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Property Taxes: $358
Car Insurance: $190
Electricity and water: $175
Home insurance: $50
Cellphone + internet: $120
Life insurance: $42
Travel and Entertainment: $300
Home maintenance: $100
I know that I didn’t include donations, taxes, and health insurance, but I did include a generous estimate of our core expenses. We actually don’t spend that much in some of the categories above. So what does this mean?
By my calculations, if we maxed out our 401k and then threw every penny of our earnings at our mortgage right now we can pay it off in a little over five years. And in lieu of a sale at the or cash raining from the sky, it may be our only alternative. If we had the mortgage completely paid off, then we would be very close to financial independence because it is not extremely difficult for us to generate $2000 a month through part time work or online ventures. Even though I am not blogging much as before, I am still making money from my old articles. If I had more time to develop my websites then it is not inconceivable to generate another $1000 a month.
The hubby is telling me to do what I think is best, and I have been prepaying the mortgage, but not at an extreme level. We have thrown a few hundred extra to the principal every month. Perhaps I should start throwing every penny at it from now on. Our mortgage rate is only 4.875% and some may say that there are better investments out there now, but I feel that it is tough to find something with a guaranteed return of 4.875% now. The economy is still at a precarious stage where deflation seems imminent. We already have a good cash emergency fund that would last about 2 years, and we are still investing in the stock market for the long term in our 401ks. Basically, there is no reason not to pay off this debt now.
Some people have told me that I am crazy, but I really think that I am just being conservative. Why would I want to keep debt for decades?
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First, let me tell you a little story. Yesterday my mom called me and told me of an investment property she and my dad were considering. Apparently the current owners bought two duplexes at the height of the bubble for $500,000 and put $250,000 down, and now these two buildings are listed for $77000 each. My mom’s comment was, “isn’t this sad? The hard working folks lost all the money and Wall Street won!” I basically replied to her and asked her what Wall Street won from this particular case. The lender to the couple will lose money in this deal, and it seems to me that this couple just made a bad investment. However, the general sentiment now is that all the bankers are to blame for everything ill in this world whether it is true or not.
The folks who bought Goldman’s Abacus product also made a bad investment, and it seems silly for them to complain that Goldman “knew” that the investment will go sour. Seriously, can you really blame Goldman Sachs for people who do not pay their mortgages? Did Goldman hold a gun to these people’s heads and force them to sign their loan documents and default? I think it’s ridiculous to say that Goldman or Wall Street in general knew that the housing crisis was going to happen when almost EVERYONE and their pets’ fleas were caught in the real estate mania and truly believed that real estate prices will never fall. The contention here is that the person who helped create Abacus felt that the underlying investments would go sour so he was on the other side of the bet, but obviously the buyers of Abacus felt that it was a good investment because they would not have bought it otherwise. They also trusted the ratings companies that rated these underlying securities to be awesome. So this case seems like the buyers of these investments are feeling gypped that their bet went wrong. The fact is that they had access to the data of every underlying security, and it is their fault for not doing their due diligence.
Although I am not a fan of market makers like Goldman Sachs because I feel that they control too much, in this case I think it is ridiculous to try them for fraud. If they committed fraud because they selected a consultant who believed that the securities would fall, then perhaps all the people that lost money in real estate in recent years should sue the real estate agents of the sellers that they bought their homes from. Perhaps those real estate agents counseled their clients into selling their homes because they felt that the real estate market peaked, and they gained from the sales financially. Have they all committed fraud, too? Goldman is an easy target because there is all this hate against big financial institutions now, but when will people own up to their mistakes? All the investors from the Wall Street banks that bought these CDOs to the “Main Street” duplex owners who lost money in the real estate bubble are only here because of their own greed and I am not shedding a tear for any of them.
As to the SEC, it almost seems like they’re trying to show that they are doing something productive after the . In this case I agree with by selling Abacus. I don’t know what kind of precedent this case would present to salivating lawyers. What’s next? Can anyone with a bearish opinion be sued when proven right? Will investors start suing blogs like Calculated Risk and Doctor Housing Bubble for “creating” the real estate collapse by writing about their honest opinions about the real estate mania? Lets be honest here, if the real estate bubble hasn’t popped yet then this lawsuit would not have been brought forth, and I really think that everyone should just accept their wins and losses in this whole madness and move on to better investment opportunities.
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The provision I am talking about is embedded in the ginormous that recently was passed by the House. The plan is a authored by Congressman Chaka Fattah. It is based on a Pennsylvania program Fattah created a couple decades ago called . The way it works in Pennsylvania is that before a homeowner is foreclosed on, they get a notice from the lender that tells them they can apply for the HEMAP program. Then if they qualify for the program they are given another loan that is worth up to 24 months of mortgage payments or $60,000, whichever is smaller. The HEMAP program determines whether or not the borrower can repay the loan in 24 months, and they consider many things including job skills and medical situation. Once the loan is secured from HEMAP, the borrower starts paying HEMAP at least $25 a month and at most 40% of the borrower’s net income, and HEMAP pays the entire mortgage amount to the lender. The HEMAP agency establishes a repayment schedule for the assistance loan, but if the borrower has enough equity and credit to the entire mortgage then the loan must be repaid in part or in full.
It is unclear what the final bill will look like in Congress, but if it is exactly like the Pennsylvania program it still might not do much good. The main reason is that most people have no equity in their homes, so why would they get another loan to put themselves in further debt? This is basically a shell game that uses debt to pay debt, and I don’t see how homeowners will benefit unless they have significant equity in their homes and just need a little help to tide themselves through a period of unemployment. There are definitely people in this category, but they might do better to just get the money from friends and family, and the truly responsible folks would have an emergency fund that they could use. I also could not find much information on the default rate of the HEMAP loans in Pennsylvania, so it is unclear just how “successful” it is for the taxpayer, but I guess the government is just planning to spend TARP money, and that is not real money to the congress people anyway. What do you think? Does it make sense to directly pay for the mortgages of those facing foreclosure?
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The article suggested that the effect may be regional because most Asians in America live in California, which is one of the states hardest hit by declining prices and the recession. This is definitely a solid theory. Asians are not immune to job losses and for many families the loss of even one job means that the next mortgage payment is no longer affordable. As I wrote in , Asians often ignore the basic debt to income ratio guidelines to buy a home because they figure they will save money on everything else. If two people were paying 58% of their income on a mortgage then one job loss definitely puts the nail on the coffin. California currently has one of the highest unemployment rates in the country, and since the Asian community is concentrated here in California we are affected as a whole.
Next I think the speculative mania during the housing bubble was much more intense amongst the Asian community. This is just my anecdotal experience, but my whole family and Indian coworkers talked about real estate pretty much 24/7. These people mostly had significant amounts of savings for a downpayment, great credit, and all they were seeing is that the real estate market went up 20% a year while stocks were not exactly catching up. This prompted a lot of people to buy real estate that they did not even need. Some of them intended to flip the properties quickly, and some became landlords with the intention to flip a bit later. Another thing that spread the fire is that Asians talk about personal finance amongst family and friends very often so more and more people jumped on the bandwagon. There are also folks who used their homes as ATMs to buy more property because they figured that they were making a sound investment. For the most part, the Asians I have encountered that did all of these real estate deals knew exactly what they were getting into, and they were all sure that they were being smart about their money. The phrase I heard the most often were that “real estate prices in the Bay Area will never go down” and “real estate is the best investment”. I know that many non-Asian people did the same thing, but I feel that the Asian community got into real estate much more because owning real property is high on their priority lists.
Now after the crash, I actually do not personally know any Asian families that lost their homes. I do know several that are fairly underwater, but they are still faithfully paying their debt because they are still employed. Believe it or not real estate is still a really hot topic for my parents and their friends. Now they are all talking about scooping up cheap properties as rental properties. Now what I hear from my mom is similar to the following, “this property sold for $400,000 in 2005! Now it’s 70% off! Positive cashflow!!!”. I responded to her, “mom, remember when I told you a few years ago that real estate could come down by 40% and you didn’t believe me?” She then said, “It’s more than 40% down!!” I guess the obsession will never end. Anyway, I wish them luck, and I hope some of the decline in homeownership was voluntary and not due to foreclosures.
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First of all, the FHA doesn’t make loans. It simply insures lenders against losses on defaults. This means that if a loan defaults completely, then the FHA is on the hook to make the lender whole. The money it uses comes from mortgage insurance premiums that borrowers pay. The current rate is 1.75% of the loan amount upfront, and some additional monthly insurance on 30 year loans. The monthly mortgage insurance goes away when the borrower gains enough equity. When you add it all together the premium is less than 3% of the loan. The borrowers will need a minimum downpayment of only 3.5%, and they can borrow up to $729k in high cost areas. The problem with this whole scheme is that the lenders do not care if the FHA loses money because they will be compensated if things go wrong. Since private insurers, Fannie, and Freddie tightened up their lending guidelines, the new subprime loans are practically all going to the FHA. This has pushed the mortgage loan market share of in the second quarter of 2009.
Basically, the FHA has taken on a vast expansion, and with that expansion it has taken on a lot more risk. The 90+ late and foreclosure rate of FHA loans is now at 7.8% according to the Mortgage Bankers Association, and this is only expected to rise since those who take out FHA loans generally have very little downpayment, and their average credit scores are lower than the prime borrowers. Unemployment has not stopped rising and the economy isn’t totally recovered. The FHA currently insures about 5.2 million according to its website, and 7.8% means that about 405,000 of these loans are practically lost. Additionally, there are another 400 to 500k borrowers that have missed at least one payment. Since the value of the FHA reserve funds are going to fall below 2% of the value of the insured loans, it is hard to imagine how the agency would cover all the losses when they come due unless all the loans that defaulted have balances much much lower than the average loan. It is pretty simple math when you think about it.
I really do not see how the FHA could build up its reserve fund in two to three years when the foreclosure rate of the loans it is insuring is not exactly decreasing. The FHA is insuring many more loans than before, but those new loans are also defaulting and draining the reserve funds. You have to remember that the insurance premium is very small, so in many instances the FHA is using the premiums from 20 to 30 homes to repay the lender for one default. That is only sustainable if the default rate is very small, but a 30 day late rate of 17% is not exactly encouraging.
Anyway, the FHA does not expect to increase its insurance premium rates or downpayment limits, but it is requiring audits of the lenders that send loans to the FHA to prevent fraud. I would have thought that those audits were already happening, but I guess not. If the FHA really wants to decrease the amount of its defaults it would need to increase its downpayment limits so that people have more equity in their homes, but I don’t really see that happening. Eventually this agency is going to need a bailout. They may not call it a bailout, but I think it is pretty much inevitable unless the FHA changes course drastically.
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