billddrummer (55.89)

Slavery Isn't Dead--Financial Firms Hold the Chains

June 07, 2009 – Comments (3) | RELATED TICKERS: WFC , BAC

I've been reading about how many homeowners are underwater in their houses, and I'm glad I'm not one of them.

In this area, nearly 30% of homeowners owe more on their houses than they are worth.  And the number is rising every month.  These people can't sell without bringing cash to closing, can't refinance because no bank would lend them as much as they owe, and have to live with the idea that their home is just a big apartment (with a bigger payment).

I coined the term 'mortgage rent' on the www.ml-implode.com website nearly 2 years ago, to identify people who are merely renting their homes from the mortgage lender.  True, they can deduct their interest payments, but in reality, the payment is just rent.  Without capital appreciation, you're renting, no matter how nice your house is.  And with more and more homeowners seeing their equity vanish, more and more homeowners are paying rent, whether they are willing to admit it or not.

The big question is this:  How many of them will choose to walk away rather than continue to make the WFCs and BACs of the world richer?  Especially with the number of vacant homes available (locally, more than 30% of the homes for sale are vacant), and the number of vacant apartments, condos and duplexes (apartment vacancies are above 10%--even higher if you look at 'Class A' units), it's not hard to do the math.  Should I keep paying this high mortgage payment, or find someplace to rent that could be as much as 50% cheaper on a monthly basis?

I tend to think that as more families take a sharp pencil to their budgets, they'll discover that letting the house go isn't as traumatic an event as it was considered just a few years ago.  And setting aside the idea that 'you signed a mortgage contract, you must adhere to it,' doesn't compensate for the dollars and cents equation--"If I pay this mortgage, I'll stay in this house, and ride the value down for a few more years.  Then, it won't appreciate for a few more.  Meanwhile, the money I spent on the mortgage payments won't be available to save for college, or retirement, or anything.  On the other hand, if I let the house go back to the bank, I can probably find a cheaper place to live, and rebuild my own balance sheet with cash."

Let's see if the consumer's propensity to save will spill over into the rapidly depreciating homes many people now live in, fostering in a further round of defaults for the biggest mortgage lenders.

This is becoming a psychological puzzle that bears investigating. 

I'm just glad that I don't owe any 6-digit loans now.  After my debt is repaid, I'll be able to rebuild my balance sheet with cash.  I'm deleveraging, and I feel good about it, even though I'm not to the point I thought I would be now.

As a corollary, I found out recently that I'm $8,000 underwater on my car.  But it still runs, and I keep paying on it.  After a few months, I'll refinance it to get a lower payment, but continue to make the same payment I am now to reduce the balance faster.

If only the government saw debt in the same light!!

And that brings me back to the title of this post.  By printing as much money as rapidly as it has, the Fed has essentially enslaved the next 4 generations of Americans with the debt that's being issued now.  Unfortunately, that means my children's grandchildren will be paying off the debt we issue next week.  To say nothing about the debt that will be issued next month, and next year.

I for one am livid that my children's standard of living may very well be worse than mine, after every generation before mine saw a better future for themselves than their parents did.

And I see no way out, unless a radical change takes place within the US government.

This will be interesting, and I hope I'm wrong.

Fool On!

Bill