The Subprimes Crisis Revisited: An Anonymous Response

On March , 2008, I added my longest blog to date -- on the subprime crisis. It generated some healthy dialog with Notorious, a responder who questioned whether the Bible gave validity to having any debt whatsoever, while thinking through both sides of the issue.

It also generated some offline dialog with friends and family members who wanted to know how autobiographical certains elements of my original post were. We'll leave that for another dialog!

I did receive a new response today, this one from Anonymous . Since "he" left me a simple enough clue to know his identity, I thought I'd take the liberty of posting his response as a new blog. I think Anonymous has something to say to people who are discouraged because they don't feel they make enough money ... or are upside down in a house ... or are burdened by consumer debt ... with a simple message of simplicity, savvy, and faith!

Nice post. I've got a few thoughts to add.

First, my story. I was an urban missionary, living hand-to-mouth in the early 1990's when I bought my first two family in a "soft-second" mortgage program. I had a negative networth from student loans and no prospects for improving my income. Fastforward 15 years.

I own a very nice 4 bedroom home in Connecticut (the wealthiest state in the union) free and clear. How did I do it? Simple but bold moves in an appreciating real estate market. I bought, I sold, I leveraged, I had 18 tenants and property in 3 states then I sold everything, paid an enourmous tax bill, and bought my home with cash in 2004.

From 2004 - 2007 I was a Realtor. You've heard of the "Realtor to the Stars"? I was the "Realtor to the Millionarie Next Door." During that time I was helping smart real estate investors unload their over-priced stuff to folks who didn't have a clue. I sold millions of dollars in real estate during those years. We all saw this coming. Today the smart money is waiting for the bargains. They'll be back. The issue here is "understanding the times" (there's a biblical concept).

Biblical prohibitions about debt are good -- but unless we're going to eliminate a financial instrument that knowledgeable people looking to put capital to work without complete exposure (generally the debt is secured with an asset) then we had better learn to live with debt, and use it wisely.

Sex is dangerous too and monks abstain. Should we become debt-monks?It really has more to do with self-control, courage, and an ability to read a situation dispassionately than anything else.

The millionaries I know don't drive fancy cars, live in big houses, or vacation in exotic places. They're usually modest, often religious, and always very savvy.

Thoughts?

March Madness

In Shakespeare's Julius Caesar, a seer warns Julius to beware the Ides of March. On his way to the Theatre Pompey, Caesar sees the same seer and calls jokingly to him, "see the Ides of March has come."

"Aye, but not gone," the seer whispers back to him as Julius strides to his death at the hands of the "Liberators," a group of senators who stabbed him to death in an act of "tyrannicide."

The Ides of March has truly come and gone in 2008, but we are in the middle of an annual American ritual where the warning to "beware" is particularly relevant. That's right, we are at the halfway point of the NCAA men's basketball tournament, better known as March Madness. This is a time when even marginally interested basketball fans live up to the full expression of the abbreviated nickname "fan" and become ... fanatics.

This particular tournament seems to deliver the "madness" each and every year as a David or two slays a Goliath or three. Just this year, San Diego toppled mighty Connecticut; West Virginia dispatched perennial power Duke--after Belmont, still fairly new to this Division I game missed a last second shot that would have knocked the Dukies out in the first round; and Davidson, led by a sophomore guard, Stephen Curry, who looks all of 16 years of age, stunned behemoth Georgetown.



So a note of simple caution to colossal Kansas, unbeatable UCLA, notorious North Carolina, mammoth Memphis, terrifying Texas, and any other "favorites" still playing in the tournament: beware March Madness. It has come. But it has not gone.

Who knows what liberators are out and about with tyrannicide on their minds?

The Subprime Crisis and Your Future

For most, the American dream has included owning ones own home. One of the most important reasons is that it has traditionally been a key component in ones retirement portfolio.

The thinking goes like this: buy a starter house, fix it up, leverage the improvements and appreciation that have increased your equity stake, sell it, and then sew the proceeds into buying a bigger and better house; repeat those same steps with your new house to secure your next upgrade; repeat until sometime in your mid-thirties to late-forties at the oldest, buy your dream house with terms that insure it will be paid off no later than the day you retire, thus eliminating and in essence "fixing" one of the biggest variable expenses at retirement age, when odds are your income will go down or be eroded by cost of living adjustments.

Even as America got mobile and people cris-crossed the country with moves, the above scenario worked because of a persistent and unrelenting appreciation of home values. A transitional lifestyle might create a few lateral side trails, but the assumed destination has been the same: a home owned free and clear to live in -- or to sell in order to pay cash for a downsized home (while pocketing the proceeds) or in a more desired retirement location.

Something quietly shifted in the equation that is a direct corollary to the boom in the use of consumer credit as a way of life. Home prices continued to rise well beyond the inflation rate, thus increasing equity, which is another way of saying, "wealth." But rather than letting the home nest egg grow, we turned this windfall into a new revenue stream for living expenses, usually by refinancing an entire mortgage with debt added in or by taking a second mortgage(s) to pay off credit debt rather than to do home improvements, another traditional way to increase equity.

It's been said that retirement should not mean no more work -- idleness is bad for your health -- but rather it should lead to the ability to do whatever work you want, ranging from volunteerism to a second career.

A few of the potential impacts on our future in light of the subprime crisis and ensuing loss of home values include:

* we may have to work more years full or part-time than we planned because part
of our retirement package has been damaged;

* it's tougher to move -- unless a company is guaranteeing the sell of your home (and a lot of companies have been forced to eliminate this program) -- and watch your home sit on the market; even if there are great deals where we want to move, most of us can't afford to buy without first selling;

* with less "wealth" we don't have as much credit available to spend on those goods and services outside our normal income stream -- which will hurt the easy-credit-fueled economy;

* you might not be able to move where you want to at retirement age -- not all regions are equally impacted by the subprime crisis in relation to home values; there's a reason small "ghost towns" in areas of the country that have experienced
population loss for decades are filling back up -- cheap mortgages.

Will home values bounce back? I believe the answer is yes. But I think it's going to take a few years. There seems to be too much inventory with so many people insisting on building new homes. But new house starts are finally going to slow down, which will be one more stressor on an already stressed economy, but which is required to tighten the housing supply and raise prices. How can I be so sure? Simple. If it costs $130 per square foot to build a new home and it costs $90 per square foot to buy an existing home less than 10 years old, home buyers are going to figure ways to freshen up and personalize the existing inventory. The per square foot cost gap is at its highest ever on a national aggregate.

As someone who has benefited tremendously from the appreciation model -- and then taken an "equity beating" during a recent move (that included building a new home) -- I am realistic but optimistic that owning a home still needs to be a key strategy in securing your best financial future. Obviously, our future, financial and otherwise, is not just up to us, but I'll throw out a couple modest suggestions:

1. Get on a schedule to pay off your house before retirement. If you aren't familiar with the simple little secret of making double principal payments, which will allow you to cut your 30-year mortgage in half, visit any reputable financial website to learn how -- it's not nearly as daunting as it sounds. If you've elected one of the dreaded interest-only loans, put a principal payment into your monthly automatic payment schedule and start paying down -- yesterday.

2. Don't treat appreciation as a revenue stream but rather a long term investment -- retirement. Second mortgages and refinancing as an ongoing strategy to eliminate debt needs to be eliminated.

3. Don't put your eggs in one basket -- your retirement nest egg should be a diversified program with IRAs, 401ks, Social Security, personal savings and investments, company retirement plans, ideas for post-retirement income, AND a home that is paid for!

4. Get bad spending habits under control. Enough said.

5. Outgrow your problems. To have more, you have to become more. Don't float along in life, make a plan and build disciplines in your life for growing emotionally, socially, mentally, and most of all, spiritually.

Is America Getting Dumber?

In an opinion piece for the Dallas News, Susan Jacoby argues that Americans are getting dumber, in large measure due to the triumph of video over the written word. She is quite alarmed at the continuing and accelerating declines in the reading habits of Americans:

Reading has declined not only among the poorly educated, according to a report by the National Endowment for the Arts. In 1982, 82 percent of college graduates read novels or poems for pleasure; two decades later, only 67 percent did. And more than 40 percent of Americans under 44 did not read a single book – fiction or nonfiction – over the course of a year. The proportion of 17-year-olds who read nothing more than doubled between 1984 and 2004. This time period, of course, encompasses the rise of personal computers, Web surfing and video games.

Now there are all sorts of arguments on what constitutes learning and intelligence and that it is possible that an antiquated educational system imposes and over emphasizes book-based activity and testing as true indicators of intelligence.

Brett Favre: My Only Criticism

I know, I know ... it's not right to criticize Brett Favre just one day after his retirement on March 5, 2008. After all, in his 17 seasons in the NFL, he set almost every major record for a quarterback: most touchdown passes (442), most yards (61,655), most completions (5,377), and most interceptions (288). Ignore that last one! Oh, he started 253 consecutive games, second most in NFL history behind only Jim Marshall of the Vikings, won a Superbowl, and was three time league MVP and a 9 time Pro Bowl selection. You get the idea. He was pretty good.

Criticizing Favre is like lecturing Albert Einstein on his penmanship (who's going to take you seriously when they think you wrote S = MC2); or scolding Luciano Pavarotti for packing a few extra pounds that were really noticeable the last time he sang at the Met in tights (and he probably could have stood to lose a few pounds and inches); or suggesting to Lance Armstrong that yellow really isn't his color (Lance -- have you thought of switching to periwinkle bracelets?).

But I'm going to go ahead and barge in where angels dare not tread and criticize Favre. Brett: you threw off your back foot too much and in so doing you were a terrible example to a generation of young quarterbacks.

Many great quarterback coaches leave their pupils' throwing motions alone. After all, there have been great college and NFL quarterbacks with a variety of throwing motions (hey Titan fans, there's hope for Vince Young!). However, the great QB coaches always coach footwork. Length of stride -- and of course -- stepping into the throw; in other words, throwing off the front foot.

It just so happened the Brett Favre possessed one of the strongest arms that the game has ever known and that allowed him to break almost every rule and still deliver an incredibly accurate and well-timed football to his receivers -- with velocity. This trait usually didn't become a problem until the playoffs when the better teams tend to have better and faster defensive backs. To be fair, not all the teams that Favre led into battle would have had a prayer to make the playoffs in the first place had it not been for their gritty and talented starting quarterback. But it was playoff time when throwing off his back foot, maybe to elude a ferocious rush or buy time while a receiver came open -- or maybe out of habit -- sometimes resulted in painful interceptions for even Favre.

What does that have to do with young quarterbacks? Simple. Favre made everything look so artistic and effortless that it's only natural thousands of young quarterbacks would rather look like Brett Favre than step into their throws like their coaches beg them to do in practice drills. Throwing off the back foot usually doesn't work for mere mortals who just have "arms" connected to their shoulders -- and not rocket launchers.

But I do have a suggestion on how Brett Favre can atone for his egregious bad example to the youth of American who play the quarterback position.

Here it is. Brett: just come back for one more year and model a new commitment to old school footwork!

Is that too much to ask?