San Diego homeowners face decision dilema
October 31st, 2008 Categories: Real Estate News, San Diego County Community News, San Diego county Real Estate News
SAN DIEGO–I have written posts in the past here regarding my belief that homeowners who were capable of making their mortgage payment but were walking away from a “bad investment” were acting irresponsible and actually feeding the depreciation of the San Diego real estate market. However, with the new programs that seemingly spring up weekly, it is getting harder to not side with this decision.
In an article from the New York Times News Service, Todd Lawrence of Norwich, Connecticut was featured as a homeowner struggling with the decision to continue paying his mortgage on his upside down home.
If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Lawrence believes sober souls such as himself are also due for a break.
“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”
But the benefits of a bailout for Lawrence’s neighbors seem ephemeral to the 45-year-old, especially because he figures the cost of helping them will come, one way or another, out of his pocket as a taxpayer. “I’m basically financing my own financial destruction,” he said.
I am starting to feel the same way.
As the real estate market changes I think it is safe to say that my income as well as my homes value have gone down and to some extent, this trend will continue. So, do I wait to see how bad it gets, or do I get rid of the “rocks in my head” and make an investor focused financial decision and do what is necessary in order to meet assistance guidelines? If you look back through this blog, you will see I have never been an advocate of this. Guess the electoral year is having an impact on me as I morph into a “flip flopper”.
While the goal is to keep homeowners in their homes, the programs can not entice capable homeowners to forgo making payments on their mortgage in order to qualify for their piece of the pie. Remember, some of these programs could potentially rewrite a new mortgage for you at 90% of TODAY’S value, essentially putting the depreciation on the bank and resetting the level where your appreciation starts. This could easily be a few hundred thousand dollars.
Paul McCulley, a managing director with investment firm PIMCO summed it up this way. “If the lunch truly is free, the demand for free lunches will be
large.”*
While the government position is stated by Michael Krimminger, special adviser for policy at the Federal Deposit Insurance Corp this way.
“This is not about trying to create fairness.The goal is to keep people in their houses.” – *San Diego Union Tribune,October 31,2008
Another consideration facing Larry the Homeowner in the decision process goes beyond the homeowners benefiting from the government programs. It’s about a perception of fairness and why the heck we’re bailing out the millionaires. So let’s look at the banks.
While probably the craziest thing of late is the last CEO of Washington Mutual walking away with $19 million for being in the position 17 days, this really is just another indicator of what is happening with executive compensation. I wrote about the CEO’s of Fannie Mae and Freddie getting $9 million and $14 million when they were given the opportunity to get the heck out of dodge before things got really ugly.
Viewed in comparison with worker earnings(of their own companies), the ratio of executive pay to average worker pay went from 24:1 in 1965, to 42:1 in 1980, and to 364:1 in 2006.*
But this is not about executive compensation, it’s about what part this corporate mindset plays in our decision making. If the govenrment is going to use my tax dollars to bail us out; Great. Unfortuantely it appears to be business as usual in the boardrooms of the financial institutions.
I read an article published MSN today that reported approximately $50 BILLION dollars of the $125 billion dollars given to nine banks participating in the bailout plan is already earmarked for BONUSES!!! On September 15, 2008, CNN.com had a article headlined, “Lehman Brothers collapse stuns global markets.” Yet former Lehman boss Dick Fuld, was paid $485 million in salary, bonuses and options between 2000 and 2007!!! That’s less than year prior to the collapse of what was the leading US investment bank.
Additionally, many of the institutions receiving government funds are still budgeting to pay shareholder dividends using this “bailout” money. Remember the bailout was suppose to be used to make the banks more liquid, thus giving them the ability to lend money. Unfortunately interest rates are up and the money seems to be going to bonuses, dividends and purchasing other banks.
Lastly, JPMorganChase announced today that they were going to suspend foreclosures on loans it owns for at least 90 days while it puts new policies in place. Additionally they will be opening 24 counseling centers and hiring 300 employees to work with borrowers to cut monthly payments, by lowering interest rates and temporarily reducing loan balances, which I do see as a good thing. But what’s to consider here for those of us still trying hard to do the “right thing” is homeowners are seemingly guaranteed free living for at least three more months. Many of these same homeowners most likely have already stopped making their payments already.
I understand there are many members of our community that have found themselves in financial hardship and I do have empathy for their plight and I certainly wish no ill will on anyone. It is a tough position however to be the Humpty Dumpty. You are in a very fragile position working hard and making sacrifices trying to stay on the fence. You didn’t buy the RV, Boat or fancy trips and you never used your home as an ATM. So you 
reflect back at what we have looked at and the voice in the back of your mind there is telling you that just maybe “all the kings horses and all the kings men” can put you together again if you can get your piece of Georgie (W’s) Porgie’s 700 billion pie. You just need to hop off the wall.
“From a purely economic standpoint, there’s not a whole lot to be gained from staying,” said Rich Toscano, a San Diego financial adviser.*
Lastly I love this, found on the Wall Street Journal Blog.
The U.S. government has a far uglier budget than any U.S. bank, with a deficit expected to more than double to $407 billion this year from last year’s $161 billion. It also is the home of $640 toilet seats and $1 trillion in missing transactions. No bank in the U.S. has been as irresponsible as that. So who is in a better position to push the banks into more responsible performance–the government or the markets and shareholders?
No Comments yet »
RSS feed for comments on this post. TrackBack URI
