Castles in the Sand

I have always loved making sand castles on the beach. From my earliest memories, I remember making sand droplet castles with my Mom and Dad and brother. My Dad would always build these lovely castles with deep moats that would fill with water. But being made of sand on a beach with a strong tide is a very precarious predicament for a castle. We would always search for yesterday’s castles the next morning and there would be hardly a trace. I guess if you really want a lasting castle you need a better location, a stronger foundation… and it would help if it wasn’t made of sand.

I know it won’t come as a surprise to you when I say that we are facing an enormous problem in the mortgage industry in America. Houses are going into foreclosure at an astronomical rate. Loans are becoming exponentially more difficult to secure than they have been in the past. Financial titans Fannie Mae and Freddie Mac faced bankruptcy as a result of all of the bad loans that they were holding… until the government stepped in and basically did a hostile takeover of Fannie Mae and Freddie Mac. However, in that process the government took over an 80% ownership of Fannie Mae and Freddie Mac stocks. And it is what happened to the previous owners of those stocks that is currently driving the banking crisis.

You see, banks and investment firms from all over the world were heavily invested in Fannie Mae and Freddie Mac. So when the US government forcefully took over 80% of the shares, a shareholder who had owned 5% of the entire company now only owned 5% of 20% of the company. So if your 5% was worth 20 billion dollars, it is now only worth about 4 billion dollars. That is a lot of money lost friends! And that is why banks all over this nation are failing and an investment giant like Lehman brothers has gone bankrupt. And it is also why the government is now asking for 700 billion dollars to try to stem the hemorrhaging of the banking industry. This is a very simplistic summary of what is happening in the fiscal world. But to me, this crisis really comes back to a lack of financial awareness by individual Americans. This all started in the mortgage industry because quite simply, we borrowed more than we could afford because no one told us “no.”

All over America, people are pointing fingers at corrupt mortgage lenders for doing sub-prime loans. This basically means that a person doesn’t have good credit, isn’t a good candidate for a loan because of a lot of debt, or bad credit history, or they just can’t afford it, but the lender gives them loans anyway and does it with balloon payments (you start out with a small monthly payment, which you think you can afford, and then your interest on your payment “gradually” increases, but as many have discovered… it can quickly get out of hand), or the very evil “negative amortization loan” which is so evil I shudder to even talk about it (you start out paying less in monthly payment than the cost of interest on your loan. So your balance on your loan actually grows because the interest that you are not paying is added onto your loan amount. Negative amortization loans typically have a cap for how much can be added to your loan and when you reach that cap they raise your payment to fully cover the total of the loan and what ever interest your balloon has reached. You can see why so many have gone bankrupt as a result of these loans. It is a loan made of quicksand and marketed as the easy road to home ownership.)

All of this to say… I don’t think you should ever sign any kind of contract until you really know what you are doing. People in America have relinquished responsibility for their finances to banks, to mortgage lenders, to investment houses, and it is costing them dearly. It is time to get educated on your mortgage and it is not as complicated as they want you to think. If you feel overwhelmed and ignorant, then you will blindly trust and if you blindly trust then they will make more money. But even though it is sometimes a fight to educate yourself on what is happening with your money, it is a battle you have to fight.

When Matt and I were buying our home, our mortgage broker was also one of our best friends in the world (he still is). But I still peppered him with questions and then came home and studied and then went back and asked more questioned. We trusted and loved our friend, but we needed to understand what was happening with our finances.

No matter how much you trust someone, don’t sign a contract without fully understanding what that contract is saying. Get a second opinion. Ask everyone you know. The more you understand what you are getting yourself into, the less chance you have of getting in over your head. Our friend was so incredibly patient (with me in particular) and we really were so blessed to have a mortgage broker who totally had our best interest at heart. However, by the end of the process, I could sign those papers with confidence. I understood our loan, our interest rate, how long it would take us to pay off that loan, and what all the fees were for. And I also knew that we were getting a loan that we could afford. We felt great about the process, and even better about our home because we had done the numbers and figured out our budget for the new home before we even committed to buy the home. We not only loved our home, it was a home we could afford.

And that is what I am going to talk about tomorrow… how do you budget for a new home? What should you consider when looking at buying a new home? And what is the best way to move towards home ownership? I know that many of you are staying put for now in an economy that is very hostile towards selling your home… but some of you may even be facing foreclosure right now, and I would love to help you so that this never happens again. And just to be honest, some of you have no business buying a house until you have worked out your budget and gotten a handle on your debt.

Yet a budget is more than just a method for staying out of debt, getting out of debt, and managing your money… it is also a wonderful guide for making wise financial decisions for the future. I am convinced that if everyone in America had a budget and actually knew what was happening in their finances that we wouldn’t be in our current economic situation. For that matter, if the government could just get on a budget… 🙂 but that feels like a cheap shot. Regardless, it is time for all of us to own up to our financial responsibility and that starts with understanding our own finances. If you own a house, it is really important to understand your mortgage, and if you don’t own a house, it is never too soon to start educating yourself about the process.

And hopefully by the end of this “series”, you will know better than to build your castle out of sand on an unstable beach in an unsable market. Just think of budgeting as the best foundation for your home, and getting a well-researched and solid mortgage (or even better-paying cash) as the pillars that will anchor your home no matter when the tide comes. America has built her castles in the sand, but it is time to learn from our mistakes and move to higher ground. The bad news is it will be a little more of a climb to get to there, but the good news is you won’t have to rebuild your castle after the tide comes in.

See you tomorrow,