Profile in IrresponsibilityI saw this story on cnn.com's front page a few days ago but had been too busy to comment on it until now. It's an anecdote of a family under sudden financial stress:
I question the journalistic value of publishing stories like this for a national audience. I see no purpose for it, except perhaps to tug at heartstrings and build support for bailouts. It's ironic, then, that this story is actually a marvelous example of someone who does not deserve a bailout. (And I'm pleased that many of the commenters there share my sentiment.) I have very little sympathy for Patricia Guerrero. She was financially irresponsible, and I'm incensed that politicians will be falling over each other pledging to solve her problems with my tax dollars. Let's review the relevant facts. She couldn't afford her home to begin with. Her mortgage costs $2,500/month, or $30,000 annually, yet her income was only $70,000! Even worse, she had an interest-only mortgage… she was paying over 40% of her income on interest and building no equity at all! The jaw-dropper here is that she was a loan processor before being laid off — she, of all people, was in a position to know the risks of a mortgage like hers. (The story didn't say whether she processed mortgage loans, but I expect anyone working in the field to have this kind of knowledge.) She had little or no savings, probably as a consequence of this unaffordable house. She was laid off only two months ago and she's already at the end of her resources. Despite drawing unemployment checks and having her mother move in with her to split costs, she used up her tax refund to pay bills and is now going to the food bank because she can't afford to buy food for her two young children. The story does say that she is estranged from her husband, but there is understandably no additional detail. I wonder cynically whether he didn't want to be with her because she was financially irresponsible. (Of course it could have been for many reasons). It is irresponsible to be at her station in life — good-paying job, husband, kids, house — without having a solid financial footing. She should have had an emergency fund in case she lost her job. (Especially if she processed mortgage loans, she should have seen the writing on the wall months ago.) She should not have bought a house she could not afford. Yes, she lived in California, but she could have rented… or moved somewhere affordable even if that meant leaving the state. Most importantly she should not have brought two children into the world when her financial situation was so precarious. Those children deserve better. (But not on my dime, take careful note.) She should sell her house. She can't afford it. Get out, get out, get out!
© Kyle Markley
— Posted 2008-03-29 22:56:29 UTC —
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Comments: 7
She couldn't afford her home to begin with. Her mortgage costs $2,500/month, or $30,000 annually, yet her income was only $70,000!
Who appointed you arbiter of how much home she could afford?
If I had an income of "only" $70,000 I would certainly be able to afford annual mortgage payments of $30,000.
HAHAHAA! <to Minimum Wage> Wow. Obviously she COULD NOT afford it because she had no emergency fund, or plan of action to deal with stressful times, nor the presence of mind to read the writing on the wall. Being able to "afford" something doesn't mean you're able to merely purchase something -- if you can't afford the upkeep and other costs (ie furishing in a house, gas for a car, food!, insurance, taxes, unexpected maintainence) then you CANNOT afford it!
A good rule of thumb is to spend ~1/4 of your earnings on your dwelling/place-to-live. This 1/4 INCLUDES maintenance and taxes and insurance. Also, people tend to spend all of what they make, instead of spending what is reasonable and saving the rest for a rainy, rainy day.
Thinking that because you can purchase something but not REALLY afford it is exactly the kind of mindset that has ruined so many so-called "homeowners".
I don't feel sorry for her one bit, although I fear for her children and their tarnished lives, but too many people are ignorant on such important and basic financial concepts.
No, she couldn't afford the home to begin with. Her take-home salary was probably about $50,000 annually. With a kid to support, she'd need more than $20,000 a year for all her other expenses.
Besides, if she's lost the house for non-payment, then OBVIOUSLY she can't afford it.
Minimum Wage,
I was expressing an opinion, not proposing to regulate her actions. If you think my opinion is wrong, you're welcome to your own.
I think you'll find few others who agree it's responsible to spend over 40% of your income to pay for a house you're not building any equity in.
I'm paying more than 40% of my income to pay for a house I'm not building any equity in.
If you don't think that's responsible, I'd love to hear a better idea.
Minimum Wage,
Here are a few strategies to reduce housing costs:
A) Smaller is cheaper; consider downsizing.
B) Renting is usually cheaper than owning.
C) Split the costs with a roommate or roommates.
D) Relocate to an area where housing is cheaper.
Of course I understand that not everyone would be excited at the idea of renting a studio apartment with their significant other in Detroit. :)
Clearly she couldn't afford the house. In deference to Minimum Wage, I suppose there are a rare few extremely frugal people who can afford spending 40% of their income on a house, but those people are rare indeed.
However, while she can't afford the house, she probably can't afford to sell it either. She hasn't been building equity and I suspect that she started with little to no downpayment. With housing prices going down, her mortgage is almost certainly underwater.
The question is what, if anything, the government should do. My belief is that doing nothing will cost taxpayers more money in the long run than doing bailouts now, especially if the bailout is structured responsibly such that it isn't a straight giveaway but instead something like an abeyance of full responsibility.
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