. Many people have families, children, pets and they just don't flip like eggs.
3) Some people have to walk away from their home for other reasons: they need to move for work, they need to move in order to survive, they lost their jobs, they got sick. Or maybe there are other reasons the house isn't affordable. Looks to me from examining some foreclosure notices that some houses are going to foreclosure after years, not months. Why?

Could it be the price of gas doubling in 2 years? People need gas to go to work. The first round that took gas to $3 seemed to suck up the personal budget surplus.

Could it be the price of energy doubling in 2 years? Meaning electricity because of the price of oil plus deregulation, the price of heating oil, natural gas and propane all nearly doubled. (I can't figure why natural gas did that, it's a different resource from oil. I'm not sure switching to natural gas is a good idea without some regulation.) Energy is at the foundation of the economy - everything depends on it. It isn't a luxury. Without energy, no food, no internet, no education, no medicine and therefore no jobs.

Could it be the price of groceries which went up anywhere from 20% to 100% depending on the product? The price of milk doubled, and it hasn't come down. Fresh vegetables are much higher. Everything seems to have taken at least a 10% increase since fuel doubled. Packaged goods like cookies and cereal are a lot higher. Chicken on deep sale is about the same as you could get before, beef - not. Pork - not. Fish - not.

These basics: food, utilities and transportation costs put a 20-30% hit on monthly budgets. In some cases 50% or more. In Maryland, electricity doubled. Bad the mortgage is going up. An insurmountable problem when the electric bill is as big as (or bigger than) the mortgage.

You think maybe that had something to do with it?

But wait, oil went down, right? Yup, but groceries haven't, utilities haven't, and gasoline is creeping back up. Business is passing on the increased costs they have in their operational budgets, just like you have in your budget. It's a difficult inflationary cycle. Those losses the banks took, they are going to pass on the costs, too. In interest. The government money will only last 2 years and they have massive interest payments looming themselves.

So, what are we doing to pay for this economic plan? Taxing energy. Oh yeah, that makes a lot of sense. So utilities, groceries and transportation (personal and public) can increase even more.

To me, that means those families who went essentially bankrupt because of their operational expenses (food, energy, medical care), not because of their capital investments (houses, 401k/retirement, even cars) are never going to be able to afford that house again. There is nothing in the future that will change their financial situation, only more pain.

Another factor looming in the very near future: state and local tax increases to cover revenue losses of astronomical proportions. You can only cut so much. Their operational costs went up just like yours. Try a 20-30% increase in non-federal taxes on top of your energy penalty, increased food and medical costs. Folks, the news you hear is bad enough. The news you are about to hear is really awful.

Where is all this money going to come from???!?!!?

I expect you will see a lot more mortgage foreclosures as the tax bite on top of the other operational costs takes yet another layer of citizens into the poverty zone.

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