With all the headlines and debate regarding soaring foreclosure rates, it’s sometimes forgotten that most foreclosures can be easily prevented with a low-tech, unregulated, private, bi-partisan and no-tax solution.
And what is that solution?
As a nation we have forgotten how to save. Government figures show that during the past few years our willingness to save has dropped by more than 75 percent. In some quarters the country has actually had a negative savings rate. We saved nothing. Nada. Zip.
A lack of savings dictates living from paycheck to paycheck. That may be tolerable in the short run, but inevitably it happens that the car must be fixed, a child requires medical care or money is needed for a traffic ticket or birthday gift.
Little costs add up and soon bills are being paid late. Late bills mean there are also late fees, additional costs that are simply unaffordable. In such a financial environment it doesn’t take much to tip over, to have bills which can’t be paid at all.
Mortgages are the one debt that everyone wants to pay in full and on time. The reason: The penalties for non-payment are severe. First, there are late fees, then if foreclosure is threatened there may be big legal bills and finally, if foreclosure cannot be avoided, there’s the loss of a home, the loss of equity, ruined credit, potentially a suit for unpaid mortgage principal plus psychological damages that will take years to overcome.
Michael Mihalik, author of Debt is Slavery (October Mist Publishing, $14.95), says “we borrow money to buy things we don’t really need and don’t use, which forces us to go to a job we hate so we can pay back the money we borrowed to buy things we don’t need or use.”
Mihalik’s real target is not debt in general, rather what might be called ‘bad’ debt, the use of money for such things as impulse buying, keeping up with the neighbors and “overcoming depression or a felling of inadequacy.”
Mihalik admits there’s also “good” debt, borrowing for education, starting a business and owning a home. But what has happened with real estate reflects what’s happened generally: We buy more than we need and the result is that we owe more than we should.
Consider home sizes: According to the Census Bureau the average home had 1,560 square feet in 1973 and 2,330 square feet 30 years later in 2003. During the same period, household size fell from an average of 3.01 people to 2.57 people.
Here’s what these numbers mean: In 1973 the typical home had 521.26 square feet per person, a figure that rose to 906.61 square feet by 2007. Combine larger costs for vastly bigger homes with reduced savings and the result for many homeowners is obvious: Monthly costs are huge and there’s not a dime left for emergencies.
Lenders typically require buyers to have cash reserves equal to two monthly mortgage payments. But is that enough? And what happens to those dollars once a sale has closed? There’s no requirement to maintain such reserves and no one checks.
“The basic rule is that more savings equal fewer foreclosures,” says James J. Saccacio, chief executive officer of RealtyTrac.com, the nation’s leading foreclosure marketplace. “Savings can give you time to get back on your feet if there’s a job loss or other calamity, and that time can save you from foreclosure and damaged credit.”
The huge advantage of cash on hand is that if necessary a home can be sold at a leisurely pace. There’s no rush to sell within a month or two and therefore there’s no foreclosure discount and no distressed price.
You don’t have to start a savings plan with much — but you do have to start: Whether you save the day’s change, a set amount each week, eat-in more often or switch to a cheap-but-safe car, it’s possible to save money and create a hedge against future calamities. As millions of homeowners facing foreclosure are finding out, money in the bank isn’t a luxury, it’s the difference between being at home and being on the street.
Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers.