Let's Put This in Everyday Terms

Here's the scenario:

Today is payday and after taxes your employer put $1,000 in your bank account.  Out of that thousand bucks, nine hundred dollars is going to pay your debt.  Keep in mind, food is not debt.  Electricity is not debt.  Gasoline is not debt.  How ya feeling about your paycheck now? 

Can you take care of your family on the ten cents on a dollar that is left after you've paid your debt?  Can you prepare for your children's future?  If not, what is the effect that the debt that you have incurred have on your children?

Now, consider this:

President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020, the Congressional Budget Office reported Thursday.

Don't fool yourself, when our country's debt reaches the point that it consumes 90% of GDP, it will impact our children.  Their lives will be vastly different because of the debt that our government has incurred.  Is this what you want for them?

What about our elderly?  This country has five trillion dollars of unfunded obligations under Social Security and thirty-eight trillion dollars of unfunded obligations under Medicare.  We promised those programs to our elderly and then we spent the money.  On top of that, we now have yet another entitlement program, ObamaCare, that will demand even more money that simply doesn't exist. 

Your family can't survive with 90% debt and neither can your country.  The solutions aren't easy but they are necessary.  Those of us in our "middle" years will need to sacrifice the most so that we can keep our promise to those who have already retired and provide our children with a better future.  Most of all, our government has shown that it has no fiscal disipline so it is up to us to put our government on a buget.

Read more.

Absorb this

pjMom posting a comment at Potluck:

Imagine your family’s finances if you spent and borrowed like Washington: you’d owe $60 in credit-card loans for every $100 of income. Every month you’d pay back a little but borrow even more. In 10 years, you’d owe $87 for every $100 you made. At some point you’d hand off the debt to your kids. If they worked until 2035, they’d owe more than $180 for every $100 they earned. In 2050, your grandkids would owe more than $320. By 2080 they’d owe seven times their earnings. Of course, lenders would cut them off well before then, and your family would be ruined. But this is the path your government is on right now.

–Rep. Paul Ryan in Newsweek.

In 2050 my grandchildren will be 46 and 49 years old.  I imagine they will have children that they are trying to put through college.  How can we possibly saddle them and their generation with that kind of debt?  It is nothing less than immoral.

Can This Home Be Saved?

Over at Reason Tim Cavanaugh discusses the new Mortgage Metrics Report and comes to the conclusion that more often than not mortgage modifications don’t solve delinquency problems:

That is, lenders are increasingly offering supposedly distressed borrowers substantial reductions in principal and interest payments. (See page 25 to see how rapidly these modifications are becoming much more charitable to the borrowers.) Redefault data track how many of these renegotiated loans end up back in trouble. There's a wide variety in types and degrees of trouble — everything from 30 days' tardiness on payments to completed foreclosures.

But one pattern emerges when you add up all the redefaults per quarter and compare them to the total number of loan modifications: When you take deadbeats and give them a free opportunity to get out of contractual obligations they willingly signed before God and country, a fairly reliable majority of them — and often a fillibuster-proof 60+ percent — end up deadbeating again.

As a former loan officer I can tell you that are some very good reasons why loan ‘work outs’ often don’t work out.

First, let’s start with Tim’s use of the word “deadbeat”. Not all people who default on loans are deadbeats. I define a deadbeat as someone who just doesn’t repay debt because that is just their nature. True deadbeats fall in to two main categories. Some people do not repay debt regardless of their ability to pay. It simply isn’t a priority to them even when the debt they are not paying is for the roof over their head. From personal experience I call this type of deadbeat a “Stuff Person.”

The Stuff Person has a nice home and drives a new car. They have the latest Iphone and wear label clothes. Game day the gang meets at their house because they have the huge flat screen TV with all the bells and whistles (Note: I‘m talking about games played on the road, stuff people have season tickets for the home games). They never brown bag their lunch and dinner is at the “IN” restaurant several nights a week. Stuff people pay their electric, water, cable, etc., on the day the service has been scheduled to be turned off. Their mortgage, cars and credit cards are all at the highest interest rates allowed by law because of their credit scores and they pay an NSF charge for almost every check they write. But they have stuff. Sooner or later the cards are maxed out, there’s no equity in the house, and the cars are like two years old. If they can do a refi or a modification they use the breathing room to start spending again. Usually they end up in bankruptcy and foreclosure which they pretty much take in stride.

The second type of deadbeat is the “Dreamer”. The dreamer is the well meaning person who buys the house with an interest only loan for the first year or two and then the payment adjusts to include principal as well. Or maybe the mortgage is an ARM with a low teaser rate. Whatever. The point is, they mean to pay it because they assume that between the time of the purchase and the adjustment some miraculous event will occur and everything will work out. Unlike the Stuff Person who sees financial collapse as an opportunity to start over and get new stuff, the Dreamer becomes angry when they find themselves losing their home or car. The Dreamer thinks it is unfair that everything didn’t just workout and they blame everyone but themselves.

The third category of people who end up in default are not deadbeats at all. They did everything right. They don't buy more house than they could afford. They save. They budget. They don’t buy a new car until the old car is on its last legs. When they lose their job or become ill they call their lender right away. They try to work everything out and when they can’t they are upfront with the bank. Sometimes bad things do happen to good people.

The comments on Cavanaugh’s post were interesting. I could spot which posts were from deadbeats and which were not. I could also spot which posts unfairly labeled everyone as deadbeats whether they deserved it or not.