This is what happened when I drove my Mercedes to pick up food stamps
washingtonpost.com
washingtonpost.com
I don't understand how a mortgage payment can go from (presumably) reasonable to exorbitant with just an adjustment of the perceived value of the home. My impression is that in the past people put less stock in the financial value of their home and just continued to pay their mortgage regardless of the underlying market. Now it is more common to walk away if you're under-water or refinance if you're in the money or want to take out some equity.
On the other hand, a lot of people bought houses on 3-5 year fixed interest mortgages during the housing bubble, on the grounds they expected to be able to resell or refinance when the fixed interest rate expired and the mortgage suddenly got a lot more expensive and -- because their properties were now underwater -- they could not sell or refinance.
Back in the days when people just paid their mortgages, real estate was seen as a safe but boring investment, and interest rates were at 5-6% (2-3% above inflation).
It's a bit rich when a mortgage lender lends money to a high risk customer and takes out insurance on their defaulting or the property losing value (PMI) and charges the customer for that insurance and then gets annoyed if the customer walks away from the wreckage.
I couldn't understand the gut negative reaction I had to this story. I understand why these programs exist and am not necessarily opposed to them. But I feel that people (within their means) should structure their financial affairs to not have to rely on these programs and not use them unless they have to. Unemployment for college educated workers barely crossed 5% at its worst so the two should not have been unemployed for years.[0]
I would be hard pressed to accept food stamps even if I qualified but I would likely accept unemployment insurance. In that sense, it's funny that food stamps are faux pas, unemployment insurance is acceptable and tax minimization is applauded. Even knowing that, I can't help but hold those same biases though.
[0] http://www.economicpopulist.org/content/what-happens-when-pr...
If they paid 0% down then they may also have been paying PMI of around 1% on the loan (high risk borrowers effectively get punished twice on interest rates).
Just look at the LIBOR Index (most popular index for ARM mortgages) in 2008 and 2013.
Jan 2008 - 4.18750%
Jan 2013 - 0.84250%
Also your figures seem wrong to me:
http://www.hsh.com/natmo2007.html -- in 2007 a 1 year ARM was over 6% for most of the year, longer ARM loans would have been higher. Most people in 2008 didn't have loans taken out in 2008, but more likely in 2004-2006 when the market was hot and rates were higher.
Incidentally, while the real interest LIBOR rates right now are close to zero, actual mortgage rates are considerably higher, especially on 30y fixed (we got a 15y fixed mortgage because with the difference in interest rates our mortgage payment was only about 40% higher than the 30y option).
My numbers look wrong to you because you are comparing them to your APR. You shouldn't. As I've mentioned before APR = Index + Margin. If index goes down, and margin is fixed, what happens to the APR?
You are correct, most people did not get their mortgages in 2008. But the family we are discussing here did. And for anyone with 5/1 ARM taken out in 2004-2008 the rate would have gone down after the fixed period.
I had a friend buying a house in 2004-2005. She was getting first-time homebuyer's assistance from some semi-governmental agency: they assign you a person who walks you through the paperwork and gives advice on mortgages, presumably to prevent fraud and rip-offs. The guy was heavily pushing an adjustable-rate mortgage, though: "Look at these low rates for the first two years! And after that I'm sure they'll be reasonable." My friend was outraged, as someone who'd gone into risk management in lieu of college. "How could this guy be trying to convince me to sign up for unknown rates that will rise and could change at any time, when I could just get a 30-year mortgage like anyone else?"
Think of all the people in 2008 who didn't know not to get an ARM, and who might have been pushed into it by some "advice" they thought was good.
They'd likely have really low interest rates [1] right now due to the federal reserve keeping the rates low, and presumably refinancing soon now that house prices have risen quite a bit (depending on your market, and loan details, of course).
The 6-month libor, which a few ARM's are pinned to is currently at 0.4%, in 2008 it was around 3%, so your ARM could potentially have a lower interest rate of around 2.6%.
If you didn't lose your job, and had a 3-5 year interest only ARM in 2008, it's possible you could have benefited from it (again, depending on your local housing market). This obviously didn't work out well for everyone, but ARM's are a risk that can pay off as well.
That being said, once rates start rising (possibly soon, according to the fed[2]), there could be another foreclosure bubble of people sitting on ARM's watching their rates climb up.
[1] http://www.erate.com/six_month_libor_index.6-months-libor.ht... [2] http://www.nytimes.com/2015/03/28/business/yellen-says-fed-w...
I mean, this was the beginning of home renovation shows that said things like "Your house was worth $200K. We did $50K of renovation. It's now worth $350K." While there is definite value to improvement, some numbers people were seeing on property were ridiculous. Like seriously, even without the above example, for people to seriously believe that the house they bought one year ago for $x should now be worth 1.5 to 2x with little or nothing being done doesn't pass the straight face test.
Is it strange that when paying $1k in mortgage payments to 'buy-back' 240k of value, that paying $1k to 'buy-back' $150k in value can be called unreasonably high?
Especially when suddenly you can buy equivalent property for much lower prices, and lower mortgage rates. And suddenly rent starts to look cheap in comparison to paying mortgage + the cost of $90k devaluation in a 2 year span.
I can easily see how that can turn exorbitant. However, even that it turned exorbitant you're assuming. They may have felt it was unreasonably expensive in the first place, despite it being a good move compared to renting. e.g. if you live in a place like NY, some may consider everything and anything exorbitant, just a matter of perspective. It certainly seems true that the cost of housing as a portion of income and disposable income has been one of those things (like healthcare or education) that got cheaper over time, while other things (like most technology) got cheaper.
They made a choice: Sell the Mercedes (likely for $8,000 - $12,000 in cash) and support their family by supplementing their income for six month to a year on that, less after buying a $3000-$4000 daily driver. When you're in food-stamp-hyper-frugal-mode, $8,000 cash can keep your family alive for some time!
They chose to get food stamps and keep the luxury car instead.
It was their choice, but when you're driving around your "emergency fund" and your bank account is hovering at zero while Uncle Sam puts food on your table, some would suggest your priorities and means are a bit confusing.
You realize that their means change when they lose their job and apply for government benefits right? That we should reevaluate our priorities and budgets when our means change (we lose our job and become unemployed for a long period of time!)
If you make 120k/yr and you receive government benefits like food stamps, I have some harsh words regarding your clear abuse of our safety nets.
>then you're probably so cheap you don't take vacations
Some offense intended: Just how young are you? Too "cheap" to take vacations? We're talking about losing jobs in a dual income family situation. How boring am I? Boring enough to budget and successfully raise a child.
How immature are you? Because it clearly sounds like you are WAY WAY WAY too immature to raise a child. "Too cheap to take vacations"!! The audacity of an entitled young twenty-something! You sound like someone who is too immature to successfully put food on the table for your child because you're too busy spending your money validating your entitled luxury lifestyle to save your money and prepare your family for the unknowns of life.
So now being able to take vacations (even if you're in financially good shape) is off limits? I'm not justifying anything that the lady in question did... but I think a 30k car and one vacation a year is reasonable on a 120k salary. Sounds like two people, yourself included, have said no- that is not acceptable (and that makes you entitled for thinking so). I know some extremely thrifty (or smart if you will) people that don't place any value on emotional experiences that might "recharge your batteries" that would argue it's a waste (even if you have more than enough money). Looks like you're one of them.
When you lose your job, you're right- the "means" change and you need to re-evaluate things. I'm not questioning that. I was questioning how is a 30k car out of the means of $120k/year person, especially if they can buy it in cash.
Yes, you should absolutely do whatever it takes to support the family, including selling the Benz.
I misread that original comment as "Benzes are only for rich people, not for peons that make $120k or below" and made a Jackie Chan face
Of course not. This is outside the context of the thread where a family LOSES JOBS and starts accepting food stamps because they cannot afford food.
Yes -- IF YOU CANNOT AFFORD FOOD, you are too poor to take luxury vacations. I apologize if that is offensive.
Otherwise: PLEASE learn to follow basic context. This isn't a generalized conversation of yuppie finances.
It's a specific conversation of a specific case where a dual income family becomes a no-income family, but keeps luxury vehicles while accepting government money.
I find it irresponsible to store value in a depreciating luxury vehicle while asking your neighbors for food, but there are other opinions on the subject.
Yes!
> If you have no debt and you have the ability to buy the car cash or pay it off within 1-2 years, how exactly is this bad- especially since you'd enjoy it?
Enjoyment does not enter into whether or not it is rational to put a substantial portion of your wealth in a depreciating asset such as a car.
> Sure, the boring thing to do would be to put all the money in savings...
But then you wouldn't be buying foodstamps five years down the line.
> but if you think a 30k is outside your means, then you're probably so cheap you don't take vacations
Being cheap and being smart with money are not the same thing, and using words like 'cheap' to target a person indicate that you are not approaching the subject rationally but would rather attack a person that has an opinion different from yours using a negative term than to bring a solid counterargument. Pity.
I'm with you- as long as you make more than you spend and you can squirrel away 6 months of savings (to avoid situations where you need assistance), you're doing great.
But enjoyment does count for something, which is what I was getting at. On paper, vacations are a complete waste of money, there is no rationalizing them; they're purely for enjoyment and you have nothing tangible at the end.
The real mistake for these folks was not the $30k car purchase (that they paid off)... but the $200k of debt they introduced themselves to buy purchasing a house in a questionable market and being legally tied to it (unable to sell because it's underwater).
To me having two vehicles when you have no income and two children with health issues is absolutely way above your means.
Of course that situation sucks and it sucks even more that this happened in a country where healthcare is anything but free and getting around without a car is difficult but that does not change the cold hard facts. Feel free to shoot the messenger but better heed these words if your life situation ever should change for the worse in a short time, your future depends on your ability to adjust rapidly in situations like that, ignoring it or trying to postpone the inevitable will not help at all.
Fuel economy, maintenance costs, taxes, insurance that's where the problem lies and those are all cheaper for a simple Toyota than for a Mercedes.
My father in law just scrapped 20 years old reliable Mercedes. There was new tax which charged 2.5x of its value every year. Instead we got small Fiat which breaks all the time.
Really? All I see is someone who lacks good judgement when I read that article.
I had a Mercedes once and sold it when things got tight. Holding onto an asset like that when you're impoverished is just foolish. I can't imagine being unemployed that long either. I'd be raking leaves for money after two months.
Buying a car is a sunk cost. Once you own it, getting rid of it before it cannot be driven anymore is wasting money. Once she bought that Mercedes, once it got too old, swapping it for a newer used vehicle would just give her a worse vehicle that would cost her more money in the long run.
I am poor. I've never been rich. I have a few nice things because I force myself to do the math on things. Other poor people hate me and threaten to report me to "the authorities" for owning nice things because somehow I cheated to get them.
I may not own many things, but the things I own do what I need them to do, and will do so for a very very long time. What this woman did, in my opinion, was the right thing.
Selling only makes sense if you can actually profit from it.
Near where I live, the advertisements on the bus stops say "USD 500 and you ride!" because a functional car means access to work opportunities, i.e. money.
Suburban America is a design error with grave repercussions down the line, but since it was designed by and for the affluent assuming multiple vehicles per family and things like bicycle paths and public transport are either not present or just about un-usable you're going to have a problem if you don't have access to a vehicle.
But quite a few people do not have access to vehicles today (for instance: children, quite a few elderly people, everybody too poor to own cars) so maybe it's time to start fixing this problem?
Two cars for every family is long term un-sustainable, and two cars for a family without income to me sounds like it is an impossibility.
Even so, there are ways to use only one vehicle, even in a family where two people are working, figure out who keeps the car with them during the day, either drop off the other at work or at the nearest public transport hub (assuming that one exists).
That should take care of the bigger problem. Having two cars when you can't afford your food is really not good.
I find their reaction a bit strange without further context.
A Mercedes is a reliable car if it is maintained well and if you're living on food-stamps and are unemployed that value will drop very rapidly because you can no longer afford to maintain it. Once it stops running its resale value is nil, so better sell it before then.
See: http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-sm...
I've run this beast:
http://pics.camarades.com/v/jacques/cars/golf/
From '09 to '11 and it had more than 300K km on it by the time I was done with it (and it still brought me back more than I paid for it...).
You have to be pretty sharp when you're buying them to make sure you don't buy one that has been maintained poorly.
Fuel pump and turbo are the most important things to check.
That car cost about $750 to buy and another $200 for fixes required right after buying it to get it through the 'MOT', after that it ran without a hitch for two years.
An American car is probably better for a poor person than any German car. Sure, you may have to repair it more often, but parts and labour are a lot cheaper. Even if it costs more in total, for poor people a large number of small bills are often easier to deal with than a single large bill.
The newer diesels have insanely high injection pressures, I have a campervan that has one of these engines (the 2.5L) and I really hope that there will never be a problem with that because it will make your $3000 look like pocket change if it fails in a serious way.
In a pinch I think I'd rely on the older and much simpler models rather than to go for one of these hyper efficient versions. They seem to trade efficiency in fuel for a much shorter life-span and a higher repair bill.
The government here puts an insane premium on fuel consumption without taking into account the effect of all those fuel saving measures on the total-costs over the lifetime of the car.
At a rough guess it is a toss-up, what you gain in fuel efficiency you lose in expensive repairs.
Unless I missed something, I don't see where the author and her husband made any poor choices. Keeping the paid-off vehicle is prudent[0]. They were making a combined income of $120k, according to her, when they chose to have a child. Only after the pregnancy was her husband laid off and they couldn't have easily foreseen that the babies would have health problems. They bought a house but the timing wasn't their fault and it's almost impossible for a layperson to predict. In short, they discovered the true meaning of "shit happens."
0 - That's one thing people might want to keep in mind when they see someone talking on an iPhone while paying with food stamps. It's far easier to keep what you have than to sell it--usually at "fire sale" prices for quick cash--and try to replace it with something cheaper. If I ever lost my job, two of the last things to go would be my paid-off vehicle and my dirt-cheap unlimited data mobile plan with smartphone.
I've driven perfectly reliable cars that cost less than $5K. A 10 year old Mercedes in great shape is probably worth about 15-20K. Why not trade that in and get another "paid off" car worth 5K and a check for 10K?
I guess it depends on how you were brought up. I'd rather sell all my possessions at pennies on the dollar, live in a honda civic, and do odd jobs than take government assistance.
The trade-in, dealer value for my paid off car is approximately $2,100. According to Kelly Blue Book, the dealer value for a well-equipped 2005 Mercedes-Benz CLK with 150,000 miles on the odometer and in "very good" condition is $5,124.
> I guess it depends on how you were brought up. I'd rather sell all my possessions at pennies on the dollar, live in a honda civic, and do odd jobs than take government assistance.
I strongly object to the insinuation that my, or anyone else's, rearing was any less moral or righteous than yours simply because I wouldn't conduct a fire sale of my assets, make my family homeless, and forgo the social services that my tax dollars have paid for. Not once in my adult life have I had the misfortune of being unemployed, gravely ill, or some other tragedy, and for that I am both very lucky and truly grateful. My childhood was the exact opposite for my family and I'm thrilled that my parents didn't pack us into the Suburban and say "welp, that's it, kids, we're on the streets now!"
It's called a safety net because it saves people.
Not even close. The three Kompressor models in '03 were the C230, C32 AMG and SLK32 AMG. KBB trade-in values for those cars are about $3k, $5k, and $10k respectively and it is likely they had the C230 otherwise the author would have called it their Mercedes AMG.
Luxury cars are terrible at retaining their value. If you want that, buy a Honda Accord or Toyota Corolla.
Not a 10 year old C-class, especially not a C230.
But then again, I've always been the 'help yourself' type of person, my main reason for that is that I like to have some control over my life and government hand-outs rarely come without strings and can be withdrawn at a moments notice.
But for those that really need them it's very good they exist.
you cannot under estimate the value you place in things in your everyday life when you know you worked to obtain them.
I cannot imagine being unemployed and simply collecting money and assistance. I would take entry level jobs putting up groceries to bide my time, or be at the local donation center sorting stuff for free. idle time leads to an idle mind and that does more damage than about anything else I know of