Sep. 28, 2006 - Render unto VISA and to God

The Detroit News ran a great article, The Tithe That Binds, by Brian O'Connor on September 23 that highlights what appears to be a monumental financial dilemma for some Christians. 

The dilemma?

A major oversight in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which went into effect last October, does not make any provision for people to tithe or make charitable contributions under a Chapter 7 bankruptcy or Chapter 13 repayment plan.

In other words, you must pay your creditors first and God second, if there's anything leftover.  That's a problem because most Christians understand that tithing represents what we pay to God first.  As one pastor put it, "Tithers do not see it as discretionary.  They see it as something their faith calls for."

One Woman's Plight

O'Conner's story focuses on the plight of a local woman who has faithfully tithed 10% of her gross income for the last 25 years, plus she gives an extra 3% toward missions.  A few years ago she incurred some debts to help a family member who has now passed away -- leaving her with all the bills which she can't afford to repay.  (A dumb move to begin with, however admirable, but that's a topic for another day.)  So this nice lady is contemplating bankruptcy but she doesn't want to give up her tithing.

Her proposal:  Pay $100/month to her creditors for 5 years to cover a small portion of her outstanding debts.  The rest is presumably forgiven.  In the meantime, she can tithe $300/month to her church over that same 5 years.  God gets His portion while the creditors get the shaft.  (Gee, what a great witness to unbelievers!)  But only if the court will let her.

This story got me to thinking about the right thing to do in this woman's situation.

Is her proposal really fair?  Does this glorify God and bring honor to His name?  Is this the Christian thing to do?  What does the Bible say about it?

No Dilemma Here

After looking into it, I realized there is no dilemma.  The correct thing for this woman to do, indeed for any Christian to do, is to tithe and fully repay all creditors.  No matter how long it takes.  No matter how much it hurts.

Psalm 37:21 states,

"The wicked borrows and does not pay back, but the righteous is gracious and gives."

You cannot cloak yourself in the righteousness of tithing while simultaneously stiffing your creditors.  God's word says that not only are the righteous gracious in their giving, but they are also faithful to repay whatever they borrow.

Failure to do either one is wickedness.

The woman in this story should be just as concerned about repaying her creditors as she is about giving to God.  They are equal tasks.

Eventually Congress will probably fix this oversight in the bankruptcy law so that tithing and charitable giving are allowed.  That will remove the legal dilemma but not the moral one.

The Bible is clear.  A Christian should tithe and repay all debts.  That is what honors God and brings glory to his name.

Aug. 10, 2006 - Mortgage Pains

Starting in July 2005, I wrote a number of posts about the problems facing families with "creative" or "exotic" mortgages (see Playing with Mortgage Fire, Exotic Mortgages and Hot Real Estate, Catching Up, and When Housing Booms Go Bust).  I also took on the mortgage companies that have encouraged and benefited from consumers' penchants for more house than they could afford.  The result is best described by what happened to Lender's Slave.

Here's an update.

Today's Wall Street Journal (subscription only) provides insights on the current situation.  The story is by Ruth Simon on pages D1 and D3, "Homeowners Start to Feel The Pain of Rising Rates."

The article highlights several individuals and what has happened to them over the past few years.  The stories are all similar and go something like this:

Interest rates were low a few years ago and we could afford the payments.  Now that rates have increased substantially we can't afford the payments.  So we're behind on paying the bills.  To make matters worse, we can't sell our house for a decent price because everyone else is trying to sell too and there aren't many buyers.  Nobody explained that this could happen when we signed the loan papers.  Woe to us!

It's always someone else's fault.

The reality is that most of these folks knew they were getting into an unconventional loan arrangement (option ARMs, interest-only, piggyback, etc.) but they didn't want anyone to spoil their dream of a newer/bigger/better home.  All they cared about was whether they could afford the payment right now.  Forget about 3 years down the road.  That's eternity.

I can just imagine the trial lawyers gearing up for a field day in court.

I'm not excusing the lenders.  They probably didn't go too far out of their way to warn their clients about the downside risks of these exotic loan arrangements.  (Can't  jeopardize the closing with any negative talk!)

Mortgage mills don't care about the future.  They only care about the immediate transaction.  Their idea of a long-term relationship is flipping you in and out of mortgages as often as possible, especially when interest rates move.

The key is you.

The moral of the story is that we all must take responsibility for our financial decisions.  No one made the folks in this article sign on the dotted line.  They willingly entered into a transaction and most likely understood the risks, even if they're unwilling to admit it now.  (Who wants to admit they took a gamble and lost or acted foolishly?)  If they didn't understand what they were getting into, then they should have asked more questions or done their homework.  It's not like there isn't any information out there about this stuff.

Take responsibility for your financial decisions.  Don't pass the buck off to someone else or you'll find someone else passing your bucks around!

Dec. 12, 2005 - Mortgage Mayhem

Auto industry woes, high unemployment, steep business taxes, and the Detroit Lions are not the only curses we have to deal with in Michigan.

We must also endure the unending pitches from the "mortgage experts" at Rock Financial (suggested tag line "a quickie loan company") and other lenders like American Equity Mortgage (suggested tag line "your home will belong to us") and Patriot Financial USA (suggested tag line "you don't even need a home to get a loan").

Talk about a tough place to live!

Blaring over the radio are Rock Financial's incessant commercials extolling the virtues of their "exclusive" mortgage programs to satisfy your every need.  After all, they are the "mortgage experts" and "Michigan's largest" lender. 

How can you go wrong with this poster child of the refi boom?

The key mistake in dealing with a mortgage mill like Rock Financial is believing that mortgage advice is neutral and that the mortgage company has your best interests at heart.  Don't bank on it.

Mortgage mills have one basic goal and that is to keep you on a continual cycle of refinancing your mortgage over and over and over.  That's because mortgage mills are transaction-based businesses that are geared toward making a lot of money on each closing.  They don't care about you as much as they do about the transaction.  Their "advice" about how to handle your mortgage is driven by their dependence on creating transactions.

At times it can lead to some idiotic recommendations.

For example, when interest rates were at their lowest point in several generations (June 2003), these folks were extolling the virtues of adjustable rate mortgages (ARMs) for the masses rather than locking in great long-term fixed rate deals.  Thus, the mortgage industry saw unprecedented growth in ARMs.

(Note, there were legitimate situations and borrowers for whom ARMs did make sense in that time period, but not to the extent they were pushed upon the public.  Instead, ARMs became the loan du jour for people who could not otherwise afford the steep payments of a more sensible mortgage product.)

The problem, of course, is that when interest rates are low they have only one direction to go -- up!  (Gee, what a surprise.)  Guess who's stuck as those interest rates rise?  The hapless borrowers watching their payments go up.  Or maybe not.

Fear not borrowers, the mortgage experts are coming to the rescue -- again!

Now that short-term interest rates have risen dramatically, and long-term rates to a lesser extent, the mortgage experts are falling all over themselves to recommend converting those ARMs that were such a great deal 6 months ago to fixed rate loans "before it's too late."  More transactions.  Cha-ching!  

They are yo-yoing borrowers up and down by making recommendations that run counter to sound financial decision-making.

Call me old-fashioned, but I thought the ideal strategy with any investment is to buy low and sell high.  The parallel on the borrowing side is to lock in long-term fixed rates when they are low (and expected to rise) or go with short-term floating rates when they are high (and expected to fall).

Oh, silly me, I couldn't run a very good mortgage mill with such advice.

The good news is there are many solid lenders and dedicated loan officers out there who do take excellent care of their clients.  However, you generally won't find them drowning us with their hype over the radio or TV, blabbing on their own talk shows, affixing their names to large commercial properties, or buying professional sports teams.  It takes a lot of money to burn to do those things and that money comes from their customers' pockets.  Better to keep that money in yours and out of theirs. 

Instead, you'll find good mortgage lenders and loan officers quietly going about their business taking care of clients.

Aug. 17, 2005 - When Housing Booms Go Bust

Once again the Wall Street Journal (subscription only) is giving considerable press to the housing/mortgage boom and the potential looming problems when it goes bust.

Today's edition has three major stories all starting on page B1:  How Will Home Boom End?, Lessons From Busts Gone By, and Near Nation's Capital A Hot Market Cools.

Here's a synopsis for you that highlights some of the same issues I've raised in prior posts (see The Lender's Slave, Playing With Mortgage Fire, and Exotic Mortgages & Hot Real Estate).

First the good news.

The main point is that housing booms don't normally end with sudden meltdowns like the stock market sometimes does.  Instead, it is usually a drawn out process over many months or even years.  The reason is that it takes time to sell a house whereas stocks can be sold in seconds.

Now the bad news.

People who find themselves in these circumstances get hurt the most because they:

• Are forced sell at a bad time due to a job loss or transfer.
• Have little equity in their homes and huge mortgages.
• Are counting on large gains in home equity to fund their retirement.

I would add that an underlying characteristic is that such people have most likely stretched themselves beyond reasonable borrowing limits just to get into their homes.  Under normal circumstances they could not afford their homes but the mortgage industry has enabled them with exotic mortgage products and lower credit standards.  This is a dangerous mix.

No on knows if, when, or how the recent U.S. housing boom will end.  Housing prices may just flatten out rather than suffer serious declines.  In that case it may not be such a big deal.  But there doesn't need to be a dramatic end to the housing boom for the above variables to work against a family.  On an individual level many things can go wrong when a person is swimming in debt.  

The key is not to put your family in that situation in the first place.

Aug. 1, 2005 - Catching Up

Sorry to leave such a gap in my blog but I've been off taking care of clients and tending to family responsibilities -- like a broken air conditioner on the warmest weekend of the summer!  Now that the a/c is back on it's time to tend to my blog.

Making Me Look Smart

You'd almost think the Wall Street Journal has been reading my blog about the inappropriate and dangerous uses of the latest exotic home mortgage products (see Playing with Mortgage Fire from July 11 and Exotic Mortgages & Hot Real Estate from July 13).

The WSJ featured three prominent articles on this topic in the last two weeks.  Unfortunately, these articles are only available by subscription so you'll have to make do with a few quotes and my brief comments about each.

Easy Money: A Mortage Salesman's Pitch

July 20 - Front Page and Page A6

This first article follows the pursuits of a successful loan officer.

"...offering alluring and controversial mortgages that require unusually slim payments for a few years, before bigger sums fall due. Some customers use these loans to borrow as much as seven times their annual income -- a staggering jump from the two-times-annual-income level that was the rule of thumb when the 30-year fixed-rate mortgage was the norm."

 

"As real estate mania intensifies, the mortgage industry keeps making it easier to borrow. 'Low documentation' loans are catching on, including ones where lenders simply take borrowers' word about their income and don't ask for pay stubs...In the most common twist, lenders aren't requiring even token efforts to repay principal in the early years of a mortgage.  Interest-only payments suffice.  In some cases, borrowers can even pay less that that, allowing interest to pile up and be repaid later."

I thought I had painted a scary scenario in my earlier posts.  Imagine a mortgage where you owe more each month after your payment is made!

As I said before, these mortgage tools can be effective for the right person in the right circumstances.  Instead, they are primarily used to fuel lavish lifestyles that can't be supported through current income.  In the remaining cases they are misused by people just to scrape by and get into a house -- putting off the day of reckoning for a few years.  That day will come and it won't be pretty.

Mortgage Lenders Loosen Standards

July 26 - Page D1 and D2

Just to confirm the market trends, here is a sample from this article.  Does the word "bubble" mean anything to anyone out there?  (Think tech stocks, late 1990's.)

"Novel loan products have helped fuel much of the run-up [in housing prices], which continues to defy expectations."

 

"But lenders are making it still easier for borrowers to qualify for a loan...lowering the credit scores needed to qualify for certain loans, increasing the debt loads borrowers can carry, and easing the way for borrowers to get loans while providing little documentation."

"The loosening of standards also shows up as products that were initially geared toward the most sophisticated borrowers [i.e., the right person in the right circumstances] -- such as option ARMs and interest-only loans -- have become more mainstream."

"...interest-only mortgages, which were first aimed at wealthy borrowers, are increasingly being offered to people with poor credit...[and] accounted for 30% of the subprime loans in April."

If this is a bubble, my prayer is that none of you reading this gets caught when it bursts.  Even if it isn't a bubble, there is enormous danger in stretching beyond your means, like Lender's Slave did, and suddenly finding yourself in serious financial trouble.

Investors Fret Mortgage Balloons Will Burst

July 27 - Page C1 and C4

This article looks at the flip-side of the picture.  What is the situation for those who make loans or invest in the loan companies offering exotic ARMs, interest-only, or less than interest only mortgages?  It could get ugly.

Smoke and mirrors.  Lenders get to book as profit the full amount owed by the borrower, not the minumum payment that is actually made each month.  Hard to believe but true.  The lender gets to show a profit on money that it hasn't even collected yet!  This makes their income look great now.  In addition, the unpaid interest is added onto the lender's loan portfolio and thus gives the appearance of a growing loan portfolio.

Here's the problem.  These same lenders have been lowering their standards for new loans (lower credit scores, no documentation of income, etc.).  When people can't live up to their obligations and the loans begin to default, then the lenders and their investors get crushed too.

We'll see how it all pans out.

What's Ahead for This Blog

That's all for mortgages right now.  I'm ready to move on to other topics in the days ahead.  In the coming weeks I will be posting a series of reviews on the book Rich Dad Poor Dad.  It is one of the most popular financial books around but is also one of the least understood, especially in Christian circles.  You will not want to miss it.

Jul. 13, 2005 - Exotic Mortgages & Hot Real Estate

The perfect storm is brewing on the horizon -- clouds are forming, lightening flashing, thunder booming, wind whirling.  Is it going to be a twister that wipes you out or a summer thunderstorm that only brings much-needed rain?  You determine the outcome.

What is that perfect storm?  

• Mortgage rates remain historically very low but are beginning to rise, so the mortgage industry has responded with innovative mortgage products.

• Real estate remains very hot (for now) in most markets with home prices increasing an average of 12.5% nationally in just the last year.

When exotic mortgages meet a hot real estate market, someone's eventually going to get sucked into a tornado of spiraling debt.  Sow the wind and reap the whirlwind.  Don't let it be you.

It doesn't take an irresponsible fool acting recklessly to get into trouble.  Very smart, well-meaning people can find themselves in a pickle too.  Take a peek.

Assume we have a couple looking to "move up" to a larger home.  They have $20,000 for a down-payment after selling their current "starter" home.  They've determined that they can afford an $1,100 mortgage payment at the absolute maximum (principal & interest).  At the going rate of 6.25%, that means the maximum principal amount they can borrow is $179,000 with a 30-year fixed mortgage.  So far so good.  They set off to find their new home.

Reality quickly sets in.

The hot real estate market that helped them capture equity gains in their last home has also priced many other homes out of their range -- by about $25,000 more than they can afford.  Now things don't look so rosy.

"Not to worry," says the loan officer.  "We've got a new loan program with a great low rate that remains fixed at 5.00% for the first five years and then adjusts in year six and every year thereafter."

With those terms, the couple can afford a mortgage of $205,000 with a monthly payment of exactly $1,100.  What a miracle!  Sure, things could get dicey in five years but by then the couple may move again or perhaps the husband will get a promotion or better job.  Five years is a long way off.  They want a bigger home now!

Fast forward to 2010.

The family is still in the house and not planning to move.  The husband did get a promotion but the pay increase wasn't all that substantial.  Things are looking good.  The only problem is that their mortgage interest rate is about to adjust to 8.00% with a new payment of $1,453.  That stretches them beyond their limit.  They can't afford the payment any longer.

Here's where trouble begins.

In order to pay the extra $353 toward the mortgage each month, the family starts to use other debt to cover their living expenses.  The tool of choice is usually credit cards.  After awhile the debts begin to pile up -- an unexpected car repair here, new furnace there, and before you know it they are in a tailspin.  The next step might be a home equity loan or borrowing from a retirement plan.  Eventually the house of cards collapses.  Putting off today's problems until tomorrow never works when it comes to debt.  It happens all the time.  Just ask Lender's Slave.

But couldn't they just move -- maybe downsize a little bit?  Sure.  But what if housing prices have fallen slightly -- say a modest 5%?

That means their $225,000 house ($20,000 down + $205,000 loan) now sells for $213,750.  The principal balance on their mortgage is $188,250, meaning at best they will net $25,500 from their home.  Factor in realtor commissions of 6% and that subtracts $12,825 leaving them with a net of $12,675.  It's never good to go backwards but at least they can escape with something!

They will still have the problem of finding somewhere to live and, if they buy another home, of having a high interest rate mortgage.

It could be worse.

Home prices might fall 10%.  The husband doesn't get a promotion but instead loses his job or is laid off temporarily.  Or, maybe he suffers a prolonged disability.  These things happen to good people all the time.  And then the wheels come off the cart.

Here are a few lessons to consider:

First, using an exotic mortgage product to live beyond your means is inappropriate.  The couple in my example couldn't afford the home they purchased.  That's why they got into trouble.  The mortgage gave them a false sense of well-being.

 

Second, falling real estate prices tend to burn people at critical moments in life -- losing a job, moving for another job, disability, debt problems, etc.  A forced sale at the wrong time can be devastating.  Don't assume real estate prices will keep rising forever or even hold their current values.  You may not necessarily get what you think your home is worth when it's time to sell.

As Solomon said in Proverbs 22:3, "The prudent sees the evil and hides himself, but the naive go on, and are punished for it."  Think ahead about realistic downside scenarios with any mortgage you consider.  Are you prepared to handle the consequences? 

Be prudent and avoid the perfect storm.

Jul. 11, 2005 - Playing with Mortgage Fire

I started to notice a change in the ads for mortgages back in March and April.  Long-term interest rates were rising rapidly and so the mortgage pitch was for adjustable rate mortgages (ARMs) and "interest-only" mortgages.

Then a funny thing happened.

By the end of May, long-term interest rates had inexplicably fallen to their lowest levels in the last 15 months.  Suddenly the mortgage ads changed to extoll the virtues of locking in these great long-term rates with 15- and 30-year fixed rate mortgages.

The mortgage industry today is a vast marketing machine that churns out products to meet ever-changing market conditions and consumer tastes.  If you haven't been paying attention over the last 10 years, there has been a radical transformation in home financing.  Every conceivable type of mortgage is now available to meet any situation or need.

• Good credit, bad credit, no credit.
• Fixed rate, adjustable rate, flexible payments.
• 1, 3, 5, 7, 10, 15, 20, 25, 30, 40 year adjustable or fixed rate terms.
• Flexible payments, teaser introductory rates, interest-only payments.

They've got it all.  But what does this mean to the average consumer?  Trouble if you're not careful.

Each of these new mortgage products can be a useful tool for the right family in the right situation.  But a poor choice of loans can spell disaster.

For example, the Mortgage Bankers Association recently issued a warning that many of these new "nontraditional" mortgage products (especially ARMs and interest-only loans) could lead to high foreclosure and delinquency rates in the future.

Why?

Instead of using these mortgage tools intelligently (right family, right situation), people use the increased flexibility and lower payments to live beyond their means and buy "more house" to keep up socially or to fulfill their dreams.

Big mistake as the family in my Lender's Slave post found out.  They're not alone.  Many others have felt the pinch of ill-advised mortgage choices.

Of course the mortgage companies are only too happy to accomodate the demand.  Just remember that when you hear all those commercials for exotic financing options.  The mortgage industry will pitch to you whatever will help them close more loans, whether it makes sense for you or not.  After the closing, the burden is all on your shoulders.

Generally speaking, you will be much further ahead in the long run by sticking with a house that you can afford and by financing it conservatively.  If you find yourself gravitating toward risky mortgage products just to afford the payment, then you are going too far.

Not everyone who plays with fire gets burned, but it's not worth the risk when you're playing with mortgage fire.  The consequences are too steep.  Just ask Lender's Slave.