Much has been made of the housing bubble, how it broke, and what's going to happen next.

In a nutshell:

Banks have assets and liabilities. On their balance sheet, mortgages are assets (they bring money in through interest payments, fees, etc.) and deposits by customers are liabilities (they have to give the money back).

So many people have defaulted on their mortgages, that the amount of bank owned property has skyrocketed. The banks made loans on inflated property values. Properties that the bank has on their books as a $250,000 loan (a $250k asset) is now actually worth maybe $175k, what someone will pay for it. However, the banks cannot sell these properties at such a loss. So they keep them on the books as a "real property" asset, for $250k even though the asset is not worth that amount of money. Someone called it "Enron style accounting".

If the banks were to adjust their books to reflect the actual value of their assets, they would be bankrupt. Their liabilities would far outweigh the assets.

Some analysts are predicting a second wave of mortgage defaults in the next year as a few other special types of loans, such as the Option-A, come due and go into default.

How does this affect me?

We do not have a mortgage. We rent.

I am still worried, though. Our landlords are not professional property developers. Rather, it is a family that outgrew this house, and moved into a larger one. Later, the husband got transferred out of state. Instead of selling the two homes here in Texas, they kept them as rental properties.

If they default on their mortgage, I will be the last to know. I have a friend who went through this scenario in August. Her landlord was foreclosed on, and she didn't find out until the sheriff arrived to serve an eviction notice - three days after she had paid that month's rent. She had 10 days to pack up, find a new home, and move.

My landlords are very nice, upstanding citizens, and are a military family. I do not think they would try to rip us off. Then again, I don't know what their credit rating is. I don't know the terms of their loan. I can't control whether there will be a layoff or illness affecting their income.

However, I still think it would be prudent to plan for a "just in case". Set money aside for a new deposit, should we need one. Money to move quickly. Cash for a motel. (Although we ran into a motel problem when we first moved here - occupancy restrictions. I couldn't even get a quote for a family with more than four children!)

Beefing up the savings is all part of the new economy, especially if your shelter is at the mercy of someone else's payment.

Labels: Frugal, In The News, Journey to Simplicity