From the mind of Paul Jones

Ok, this is one of those blogs that is just going to be a personal rant; hopefully, with something of value included. In case you have been under a rock, are reeling from hurricane damage or only listen to your radio in the car you have no gas for, a very scary thing is happening on Capital Hill. It looks like the taxpayers are about to be a part of the biggest corporate bailout ever, to the tune of $700,000,000,000… yes, 700 billion dollars.

I think we are all aware of the skid that are economy in the US is on. There are many out of work and foreclosures left and right and the cost of living is on the rise. No doubt many Americans are feeling the pinch on their wallets and the politicrats in Washington are coming up on an election year– this is a very dangerous situation.

Seven years ago, I bought my first house in Phoenix, AZ and at the time, mortgage lenders were throwing around money. Not only were there $0 down loans, but lenders were allowing second mortgages on homes in excess of 110% of the properties estimated value. When I started looking for a home, I consulted with a friend who was a mortgage broker and he said I could probably get a loan for up to $300,000. I could not imagine that could be the case, but he assured me that with my job history and my stellar credit (something like 770 at the time) I could do just about anything.

Alarms went off in my head, something had to be wrong, but he assured me that there were people making less that I did with credit in the toilet being cleared for $250,000. Being the pragmatic person that I am, I went out and bought a home for $115,00… just about the cheapest quality home I could find in the area I wanted to live. At the time, man of my friends told me I was crazy to live in an area the had higher crime and “lesser quality” neighbors. The wanted me to live twenty miles away in their gated communities as they we certain that the value of their new homes would rise faster than my 1970s ranch home just outside of the city.

I was certain that I didn’t want to live in a new home. I had heard too many horror stories about community regulations and fines… nothing I had any desire to deal with. While I didn’t put anything down on the home, I did pay for all of the costs of the sale and I was off running the race of a homeowner.

During the next five years I knew man people that bought and sold. In Phoenix, the real-estate market began to take off and people were buying and selling with reckless abandon. They would move from one home and upgrade to something new, trading in equity for marble countertops and stainless steel appliances. Who wouldn’t? The mortgage lenders made it easy, making “creative” loans that made mortgage payments for expensive homes easier to manage.

I talked with a few friends that helped me understand their logic. Hey, get an interest only lone for five years, live in the house for two years (just long enough to avoid taxes on the profit) and upgrade again. The thought was that they could just live in the cycle forever getting increasingly more and more spectacular houses. I didn’t buy it. The market was growing across the board and if their $200,000 was worth $300,000 in two or three years, certainly the grander house was increasing value at the same rate, thus negating all the expected profit on the increase in value.

When we debated it, I explained that based on my understanding, the only way to profit in this way would be to:

1. buy only fixer-uppers so that sweat equity can be factored in… or
2. sell your house in the growing Phoenix market and buy your next house in market with less growth, say, somewhere in Idaho.

Friends swore up and down I was wrong and told me I was foolish for not “moving up” to something bigger and better. But I was fine where I lived. It was a blue collar neighborhood with no community regulations and only a mile from my office. Sure there was crime where I lived, my house was broken into once and so was my brand new truck just a few days from the dealer lot. But crime happened to other people in wealthier areas, but with the addition of a burglar alarm on my house and truck, I figured the benefits of owning a home where I lived was better than risking a dodgy housing market that was willing to loan money to people two years out of bankruptcy.

I knew someone who bought a $300,000+ home and they were one of the worst credit risks I knew– I wouldn’t lend them $100 if they asked. I guess in some way I was a little jealous, here I was someone who worked hard and earned good money who lives in a less desirable location than someone who shouldn’t even own a house, somehow that seemed wrong.

Add to my experience, that I had several friends who were mortgage brokers who work primarily in high-risk loans. They told me often about how they are constantly lending to people who they know will loose their house in a year or so. Just talking with them, they could tell how bad a risk they were, but they found people to loan them money. Mostly on ARMs and interest only loans that they knew they couldn’t afford once the balloon payment came.

I figured that there were plenty of balloon payments coming due in five years, and I didn’t want to be a part of that. Yes, it was tempting when banks would offer me $10-15,000 in equity loans… yes, borrow over 110% of your houses value… I almost rationalized taking out such a loan to pay off debt and upgrade my home… but I am glad I didn’t.

Eventually, the heyday was over. Investors had flooded Phoenix and driven home values up so high, that most people couldn’t resist taking out a second mortgage to play with the free money. I watched it happen and everything in my gut knew something bad was going to happen, things like that just don’t go on forever. Eventually, the bubble burst.

Phoenix was one of the overheated markets that preceded the housing market crash. There was once a time in Phoenix, when there were no more that 300 homes available to purchase, within one year that list was 13,000. Suddenly, all of those people who used those great loans to by an investment, needed to sell their homes, and there weren’t enough buyers in the market to buy them. Housing values tumbled, beginning with the most expensive homes, and people began to panic.

Soon, people began to learn that housing values had fallen. That $250,000 fix-up home with $30,000 worth of improvements is only worth $250,000 and that $30,000 investment has been eaten up by the loss in value. People began to default on their loans. All those investment properties hit the market, because rental values began to tank as well. It was just after the bubble burst that I sold my home in Phoenix. Because I had purchased at the lower end of the market and I had held equity more valuable than dreams, I was able to undercut the market and sell my home within 3 days of listing it. Houses in my area were so over inflated that I had 10 solid offers, 3 of which were asking price plus.

I ended up escaping the Phoenix bubble. As fate would have it, the person that owns my house now, can’t sell it for what I sold it for, they are trapped in it until they can pay some equity into it or housing values climb again. I ended up moving to Nashville, where the market was healthy and the value of the dollar goes further. When I first moved, I almost bought a house that was worth more than the house I owned in Phoenix… I say almost because I didn’t buy that house. I bought something much cheaper.

I looked at my money and my future, and realized that I didn’t want to be a person that spent my life servicing debts, so I paid off my debts, did some charitable giving, helped some that needed helping and bought the cheapest house that I could find.

Today, I am happy. I am not caught in that mortgage debacle. I invested in something I could afford and valued equity over any other possessions I could acquire. But I, unfortunately, was in the minority. Many people in America overbought. I have had several friends in crisis, some of which ended up in foreclosure. This makes me sad– they bought the hype. Instead of looking at the facts they trusted the marketing and some are paying dearly for it.

This brings me to the subject of this blog. Our government is watching the tanking mortgage market, stock market and the struggling economy and trying to figure out what to do. Recently, the government had to reach in with the FDIC and protect some banks that were bankrupt. As defaults on bad mortgages rise, and the bank’s assurity in steady housing values fail to provide insurance, financial institutions are reaching crisis mode.

Today, not only defaults on loans growing, but banks are wary of lending money that has any sort of risk attached. Housing is more affordable than it has been in years, but people can’t get loans to get into those homes. Enter the Federal Government. Seeing how much wealth was gained in those overheated years, they can’t help but see how much the collapse of that business has harmed the economy and they think they have a fix for the problem. Bailout all some of those companies that made bad loans.

What? Why would the government make a move to ensure that businesses that can’t compete in this market are still players? Sure, these foreclosures hurt, but many of those foreclosures are occurring on loans that should never have been made in the first place. Is it the fault of the home-buyer that they bought more house then they could afford? Yes. Even if it was because the believed the hype? Yes. If a bank has defaults and it closes, who’s fault is that? The bank. Why does the government need to prevent a normal market shakeout?

Sure it is painful, and yes, if I was in foreclosure, I would be happy that someone else was able to bail me out of a bad decision, but that doesn’t make it right. In my opinion, this move is really, really bad. All it does is prevent people who have made a bad business decision from experiencing the results of the bad business. In my opinion, it is like the US Government standing outside of a casino rebating people the money that they lost inside. Losing is part of what makes businesses better or at least allows those who do things better to win.

This reminds me of all of the insurance bailouts that happen after every major catastrophe. A hurricane his a major city and billions of damage occurs. Suddenly, a company who has taken people’s money for years says it cant afford to pay the losses. The government steps in a lets that company survive. Let the company survive, because what would we do without them? We would adapt and overcome like we always do.

Let Freddie Mac and Fannie Mae crash and burn and let the economy reel and let millions of people hurt. After such a bad experience, it wouldn’t be too soon that they would let that happen again. Sure, we as a nation would feel much better and still be drugged by the thought that we don’t need to look out for ourselves because Uncle Sam is doing it for us. Let the chips fall where they may. If a company makes a bad decision and crashes and burns for it, let it happen. Sure there will be residual fallout and collateral damage, but that is the circle of life.

In America, we used to tout the idea of free enterprise. The more our Government intrudes into that, the more mucked up it gets. Free enterprise has its own checks and balances, if someone isn’t doing something right or is missing something that people need, then someone else will come along and do it, that is what makes a fee market work.

Today, the government is looking to step in and help prop up a company that contributed to decisions that created this problem in the first place. This is not small action, $700 billion dollars is $2,333 from every American, or between $5,000 - $7,000 from every tax paying American! Does this sound right? Who is this helping? This is way too much money to treat lightly. If you oppose the waste of money in Iraq, you can’t possibly support this bailout. If you believe in fiscal responsibility you can’t support it. If you believe in the principles of the free market you can’t support it.

I say let it all burn. Let this house of cards fall, then maybe Americans will wake up and decide to take their futures into their own hands and not let it be dictated by phony marketing and politicrats. Wake up America, call your legislators and demand the rationalization behind such a reckless unamerican act!

UPDATE 9/26

I just learned that many banks were forced by government policy to provide sub-prime (risky) loans. While I don’t endorse to political slant of the following, it includes a great deal of important information about the mortgage “crisis”:

http://www.youtube.com/watch?v=H5tZc8oH–o