Tuesday, February 12, 2008

There Goes That Freedom!

I received e-mail messages from two friends and business colleagues yesterday. Interestingly, I consider both of them as people who basically live and work free. Of course, there are degrees of everything and we each determine what works for us when we're living and working free. Both of my friends are married – I'm single – so there are some differences there. Both of my friends have two offspring, one is an empty nester and the other, in a manner of speaking, is sort of an empty nester. I, of course, only had one offspring and raised him during his teenage years as a single parent. Like I said, there are always a few degrees of difference. One of them told me some distressing news about one of his offspring while the other told me some happy and exciting news. But, each friend's news has some bearing on the concept of living and working free.

First, I'd like to relate the distressing news. I'm actually going to use, virtually intact, what my friend sent me with some inserts for clarification.

Jane (my friend's young, adult daughter) and Josh (her boyfriend) lived the hi-life and can use this as a lesson. Jane has become very conservative and would like the life she so vehemently spit upon when she was younger. Alas, there is no going back. She wants to be financially responsible and live well within her means now. Yes, it was fool-hardy for them to walk into it (it being – buying a starter home that was too expensive with a sub-prime adjustable rate mortgage – ARM) with both eyes wide open. The bank (after the housing market and mortgage industry collapse) had them in a position in which they would say "Ok, give us this much and we'll review your interest rate for the future." The (her) response "Well, I'd like to know--if I fork over everything I have and bring it up to date, what will my future payment be?" (The bank's response,) "We'll assess that." Interpretation, "Everything you earn for as long as you are our (the bank's) indentured servant. We'll leave enough for you to barely get by, but the lion's share is ours and we'll manipulate your interest rate to ensure that you always stay our servant. When we sense you are going under we'll slack off a bit. When we feel you are strong, we'll drain you back down. We will keep your credit rating where we would like it to be to ensure you can't slip our grasp." Shades of the coal miners buying from the mine owners' stores, yeah?”

This is very sad and distressing because these two young people have no way to bail themselves out of the situation. Their parents, conservative, middle-class Americans, have their own basic level of security and appreciate being able to pretty much live and work free at this time of their lives. However, they are not in a position to assume the daughter's loan nor ante up the money to keep them out of default without jeopardizing their own financial position. So, the daughter and boyfriend are preparing to lose their house, which, they probably thought they would resell after a few years, make a whopping capital gain and then do it again. Unfortunately, as I'm sure readers of this blog know, housing prices have declined, considerably in many areas, leaving the houses worth less then the outstanding mortgage. Additionally, it has turned into a “Buyers' Market” - and there just don't seem to be a lot of serious buyers out there, other then speculators looking to take advantage of those in financial trouble. So, this young couple have accepted that they will lose their house and have to file bankruptcy while still in their early to mid 20's. They will be free of the bondage of the bank. But, will they be able to live free and work free? Effectively, any credit rating they had built up will be gone and it will be a while before they will be able to build back to the starting point again.

They are not alone! There are literally hundreds of thousands and, probably, more realistically, millions of people who find themselves in the same dilemma. Is it their fault or the fault of the sharks in the banking – and especially the greedy mortgage banking industry's fault? The answer, of course, is BOTH! The sharks went into a feeding frenzy just like when you throw chum over the side in shark infested waters. They really didn't care whether their prey could handle the finances or not – all they wanted to do was close sales and loan money and take home commissions. On the other hand, the victims, and many victims were not young people, they are slightly older folks with young families, they are empty nesters, they are middle aged folks – and, I'm sure there is probably a percentage who might be in their senior years. What was the common denominator? Two factors basically describe it all – Greed and Instant Gratification! This is not the first time this has happened in history. It has happened over and over. I'm not an economist and I sure don't profess to be even remotely knowledgeable about these kinds of economic issues, but, the economy has gone up and down and up and down in cycles, basically forever. So, GREED is the big factor. It wasn't long ago when we heard of large numbers of “day traders” in the stock market losing their shirts! GREED! Some of them, I've heard, took similar actions to people who lost their shirts when the “Great Depression” hit back in the '20's – they took their own lives.

Like I said in the last paragraph, I am not knowledgeable in these kinds of economic issues. I, usually, use something called – common sense. I've been led down that primrose path a few times in my life and I've come to trust in the statement, “If it looks too good to be true, it usually is!” Now, I've missed out on a few really good opportunities during my lifetime, but I won't spend any time crying over spilled milk. But, more often then not, my common sense and remembering that statement have saved my behind from the fire. Five years ago I applied for a mortgage. I determined how much my monthly payment limit was. When I went in to the mortgage company, I didn't tell the agent how large a mortgage I wanted, I told him what I was willing to spend per month – PITI. I already knew within a thousand dollars or so, how much that represented in terms of a mortgage. I gave him the information he requested. He entered it into his computer, it immediately gave him back my FICO credit score (which is very high) and approved the mortgage instantly. But, then he went even further and said, you're qualified for another $200,000 to $300,000, I can get that approved for you right now, too. I replied, will my payments still be the same amount as the amount I gave you when we started this process? I, of course, not being a total dolt, knew that answer and he assured me the payments would be quite a bit more then the amount I wanted to pay. Why, here I was, a single guy and I could be approved to buy a huge McMansion – that I didn't need and didn't want to make payments on – just because they were willing to give me the money. I turned down the excessive offer. My real estate agent couldn't find anything that was decent or that I'd want to live in within my price range, so instead, I leased a home that was worth approximately three times what I was willing to spend on a house and my rental payments were exactly what I was willing to spend on the mortgage I was approved for. The home fulfilled all my living and business requirements and I've enjoy five years of blissful life here.

Five years ago, after my own experience, this economic “know nothing” predicted the bubble would burst, the greedy mortgage bankers would get their just reward, the greedy home builders, real estate people would be gnashing their teeth, people would be losing their homes, there would be foreclosures everywhere and bankruptcy would become a common word again. As much as I wish it wasn't true – I WAS RIGHT! There is no living free and there is no working free when you put greed before common sense and instant gratification before determining what you really need in life. How many people do we all know, maybe even yourself, who are slaves to the banks and live in prisons of their own making? There are far too many.

Now, to my other friend's great news. This doesn't take as long to tell. My friend and his wife have a couple sons. Both of them are very sharp young men. These two parents want to give their offspring (like most parents do) a leg up on life. So, they've sent both of them to private, boarding schools. This is pricey. But, they chose to live in a small, country region where they have most of the amenities and conveniences they needed and wanted, at a considerably lower overall cost of living and a much more laid back pace of life, rather then in expensive localities (large cities) where each parent originally came from,. Certainly, there are a few things that annoy them about their environment, but in general, they are happy there (there's that word again – happy). So, because it doesn't cost them as much to live, they live a very pleasant lifestyle, perhaps a bit better then they could afford in a more expensive region. And, while the private boarding schools are quite pricey, it's a bit easier for them to deal with since their overall costs are less.

The good news is that their oldest son, who will enter college this fall to study theater has just been awarded a full, four year scholarship for all tuition and fees at the college of his choice. This doesn't exactly set my friends “free” since they still have to cover room, board and books, which is still a healthy sum. However, they will be a lot freer without the heavy burden of out-of-state tuition and fees at a very good college. So, my congrats to their son and to them. Everyone wins in this case and they'll be a bit freer financially over the next four years and their son should have a good launching pad for the career path that he has chosen in the arts.



If you're new to reading this blog, go to the first posting: “Welcome to My World!” which will appear the beginning of each month in the archives and you'll gain some insight about what this blog is all about.

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