Dollars and Sense! – July 2008

Help me, I’m drowning.

In case you have been out of touch with all the things happening in the financial world, the housing industry is a mess right now. And it is about time. Time has come to get back to reality. Not reality as in television programming, but reality as in the real world of lending for the common good.

Ben Franklin was well published as a firm believer in prudence and thrift. Keep life simple, put some of each paycheck in savings and don’t spend more than you are currently earning.

Within the last 30-40 years citizens of our country lost those values. Some things did not change however. Companies and individuals have always wanted to maximize their income at the expense of others. So what happened?

I believe it was a significant shift in how credit was granted. Just over 40 years ago the credit card industry became well established with the “low monthly payment”. But our education system failed to recognize the danger and include any instruction in the curriculum about the proper use of this “new phenomenon”. Then manufacturers started making car loans that extended to 72 months. This enabled them to make more expensive vehicles, which equals more profit and also keep the buyer happy with a “low monthly payment”.

Now enter the housing industry. “Back when”, the lenders required 20% down payment before approving a fixed rate loan. Borrowers did not need mortgage insurance since they now had a significant stake in the purchase.

Buyers made sure the price and/or size of home was reasonable and affordable for their foreseeable income. Houses were small and families joined social/fraternal organizations for recreation and camaraderie. This versus the current isolated entertainment within the home– thus requiring larger homes– thus permitting larger entertainment– thus requiring larger homes– etc.– etc.

Then came today’s crash of the real estate market. Lack of prudence and thrift, through both corporate and individual fault has led us to the current situation. Lenders created very complicated loan formats that were sold as the best thing since sliced bread. Borrowers wanted more than they needed (e.g. 4000 sq/ft homes), very expensive cars were leased vs. purchased, and best of all was the “easy monthly payment”.

Life now revolves around working just to make payments and owning nothing. Net worth is shrinking, savings are being demolished, and many families are beginning to panic.

So here is what you do if you are facing panic mode. Get help now. Do not let the situation get worse. Local agencies are standing by to help. Call 360-423-9197 if you own a home. Call 800-244-1183 if you are renting. Get a handle on the situation now because it will only get worse if you don’t.

The author is a counselor for Financial Solutions of SW Washington, located at 1339 Commerce, Suite 203, Longview WA. If you have questions about this article or have ideas for future topics, please contact him @ 575-9395.