The crisis is fundamentally about wanting too much at once. But the face it has consistently shown is one of over-leverage. Over-leveraged people, over-leveraged companies and an over-leveraged government (ostensibly all the same thing).
This article tries to paint a picture of those getting those getting the short end of the stick, but all I see are over-leveraged people out of time.
A few choice quotes:
We have entered the one-strike-and-you're-out era. One lost job. One medical emergency. One bad risk or misjudgment of the heart...
We're geared to believe that risk begets reward and our tomorrows are brighter than our todays. One-strike-and-you're-out is a neck-snapping reversal for a culture accustomed to assuming that fate is a welcome friend...
People like Paula Stevens and Joseph Zachery weren't flipping houses or lying on their loan applications. They didn't pile up mountains of credit-card debt. They worked hard for what they had and shared their modest portions with others...Their bitterness stems from a feeling that they've held up their end of the social contract, but now the terms of the deal have been rewritten by malign forces....
Not everyone who has fallen behind on a mortgage is a loser complicit in the housing collapse.
That last line is from the closing paragraph. (emphasis mine) So the big question here is "are these two people 'losers'?" Are these two really innocent bystanders in the housing collapse? I think the answer is no and the reason should be clear simply by analyzing the risks under-taken by both parties.
Occupation: Firefighter from 1986 to recent. Ended at $60k / year.
House: $100k house, needed renovations
Worked a second job: Like most firefighters, he always had a second job...he started his own business, demolishing houses condemned by the city.
He used the equity from his house to buy demolition equipment, resulting in a mortage where "he owed nearly twice the original purchase price."
Crisis: he gets into an accident on the job.
He's shuttled around between hospitals, he gets full disability from the fire department (plus some electroshock treatment?) and he's now living on pension. He get $50k / year. It costs him $800 / month for medical, leaving him with $2,400 for everything else. But get this, his mortgage is $1,600! On a 100k loan that doesn't make any sense. But the problem here is that he actually owes 190k which he's paying off at 9%.
So why did he end up here? Was it the work accident? What did he do wrong? What are the risks he took?
- Leveraging non-existing home equity:
He didn't pull out just the home equity he "actually had" from his down payment or his mortgage payment. He pulled out "speculative" equity that the bank extended based on the prevalent housing prices at the time. He wasn't borrowing "his own" equity, he was borrowing equity that he hoped the house would have.
Rather than taking out a business loan for his small business, he took out a loan against his home meaning that a crisis in his life would likely cause his to lose his home.
- Leveraging his ability to fix the home:
As stated, the home was a fixer-upper. He was banking on his ability to fix the house in order to prop up the value of the house. Of course if he wasn't able to fix the house for some reason, it's value would bleed from lack of maintenance.
- Leveraging his second job:
He knew his pension income and he knew his medical payments, he knew the money he had to work with. Based on the fact that he's losing his home, it's pretty obvious that he wasn't going to be able to keep his home on just his pension. He needed that second job to keep him going.
This is a really big point.
There is no indication that he has disability insurance on his second job. Here he has a second job that he needs to keep in order to remain solvent. He's dependent on his own mobility and capacities. But he's not insured if he loses them.
Yes he had disability from the fire department, but that was only for his fire department salary. Where's his insurance for his other business?
He buys 100k in equipment, but doesn't buy 100k+ in disability to cover his potentially catastrophic liabilities.
He's a firefighter, he runs into burning buildings for a living and he's gambling his livelihood and his home on the fact that he won't be injured.
So he got injured and lost his home.
Occupation: Gateway tech support. No college degree, serial "entry-level" worker. In her best year she grossed 42k
House: 3,000 sq ft, purchased in 1994. Re-financed 3 times, now owes 159k (@ 9%!)
Crisis: lost her job at Gateway and can't find one that pays as much.
So the obvious risks:
- Living without a buffer:
"It takes $14 per hour for me to meet my bills...That's what I was making at Gateway when I was laid off. But no one wants to pay that much..."
If you're making $14 / hour, you need to be living off $11 or $12. How else are you going to save up cash for retirement or even just emergency expenses like job losses?
- No professional development:
She made it to 56 and somehow doesn't have the skills that she can market for $14. There's no sign that she took college night courses or professional training.
- Where did the equity go? the savings?:
She's 14 years into a mortgage and she owes 159k. The median home price in Kansas City during the last recent peaks was just under 190k.
But she bought in 1994, close to the bottom, 14 years ago. She most likely owes more on the house than its original asking price. And she's paying 9% on it to the tune of $1,400 / month.
And where are her savings? It doesn't seem like she had retirement plans of she would have money right now.
- Family Obligations:
...but her oldest daughter, Maggie, 28, has a new baby and is enrolled in nursing school. "I just have to get her through that," Stevens explained
I pay less than $1,400 after utilities. That's less than her mortgage and this is a luxury suite. You can get an older apartment or a townhouse down the street for $600 to $900. That would make it a lot easier to balance the bills.
So where does that leave Paula? She's obviously over-extended, but all of the signs are pointing to her basically not having savings. Her telling quote is this defeatist line: "That's how it works. You just keep starting over." Rather than spending her life accumulating, she just kept starting over.
My personal opinion (because it's my blog): neither of these people should be in their homes. They should both be renting, either really close to family or really close to public transit.
Disagree? I'd love to hear other thoughts.