Odd Financial Situation I'm In

Folks-
It's hard for me to believe that it's been over a month since I've updated this blog. In that time I've been entering a diary over at The Daily Kos, mostly because most of those entries fit better there, but also because more people check out my entries there. I will, for now, continue to update my blog here, but I will also continue to evaluate my using this blog from time to time.

Now, here's my most recent entry. It's also probably my most personal one.
I’m going to do something I haven’t done before. I’m going to open up about my current financial situation. The main reason I’m going to open up here is because in all of my years, I find myself in a bizarre situation that I haven’t ever been told to expect.

Whenever I’ve committed thoughts to keyboard, I’ve always held back a little bit from my private life, which I understand includes ones financial life as well. I’ve not understood why this should be the case, since politicians and celebrities seem to have so little financial privacy, but I’ve held back in order to protect those around me from some… unknown, unseen, possibly legal liabilities.

So, with no further beating around the bush, here’s the background of my situation. Like many Real Estate Agents in the last few years, I got duped into taking one of those toxic loans out in order to buy a nice new home that I should have known I wouldn’t be able to afford once the loan recast. I can’t really remember the reasons why I would do something that seems so dumb in hindsight, but I’m betting the banks are thinking the exact same thing right now, only from the other side (“Why did it seem like such a good idea to loan money to people while making such a point to make sure we knew nothing about their finances?”)

So, about a year ago, under mounting financial debt and looking at a home value about 2/3 what we paid, we looked at our choices. We could file for bankruptcy, go through credit counseling, have the counselors tell the judge that we couldn’t pay the debt, have the court auction off everything, etc., or try something else. The something else that seemed most honorable to us was to pay off our credit cards, which in hindsight seems like the best thing we could do (Citibank recently increased their lowest credit card interest rate to over 20%!) while negotiating with our mortgage company in order to see if we could change the terms of our mortgage.

I’m going to do something I really didn’t want to do at this point: Name the bank. I think you’ll understand why later. To the credit of Indymac Federal Bank, even while they were going through all of their problems, they kept working with us. At least they did until last September. They asked us to get our financial information together for them and call them back with the information. I got the information, just as they asked, and called them back at the number they gave me, and ended up leaving them a voice-mail message. Next day, I left them another one. I waited a few days, called them back, and left another voice mail message. Then I did the same the next week. The week after that, I did the same thing. No replies came. No calls, no letters, no emails, no faxes, nothing. I called again the next week. I kept this up until around the middle of October, figuring they were backlogged, and would get back to me when they had the time.

Then came mid December. I got a letter from Indymac telling me I owed them roughly half of our joint household income by January 19th, or they would start foreclosure proceedings. I called them back at the number provided…and left them a voice mail message. And another one. Same thing the next week.

I figured it was time to up-the-ante, so I contacted my Congresswoman’s office and left a voice mail for her assistant who handles these things…and got no response.

So last week, we contacted a company that supposedly will negotiate with our mortgage company for an up-front fee, and I was going to go with them until I went to the California Attorney General’s webpage and found out that it was illegal for them to take a fee from us until after they had provided the services. Yesterday I called Indymac and after leaving my voice mail message in disgust, I called the Consumer Credit Counseling Service in my area, as suggested by the AG’s office, and was surprised to hear only confusion on their end. They suggested that I try to find a branch of Indymac and go in and talk to them, even though there are no branches in my area (in fact, the nearest branch is an 8 hour drive away). That was their best suggestion after a roughly 20 second phone call. No service from them was suggested or provided to this consumer regarding credit or counseling, so I’d say they failed completely.

To me, this is a bizarre situation. In my experience, and in all of the classes I’ve taken from high-school on, I’ve been told that the person who is owed money is the one that constantly tries to contact the person who owes them money. This is completely the opposite of my current situation. I’ve been calling them for MONTHS, and I haven’t even gotten any kind of confirmation that I’ve contacted them. I feel like I’m hounding them. I imagine them cowering in some room someplace, saying “Don’t answer the door, that guy owes me money!” It’s nuts. We hear all the time that if you’re in financial trouble that the worst thing to do is to stop talking to your lenders. That’s not my problem. They have stopped talking to me, even before we could talk about a possible solution! Is this the Indymac Federal Bank who was supposed to be a model of working things out with their customers, as was reported just a few months ago?

I hate to say it, but the real feeling I have is that this problem is so large for these people that they actually have no idea how to tackle it. Indymac can’t figure out what they can do, Congress can’t figure out what they should do, and the CCCS doesn’t know who they are, what day it is, or remember how they got to work (“What’s that ringing thing? What happens if I pick this thing up?”) The problem of foreclosures has gotten so huge that they are unable to figure a way out, and have decided to simply shut-down all thought and hope the automatic systems take care of the problem, or that by some miracle, it simply vanishes; the nightmare over with the dawning of a beautiful new day. Unfortunately, the dawning morning is the dream, and the financial crisis is real.

My family and I would like to keep the house, but we have completely lost our investment in it. The question is: “Should I keep plunging money into an investment that is currently, and probably always will have a negative return on my investment?” The businessman in me says no. Any further investment is money lost, unless Indymac can reduce our payments to a reasonable level. No offense intended, but that’s the right business decision. However, this is about family. If I could work out something else, I would, but it’s going to require Indymac to at least return my phone calls. The question for them is: “Do you want to definitely lose 2/3 of your investment, or find some way to lose ¼ or less (or possibly nothing, but no more than 2/3)?” Their current actions say they would rather definitely lose big than risk losing small. They know where I live and have all of my contact phone numbers.

I would love to hear from other people. Do you have any suggestions on what to do next? Are you in or have you been in a similar situation? Do you work at Indymac and know what is happening? I’m completely at a loss, and for once in my life, I have no idea what to do next.

The Current Financial Situation, and Some Solutions

By Ed Smallwood

Yesterday I was watching CNN. Connecticut Democratic Senator Chris Dodd was being interviewed, I can’t remember who it was that was asking the questions. What stuck out in the interview was what he said about a closed-door briefing the Senate got from Federal Reserve Chairman Ben Bernanke. He wouldn’t comment on the exact content, after all it wouldn’t be terribly useful to keep the information in a closed-door briefing if it was all going to become public immediately afterward. What Senator Dodd said was that after Mr. Bernanke was done talking, there was stunned silence for 10-15 seconds in the room.

That’s significant. It’s also very frightening, either way you look at it.
I have known for some time that things were going very wrong with the economy. I remember an interview last March with Paul Krugman in Fortune magazine where he said that he thought we would hit 6-7 Trillion Dollars in capital losses in the housing industry this year, a 25% reduction in equity throughout the United States. That is what we are just beginning to see right now. Congress is talking about an 800 Billion Dollar bailout. You can see that what Congress is talking about is roughly an order of magnitude too small to cover what Paul Krugman was talking about. In short, 88% of the losses aren’t being addressed by Congress.

Now, we also have to take into account that the International Monetary Fund is estimating our GDP at roughly 13 Trillion Dollars. The losses we are talking about are more than half of the Gross Domestic Product of the entire United States. Nobody alive has ever faced a financial disaster of this magnitude.

Is that what Chairman Ben Bernanke was telling the Senators in that closed-door briefing? Numbers so large that it stunned veteran Senators into silence? I think that’s exactly what happened.

Here’s the real problem: The simple answer to this problem was to avoid deregulating the banking industry in the first place. Don’t let this debacle happen. Unfortunately several years ago the “Regulation is Bad for the Economy” branch of the Republican party got it’s way, with Senator John McCain cheering it on. The easy and simple answers to this problem are all gone now. There is no choice but to see our economy slide downward. It’s simply too late to prevent that.

So, what do we do now?

We’re going to have to bail out Wall Street. We don’t have a choice about this. That’s what Congress is doing to some extent now. The problem with how they are doing it is that they are diluting the shares that investors have by taking majority stakes of the companies they are bailing out and putting it under Government control. They are allowing the investors a chance to keep some of the value, but not most of it. This is unlikely to work in the long term. People’s retirement savings are going to suffer, even though it isn’t as much as they could. In short, the government is bailing out the executives of the companies more than the investors.

The landscape for homeowners is even bleaker. Nothing whatsoever has been done to address their concerns. Foreclosures are happening at an even greater pace than before. More properties are going “upside down” in value than they were before, and the Santa Clara County Association of REALTORS is estimating that this will be the case until at least 2010. Some estimates I have been reading put it at 2012 or later.

Now, with it harder than ever to declare bankruptcy (thank you Republicans,) and savings evaporating, the backbone of the American Economy, the Consumer, has almost no money to buy anything. We can see this through the fact that spending is decreasing while savings are simultaneously decreasing. Until something is done to address the concerns of the average person on the street, the economy can do nothing but spiral downward at an ever increasing rate.

This is where we stand now.

What are we going to have to do?

We are going to have to make peace with the fact that our economy is going to crash first of all. We can’t prevent it. Next, we have to do what we can to prevent it from crashing so bad that it can’t recover. This is a real possibility. There is nothing magical about the economy of the United States. Other countries in a similar state that did nothing saw their economies die outright. Most of them are third-world countries now, or failed states. That’s the danger.

We have to bring back the regulations that prevented this problem from happening decades ago. This is an absolute must. Doing any less than this means that nobody will trust banks enough to loan them money to make loans. That’s how the system works. Without that key part the system collapses and doesn’t recover.

We have to protect the money of the average person as much as possible right now. We can’t expect someone to pay back a bad mortgage at an ever increasing rate for the rest of their lives, tying up their spending power in servicing bad debt just because some company got greedy. If these homeowners decide to allow the banks to foreclose, they will find it harder to buy another home later. The inventory of foreclosed homes will increase, because there will be fewer qualified buyers (you can’t have a foreclosure in at least the last 2 years to qualify for a home loan). This is dangerous in several ways. First, unoccupied homes bring down property values. Second, they are fire dangers. Houses are fuel. If you have enough of them you can end up with a wildfire in the middle of a city. Oakland can tell you why this is bad.

This means we have to do at least one of two things, probably both: we will have to forgive at least part of the bad debt to keep people in their homes, or we will have to allow people with foreclosures on their record to get credit anyway. The former is preferable, and while the FHA is doing this to a small extent, the program needs to be massively expanded. The latter solution will probably have to be put into effect as well. Why should we do this? Why not let the people who took out these loans just hang? If we allow our spite to get ahead of our pity (or self interest), making sure these people pay back their loans, our economy suffers from having too little money left over to buy the things that we sell. All of us suffer if we make any one segment of the population suffer too much.

In addition, we really need to start working on our infrastructure, and I don’t mean just roads, bridges, ports, electricity grid, and communications grid. I mean the workforce as well. For most of my life we have seen a growing battle against the workforce. McCain’t has been talking a big game over how strong our workforce is, but the reality is he has actively been working on weakening it.

The big secret that allows the American economy to be so strong has been our educational system. Public education was invented here. We have expanded it ever sense the Brotherhood of Friends (often referred to as “The Quakers”) introduced the concept. All of my life the Republican Party has been trying to weaken it. Vouchers. Increasing tuition in Universities. Destruction of vocational schools. Even “No Child Left Behind” which is decreasing Federal funding to elementary schools. Recently when Democrats tried to bring back full tuition for all Iraq War Veterans, McCain’t voted against it. He said it would reduce the incentive for our Servicepeople to reenlist. This attitude is going to prevent our economy from recovering.

We need a top of the line communications grid to allow educated people to build products using electricity that will be shipped to the consumer through working ports and over working roads and bridges. If any one of those things isn’t working, our economy dies and stays that way.

Why wouldn’t our economy recover? Really, why would it? People with money are under no obligation to invest it in our country. If our economy is wrecked, they would be dumb to put good money after bad. They’ll invest it elsewhere, in economies that are booming. China is a good example. With no money being invested in our country, no educated people to design new products or services, a 20th century communications grid expected to help them design them, no energy to build them, and deteriorating ports, roads, and bridges to ship them our economy will stay sunk.

What we really need to get us through this crisis is a leader that believes in our future, not one that is trying to bring us back to a failed past, namely the “Roaring ‘20s.” Let’s all make sure we work toward our country’s future.

Links:

Fortune Magazine interview with Paul Krugman: March 17th, 2008 by Jia Lynn Yang http://money.cnn.com/2008/03/14/news/economy/krugman_subprime.fortune/index.htm

Mass Commuter Migration

By Ed Smallwood

Right now we are all glued to our sets, wondering how the coming elections are going to go. Will Hillary somehow manage to get the Democratic nomination even though she’s behind? Will McCain manage to get more than 75% of his party to vote for him, even though his only competitor, Ron Paul, is getting less than 8% of the vote, and Huckabee is still pulling about 12% even though he’s no longer in the race?

I’m going to take a much longer term look at what is going to be happening. Much will happen regardless of who is President. The main difference the President and other politicians can make in the next few years will be in how traumatic these changes are.

I’m sure by now that you are aware that we have been in a significant Real Estate downturn for the last year or two. One analyst has said that he expects U.S. home values to decrease by as much as $7 Billion in the next 18 months. Some of the hardest hit areas in the country are in the state of California, specifically Stockton and Modesto. Home foreclosures could hit as much as two-thirds of the properties in Stockton. 90% of the homes for sale in Los Angeles are short-sales—being sold for less than is owned on the property.

Let me throw in another piece of information that may at first seem unrelated, or perhaps related in another way. Goldman Sachs released a study a few days ago that predicted that oil will be priced at $200 per barrel in the next two years. This sent prices for oil up to $123 dollars on Wednesday. We should expect to be paying $7, $8, or even $10 per gallon in 2010 according to this study.

I’m going to be mentioning Modesto a lot in this essay. I live in San Jose, which is the self-proclaimed Heart of Silicon Valley. Modesto, about 90 miles away, has been a bedroom community for Silicon Valley for a couple of decades now. I have known people who have commuted between Modesto and Scotts Valley, 110 miles apart, just because they could afford a home in Modesto. Keep in mind that in this part of California, a 110 mile commute takes about 3 hours each way, more in rush hour.

Since I was a child Modesto had filled two roles—It was the bedroom community for Silicon Valley, and it was an agricultural community. The population of Modesto has grown from 194,506 in 1970 to 446,997 in 2000. In short, it grew about 230% in that time. I’m sure if we had more recent information you would find that Modesto had grown even more between 2000 and 2005.

In the 20^th Century, the single biggest change in our society was brought about by the introduction of the relatively inexpensive automobile. Fueled by cheap gas, it allowed its owner to go almost anywhere they wished to go (within reason), pretty much anytime they wished to go. People were no longer restricted by how far they could walk, or what time the train was leaving. In addition, a car could be much faster than virtually any previous form of travel.

This resulted in many changes to our society. The one I am most interested in as far as this essay is concerned is our living habits. Before the car, you lived close to where you worked. Either you worked on the farm where you lived, or you lived in the town or city where you worked. You either walked to your worksite, or you rode a horse or took a train of some kind the short distance to your workplace. The idea of living in one town and working in another was unheard of, even for the rich. It was simply too expensive and too time consuming to do this.

With the introduction of the Model T by Henry Ford’s car company, this all changed. It started to be possible to live further from your workplace and commute. Suburbs started to form. This trend accelerated in the post World War II era, and continued on until very recently.

Some of you may be asking why I would talk about this trend in the past tense. The reason is because I believe it is over. The new trend will be the reversal of the past 80 years of suburbanization.

The popping of the Real-Estate Bubble about 2 years ago is simply the first shot. People ran up the cost of homes they could not afford, and when they could no longer pay back the money, the banks started to foreclose on the assumption that they could sell these properties to someone else and make their money back. In some circumstances they are tragically wrong. The smart banks are going to negotiate with the borrowers and write-off their losses. The stupid banks are going to foreclose on the assumption they will find buyers, and then find themselves stuck with many homes that they will never be able to sell.

You may be thinking that I must be wrong. People have to live someplace, right? Those homes will be sold to someone at some price, even if it is a loss, and probably most will be sold eventually for more than they did originally, right?

Not when gasoline is $8 per gallon. We are running out of oil. No amount of hope or denial is going to change that. Gasoline prices are going to ratchet up from this point out. There will be times when it is a bit cheaper, but the trend is going to be. This is unavoidable. This will have a direct effect on where we choose to live.

We should not be asking ourselves what we can do to bring down the cost of gasoline. We need to be asking ourselves what we can do to bring down transportation costs. Hybrid and electric cars may not be a solution for many people. In the near future it may cost as much to fuel up a Prius as it currently costs to fuel up a large SUV. As demand for rechargeable batteries increases, the cost is likely to increase as well. This will increase the cost of hybrid and electric vehicles. The most obvious way of bringing down the costs of commuting is not to commute very far. Living close to where you work is an easy way spending less of your paycheck on transportation.

This is an ominous thing for cities like Modesto. Modesto has very little industry outside of building homes and shrinking agriculture. Most of the jobs there are services provided to people who live there. Over time, the combined cost of commuting plus the smaller mortgage payment in the bedroom city will begin to approach, and eventually surpass the cost of the larger mortgage payment closer to the workplace. For example, a person commuting in a Honda Accord, getting 31MPG Highway commuting between Modesto and San Jose is going to be paying $465 a month for gas at $4 a gallon. When the cost hits $8 a gallon, it will go up to $930. Commuting in a Jeep Grand Cherokee getting 20 MPG brings those costs to $720 and $1440 respectively. The amount that you are paying in gas at $8 per gallon can make up the difference in your monthly mortgage payment between a $300,000 loan and a $455,000 loan for the Honda driver, or a $540,000 loan for that Jeep driver. That makes up for the difference right now between living in Modesto and San Jose, easy.

Cities that are closer to Silicon Valley than Modesto will face this issue a little later, but not a lot. Tracy and Salinas at about 60 miles away from San Jose and Gilroy at about 30 miles away may have a little bit more time than Modesto, but they will have to face a declining population of commuters eventually.

The big question for leadership in these areas is how they will face this issue. You can ignore it and allow significant parts of a city to become a ghost town. You can look to create another industry. This could involve adding Indian Gaming Casinos, and living with a greater crime rate, or adding an amusement park, and living with more noise. It could involve something else entirely. It could involve the city declaring imminent domain on abandoned tracts, bulldozing the properties, and putting in parks to improve property values nearby. You could even allow people to buy vacant properties next to their own and combine the lots, and build a nicer home on the combined property. This might be a good idea in certain areas of a city. Some of these combined properties might even be returned to agriculture as large gardens or small farms.

Regardless, the trend is obvious: With expensive gas, people will choose to live close to their job. Doing otherwise will not be an option for most people. Political leaders will have to deal with this sooner or later. Smart ones will deal with it sooner. Lesser ones will deny the problem until the trend is obvious to everyone, and difficult to deal with because tax revenues will already be dropping. Stupid ones will say having abandoned properties in a city is not a problem, and hopefully, will be voted out.

Bringing these facts to the attention of local politicians will help. People living in these areas ignore the migration of commuters toward their job city at their own peril.

Sources:

Modesto’s population:

http://recenter.tamu.edu/data/popmd/pm5170.htm