Someone with sense in the Obama administration has convinced their economic team that Freddie and Fannie brought new meaning to the term “mission creep” and therefore should slowly but surely be killed.

Amen.

I love this quote from a WSJ article:

Officials portrayed a housing-finance system that would include a role for both the public and private sectors, but would be different from the current system in that the government’s role would be smaller, underwriting standards would be tighter, and borrowers would be required to hold larger amounts of equity in their homes.

Can I get a double Amen?

And then this from the same article:

The cost of mortgages is probably going to go up, and homeownership is probably going to go down. Both of those things arguably could be a good thing.

Proper economic balance is always a good thing. How long have some of us been preaching that expanding homeownership by force-feeding goofy mortgages on unqualified buyers creates problems, not solutions?  In my case, this long.

We need government regulation of banking and lending but not intervention in a dynamic market of buyers, sellers, borrowers, and lenders.

I’m concerned that Barney (Frank) and his buddies will oppose this move but to do so, they will be pushing against a mountain of data showing that Fannie and Freddie bring a lot more trouble than value to the table.

Your thoughts about this development?

(More in this article: Obama Administration Proposes Fannie Mae, Freddie Mac Phaseout)

No related posts yet.

Our interest rate declined to 3.875%, cutting our total payment in half.  We will be using the extra cash flow to fund some interior upgrades. We are still not sure how long we will be in the house but it will definitely be beyond the six month payback period for the closing costs.

I had an interesting conversation with the owner of the title company that closed the loan. He and his business partner started the business in the summer of 2007, just before the bottom fell out of the residential housing market. Almost immediately, their start-up business went from 40 closings per month to six. They were able to survive because they were small with controllable overhead and because of heavy reliance on technology. Many much larger title companies went out of business.

During the closing the question of an owner’s title insurance policy came up. We had already purchased owner’s coverage when we built the house. Beyond that, we’ve owned the house for so long that the statute of limitations on prior title defects has expired.

With the economy stuck in neutral I think mortgage rates will remain low for the foreseeable future. Take advantage of them if you can.

No related posts yet.

Let’s recall that taxpayers bailed out Freddie and Fannie, both of which were incompetently managed by folks who assumed their positions by being political insiders. Through 2009, $111 billion in taxpayer dollars had been sent to prop up Freddie and Fannie. The government then announced that it would send an unlimited amount of additional support to handle losses expected to hit $170 billion. Previously, there had been a $400 billion cap on aid. (Source) It seems that $400 billion just doesn’t buy what it used to.

It also seems that the government is slow to learn that pumping more taxpayer money into the real estate bubble is not working out so well. The foreclosure rate in February 2010, although down 2% from January, was still 6% greater than in February 2009. This was the 50th consecutive month of year-over-year increases in foreclosure activity. (Source) What is our real estate economy gaining from all of our taxpayer money being thrown down a rat hole? I’m not seeing a reasonable return on taxpayer investment. The real benefit has been to people who were able to buy homes at declining prices, including short sales and foreclosures. That would have happened all by itself.

This brings me back to Freddie’ interest-only loan announcement. It was apparent to everyone but Freddie and Fannie that a high percentage of interest-only loans were taken out by borrowers who had poor cash flow and over-borrowed to buy something they really couldn’t afford. Not surprising, the delinquency rates for interest-only loans were almost three times higher than for a conventional loan. Freddie said it had actually begun “phasing out” interest-only loans last year, after “big losses” on such loans the three prior years. Wow – it took a mere three years to react!

Now Fannie – they are still thinking about the problem:

Fannie Mae, too, has announced huge losses on interest-only mortgages, but a spokeswoman would not say whether the company might shut off these loans.

(Source: Mortgages – Less Interest in Interest-Only Loans.)

Let’s see: “Huge” losses on risky loans, now propped-up with billions in taxpayer money. What other input is Fannie waiting for?

Do you want your taxes used to back high-risk loans having an established track record of huge losses?

No related posts yet.

Car payments are particularly problematic for many people because once they start making them, they never stop. When their vehicle gets some age on it, they trade it in for something newer and for another set of payments. Car payments become a permanent part of their financial life. That’s bad news. The good news is that our national love affair with cars may be diminishing.

Years ago we had car payments. We learned quickly that we needed to get off the car payment treadmill and stay off. Here is our strategy for doing that.

1.  Pay cash for your vehicles. Yes, that’s a “duh” statement. So let’s move on to how that can happen.

2. Buy and hold. We buy used cars for my use. My current vehicle is a 1999 model that we bought (for cash) off lease in 2002.  It has 105,000 miles on  it.  We have purchased three new vehicles for Mrs. ToughMoneyLove over our 32 years of marriage because she has been the primary kid transporter. The first two were minivans, each of which we drove for 140,000+ miles then donated to charity at the end of their useful family life. Her current vehicle is a 1999 SUV with 130,000 miles on it that we bought new (for cash). Both vehicles have been well maintained, look fine and run great. I expect each to give us at least another 50-60k miles of reliable service.

3. Buy enduring style and quality. Many people put their money into superficial technology and flashy or trendy vehicle designs.  Sooner rather than later these owners tire of their vehicles and dispose of them long before the vehicles are physically “used up.”  Sometimes all of that fancy dashboard technology becomes a maintenance burden. This causes the buyers to get back on the payment treadmill. We prefer vehicles that are well-designed from the inside out, are built to last well beyond 100,000 miles, and have classic styling that does not look dated in three or four years. Like most of you, I would dislike driving around in an older vehicle that was rusty or that rattled and smoked its way down the highway. Our vehicles – even after ten years and many miles of use – don’t have those problems. I’ve been in many cars much newer than mine. I wouldn’t trade for most of them. There are brands and models at all price points that consistently provide that quality. Find them and keep them.

4. Accept that a vehicle is not a status symbol. A lot of vehicle owners get on the payment treadmill and stay there because they consider their vehicle to be a valid representation of their status in life. Big mistake. Can you name a friend or family member that you genuinely like more because of the vehicle they drive? I hope not, because that says more about you than about them. Money envy and conspicuous consumption are not characteristics to emulate.

5. Maintain your vehicle. This sounds like another “duh” statement but not really. I often hear folks rationalize the purchase of a new(er) vehicle by reference to the maintenance costs of their present vehicle. Most of that is baloney. It is almost impossible to pay more to maintain a quality vehicle than to buy and depreciate its replacement. (Here are some other lame excuses for buying a new car.) Whenever I begin to cringe over a repair charge for one of our vehicles, I think of that payment as just a fraction of what it would cost me to buy something else. I also think of the appreciating assets we have been able to accumulate over the years with money we have not spent on car purchases. The cringing stops.

6. Save for the next vehicle. To stay off the payment treadmill, you need to save for your next vehicle purchase. This is critical. It is a lot easier to do when you are driving your existing vehicle for ten years or more. Plan ahead from day one of vehicle ownership toward buying a replacement. Start a CD ladder or similar 5-10 year investment/savings vehicle to use for vehicle replacement and repair. Use a savings goal calculator to determine how much you need to set aside each month.

That’s what we do to stay off the car payment treadmill. What about you?

No related posts yet.

Too many folks “buy” a house, thinking that it’s an essential component of the American Dream. What they end up buying is a mountain of debt that they can’t repay today, tomorrow. or ever. Even if they can afford the mortgage, they naively overlook the other costs of home ownership. The dream becomes a nightmare.

Now Thomas Sugrue a professor of history and sociology at the University of Pennsylvania is setting the record straight on the evolution of the American Dream. In an essay in the Wall Street Journal, Prof. Sugrue makes historical and practical case that the new American Dream is renting. According to the professor:  ”We are a nation of homeowners and home-speculators because of Uncle Sam.”

Bingo.

Again according to the historical record, before the government got involved:

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words “keep out of debt” or “pay as you go” appeared in countless advice books. As the YMCA told its young charges, “If you can’t pay, don’t buy. Go without. Keep on going without.” Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn’t lose its sweetness because someone else held the title.

Thanks to government meddling since then, personal finances have been dictated by the demand for bigger homes and bigger loans. Where the middle class was once stigmatized by debt, now being a renter is looked down upon.

So what does foreclosure rate in the American Dream? A badge of honor? The personal finance Purple Heart?

If you read anything today, read Professor Sugrue’s piece. I was particularly struck by his concluding citations to comments made by another historian:

James Truslow Adams, the historian who coined the phrase “the American dream,” one that he defined as “a better, richer, and happier life for all our citizens of every rank” also offered a prescient commentary in the midst of the Great Depression. “That dream,” he wrote in 1933, “has always meant more than the accumulation of material goods.” Home should be a place to build a household and a life, a respite from the heartless world, not a pot of gold.

Brilliantly pure, isn’t it? Where is that wisdom now?

No related posts yet.

When writing about inflation, most personal finance writers (including Mr. ToughMoneyLove) spend most of their energy on damage control. We talk about investing in gold, commodities in general, or inflation protected securities such as I-Bonds and TIPS. There is a lot more of that going on now because of current government fiscal and monetary policies. Most experts just can’t see a way for our economy to avoid the ravages of escalating inflation in the very near future.

The news this week suggests that experts in the real estate financing business are already seeing signs of inflationary pressure. More specifically, long term interest rates took a big upward jump. This includes mortgage interest rates. Lenders are not going to lock themselves into a low interest rate for 15 or 30 years while rates at which they borrow are skyrocketing around them. They are now anticipating exactly that and are adjusting rates accordingly.

You can take advantage of what’s about to happen. But it may not be easy.

You need to prepare to exploit a further drop in residential home prices.

Yes I know that home values have plummeted in the past two years. But they are likely to fall even more if, as expected, mortgage interest rates start climbing.

Historically, home prices generally have had an inverse relationship to mortgage interest rates. As rates rise, prices fall. This is only logical. A buyer looking to borrow money to buy a house is constrained by the size of the monthly payment as it relates to their income. At least, that is the way the financially responsible people approached things. Higher interest rates increase the size of the monthly mortgage payment, thereby decreasing the size of the mortgage – and value of the house – that a buyer can afford. High interest rates can price some buyers out of the market entirely. Other buyers may choose to wait things out, hoping for a decline in rates.

The result? Falling demand and therefore a decline in prices for both new and resale homes.

This was precisely the theory that the Treasury was counting on when it began spending a lot of our money to force mortgage interest rates down. Its goal was to boost home values to help owners recover from being underwater on their mortgage balances. The rates went down for sure. Lots of new buyers are getting some financing bargains.

But time may have run out on artificially low mortgage interest rates.

So how do you prepare to exploit what is going to happen?

Many of you won’t like this idea but here it is: Pay cash for your next home.

If I am right about home prices falling even more when interest rates go up, there will be untold home bargains to be found, even better than today. Naturally, you don’t want to pay for that bargain with a high mortgage interest rate. Paying with cash is the best way to capture the benefit from inflation.

Where do you get the cash? The best way is to save it. With enormous government deficits built into the budget for the next ten years, inflation will be with us for a while. This gives you several years at least to stash money so that you can snatch a real estate bargain when the time is right.

What if you already own a home? Think about selling it now, before prices drop again. Rent, invest your equity, and get ready for your next move into the housing market. This may not make sense for a young family planning to stay put. But if you are a baby boomer thinking about downsizing, this plan can make sense. Even if you are younger and you know you will be moving in a few years anyway, why not implement a plan now to benefit?

I didn’t say it would be easy. But sometimes you need to work hard to take advantage of a golden opportunity. An inflationary economy may present you with just such an opportunity, for your next home.

So readers, what do you think of my suggestion?

No related posts yet.

Mr. ToughMoneyLove is always on the lookout for ways to save time and money by skipping people in the middle who have their hands out but do not add a lot of value. One candidate for skipping that comes to mind is the mortgage broker. For a quick lesson on how mortgage brokers can pretend to be helpful while digging deep into your pocket as you dig a financial hole for yourself, read the entire article I linked to in this post about a very public fool of finance.  That reporter was done in by his own stupidity, including a failure to recognize how he was being used by a  mortgage broker whom he treated as an objective financial advisor.

So I was interested to discover a new online resource (in beta release) at Home-Account.com. Normally, I would not check out a site like this because we are not in the market for a mortgage nor do we plan to be. We are actually in an accelerated pay off the mortgage mode. However, when a site is talked about by a technology writer at PC Magazine, that piques my interest a bit.

This site claims to provide an objective path to an ideal mortgage suited to your situation. One unique feature of the site appears to be advice tailored to a user profile to increase that user’s financial fitness. This prepares the user to obtain the best mortgage. The user is even assigned a “grade” in regard to mortgage eligibility.

The aspect I liked best about Home-Account are these representations (assuming they are true):

1. Home-Account has no vested interest in selling you a particular financial product. We make the same whether you get a new mortgage or not.
2. Home-Account doesn’t accept or pay fees to any mortgage broker, banker or salesperson.
3. At Home-Account we are 100 percent consumer advocates; we serve and empower the homeowner to make smarter decisions.
4. Home-Account is not in the lead generation business like all of the other Internet mortgage sites.

This claim to complete objectivity separates this site from all others who provide similar information. That includes your conventional mortgage broker.

Anyway, if you or a family member are shopping for a mortgage, it’s probably worth a test drive.

Moving on, there was an interesting exchange of views this week at the Master Your Card blog about the writer’s succumbing to impulse buying for “cute” clothes and then explaining to readers that it was OK because she didn’t have any credit card debt. I didn’t think it was OK and I said so in the comments. I was jumped on by other readers who also seem to like clothes shopping as a recreational activity. You might want to have a look and share your own views.

My writing appeared this week in the Carnival of Pecuniary Delights (where my post was an editor’s pick) and the Carnival of Personal Finance. These carnivals are always worth reviewing.

Enjoy the remainder of your weekend.

No related posts yet.