Wednesday, January 25, 2012

What Do I "Deserve" in Life?

I'm having a hard time writing this morning. I feel like I have griped and complained a lot here lately. I also don't think I've written enough about real estate to even call this a sometimes real estate blog. So, I am going to frame this discussion with a discussion on the real estate "crisis."

Very little in life chaps my hide more than the mentality where someone thinks they are "owed" something simply because they exist. In this blog, I am going to talk about this mentality coupled with the housing crisis. It is a worthwhile discussion and one that can be applied elsewhere.

Adam Smith published "The Wealth of Nations" in 1776. This was a groundbreaking work and discussed pretty much every aspect of an economy. One of the central themes (among many) in the commentary was the idea that, basically, if you take care of yourself, you in turn take care of the nation. If you can support yourself and your family, you are not a drain on anyone. Additionally, you must be contributing something worthwhile because you would not be able to support the family otherwise. In other words, the unintended consequence of taking care of yourself and being as productive as possible is that the entire community around you benefits. It is not a new idea but it does seem that we have departed from this standard. There are an endless array of directions we can go with this discussion but lets instead focus on housing.

Many, many things led to the collapse in the housing market. In my opinion, there were two things that were the overriding ideals that got us there. Number one is greed. Greed from politicians that tried to win votes by framing home ownership as a right and creating an environment for corporations to mask greed in the name of helping everyone attain that right. Number two was the mentality of so many Americans that they deserved the home, no matter their circumstances, no matter the cost, etc.

Let's look at number 1. Everything in our government is linked. Nothing happens in a vacuum. When the president makes a statement that he is going to work toward everyone owning a home, he sets a goal for congress. Congress reacts with a bill, the bill becomes law, someone challenges it, the judiciary confirms or denies it, the people react. Several bills have been passed toward this "goal" of home ownership for everyone since the late 70s. Several different presidents have had a hand in this "goal" as have countless senators and representatives and others. It is definitely not one single person or even party that is responsible here. See past all that label business. Politicians piled onto this "goal" because it made their constituents like them. On the surface it seems like a noble goal--"everyone owns a home because that is the American dream." The problem is that it is completely unattainable and not even a good goal to begin with. First, not everyone wants to own a home. Second, not everyone has the cash to pay for a home outright. Third, not everyone without the cash should be extended credit. Fourth, when the government meddles in this portion of private life, there is no way for them to be unbiased, no way for them to be smart and absolutely no way for them to actually "help" the situation that was fabricated to begin with.

One of the ways the government helped create the mess was to push guidelines for Fannie Mae and Freddie Mac. It may be good at this point to give a brief synopsis of these two Government Sponsored Enterprises (GSEs). Then we will see how this all happened from the top down.
What GSEs do? Basically, they buy mortgages from private lenders. If a bank or mortgage company writes a loan to someone that "conforms" to a certain set of guidelines, then Fannie or Freddie will buy that loan. They will keep some of the loans as investments but the majority are then packaged up and sold as securities to investors.
What does the government have to do with it? When these loans are sold off, it is implied that they are guaranteed by the agency and backed by the government. Both GSEs have a line of credit with the Treasury. The GSEs also do not have to hold the cash reserves that other banks do. Instead, they borrow from the treasury and repay with the revenue they get by selling the securities at a higher price than what they bought them.
What did this have to do with the crisis? This is where you have to stick with me... Government sets the goal to get more people in homes. The government holds the purse strings of the treasury that is the life support of the GSE. The government tells the GSE to get more people into homes. The GSE loosens the criteria to make a loan "conforming". For the private lenders, this creates a FIELD DAY. They can now loan to more and more people with the guarantee that the GSE is going to buy the loan. It's a no brainer for the lender. More loans+no risk (they are selling the loans as soon as they make them)=pure profit. This initial feeding frenzy starts up some other secondary market companies (Fannie and Freddie started the "secondary mortgage market--they buy the mortgage after it has been written, they don't actually lend money to the consumer) that are not GSEs but can get in on the fun. They use the same pool of investors, promise a higher return because the risk is a little greater and start encouraging lenders to make riskier loans because they will buy the loan at a premium.
Why are they riskier loans?  Lots of reasons--lower credit scores, less job history, "stated income" instead of verified income, second homes, investment property, over inflated values, no down payments, cashing out equity that is not even there yet (110% loans), interest only payments counting on the increase of the market to grow equity, the list is endless.
So what happened? They failed to recognize one key, central element in all economies--they are cyclical. Sometimes they are up, sometimes they are down. NO economy will rise indefinitely. It can't. It has to have some down times. When it came down, it came down hard. First you saw the riskiest loans start to go sour, investors panicked a little. Then you saw the GSE loans start to go south. Investors panicked a lot. This caused a major retraction of investor money. With no one to sell to, Fannie and Freddie (and all those other secondary market companies) had no way to unload the loans they promised to buy. They had a real problem. It only got worse when the low standards of lending came to roost and people defaulted on their mortgages. Interest rates adjusted up in order to cover the problem--this put even more people in bad situations. This flooded the market with properties. When you oversupply, the price has to drop. Couple this with some other bad market conditions (companies closing, people losing jobs, etc.) and you compound the issue. When the prices drop, all those people who were counting on the increase in value to supply their equity get burned. There is no equity anymore. In fact, they are all upside down. If you are upside down, your interest rate has adjusted up because you did an interest only ARM, and you lose your job--you lose your home. More people do this and the prices drop even more because there are even more distressed homes. It really was the perfect storm of bad banking practices, corporate greed, politicians buying votes by flexing control over the lenders, some natural slumps in employment and the second issue--the people buying into the "I deserve it" mentality.

I am guilty here. I catch myself frequently justifying purchases because I deserve something. I work hard and thus I deserve that new ____________ or whatever. We have a lot of help in programming this mentality into ourselves. And honestly, its not that hard to believe it.

We live in such a wealthy nation it is easy to see the success of others and to hear the stories of people starting from nothing and going to millionaires (or more). The sad part is, we only hear those stories AFTER they have made it. We don't get to see, really see all the work that goes into getting them there. When we see that success we get inspired to be millionaires also. The problem is, we don't (usually) get inspired to make the sacrifices and work toward that goal. Instead we frequently adopt the "if ___________ is that rich or has that _______, I should too." Jealousy creeps in. Politicians love to use this in their quest to keep power. If we throw the plebes a bone, they will love us for it. Thus, we have the situation I outlined above. And we, as a society, play right into their hands. A lot of the people that were involved in the housing bubble knew that what they were doing didn't make sense. These were not stupid people. They got caught up in the moment. When they laid down their heads though, they knew that it was not going to last and it was not a good idea. It doesn't make any sense to borrow more than what a house is worth using that house as collateral. It doesn't make any sense to pay interest only on a tremendous debt in order to be able to afford MORE DEBT. But we, as a society, did it. Why? Because we could. It allowed us to be that much closer to "the haves". We deserve it. We work hard and the government says everyone should own a home. The banks agree and they are nice enough to give us our dream even though we are uneasy about the payment and the possibility of future payments being higher. Think about it.

If we had been a society that inherently delays pleasure and rejects jealousy and truly understands that we deserve only what we work for, we would have NEVER been in this situation. We would have rejected the notion that everyone deserves a home and replaced it with "everyone that deserves a home has worked to earn it." Think about that.

I work and save, work and save, work and save. I pay all my debts on time because I don't take out debts that I cannot repay. I live within my means. I work hard at my job and earn a salary commiserate with what I contribute to the company. I do what is best for my family and I buy within my means. I earn a home because I planned to get it, worked toward it and secured the way toward it. I didn't wake up one morning and decide it was my right even though I spend everything I have and never work toward a plan and always live outside my means.

Here is the bottom line and how it all relates back. When you start to think that it is unfair that so and so has whatever, look in the mirror and ask yourself, "what did I do to earn that?" Sometimes you do experience setbacks that may not even be your fault. Sometimes you make a mistake due to inexperience or trusting the wrong person. That happens. Sometimes people are very fortunate and maybe even dishonest and get stuff they don't earn. That happens too. But, at the end of the day, if we are truly honest with ourselves, sloppy management, poor planning, laziness, ignorance, lack of research, naivity, jealousy and greed (all of which we can control for ourselves) are going to be the root of your money and housing problems 99% of the time. I know they have been the cause of all of my money problems in life.

The answer to my initial question, "What do I deserve in life?" is pretty easy to figure out. What I have worked for, no more, no less. If you feel that you deserve more compensation out of your job, quit, learn a more valuable skill or demand a raise. If you feel that you deserve more for your money, negotiate sales or clip coupons or whatever. DO something about it instead of relying on the government to TELL you what you deserve.

On a COMPLETELY different note, the college ministry that I work with has started a new prayer ministry. It is pretty cool. Basically it works like this, if you need prayers or know someone that does, you text your request to 61JESUS4U2 (615-378-7482). You can be completely anonymous or give all the details you want. We will not keep your number, solicit money, sell your info or anything else. We will not even contact you back unless you want us to. All we will do is pray for your request. So far we have about 20 signed up to pray. I suspect in the next few weeks we will have over 100 on the chain praying.

1 comment:

David C said...

I agree. Entitlement is ruining our country. I cringe when I watch shows on HGTV and I see young couples looking at houses commenting on how they will have to tear out the kitchen and put in granite and hard wood floors everywhere. Now you even have the "Occupy" people, and like it or not it will be a major election issue. A large section of the public has not learned anything from the housing crash. They seem to feel even more entitled than before.

Post a Comment