The government says the recession has ended, citing purely economic statistics. You know, all that stuff about GDP expanding again. But try telling that to your neighbor, or cousin, or your son, all of whom are out of work and about to have their lights shut off.
But we Americans have been through this before, and we've always survived. In particular, I remember the nasty recession in the mid 1970's that destroyed my father's employment agency business.
That was an era when you sat in the employment agency office and discussed your resume, career, and salary goals with an employment counselor. There was no monster.com or linkedin.com, and you would be appalled to pay someone else to write your resume.
When a dearth of jobs closed my father's business, it forced me to leave college and work full time for several years, until I had saved enough funds to re-enroll. It wasn't easy, but that was the American way. You worked hard and persevered and eventually it paid off.
My Mother always taught her children the value of having a roof over your head, and how wonderful it was to finally pay off your mortgage.
She never said, "maybe you shouldn't pay off your mortgage because you can get 8% a year in a growth mutual fund and you're only getting a 4% return when you pay off your mortgage."
She also didn't walk away from her mortgage during the recession of 1990 when her house lost 25% of its value.
So I grew up with some old fashioned values, from parents who had endured a long economic depression in their early years, and in many ways the lessons they imparted to me have stuck like top stocks for 2010.
Today I am a real estate investor and, among other wonderful things, real estate has enabled me to pay off my own home mortgage early.
I'll take the 3% hit I could be getting from a mutual fund if I still had that monthly debt, in exchange for all of the risk that I no longer have. Sleeping like a baby at night is well worth any possible 3% to me.
Ethan has no mortgage worries...
So my heart is heavy when I read articles about an increase in the dropout rate from loan modification programs, and even more so when I read that "strategic defaults" are on the rise.
A "Strategic default" is when a borrower chooses to stop paying their mortgage, even if it means losing their home to foreclosure. Instead, they may just pay other bills, such as car loans and credit cards.
These are not folks who are out of work or can't pay some kind of predatory sub prime loan. No sir, these are people who are employed, but just don't want to pay anymore. In most cases, it's due to their home having fallen in value to the point where they may have 25% NEGATIVE equity or more.
According to recent research, that 25% point seems to be the point at which despair takes over, and the borrower decides it's useless to pay on an asset which may take a decade or longer to come back.
The current estimate is that about 588,000 people strategically defaulted on their loan in 2008, a 128% increase from the previous year. The 2009 numbers are not in yet, but are expected to be higher.
But what is worse is that, according to recent surveys, almost one out of every three homeowners today is willing to strategically default on their home!
Aside from the negative equity, the main reason for this is due to the increasing length of time that people can fail to pay their mortgage before the bank sends out the Lis Pendens (first notice of foreclosure).
Swamped with ongoing loan modifications and homes already in foreclosure, the lenders are purposely taking longer and longer to go the foreclosure route.
And people know this, and are taking advantage of it.
Suppose you are three or four months behind on your loan, and unemployed, underemployed, or simply struggling to make ends meet. Even if you wanted to pay your mortgage this month, the lender will demand payment in full and will not take a partial payment.
So those people usually succumb to foreclosure, short sale, or loan modification.
But the borrowers who are strategically defaulting are simply pocketing the money they would have paid on their mortgage, with a strategy to pay off other debts, and then eventually rent a home or apartment from someone else.
They also know that in three or four years, they may be able to improve their credit score, and buy another home that is much cheaper than the one they left.
But the question is whether or not the lenders, or the IRS, will go after them for the difference between the mortgage owed, and what the home brings in a foreclosure sale. The Mortgage Forgiveness Debt Relief Act of 2007 is very complicated and expires in 2012.
Could these defaulters eventually owe $50,000 or $75,000 to the IRS?
Given the large numbers of people, and our permissive "bail out" mentality in America right now, that is unlikely. It seems that, once again, those who behave irresponsibly will be rewarded, while those who stay the course will get nothing for their efforts except a boost to their self-esteem.
Incidentally, lest you think I am unduly harsh, let me ask you this: What do you think the repercussions of strategic defaults will be in the future? Do you think that banks will just look the other way?
Of course not!
It is highly likely that lenders will begin to ask for larger down payments and/or raise interest rates to account for their higher risk for strategic defaults on their loans.
That means that all of these walk-away borrowers are going to cost you and me, and the next generation, a lot more money to secure a mortgage.
But to build wealth, one must look at things from different perspectives. When I think about the next decade or two, I see an America that could easily lose its middle class. There will be rich and there will be poor, but perhaps not much in the middle.
All of the borrowers who are now strategically defaulting will not be able to buy homes for several years. Perhaps after their experiences, they will distrust the real estate market so much, they may never again buy a home.
That means they will either choose to, or be forced to rent. If their numbers are large enough, this will elicit undue demand for rental homes, multi-family properties, and apartments.
The people who cater to that demand, will benefit and receive top dollar for doing so. Those people are the wealth building landlords of the next decade or two.
People like myself....and hopefully you!
At the risk of sounding like a broken record, the current 15 year mortgage rate, which stands today at 4.24%, is an unbelievable bargain. Investor loans are typically .50% higher, so an investor with good credit and 20% down should be able to buy a home right now with a 4.75% interest rate.
Today, with prices of many foreclosures at mid 1990's levels, investors are able to take out 15 year loans and still have a rental cash flow of $250- $400 per month.
Now listen carefully, for here is the best part...
That means that even people who don't want to become active landlords can still buy rental properties, hire a property management company, pay them a fee (about 10% of each month's rent) to deal with the tenants, and STILL have a positive cash flow.
What? You mean someone else gets all the headaches and I still get several hundred dollars a month of positive cash flow, combined with rapid principal pay down?
She gets the headaches...you get the money!
Hmmmm, that's more like it....tell me more!
Well, let's look ahead 15 years. How old will you be then? Ask yourself these questions:
Could a paid off rental property or two pay for my daughter's college tuition or wedding?
Could a property paid off by tenants be sold to generate enough money for me to start my dream business?
Could I use an extra $1,000 or $2,000 per month in retirement to travel or just live better?
Could I leave my grandchildren a starter home when I pass on, so they never have to rent again?
"But Ethan, I don't want those 9 PM phone calls about leaky pipes" -- No problem, they will go to the property manager.
"But Ethan, I don't have 20% to put down" -- You don't have $10,000?
"But Ethan, I don't even have $10,000" -- Well, do you have a sum of money in an IRA? Did you know you can use your IRA to buy homes with top 10 stocks for 2011?
In my Master Real Estate Investor course, I detail the specifics of how to set this up for yourself. The amazing irony is that in 2008, when I began writing the course, homes were more expensive than now and the interest rates were a lot higher. It wasn't very easy to cash flow a 15 year mortgage then. That opportunity is now here, but who knows for how long?
So I intend to make my parents proud. Whether my real estate goes up, down, or sideways, I won't skirt my financial commitments, and instead, I intend to spend the next 15 years profiting off those who have recently done so.
The America of 2010 may be a tougher place to make money than it was years ago, but there are still ways to make it happen for those with the imagination, perseverance, and fortitude that once made this country great.
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