Maryland and Virginia Real Estate and Homes Blog

IT PAYS TO BE BIG.  IT PAYS EVEN MORE TO BE VERY BIG.  CITIGROUP IS THE BIGGEST AND IT APPEARS THAT THEY GOT THE MOST, SO FAR. . . . .

• $20,000,000,000 CASH TO CITIGROUP.
• $306,000,000,000 GUARANTEES TO CITIGROUP.

CITIGROUP’S BAD MORTGAGE-BACKED-SECURITIES PORTFOLIO ARE GUARANTEED AGAINST LOSS - - -LOSS TO CITIGROUP, THAT IS.   

THERE IS NO GUARANTEE FOR THE AMERICAN HOME OWNER FOR THEIR LOSS OF HOME VALUE.

THERE IS NO CASH TO THE AMERICAN HOME OWNER TO HELP THEM MAKE THE MORTGAGE PAYMENT ON A HOME THAT IS NOW WORTH ALMOST 1/2 OF WHAT THEY PAID FOR IT. 

WHAT DOES THE FUTURE HOLD FOR THE AMERICAN FAMILY?  I wonder what our real estate market will look like 5 years from now when most of the ARMs have reset and when many home owners are making payments on mortgages that are 1/2 of their gross monthly income.  Wages are increasing at about 3% a year, but unemployment is going up and that should put downward pressure on wages. 

With the percentage of the family’s morthly gross income going for housing, the family will not be able to follow their financial plan, if they have one.  The scenario for the average American family struggling to make their mortgage payments is not a pretty picture. 

• The college fund will dry up because the parents needed the money for the mortgage payment.
• The roof will continue to leak because there’s no money to replace it after paying the mortgage payment.
• Dad’s not home much any more because he needs more overtime to make the mortgage payment.
• Mom and Dad are driving 8 and 10 year old autos because they can’t get financing on replacements and don’t have money left over to save after making the mortgage payment.
• There’s no money for life insurance for the family after the mortgage payment. 
• No more payments are made to the 401K because the family has to make the mortgage payment.
• Family vacations are not planned because there is no extra money after paying the mortgage. 

HOW MUCH MONEY IS LEFT IN A HOUSEHOLD BUDGET WHEN THE MORTGAGE PAYMENTS REQUIRES 39%-45% and 51% OF THE FAMILY GROSS MONTHLY INCOME?? 

• The median income for men is about $45,113 a year.
• The median income for women is about $35,102 a year.
• The median home price is about $229,100. 

When the family purchased their home in 2005, they paid $400,000 for an 15 year old property, their dream home.  Their home was priced at the average price for their location for the 2005 real estate market.  They qualified for a mortgage loan with 10% down.  Their mortgage loan was a 3/3 year ARM starting at 5.5% and resetting to 7.5 in 3 years and then 9.5 in 3 more years.  That means that in 2011, their interest rate will be 9.5%.  Taxes are about $400 a month and home owner’s insurance is about $50 a month. 

• PI on their $400,000 home in 2005 was about $1,932. 
• Taxes on their home is about $400 a month.
• Home owners insurance is about $50 a month.
• MI is about $120 a month. 
• Their total mortgage payment in 2005 was $2,502, or 39% of their combined family income.

39% of the monthly gross income for a mortgage payment is high.  However, this American Family is very thrifty and has saved a 10% down payment, have no car payments for their 4 and 6 year old cars and pay their credit cards off every month.  So, with good credit scores, they qualified easily.  They anticipated refinancing their mortgage loan prior to reset in 2008. 

• In 2005, their mortgage payment was $2,502 @5%.  Their combined income was $6,400 a month.
• In 2008, their mortgage payment went to $2,965 @7%.  Their combined income is $6,600 a month.
• In 2011, their mortgage payment will go to $3,466 @9%.  Their income will be about $6,800 a month.

This anticipates the average rise in income of about 3% a year. 

• In 2005, this family’s mortgage payment was 39% of their monthly gross income. 
• In 2008, the family’s mortgage payment went to 45% of their monthly gross income.
• In 2011, the family’s mortgage payment will go to about 51% of their monthly gross income.

In 2008, when our family contacted their loan officer about refinancing their home mortgage, they were unable to do so because the market value of their home had fallen to $300,000.  The family is now “upside down” and owes more than the value of their home. 

WHERE IS THE RELIEF FOR THE AMERICAN HOME OWNER WHO STRUGGLES TO MAKE THEIR PAYMENTS? The mortgage companies are stubbornly clinging to their belief that the American home owner will continue to pay for a home that is worth half what they are paying for.  Sooner or later, the American home owner will be bled dry and then another round of foreclosures and short sales will begin.  No family with children can continue to make mortgage payments of 45 to 51 percent of their gross monthly income. 

SOME EXPENSES ARE MANDATORY.  Federal taxes for a family in this income bracket are not high.  However, they have Social Security taxes of 7.6% a month.  Monthly payments for their share of health insurance is about $200 a month.  Groceries for a family of four is increasing every month.  Gasoline and maintenance and insurance on their vehicles is about $600 to $800 a month.  There is simply no money left in a family budget after making their house payment, if they have a budget.  Budgets don’t work when the expenses outstrip the income.  The family begins to make minimum payments on their credit cards and begins to go deeper in debt each and every month. 

This is a typical American home owner who purchased a home in 2005 and is headed for financial disaster. 

WHAT IS THE SOLUTION?  Until we have a national write-down of mortgage balances, the home owner will not survive.  The banks may, buy the home owners will not.  As with our hypothetical American family home owner above, folks will continue to go farther and farther in debt.  Real estate taxes are likely to increase as towns and cities feel the crunch from loss of property values and the concomitant loss in revenue. 

TRICKLE DOWN ISN’T HELPING THE AVERAGE AMERICAN FAMILY BECAUSE THE BANKS ARE NOT HELPING FAMILIES.  THEY ARE HELPING THEMSELVES and THEIR SHAREHOLDERS.  Those same shareholders who benifited from the stock value and dividends in 2004, 2005, 2006.  IMO, the focus on helping the banks survive has been wrongheaded from the beginning.  Those same banks benefited from the housing boom are now benefiting from tax payers and the tax payers are being left in the dust.

This has been the most wrong headed government program I’ve ever witnessed.  It’s easily worse than the farm bill, the transportation bill and other government give-aways. 

GOVERNMENT GIVE-AWAYS TO THE CONSUMER?  I seem to recall that there was a “stimulous” program some months ago?  I can’t recall the details, but for our family above, it would pay for their grocery bill for about a month or two.  The stimulous that put money in the hands of the American family was about $300 for a single person or about $600 for a family for about 120,000,000 households.

BAIL-OUT TO CITYGROUP FOR GUARANTEES AND CASH - $326,000,000,000.

WHAT’S WRONG WITH THIS PICTURE?