Westchester Guardian/Catherine Wilson.

Thursday, October 16, 2008

Catherine Wilson, Bureau Chief
Northern Westchester

Main Street Americans Had A Hand
In The Current Economic Crisis

As Congressman Eliot Engel noted last week, “New York is affected by the recent economic crises the most”. Local residents are stunned by recent events; worried about their jobs, their investments, and their pensions.

So far the $700 billion bailout is having minimal effect; stocks are still tumbling, falling at rates rivaling those of the Great Depression. Individuals already feeling the pinch from rising food prices, skyrocketing energy costs, increasing taxes, and lower home values, are now watching their life savings evaporate on Wall Street.

Many Westchester residents are being squeezed at both ends. In addition to higher living expenses and falling investments, they also face job and salary cutbacks. Amongst the local residents lucky enough to anticipate any raises in income in the next few years are those with a County CSEA contract. However, with less money to go around, even those government contracts may be subject to renegotiation.

Taxpayers are unlikely to vote for politicians who support ‘lavish union benefits’ when they, themselves, no longer enjoy the same. A voter backlash against corporate greed is already in progress on the national level as Barack Obama rises in the polls and John McCain declines. Closer to home, as Westchester now has the dubious distinction of having the highest property tax rates in the Nation, a backlash of equal magnitude in local elections is, likewise, developing.

But who should the backlash be aimed at? Is the current economic crisis solely the fault of corporate executives and politicians? Or did they have help? Apparently they did, from many of our neighbors. Listening to Lehman Brothers Chief Executive Officer, Richard Fuld, testifying before the
House last week on the exorbitant compensation packages given to the company’s executives, even as the firm was failing and filing for bankruptcy, local residents could be forgiven for assuming that the fault for the current economic debacle lies with the Villains on Wall Street.

But that is only one side of the equation. Missing from the political debates and media reports on this issue is the role the American public has played in this crisis. As The Guardian noted last week, the crisis stemmed from the deregulation of the banking industry allowing it to offer risky sub-prime mortgages. The ‘No-Money Down’, ‘Low Introductory Rates’, and ‘Variable Rate’ mortgages, as it turns out, were all junk products. But greedy Wall Street and banking executives would not have profited from offering these mortgages if no one was willing to buy them.

Why, then, did Americans ignore practical money management guidelines and purchase mortgages that allowed them to overextend themselves
and their budgets? What part of never live above your means did so many of our neighbors not understand? The answer is, sadly, many individuals
do not have basic money management skills. Families who were only budgeting for a 10% down-payment for a home, were part of the credit problem that has destroyed our economy. Professionals who were blissfully unaware that a mere 10% down payment would still require them to mortgage 90% of the cost of their home were engaging in financial planning that was a recipe for disaster.

As we’ve seen in the past few years, individuals who overextend themselves on mortgages face foreclosures when their finances take a turn for the worse often due to normal life circumstances such as job loss, extended illness, or premature death. The proper way to purchase a home is to put down at least a 20%, and to have an additional six month’s salary left over in reserve savings.

As an accountant, I find it disturbing that two educated young people, working in decent jobs, typically cannot save money. The excuse many couples offer that saving and renting, at the same time, is impossible, does not hold water with me.

After all, when one has been working for five or six years in a well paying job, and has had five years living at home and saving money, the
numbers don’t add up. At $50,000 a year, assuming $15,000 in taxes and deductions, an individual should have saved half of his/her net take home
($15,000) and lived on the rest ($15,000). Between two people, they should already have $200,000, or enough for a 20% down payment
and a year’s salary in reserve, on a $400,000 purchase.

So why don’t they? Part of the reason may be that they rented an apartment for the past five years instead of living at home until they
‘got on their feet’. However, even with $20,000 a year in rent, they still should be worth $80,000. So why couldn’t two young people, earning
decent salaries, save this money? Probably because no one ever taught them how. Most Americans do not know how to save. Neither do they know how to spend. Many of the junk mortgages were sold and, indeed, still being offered, to individuals whose net worth is tied up in video
games, SUV’s, wide-screen televisions, designer clothes, mojitos, cigarette habits, and beer bellies. Even when such individuals try to get out of their spending morass, they tend to dig themselves into a deeper hole. I am currently advising some local residents who are having difficulty paying their bills. One woman, who we shall call ‘Joan’, is in her late 40’s and has lived in her house for over 25 years. Yet, has zero equity. She can no longer
afford the payments on her mortgages, home equity line, car loans, 401K loan, bank credit line, and multiple credit cards; 17 in all; almost $4,000
a month in debt service.

Joan had been offered two choices for refinancing to consolidate her debt; one from Wells Fargo, and the other from a local credit union.
I sat down with Joan and worked out a budget for each scenario for the next five years. What I uncovered horrified me. Examining the Wells
Fargo loan, I saw that it consolidated all of her debt for $700 a month less than the credit union loan; but only for the first two years. After
that, the interest rate would skyrocket, meaning Joan would end up paying even more each month than what she is paying now. Worse, the
Wells Fargo loan was for 40 years.

Since Joan is already 48, realistically she will only be working for perhaps another 17 years assuming her company doesn’t force her out before
then. At that point, she will not have enough income to pay a mortgage, and she will be compelled to cash in the equity on her home in
order to ‘trade down’. However, with a 40-year mortgage, she will have accumulated very little equity after 17 years, since most of her payments would have gone toward interest owed. She would be left with virtually nothing to buy a retirement home. And, since Wells Fargo would have her
paying out more in two years, Joan will likely not be able to save for her retirement either. In contrast, the credit union loan meant Joan would have to pay $700 more a month up front. However, it would be a fixed-rate loan so that she would not face any increases in her payments over the life of the loan. Additionally, it would be a 30-year mortgage, leaving her more equity in 17 years, when she will likely face retirement.

How, in the middle of an unprecedented bailout, could our local banks still be offering such ridiculous mortgages? It took me only a few minutes to calculate that Joan would not be able to make the monthly payments on the Wells Fargo loan when the rate increased in two years. Why didn’t anyone at Wells Fargo bother to take that into consideration before offering her the loan? What kind of checks and calculations do the banks perform before making these offers?

I wondered, “Had anyone bothered to check Joan’s financial history?” If they had, they would have seen that she is in debt primarily due
to poor money management. She has consistently traded in her cars every three years; her kids’ rooms are jammed with toys, clothes, televisions,
and video games, and every family event has been marked with lavish celebrations.

Ironically, she has nothing to show for all this spending apart from items that will quickly be obsolete; no fancy kitchen, no expensive furniture, no lavish bathrooms, nothing of lasting value. Most of Joan’s money went on pizza dinners, convenience foods, bottled water, designer coffee, gadgets, and impulse purchases.

Sadly, Joan is not alone in her lifestyle. Millions of Americans cashed in the equity on the homes to pay off their credit cards. This year’s
Wii Fit will be paid for by Mom and Dad for the next 15 years with their new home equity line, long after anyone in the family remembers
how to play the game.

While Congress may be bailing out the banking system to save the economy, no safeguards are being put into place to save Americans from themselves. The credit offers are still flowing. And for individuals like Joan, who never saw a ‘bargain’ they could resist, those offers are financially fatal. In the past week alone, while Congress was deliberating the bailout, I received over one dozen offers for credit cards, bank loans, and zero-financing for a car. My 15-year-old daughter also received a credit card offer, despite having no job, and my 80-year-old mother received offers for a bank loan and credit cards. For anyone who cannot manage money, those offers are very tempting.

So what basic money management steps should local residents be taking? First and foremost, cut out all bad habits. With the high price of gasoline and heating oil, only the rich can afford to smoke any longer. In most cases they don’t; that’s one of the reasons they’re rich! Most fi-nancial analysts recommend keeping a book of all spending for a month to see where your money goes. But, I believe that’s too burdensome for most people. A simpler approach is to go through all your bills for the past month to see where you can cut back.

Some recommendations include: Heating: Install timers to turn down heat when not needed; seal doors and windows to block drafts; check home foundations and insulation for gaps and cracks; buy heavy drapes and comforters for warmth at night, and invest in sweaters! Transportation: Use the Westchester County Bee Line bus system when possible. Residents can go all over the County for $2 a ride. Stop driving the kids to school; your taxes pay for the school bus so using your car to take them to school means you are paying this expense twice. And yes, they can walk to the
bus stop, the exercise will do them good. It may be the only exercise they’ll get all day!

Don’t buy a new car to get better gas mileage, the savings take years to be worthwhile. A better solution is to drive the speed limits and keep
your car properly serviced to conserve fuel.

Entertainment: Cut back or eliminate magazine subscriptions, cable channels, book and music purchases, DVD rentals, etc. All of this can be had for free at any of our County libraries, including DVD’s of television series. I’ve downloaded hundreds of popular tunes to my iPod for free from my library’s extensive collection. The library system also allows residents to place a hold on items and transfer items from other branches.

Cablevision offers free movie nights to subscribers every Tuesday at all Clearview Cinemas. High- five.org offers $5 theater tickets and $2.50 museum passes to area teenagers, plus one accompanying adult each. I saw Patti LuPone in ‘Gypsy’ with my goddaughter for $5 each last year! Seniors can get reduced Broadway tickets from tdf.org; orchestra seats for Young Frankenstein are going for $32 this week, as opposed to $120 at the box office. Taxes: Check what similar homes are paying in your town to determine that you are being assessed fairly; the local tax assessor’s
office can provide this information.

Report any residents who are renting illegal apartments. Your tax dollars are subsidizing services for their tenants for free while the landlord gets to keep the 100% of the rent. Get professional advice when preparing your income taxes. The library system and local senior centers ask accountants to help local residents each Spring. Many individuals do not take deductions they are entitled to because they are simply not aware of them.
Food: Eliminate fake-food purchases. Soda and Cheese-Doodles are not food no matter what your kids say. I tell the individuals I advise to think of your body as an investment that needs regular maintenance to keep its value. If you put garbage in, you’ll get garbage out. With the skyrocketing cost of health care lately, few individuals can afford to get sick.

Last month The Guardian reported on the risk of antibiotic-resistant bacteria in our area. Going to a hospital these days can prove to be deadly. Therefore, cutting chemically-processed junk food out of your diet will not only save money, it will maintain your health. Substitute bananas for the fruit roll-ups, oatmeal instead of sugared cereals, chicken instead of red meat, tea instead of coffee, and water from the tap instead of soda and sports drinks, and an average family can easily save over $50 a week or $2,500 a year by eating healthier.

Insurance: Do not cut back on coverage. Save money by increasing deductibles instead. You do not need life insurance if you are not supporting
a spouse or children; all you need is enough savings to bury you! Likewise, you do not need life insurance for children. But all employed individuals
need disability insurance. A job loss due to a severe disability could trigger a foreclosure on your home. Combine insurances with one company to maximize credits and take the driver’s education classes offered by most towns to get the discount against your car insurance. Credit: Have only one credit card to make tracking the bill easier.

For individuals with more than one card, pay the one with the highest interest rate first. Do not consolidate credit card debts into home equity loans or mortgages, you’ll be paying for last year’s DVD rentals for the next 15 to 30 years! Shopping: Shop locally or online and avoid the malls. For one, you’ll save gasoline, tolls, and parking fees. Also, shopping in a store increases the chance of an impulse buy. It’s cheaper to pay PeaPod a $9 delivery fee for your groceries if it means you won’t stock up on junk food or the bulk items on sale that you’ll end up tossing out.

Online shopping also limits you to one store at a time, while a mall has hundreds of stores for hundreds of temptations. And any sales taxes you
‘save’ by driving to Paramus, you’ll spend at the food court on junk food. Many local groups are teaming up to help their members weather
the latest economic storm. Kim Lurie, the President of the Alliance to Restore Integrity in Divorce, offered to share these tips to her members,
many of whom are facing severe economic crises:

While the rest of the world feels the pinch that many of you have been feeling and living with during your nightmare within the Court system,
I’m sending ways that have been utilized throughout the years by our membership to conserve money. Thrift shops.....there are many and your purchases, dirt cheap, also are “green”..recycle and the money goes usually to a charity. Garage/Tag sales $.99 Stores..this is obvious Soup Kitchens/Churches daily... hot meals Freecycle.org....ridiculous amount of free things given away sometimes even unopened food. Ebay to sell things Craigs list to buy inexpensively or to sell Churches usually have “outreach” centers where you might pick up canned goods, coupons for food,
toilietires..these are not limited to your neighborhood. They are to any people in need.

Social services. Do not be ashamed of this. Remember this: You did not create this chaos. Food stamps.... Section 8 Housing Medicaid Child Health Care Plus for children’s insurance Wal mart has special on prescription medication $4.00 There is a government program for free prescriptions if you quality Health Care Plus: Low cost health insurance for those with some income but limited.

Free education, non credit for certain population, unemployed etc. Grants/scholarship for college students in certain population, degree studies.
Look for city/state/county lottery for housing. Police/State/Federal/Tax Auctions on stolen merchandise. Apply for Social Security disability if you are disabled. Unsecured credit is the last thing you pay!!! That means mortgages, food, gas etc. come before credit cards.”

Hopefully most local residents will not have to resort to most of the above measures. But for all of us, now is the time to implement basic money management skills of thrift and savings. If we don’t cut back on our excessive consumption as a society, we are doomed to repeat the economic failures of the past year. The banks and credit card companies are not heeding the warnings – they are still soliciting new victims. Our government has not passed new regulations to reel them in or stem the bad practices. It’s up to us to weather this storm.