Are All Bailouts Fair?

When a friend bought his apartment near ours, the broker presented a rainbow of financing options. Call him plain vanilla, but he went with the 30-year mortgage, which had a higher interest rate and stayed stable — despite friends telling him he was foolish not to take the lower payment.

Two years later he took out a line of credit, wanted as a cushion for those worst-case scenarios. He laughed telling me about the gentleman that suggested he take more. A lot more. To redo his kitchen, was one idea.

His kitchen is not glorious — it’s fairly original to when the apartment was first built. Needless to say it doesn’t have any stainless steel appliances. And it still doesn’t. He told the broker he wanted just the small amount, and the broker finally, albeit reluctantly, put through the paperwork. At the time I thought the story was hilarious too.

Today we’re hearing about people who can’t make their mortgage payments. The economy is horrendous. People are losing jobs. Families are without health insurance — and watching their life savings evaporate after an unexpected serious illness. Mortgages are deeply underwater — with debt higher than the actual value of a property because housing prices have careened. One in eight homeowners are behind in their mortgage payments or already in foreclosure, according to a report released yesterday by the Mortgage Bankers Association.

For some families, they’re losing not just an investment — their losing the place they call home.

But I can’t help remember the options put in front of my friend a few years back, and wonder if everyone made the same decisions he did. I spoke with a financial planner a month ago that works with what I’d call a high-net worth individual — someone who has assets in excess of $20 million. He told me of clients who mortgaged properties to buy new ones — even boats. And now their mortgages are underwater too. The difference? Their net worth declines. Someone else who didn’t have that cushion may be on the street.

I don’t want to see families homeless. It’s absolutely heartbreaking. But I have to wonder about some people who definitely made decisions that brought that scenario a little closer.

It’s easy to blame the pushy broker. And the bank president who turned the other way when employees stamped “approved” on a mortgage application that didn’t exactly add up well. But I think a cold hard look at the financial choices we all make individually is long over due.

Standing up and owning our decisions, and the results that follow, is part of being a responsible adult. It’s the lesson we all hope our children learn — and one our nation may need to re-learn now.

Tags: Barack, Lauren, bailouts, tmbusiness, tmfc

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Comment by Lea Curtes-Swenson on March 27, 2009 at 12:15pm: Wow, what a fantastic discussion you've sparked here, Lauren. I'm so glad we are in a house we can afford, and that we didn't get lured into more debt to make home improvements. We, too, are undertaking some DIY projects... and I love what Erin says about how yesterday's lavish upgrades have become today's "free gifts" for homebuyers. That's enough to stop you in your tracks and make you reconsider.

I think what's happening now in our economy is painful, but we all will ultimately benefit from the lessons learned. (And so will our kids, if they're paying attention!) The bailouts don't seem fair to me, either... I'm no prize-winning economist, I'm a parent trying to teach my kids responsibility through natural consequences. Bailouts seem to fly in the face of my efforts.

Comment by Lissi on March 12, 2009 at 7:11pm: Six years ago when we were looking for a house 'interest only' mortgages were popular. We looked at a new housing development where we liked the houses but the lots we were most fond of were 'premium' and out of our self-set budget. I remember telling my husband that we should come back to these houses in five years when their interest-only mortgages doubled in monthly payment. It's scary how we could see it coming, now so many families are stuck in houses that are worth less than they paid and they haven't made any dent in their principal because they paid interest only for five years.

Comment by Emily Bonilla on March 10, 2009 at 12:37pm: A lot that has happened is not fair: the bailout of those who don't deserve it (the banks), the financial advisers that we trusted misguiding us, the banks and credit card companies raising interest rates on you when you can't afford the current payments, electric companies raising the rates by 25% in one year, losing money selling the home you relied on being an investment (no primary home is an investment anymore), losing your job for no fault of your own, and not being able to find another job because all the companies are having hiring freezes, new innovations and businesses not being developed because no one will buy from them because they are saving money or cutting down on expenses, retirement plans not worth anything and long term investments worthless because of a crashing stock market, and the list goes on.

I had to face it. At first, I didn't think that we were really in a recession. I thought that you reap what you sow. You control your future and circumstances. But the reality of these times is that many things are happening that was caused and continue to be caused by greedy CEOs, uneducated politicians, and lobbyists that are now coming down on the little people who trusted that these people were acting responsibly. Maybe we were all naive, or at least most of us were - calling those who were not conspiracy theorists and/or crazy.

The reality today is that we are now paying for the mistakes of a few. Even the responisble person who bought a house with a mortgage that was under 25% of their income and had no debt are finding themselves jobless with no income and savings depleted, all at no fault of their own, and are becoming late on their mortgage and student loan payments. Because face it, even if you were the most responsible person and budgeted wisely most of us could not afford these expensive universities and had parents who couldn't save for our college education, so most of us have student loans and some of us who could afford it bought homes and have mortgages. And with out a job and savings depleted after months or a year of no luck finding a job, how are those debts and living expenses going to get paid.

None of it is fair. Especially the part where the ones who caused the problems get all the help and continue to make it more difficult for others by increasing interest rates on credit cards instead of lowering them, and lowering rates on savings instead of raising them.

Comment by Lauren Barack on March 9, 2009 at 10:37am: Heidi, what you wrote rings so true. I remember when we were renters feeling much less stress than I do now with a mortgage. Moving on is far trickier when you have this responsibility overhead. I think you're right too — I think home ownership is not necessarily the Holy Grail, as you said. I think it makes sense when it works, and I think it absolutely doesn't when you have to stretch yourself to a place that's not realistic — as Christine, it seems you were being pressured to do! (which you didn't - congrats!)

Comment by HeidiWF on March 9, 2009 at 7:54am: I don't think all the bailouts are fair, but then a lot of people didn't listen to the old saying "If it sounds too good to be true, it probably is." My husband and I have student loan debt and can't afford a house, good thing we have the sense to know those "liar loans" we pure rubbish. There is a lot of arbitrary pressure to own a house, like it is the Holy Grail. It doesn't help that homeowners get tax credits but renters get nothing. For too long the conventional wisdom has been that you MUST own a house or something is wrong with you. I'm so happy I'm a renter now, if we lost our jobs, we would have no problem moving to a cheaper place if we had to, or relocating. RENTERS UNITE! lol :)

Comment by Erin on March 7, 2009 at 3:38pm: Lauren, You are right! Doing the house makeover was fun, but a tremendous amount of work. When I watched the TV shows on people who flipped homes (notice that those shows are now nonexistent), I always thought that even then they so underestimated the actual costs of upgrading and modifying a home. Even paint is expensive, let alone Travertine floors, granite countertops, new drywall, low E windows, new siding, and stainless steel appliances. Electricians, plumbers and talented contractors aren't cheap either. My husband is a great weekend handyman and I am his reliable apprentice, so I guess we will be tackling the DIY stuff one careful project at a time.

Comment by Lauren Barack on March 7, 2009 at 7:50am: Roz, I think that's so cool your husband brought a budget to your date. (I can hear rising tides of anger around me as women yell "Nooo!!!") But I think that when couples can talk honestly about money, and get on the same page, they end up much more stable — and happy! We're doing that around here too. Budgets are written, we talk about what we can and can't do each month. It's maybe a little less "fun" but it sure is much less nerve-wracking.
And Erin, I know what you mean. It was hard not to get swept up in the idea of our homes as investments, over the past few years. And the make-overs were fun - right? Our our apartment has a multitude of little projects that we could be doing (and some big ones too.) Instead, we've taken them on as little DIYs. I suppose a perfectly re-done place would sell more than ours. Hopefully, we're not selling any time soon.

Comment by Erin on March 6, 2009 at 6:35pm: I added a comment and it disappeared! Oh well, let me try this again; I'm still learning the ropes around here. Your post made me think about how many of us had great love affairs with our houses. Oh, we could see the equity going up and up and we lavished expenses on making those homes turn into divas. Sure, we had so much equity it was a little too easy to take out a loan and upgrade the kitchen, the bathrooms and upgrade the landscaping too. Trying to sell in 2008, though, showed us that our upgrades were basically turned into free gifts for the new buyer. With foreclosures scattered throughout the area and distressed builders slashing prices on all inventory, the reality sunk in. This new house is going to have slower, realistic and budgeted upgrades. Lesson learned.

Comment by ECHOage on March 6, 2009 at 9:57am: Thanks Lauren,
We both have our faults in the cash flow dept. While I am not a big spender on material things, I have pushed hard to send the kids to our local Montessori school which costs. He loves the school, but the cost is high and living within our means is very important to him. As I say I am not a big spender, but I wasn't mindful of how I spent our money and how much I was spending. Slowly this was eating away at my husband's sense of financial security. So...one night on a date, he presented me w/ our new budget. It was realistic and worked w/ weekly and monthly allowances. It may sound weird to bring up a budget on a date, but by doing it outside of the context of a disagreement about $$, the playing field was level and we could discuss rather than stew.
Now if I want to do something to the house, I have a reasonable budget from which to work from and I don't have to "ask" him if we can do something that he has no interest in doing.
I am now working part time which helps and has also been good for depleting the stress levels.
Roz
www.echoage.com

Comment by Lauren Barack on March 6, 2009 at 8:30am: Love hearing this Roz. I'd love to hear how your budget works - I think so many of us feel it's unworkable to balance our expenses against costs because we don't always know what's a need — and a want. (it's surprising to find how many things we think we need, are truly just things we want.) Another friend last night told me about a cab ride he had over the weekend -- the cabbie had lost his job, and his home, and had never been happier. He had pared down his life to just what he needed — and he could sustain that. I don't think we all need that drastic of lesson, but it is exciting to think that we might actually have everything alreday in hand if we re-prioritize.