by Jennie S. Bev
Creating a balanced society where the haves and the have-nots live in harmony is always a challenging task. According to UC Berkeley economist Robert Reich, the culprits have been the insufficient earnings and low savings for the poor and insignificant spending –proportionate to income– for the rich causing fewer than optimum level of employment yielded from the multiplying effect of spending.
In the USA, the term “rich” refers to those who are earning significantly starting from a six-figure income to billions in USD annually. The top one percent earn more than $410,000 annually. The top two percent earn more than $260,000 annually. The top five percent earn more than $160,000 annually. The top ten percent earn more than $100,000 annually.
Despite the argument that the term “middle class” is hard to quantify, it is safe to assume those who earn above the official poverty line for a family of four ($22,050 for 2009) belong to this category. Most US population identify themselves as “middle class” prior to the economy downturn which was announced to have ended in June 2009.
The thing is, the middle, the upper middle and the upper classes, who were perceived as “rich,” are disappearing. It is due to a multitude of reasons, such as globalization, insufficient earnings to catch up with the high cost of living despite US high wages, and the wealth concentration in the hands of only a few people.
Main Street is still, undeniably, hemorrhaging, which can be observed from the intense foreclosure rate. By the end of this year, we can expect to have 3 million homes foreclosed. Another 10 more million homes will be foreclosed in 2011 and 2012. And my residential home may be included in the statistics.
In the last 21 months, I have been working to modify the terms of the loan agreement with the lender. It is not uncommon to have a proposal processed more than one or two years due to the long line of homes requiring attention –millions of loans.
Generally, there are three reasons on why a borrower requests for a loan modification.
The first reason is the loan is high-risk subprime with negative amortization, meaning the terms allow a homeowner to pay less than the monthly minimum of 30 years amortized capital and interest. A subprime loan is given to a borrower with less-than-perfect credit score and high debt-to-income ratio. Ideally, a loan is given to those with high FICO score of 700 or more and 31 percent ratio.
The second reason is unemployment and other individual issues, which may occur to those with either prime or subprime loans. Without a steady income, it is impossible to make monthly payments.
The third reason is negative equity in a property due to the market value was pulled down by surrounding foreclosed home. My residential home’s current value is less than 50 percent of the purchased value due to a significant number of foreclosed and short sold homes in vicinity.
With a significant negative equity and decreased income, requesting for a loan modification was the logical first choice. Extending payment term from 30 to 40 years, lowering interest to 2 percent, and reducing principal to match the current value should have been the logical solution.
The argument is: if homeowners are given the chance to save their homes, they can concentrate on earning to pay the mortgage without worry. In the end, the ripple effects would result in faster economic recovery.
Banks, however, prefer foreclosing and short selling rather than approving loan modification. They cash out quickly and can write off the loss within the same fiscal year. Short selling refers to selling a property for less than the loan amount, which is the second preference –from homeowner’s perspective– after a failed loan modification.
Government bailout money also helps out banks by giving an additional funding for every foreclosed property to ensure banks have enough liquidity. What’s good for banks are bad for consumers.
With both short selling and foreclosing, a borrower may be taxed for forgiven debts. So far, the federal has not been taxing forgiven debts due to the state of economy. California considers home loans as non-recourse debts, which means a lender can seize the collaterized property but not taken the borrower liable for the loss. And foreclosure or the repossession of a property is the last resort after the other two have failed.
With a short sale or a foreclosure in a borrower’s credit record, he cannot purchase another home for a few years, which translate to –again—fewer buyers in the market. Another downward turn in real sector economy is looming, as the result, while allowing contrarian capitalists to buy cheap properties ferociously.
On macro level, economists are arguing whether free market or laissez faire economy is appropriate or not. Individuals, however, care more about attaining happiness, as stated by historian James Truslow Adams, “a better, richer, and happier life for all our citizens of every rank.”
I’m wondering what class I belong to now, because I don’t feel like middle class anymore.