Lasting Homeowner Help? Try (Financial) Fishing Lessons

The American Dream has turned into The American Scream.

According to the Mortgage Bankers Association, a record 1 in 10 borrowers in the US were either delinquent or in foreclosure at the end of the third quarter of 2008. Given this data point was tallied before the massive wave of layoffs announced in October and November, things are likely to get worse before they get better. Against this grim backdrop, Washington is struggling with how best to help homeowners.Current proposals include government-engineered modifications for existing home loans and government-subsidized 30-year fixed-rate mortgages for new home purchases. Such programs, intended to jump-start our housing market, represent rational first steps given the magnitude of this crisis. Such steps, however, should not be our last. In many ways the housing bubble is merely a repeat of the internet stock bubble. More importantly, it is potentially the precursor to a college loan or an annuity crisis.

If we do not address the root issue that enabled home prices to rise to such ludicrous levels in the first place, history will repeat. We Americans continue to create asset bubbles and make serious mistakes with our personal finances because we are not financially literate. After two plus decades of unfettered consumerism, it is time to confront this harsh reality.

The statistics are shocking.

A recent survey conducted by Charles Schwab of 1,000 parents of 13 to 18 year-olds revealed that while 70% had taught their kids how to do laundry, only 43% taught them how to pay bills. The same survey also showed that while 97% of parents think it is important to teach their children to save and invest for retirement, only 14% have explained what a 401(k) is. Perhaps the reason for the disparity is that parents themselves aren't doing such a good job with their own finances. According to the American Savings Education Council in a February 2008 press release, less than 1 in 3 Americans routinely save the recommended 10% a year of their income. As a nation, we have lost our financial way. Founded on the principles of thrift, frugality, and hard work, our beloved country has morphed into a giant financial couch potato.

Who is to blame?

One culprit is our increasingly complex financial landscape. In years past, limited choice helped us save ourselves from ourselves. In the case of home ownership the twin forces of a 20% minimum down payment and 30-year fixed rate mortgage were self-policing mechanisms. However, in today's world of seemingly limitless financial choice we need to learn how to more effectively fish for our financial supper. Had more Americans understood how much home they could truly afford, what kind of mortgage was appropriate for their particular situation, and how to live within their means, housing prices would never have escalated to the bubble point. To date, many angry fingers have been pointed at predatory lenders, greedy mortgage brokers, and scurrilous investment bankers. Their role in our current economic malaise is irrefutable, and it must be addressed. Yet that is not enough.

As the debate swirls in Washington about how to "help the homeowners," we are reminded of this time-tested proverb: "Give a man a fish, and you have fed him for today. Teach a man to fish, and you have fed him for a lifetime."

A nationwide, mandatory financial literacy class in high school would be a nice start. To create lasting improvements, however, we must dream even bigger. We've changed the way Americans think about everything from smoking to wearing seat belts. Why not use a tiny sliver of the potential profits from government-subsidized 30-year fixed-rate mortgages (lending at 4.5%, borrowing at 2.7%...) to create a coast-to-coast financial literacy campaign ("Got Money $marts?"). Or perhaps we could offer Americans the choice of attending personal finance workshop after two late bills - sort of a traffic school for your wallet. And why stop there? We could offer a tax credit to Americans who take a government sponsored personal finance class.

The bottom line is this: Good personal finance does not have to be difficult. The guiding rule is to live within your means. Across the nation this basic principle should be emphasized in schools, colleges, houses of worship, and most importantly in our homes. As we work together to dig our country out of this financial mess let's identify creative ways to give ourselves, and our children, a gift that will last a lifetime - (financial) fishing lessons.

Manisha Thakor & Sharon Kedar are the co-authors of ON MY OWN TWO FEET: a modern girl's guide to personal finance.

Follow Manisha Thakor and Sharon Kedar on Twitter: www.twitter.com/ManishaThakor

Comments

[dadumdee]

Thirdly this: Our economy is based on scarcity, which gives things worth in the absence of something valuable to back our money. This means that losers are built in to the system. This current crisis is the realization that so many of us, despite having multiple homes, cars, electronics, college degrees, etc. are the LOSERS built in to the system. Our economy as is has and will continue cycles of good times and bad, and the haves will know the difference and invest accordingly. We have nots will continue to fund our own oppression, because as we are seeing, even when the 'haves' destroy their own faulty system through greed, the 'have nots' will foot the bill due to......

Fourthly this: Our tax system is unconstitutional. American citizens were never meant to be individually taxed for labor.

I'm all for education, but so many of our discussions are abstractions. How can we discuss adding 1 trillion dollars to the money supply and not talk about the devaluation of the dollar? How can we discuss the Federal Reserve while never mentioning that is a private consortium of banks and is not a part of our Government? How can we discuss government leadership without discussing conflicts of interests?

[dadumdee]

I agree with your suggestions on financial education, so lets have a dialogue for the benefit of everyone’s understanding.

Firstly this : "Founded on the principles of thrift, frugality, and hard work, our beloved country has morphed into a giant financial couch potato." is false. We were actually founded on the principles of free labor of enslaved Africans, and the indentured labor of other immigrants. That provided the capital that made us the economic center of the world. It also explains why 'globalization' is actually a competition to see who can find the cheapest labor.

Secondly this: Let's admit that our current economic model is unsustainable. Fractional reserved banking with nothing of value backing our money has locked us in to a system where the money supply will never catch up with the debt. Money is debt, so being more productive does not mean living better, as the American worker has experienced since the 50's.

[californiadreamer]

Those of us who bought homes fifteen years ago when the market was low were delighted to watch our investment increase. We were able to refinance our loans for home improvements. Our last re-fi was in 2006 and we were assured that the $200,000 equity would be solidl We completed our last re-model and love our home as we have fixed it up. Unfortunately the bubble burst and now our home is underwater. We borrowed money that was offered to us. We thought the risk was minimized by the fact that the lenders were professional and that they were taking a risk as well. We do not live beyond our means. Our means have been reduced by stagnant wages, high cost of living, and other expenses. We are struggling now. Yes, homeowners who need help should have it just as the bankers who made bad loans should have it. Would we be willing to give up future equity. Sure, we will make a trade off. It's the lenders who are dragging their feet on loan re-struturing. Those who have not gone upside down and who have lots of equity, they get to make a profit. As far as renters, I think they get a break when more homes are purchased, then rents will go down.

[ImmanuelGoldstein]

We will continue to be subject to these housing bubbles until houses come to mean comfort and security ,not a bottomless piggy bank predicated on the Big Lie that residential housing is a wealth producing investment. The complete failure of an economy built on that heap of still hasn't dissuaded people from thinking of it like one though. It's simply a delusion that housing prices can increase faster than incomes for very long without forcing people to borrow from a future that may not happen.

[Trebor1]

It is a fallacy that all of the increase in a nation's productivity can go to 2% of the population without dire consequences. A "market" economy presupposes that most people have enough money to go to the market.

[Erdgeist]

Here is the solution: Get back to basics. Gross income x 3 = maximum home price. In other words, if your gross income is 50 thousand bucks you can look at homes for 150 grand or less. Anything over that price -- look in the mirror then call yourself a greedy fool who deserves to lose his arse.

[americaforme]

In the USofA we have experienced the gutting of interest rates, we were bled out systematicly since the seventy's. Banks got interest rates at 1%, poor consumers recieved 17%-to as high as 32% go figure. Dont think couch potatoes deserve this sort of acid rain from the financial robbers. They primed their pumps with Greenspan, and gave our Blessed America financial disaster.

[leftLibertarian]

how about help for renters.