Monday, October 13, 2008

Do you get it? (beware, its long)

Ok, now I don't know about you guys, but I was more than a little confused about what this "buy out" thing meant to me.  I hear people talking about how they are all for it and that there was no other way to revive the economy.  Then I hear people who were so against the action they almost changed religions out of spite (that was an out of the blue example, and I have not talked to anyone with that specifically).  So what is it and what does it mean?

Working at a credit union I have some extra information given to me about once a week.  So here is a very watered down explanation of what the Government Buy-Out.

From 2001-2006 the Housing Market was at its peak and that meant low interest rates and a rapid escalation of house values.  That brought a lot of new and first time buyers which led to Mortgage Lenders inventing some creative loan practices.  This happened cause those Lenders got a little greedy.  They saw an open market with lots of people looking to buy, so they found ways to get them the money.  In 2006 24% of the loans made were to "sub-prime" or sketchy borrowers. 

What happened when those sketchy borrowers couldn't pay?  The Lenders had to get rid of the loans (sell them) or risk going under (which we know happened anyway to a couple banks).  To do that you don't sell a certain number of mortgages.  You break them down in to when the different loans come to maturity, and sell that.  So, buyers would bid on 1 year, 2 years, 5 years, 10 years, and so on.  So one bank does not own an individual mortgage.  So now, your mortgage loan could be partly owned by big wigs in China, London, Rome, etc.  No one knows where they ended up. 

So what does the Buy-Out have to do with all of this?  When those mortgages started to go into foreclosure, and the banks could not keep up, the government stepped and gave them some money to cover the problem loans.  Some people think this was the only way to do it, that our economy would have come to a complete halt and crashed down in a flaming ball of bad suits.  Some people say that it was a pointless gesture cause the stupid people who got those sketchy loans are just being let off the hook.  And the banks are just going to turn around and do it again.  

Now that we have covered that, what do we do to make sure we are not caught in the middle of a "financial crisis".  The first thing is to save.  I know that a lot of us are living pay check to pay check and we need the bulk of our money for other things.  But we should all make an effort to save money.  Do you think you could spare $5 or $1o dollars a month?  Or a paycheck?  Its not much, but in an emergency, wouldn't it be nice to have that extra $50 or $60 dollars for gas or groceries.   

Next, take a look at your loans at banks.  Interest rates have dropped quite a bit in the past months, and now might be a good time to refinance your car loan or look in to a Home Equity loan to get that work done on the house.  When doing this, look into Credit Unions as a bank alternative.  They are more stable right now, and will generally have lower rates anyway.  

Third, try to get credit cards paid off.  I know that this is easier said than done.  And if it is a choice between saving the money or paying down the cards, pay down the cards.  Less interest in the long run.  And then you will have the card in case of emergencies.  

And last, if you think you are spending beyond your means, make a budget.  I can recommend a couple of expert in this field.  (Talina, I'm talking about you.)  This will help you regulate your fun spending and make it easier to get the important bills paid first.

I hope this was able to help a few of you.  I know this can be a scary time, not knowing what the dollar will be worth from one day to the next.  How many times have the General Authorities told us to get out of debt and be thrifty with our money?  These are not just passing suggestions.  It is so important to get out of debt, stay out and save money for the future.  I don't think I can stress that enough.  


kiwibabee said...

hmmm good idea, things are a little different here in New Zealand. but what is happening in the USA still affects us here.

Kathy said...

Thanks for the information. You are a fountain of knowledge.

Anonymous said...

Interesting..... :)

Talina said...

Thanks for the shout-out Lena. But seriously, a budget is a big help. And if you don't want to do a budget, I just recommend writing down EVERY dollar you spend for one month. If nothing else, it is very educational to see where all of your hard-earned money is going and what areas you can cut back on for your new savings plan (i.e. eating out, clothes, movies, whatever). Thanks for the informative post!

Nik "the BoyWonder" said...

Lena you are wise like Yoda!

minisuperbias said...

I think two words/phrases stand out: "greedy" and "spending beyond your means". It baffles me that the "solution" to an economic crisis is spending more money. Puh-lease. I was talking to a friend the other day who is a Wharton Business School alum (think Donald Trump) and I asked him about all this, because economics is totally beyond me. He said that even though this sucks, it's inevitable. He says it's called "the business cycle". No plan is going to stop it, we're just going to have to ride it out. If people lived responsibly, maybe it would be ok, but will that happen? Uh, no. ;)

Hilary said...

We went to a cash spending budget (groceries, date money, spending money, etc) and it's helped a LOT.

Now use your insider info to explain to me what's going to happen with mortgage rates this next few months! :-)