Monday, October 6, 2008

And the credit card companies have not helped us either

Here is another good article about how we have become a nation addicted to debt:

It echoes the stories that you have seen. I have not done everything "right" financially, but we have not fallen into the debt trap like so many people have. You, Rick and Kara need to pull back a little bit and get your non-mortgage debt paid off. The mortgage is fine and is almost a fact of life. The rest is a way for credit card companies to bleed money away from you.

Think about this. Every time you use a credit card the credit card company takes 2 to 3% of the transaction. And we all pay for that. The vendor does not say I want $1000 for this and if you pay cash I will give it to you for $970. No they say I need to get $1000 for this to make a reasonable profit but most people use credit cards and I (the vendor) will have to pay the credit card company $30 on each item, so I will charge $1030 and let my customer pay the extra $31. Pretty neat for the credit card company. But it does not stop there. The credit card company, out of the goodness of their heart, say you only have to pay 2% of your outstanding balance each month because we are willing to loan you’re the remaining $1009 at %20. Next month you own $1009 + $15.45 interest and pay $20.60. Guess how much the credit card company will make and how long you will be paying before the original $1030 charge is paid off? Over 19 years! And the credit card company will get about $2,020 in interest plus the original $30.

Go to this web site and play around with the numbers:

If instead of making the minimum payment you pay $100 each month it will be paid off in 1 year and the credit card company only makes about $105. The credit card company really does not want you to pay extra. But it gets even better for the credit card company if you miss a payment, then they get to charge you a $25 to $45 late fee and the interest.

Just remember that when you are paying interest on credit cards you are also helping support a couple of other families in addition to your own. You are much better off putting off instant gratification, saving your money and buying what you truly need and can afford with cash. Then all of your earnings will go to support you family and its habits instead of god knows who and their habits.

I am mad a hell about the mortgage crisis

This is the best explanation that I have read as to what the root cause is of the current mortgage/credit issue.

The summary is that liberal journalists and editors pressured our government to ease long standing mortgage lending standards like the traditional debt-to-income ratio that had been used. They lowered the standards so that more minority and low-income borrowers would quality. The standards were lowered so much over the past few years that borrowers that were clearly unable to keep up their payments were given loans. Loans were granted with no documentation, no down payments and for more than the true market value of the property. Liberal legislators pushed these ideas on Freddie Mac and Fannie May. Even people of some means have taken advantage of these questionable lending practices by buying homes that were much higher that what they could afford hoping that they could refinance later as the home's value increased.

I saw this happening earlier this year when we sold our rental house and to a lesser extent 3 years ago when we bought it. I thought it was interesting when we bought the house that we could get what is called an 80/10/10 loan. (My previous experience in buying homes was 25 years earlier when you had to have 20% down, no exceptions.) We got 30-year mortgage for 80 percent of the purchase price and then that bank had a sister bank loan us another 10% for 15-years and we wrote a check for the remaining 10%. I thought that was creative and it was interesting that the bank was the one that suggested it.

When we sold our house the young couple that bought it had not saved enough for even a 5% down-payment let allow 20%. They bought the house by writing a $500 check and signing their names to a mortgage. I have paid more than that to get into an apartment! The deal they got was that we raised the price of the house by $5,000 over what they offered and we would accept. Then they got a loan for the original agreed upon price and at the closing the extra $5,000 went to the bank for the down payment. Pretty neat, huh? I was assured a number of times that the couple who purchased the house always paid their bills, credit card, etc and there was no problem with this approach. It seemed almost illegal to me. But once the house was sold and the closing was done, it was not my problem.

It now appears that is was not the banks problem either because they were able to sell the loan to Freddie or Fannie or someone else and pass the "risk" on. Neat, or so I thought.

I am sure this couple does pay their bills and may still be making the mortgage payments. But it appears that there are a lot of people in this country that are no longer paying their bills and mortgages because I and many others are being asked to pay part of the $700,000,000,000 to bail out the stupid banks, Freddie Mac, Fannie Mae and god knows who.

For the first time since this mess started, I understand why there are so many people mad as hell about this and not willing to allow congress to pass the previous bail-out plan. For one thing the cost of this is not going to be carried by "everyone" because 40% of the potential tax payers do not pay any taxes at all! And the next 40% paid hardly any taxes. So what is happening is that a small percentage is going to have to pay a great deal and work a great deal harder to pay for the mistakes of congress and social meddling that is being pushed on us by a few.

The current credit issue is the best reason that I have seen for voting for a John McCain. Someone who will work to clean up the root causes of this mess and get the government out of our lives.

Here in Texas it is very likely that McCain will win, but those of you in other states need to think hard about voting for and suppporting McCain instead of the social engineering that we will get with Obama.