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Mortgage Nonsense

November 11, 2008

CNN money is currently running an article about what Citibank is doing to help people avoid foreclosure on their mortages. Their program is targeted at people who are current on their mortgages but at risk of falling behind, and particularly those whose outstanding balances are higher than the current market value of their houses. Quoting from the article:

For borrowers who have yet to default, Citi will now aim to reduce their monthly mortgage payment, including property taxes and insurance, to 40% or less of their income. To do that, it will freeze or reduce interest rates, extend the lifetime of the loan or even reduce the loan principal.

It would be hard to overstate my amazement at the above quote. If they are reducing the mortgage amount to 40% of income, what was the percentage before they reduced it? 50%? 60%? What were these people thinking when they signed the contract to borrow that much money?

Let me offer a little perspective. When my wife and I bought our first house, I was making around $20k per year. She had a job but we were budgeting to live on my income alone. So we bought a house that cost $39,000 — less than 2x my annual salary.

Fifteen years later, we moved to Florida. I was contracting 40 hours a week at $49/hr, giving me approximately $100k in annual income. Again, we budgeted to live on my salary alone. So we bought a house that cost $156,000 — just over 1.5x my annual income.

When we moved to Atlanta a year later, I took a substantial cut in income to become a “native” employee of a large software firm. We bought a house for $159,000 and put $30,000 down. Still, our starting mortgage balance was much less than 2x my annual salary. Again, we budgeted to live on one salary alone.

We still live in that house. My salary has risen dramatically in the 13 years we’ve lived here. But the idea of “moving up” to a more expensive house has not even crossed our minds. Instead, we are aggressively working to pay off the mortgage. Once that is done, our plan is to downsize to a smaller house and retire. We are on track to accomplish that in a few years.

We could easily buy a half million dollar house here, or more. Even in today’s tight mortgage market, I have no doubt we could qualify for the loan. But why would we do that? Our current mortgage payment is about 12% of my monthly salary. We like it that way.

I’m currently driving a 1995 Toyota Corolla. My wife drives a 1997 Toyota Camry. Of course we could buy newer cars, but why would we do that? These are perfectly good, reliable cars. We like not having to make car payments! Instead of making car payments, we are saving money so that when we do have to replace these cars, we can pay cash.

I am a big advocate of budgeting to live on one income. I fear for those families who have to pay 40% or more of their combined household income on their house payment. Most of them have little or no cash reserves. In this weak economy, some of them are going to lose one of the two jobs in the household, and then they will lose their house and their credit rating. It didn’t have to be that way. They could have heeded the instruction Paul gave to Timothy:

1Ti 6:6-10 But godliness with contentment is great gain. For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that. People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.

Sadly, those griefs are piercing a lot of people these days.

The CNN article closes with another stunning comment:

The single best thing about the bank programs, according to Bernstein, is that they don’t cost the taxpayers anything. “You have to be happy about that,” he said. [ Jared Bernstein, senior economist with the Economic Policy Institute ]

I hope our government officials are getting better advice than that. How did a senior economist with the Economic Policy Institute forget so quickly about the $750 billion bailout bill… which will be covering the bank’s losses on these mortgages? Who did he think is paying for that? And the AIG bailout, which has now reached $150 billion? Not to mention the losses in everyone’s 401k portfolios resulting from the economic collapse brought on by the credit crisis, caused by bad mortgage loans? There is no free lunch. The taxpayer ultimately pays the tab.

Meanwhile, I still have food and clothing, and a place to live, two good cars, and a mortgage payment I can afford. That should be enough.

Some people who grossly overextended themselves may still be able to avoid financial disaster. If you are not yet upside down in your house, perhaps you can sell it and buy something with a house payment you can afford — or rent an apartment. If you are upside down in your house, consider getting the bank to renegotiate your loan. Get some financial counsel from someone who has managed their own finances well. Be prepared to cut way back. You will sleep better at night.

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4 comments

  1. The house we bought two years ago (what an awful time to buy a house…) was at the time just under 3x my husband’s annual income, but we put 20% down. Because of raises and the reduction in our principle over the past 2 years, the current balance of the loan is just at 2x his annual income.Because we put 20% down, we are not upside down in the house.Of course, we got great advice from our parents first, so we were sure to make good decisions. 🙂


  2. Hi Harmony,What really matters is the ratio of the mortgage balance to your annual income. On that basis it’s probably not far from 2x.


  3. I’m with you, though we haven’t been as conservative. We bought our home about 8 years ago. We had been foolish in the years prior. We had just finished 4 years of paying off a 5 figure credit card bill. our balances were near zero, but we had no savings. We were shocked at how hard it was to get a loan with no debt and no cash. Had we $10K in debt but $10K in cash we would have had an easier time.We found a reasonable no money down loan and bought our home for nearly 3x my salary. Since, we’ve paid some down and I’ve gotten raises and our balance is about 1.8x my salary.Our cars rotate on a staggered 10 year plan. The van is about 7 years old and paid off. Still runs fine and tows our camper fine, even at 170K miles. We’re almost 3 years into the loan on my car. Once paid off, we’ll look at a new van, but not before.There are times I look at my home (mostly my tight garage :-P) and long for something bigger, but in reality we have more than enough.


  4. Yes we were approved for much more than our house. And we could of gotten away with it, and gotten something new but far away from the highway. I am so glad we never got something too big. At the time we bought we were both working, however I knew one day I might like to be a stay at home mom and even later when my dh got a raise he considered a bigger house but all I could think was what if he lost his job, we would have a bigger note to cover. Our house seems kinda small to us (kinda 3 bedroom) but I remind my dh that families with 8 lived in this neighborhood 40 years ago, just fine. Didn’t I hear somewhere that we could of done a bailout for the half the cost by just turning those mortgages into 30 year fixed? And everyone could of kept their houses?



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