Prairie Fire

No doubt many of you have already seen the video of Rick Santelli's "Rant of the Year" on CNBC yesterday morning. The thing has gone completely viral, getting hundreds of thousands of views on the web --- not to mention getting played all over talk radio yesterday. Santelli, who is a floor reporter at the Chicago Board of Trade, is discussing the President's recent housing bailout proposal:





Based on what I'm hearing and picking up, I think it's fair to say that Santelli's rant is igniting what may grow into a prairie fire of backlash against housing bailouts (no matter what these bailouts are euphamistically called). While the floor traders who applaud him in the video may not be a representative cross-section of the American public, the sentiments he expresses (and the sentiments they are cheering) most certainly are. It's dawning on people that --- the President's assurances aside --- those who made some of the most irresponsible decisions about housing, and who contributed the most to the current difficulties, are about to get shielded from the consequences of their choices. It's as if the old story of the Grasshopper and the Ant has been updated, and the grasshopper is poised to end up with the ant's house.

I can only share our own family's experience, but I don't think we're atypical. We lived in rental housing, and then a mobile home, the first few years we were married. With Mrs Yeoman Farmer home full time, we lived on what I could earn working part-time for a research firm and part-time as a graduate teaching assistant. We had one car. Extra money we could scrape together went toward paying off MYF's law school loans and saving for the down payment on a house.

In early 1999, MYF (now five or six months pregnant with our second child), had had enough of living in a mobile home in the San Fernando Valley. She insisted we find something with a yard, where our firstborn (then aged two-and-a-half) could burn off more of his toddler energy. I began searching housing listings, and contacting Realtors, but everything in the area seemed priced far beyond our reach. Our bank confirmed this, telling me we qualified for a mortgage of no more than $130,000. There was nothing with a yard in any SF Valley neighborhood for less than $200,000 at that time.

Someone suggested we widen our scope, and look at the Antelope Valley communities of Lancaster and Palmdale. We quickly discovered that this extreme north, high desert portion of Los Angeles County was one of the few remaining enclaves of affordable housing within 75 miles of the UCLA campus. As we began working with a realtor, we learned the reason for all the good deals (and this is very important): there had been a housing boom throughout the 1980s, which peaked around 1990. Prices had skyrocketed, and then supply outstripped demand. In the early-to-mid 1990s, prices tumbled. People got underwater on their mortgages, and many homeowners walked away (does this sound familiar?). Banks foreclosed. And now, lots of those foreclosed homes were on the market at prices that even families like ours could afford.

Like I said, the bank pre-approved us for a $130,000 mortgage. We saw lots of really nice houses in the $110-$120k range, and thought about buying one. And then we thought some more...especially about our monthly payments. So we looked some more, and found that $65k was roughly the tipping point: even in the Antelope Valley, houses under that figure were either (1) in bad neighborhoods or (2) in need of more work than I could perform.

We ended up buying a 1400sf, 4 bed, 2 bath, foreclosed tract house for $72,000. When it had been built, in 1990, it had sold for about $115k. Apart from being filled with foreclosed "cookie-cutter" stucco homes on slab foundations, and on the northern edge of civilization, the neighborhood wasn't bad. Our yard wasn't huge, but it was a yard. And the house was in excellent shape, so we were able to move in the week after Baby #2 was born.

If memory serves, we made a 5% down payment, so had to pay PMI, but we got a 15 year fixed mortgage so we could build equity faster. I think our monthly payment was less than $600. But there were two important things our bank made us do before we could get that mortgage: (1) prove my income, by submitting tax returns and pay stubs, and (2) clear up a blemish on MYF's credit report. We had taken very good care of our credit, paying everything on time and paying off our credit cards in full every month. But way back in law school, MYF and her roommates had been in a dispute with their landlord; the landlord had lied and deceived them about the terms of the rental contract, and while the students were away for the summer got a court to issue a default judgment against them. MYF was not even aware of this judgment; the first she learned of it was when, eight years later, our bank pulled her credit report to approve the mortgage. The amount owed wasn't huge, but our bank would not lend to us until we resolved it. MYF tracked down the collection agency to whom the judgment had been turned over, we paid what they wanted, and got the credit report cleared up. And only then were able to get our mortgage.

We made every mortgage payment on time, maintained our excellent credit, and watched as the neighborhood filled up (and housing prices slowly increased). In the spring of 2001, for various reasons, we decided to make our move to the country and become Yeoman Farmers. We were able to sell our house for about $110,000. After deducting what we spent on new carpets and paint, and real estate commissions, and moving expenses, we walked away with just enough cash to put a 20% down payment on our Illinois property. Again we opted for a 15 year fixed mortgage, to build equity faster. Again, we took good care of our credit. And as a result, when we decided to move to Michigan a year and a half ago, we were able to do so.

All of this behavior I have described is called "playing by the rules." Nothing that we did was particularly heroic or extraordinary. None of it required luck, or special consideration. I'd contend that there are tens of millions of families in this country with experiences more or less like ours: we saved, started with what we could, and with patience got to where we wanted to be. We didn't splurge and buy more house than we could comfortably afford, even when the bank offered it. We had to prove our income. We had to clean up our credit. And it infuriates me that so many others got away with doing otherwise for so long.

To the banks and financial institutions which made loans without verifying income, or demanding good credit, I say: you deserve to fail, and responsible lenders like ours deserve to fill the vacuum that your demise leaves in the marketplace.

To those who bought more house than they could comfortably afford, and treated their houses like virtual ATMs (cashing out equity to put in swimming pools and dream kitchens): you do not deserve to stay in those houses. Your houses need to go back on the market at reasonable prices that purchasers are willing to pay. Many of those houses will become homes for families like ours was, circa 1999, who would otherwise be locked out of the market if governments were to prop up those inflated prices by trying to provide people like you with the "soft landing" to which you are not entitled.

And, above all, to Rick Santelli, I say: Thank you, sir, for giving us a voice! And if you do decide to have that "Chicago Tea Party" this summer, I will make sure I have a reason for being in town.