A few thoughts on “Mortgage Rescue Plans”

Slightly off topic for me… but what the heck.

In May of this year I left my lucrative position at Intuit (hey – that is the first time I’ve ever mentioned where I worked) to start my own company. At the time it seemed I had all my ducks in a row.

My wife is also a capable executive and we had made very conservative and pragmatic decisions to prepare for my entrepreneurial adventure.

  • We purchased a home in Chandler, AZ for about 40% of what we could have afforded on both salaries – and we only bought because we had moved from Tucson.
  • We eliminated all other debt. No car payments, nothing.
  • We front loaded our 401k(s) and our children’s 529 accounts.
  • We built a sizable cash savings.

In short we did everything right… Until:

We knew housing was bursting. So we didn’t over buy. What we didn’t anticipate was everything going bust. The capital markets have frozen – so my business plan to raise capital by March 2009 is more or less out the window. We didn’t anticipate unemployment spiking – so getting a job in Arizona is more or less out the window.

It isn’t that we are going to be out on the street next month – the savings, 401k and 529s are still there (but worth 45% less now than they were in May). And I’m not asking anyone to feel sorry for us… not at all. I just want to point out that all the mortgage rescue plans leave people like us out in the rain.

Why? Because we are not insolvent. We have the resources and history that makes us the kind of people you want to keep in a mortgage. Instead – if things go badly – we (and thousands of people just like us) will be faced with two choices:

  1. Drain our savings, retirement and children’s education funds to make payments on a house on which we are 100k upside down.
  2. Mail the keys in to the bank.

Simply put – burn up your nest egg (if you were smart enough to create one) OR destroy your credit.

If, however, you are insolvent you can get all kinds of deals to keep you in your mortgage. You’ll still have limited income, no savings, and any negative event will again cause you to be behind on your mortgage.

In short – make them another NINJA loan so they can keep the house they cannot now and could not then afford.

I know some/many/all of the people with ARMs and Interest Only loans were convinced to do something they didn’t really understand. And I’m not saying they are bad people. I’m simply suggesting that “rescues” of these homeowners is the equivalent of a payday loan. It may get you through the month… but it won’t change the fundamentals that caused the problem in the first place.

The banks need to get realistic – and so do our congressional leaders. It is time to start fixing the mortgages for those who did the right thing but now find themselves in different circumstances. It is time to make rate adjustments and principal write-downs terms of the bailouts to financial institutions – not just for those who are already insolvent – but also for those who purchased at peak and who’s financial situation has substantively changed. We should demand that if we (the taxpayers) are handing them billions they should take the write-downs NOW – and pass the lowered values along to homeowners.

Anything less is simply a two pronged tax on the middle class:

  1. Pay taxes to bail out the banks
  2. Pay the bank all of your nest egg in mortgage payments.

I don’t know about the rest of you – but I’m not signing up for that.

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