Larry King Live on CNN interviewed two families in trouble because of the recent housing crisis last night. The first family was starting to get behind on their payment, while the other already lost her home and is now living in her car.
Overview of the Two Situations
Family Hope
The first family (which we will referred to as Family Hope) lived in what they believed a $300,000 house. They are starting to get behind in payments but they haven’t received their default notice yet. They want to save their house but here are a few signs of why I think they haven’t really been doing something about it.
- Larry asked them how many months they are behind and they did not really know.
- When asked what their monthly mortgage is, they “think” it is around $2,100 – $2,200 instead of knowing
- They seem to have 2 jobs, but they believe it is impossible to come up with $2,200 to pay the mortgage.
- They are hoping that they won’t lose their house, but they aren’t making any effort to pay the mortgage payments and they’re not trying anything else to solve their situation.
Family Optimistic
The second family (referred to as Family Optimistic) is actually a female living with 2 dogs. She is a notary who was helping mortgage companies approve loan documents. Once the credit market and housing crisis started, no one could get loans and she was out of a job. She knew she was getting into trouble at the beginning of the year and now she’s lost her 2-bedroom condo and just living in her car. Even though her circumstances seem much worst, here’s what I observed.
- She didn’t try to delay the inevitable of losing her home. Once she knew she was in trouble, she got rid of the house.
- She is out of a job and living in her car, but she found a part time job which gets her $500 a month.
- She is extremely optimistic, and truly believe that she will live through this crisis and find a job and get her house back.
- She is still genuinely thankful for everyone who donated money to her.
Thoughts on the Two Situations
Family Hope
It’s very difficult to understand why this family would think they could save their home when they aren’t even making payments. To make it worst, they don’t really seem to know how many months they are behind on payments and what exactly the monthly mortgage payment is.
Larry asked them about the payment and after some mumbling (and probably guessing), they came up with a figure of $2,200. If that was true, why do they not think it was possible to come up with the payment with two incomes? This family doesn’t even seem to be trying.
Family Optimistic
This lady on the other hand sounds more likely to bounce back from losing her home. Despite the fact that she has to sleep in her car every night, she is still extremely strong and optimistic about finding a job and one day living in a house again. She doesn’t know how she will do all that yet but she believes she will, she truly believes. I’m sure she will find a way, because she will keep trying.
What Can We Learn From This?
There are many things we can do to avoid situations like these.
- It is absolutely necessary to have an emergency fund. We should setup an expense every month and pay the emergency fund account where we put money in and never take money out. If it was never needed, it means you were one of the few fortunate ones. There are many articles talking about having an emergency fund of 3 months of expenses but I think 6 months of your previous salary is much safer. With this fund, it is much better to be safe than sorry later. Having an emergency fund would’ve helped Family Optimistic while she was trying to look for another job.
- When times are good, you don’t spend the money but instead save as much as you can. During times when money seems easy to come by, it is the best time to save. I know first hand that it is very easy to spend more when large amounts of money are flowing our way, but life has its ups and downs and being prepared for the unexpected is always good. If we don’t save when times are good, we may not have a chance when the tide shifts.
- We need to be sensitive to our own financial situations. Family Optimistic knew she was in trouble and moved on from her mistakes in a timely manner even though it meant her sleeping in a car. In Family Hope’s situation, they still have a $300,000 house that they could sell and start over. This way, they can start saving up immediately for the down payment to another house in the future. As it stands now, they are just furthering themselves into debt and delaying (or even eliminating) their chances to ever get a new house.
- We absolutely need to cut our spending. Family Optimistic is living off $500 a month while Family Hope cannot come up with $2,200 per month on two income. As I mentioned yesterday, there are always ways to save more money. Live frugally and be happy.
- We need to act promptly with a sense of urgency. Both of these families don’t seem to have the “I got to fix it now” attitude. Family Hope should be cutting back on everything they are spending immediately and Family Optimistic should be out looking for another job instead of doing an interview with CNN. The most responsible and sensitive person to our needs is ourselves. Act immediately.
- Believe that there is a solution. Although Family Optimistic is in a much worst situation than Family Hope, she brings a feeling of optimism into her attitude which will propel her to find a solution to her problem. I wouldn’t be surprised if she is back on her feet and sleeping on a comfortable bed in 6 months while Family Hope is sleeping in their cars by year end.
Final Words
Many situations can be avoided if we do some preventive actions. In order to be trouble free, we need to be proactive instead of reactive. If you don’t have one yet, setting up a family emergency fund for example would be a great first step.
Believing that a solution is achievable in any situation is also very important. Never give up on yourself, even in a foreclosure situation. It’s not the end of the world if you lose your home. It just means you can start working towards your dream home again.
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tanks for the tip. I was going out of my mind trying to figure out what the problem was. Thanks again.
It is awful not to make any effort to pay the mortgage payments and not trying anything else to solve their situation.
Marci,
Don’t worry. There aren’t many people like you willing to produce more and consume less.
Hope the global economy recovers soon. Life’s getting tough with the spiralling inflation.
Remember Science Biology lessons on Producers, Consumers, and Decomposers?
I just prefer to be a Producer, not a Consumer 🙂 As much as possible that is. I know that if the national economy depended on me, we’d be at a standstill. haha.
Marci,
Well, the main problem here is that most youngsters are brainwashed into wanting everything IMMEDIATELY.
With banks aggressively pushing credit cards and all manners of advertisements driven into them whilst young, it’s a wonder that most young ones are still sane.
Sigh, that’s the sad state of our consumerist culture nowadays.
Actually, if CNN paid her, then Optimistic might have been on the right track with doing the interview instead of looking for work at that particular moment. And if she didn’t get paid, then she got ‘exposure’ and maybe netted a job from some sympathic soul watching the show. It was worth the shot anyway is probably how she looked at it.
I’m just glad I’m DONE with mortgage payments 🙂 I had a home equity loan during the remodeling of my house, and it just drove me nuts at night… Once I paid it off, I just was able to sleep so much better 🙂 And lest you think the remodling was not frugal, it went from 560 sq ft to only 1010 sq ft, and I learned to sheetrock, tile, nail trim boards, put up shelving, and I painted the whole thing myself. Not bad for an older woman 🙂
I just wish all you younger people just starting out a lot of good luck and frugalness, and as you are reading moneyning, I’m sure you’re all on the right track.
Interesting post.
I think the problem for Family Hope is they shouldn’t have gotten that house in the first place.
A residential home is a hefty investment, especially if one is financing like 90% of it via loan. It’s might be 20 year commitment to pay USD1-2K which not many people may be able to commit to.
Guess too many treat their residential homes as an asset. I for one, do not.
I can’t believe that some people have no idea of how much their mortgage payments are. We aren’t talking about maintaining a detailed budget here (although it seems like they should do that as well). A lot of people have lived above their means in the last few years spending a luxury high ticket items at the expenses of getting rid of their mortgage quicker, saving for an emergency fund and common sense. It is a hard reality check for many, but at least Family Optimistic will learn from her mistake and turn the situation around no doubt.
Man I think the first family will never be able to pay their mortgage given their current situation+attitude.
I agree with the retirement fund, it is a MUST. What I do to save for retirement fund is automatically deduct 10% of my monthly earnings to my 401k. You can’t spend what you can’t see as they say.
I think both these families are idiots. Hopefully they will come around and get their lives fixed up but who knows?
Mike
It sounds like the 1st family is in denial or ignoring the problem-only it won’t go away and will likely get worse. Your points are all good-especially #5- A sense of urgency is necessary in these situations.
Connie: I do what I can but I don’t think sites like these are nearly enough because we aren’t in people’s face telling them to solve their own issues before it’s too late. If there are ways you think this site can help more, feel free to suggest and I will do what I can.
I think your thinking is understandable so you don’t have to feel guilty about the fact that you aren’t in trouble.
I don’t believe the housing market is done going down since it takes time for the massive amounts of inventory to unwind. I don’t have a house yet so I will be watching…
@ MoneyNing – You know, I think that’s very true. And then many of them compounded the problem by taking out home equity loans on top of that.
I’m still not sure we’ve seen the bottom of this yet, but it makes me very, very sad for those families.
It also makes me thankful that I am not in the same position they are. I guess that’s selfish, but it’s true. I’m thankful that I understand my finances, and did not make those types of mistakes.
I am glad there are sites like this one around to help the people that want help, and want to learn.
Sandy: I was very shocked when I was watching the show when it took them 5-10 seconds to come up with the mortgage payment answer. I hope one day they will learn to be responsible about their finances.
Jodi: I wouldn’t be surprised to the house was originally bought at $300,000 and it is significantly lower in value now.
Calvin: I would be happy if I own a house outright but renting isn’t bad for now. Eventually we all want to own a home though.
ConnieB: Actually I’m afraid that some people with traditional loans are even under stress. Many people in the west coast bought houses that is way above what they should really be able to afford comfortably. It works out when house prices are appreciating but it’s not exactly wealth building long term as they aren’t able to save anything after they pay for their mortgages.
Moving on from our mistakes is an important, important lesson. So many of the troubles in our (or at least my.) life could have been avoided if I had just cut my losses at the most logical time.
This is the key to investing too – knowing when a stock is a mistake, and when it is undervalued and likely to go back up.
I think there are a lot of people out there with ARMs who are struggling a lot like these families when what they should do is follow the example of lady #2. Cut the loss, and rebuild within their means.
With all the things going on with the mortgage crisis, I’m glad that I’m renting.
$300,000 house? I wonder if that’s their wish price instead of the true value.
Then if $300,000 is the original price they bought it for and their mortgage payment is $2,200, doesn’t that sort of mean they paid 0% down?
Sigh… With families like these, no wonder the housing crisis is so bad.
I totally agree with believing that there is a solution. Sometimes, it’s the only thing you can hang on to in rough times.
Can you believe that Family Hope didn’t really know what their mortgage payments were? That’s crazy.