Wednesday, April 3, 2013

Mortgages during and after an Economic Collapse?

Hi Fernando,
I read your book about 1.5 years ago and am begining to read it a second time.
One thing that I don't believe you cover is exactly what happens to mortgages and taxes during a collapse. If a large majority of people are unemployed do they let you remain in the home if you cannot pay your mortgage and property taxes?
I have been aquiring supplies for two years, but one thing I will not be able to do in the event of a collapse is to pay off my mortgage. Many of my supplies will not do much good if I am forced to become a nomad.

Hi Jim, this question often comes up and I can see how it is a concern these days for most people.  Regarding taxes, like death, they are unavoidable, and if there’s one thing I’ve learned from Argentina and researching various other crisis around the globe is that taxes do go up, and they are almost entirely aimed at the middle class socioeconomic group.
Regarding mortgages in Argentina, certain laws were implemented to stop people from losing their homes, but it just worked in a smaller percentages of the cases. 

Poverty in USA

A law was passed, Ley 25.798, which gave you a year before you had to continue making your mortgage payments. The mortgage was updated to the current price of the property and monthly payments could not be greater than 25% of the family’s income. This only benefited those that had bought the property between January 2001 and September 2003, the property had to cost less than 100.000 USD or the equal amount converted to pesos and it had to be your only property, the one you live in. This of course meant that the law only benefited the lower income buyer, and only those that bought during that period of time. As for those not covered by this law, a thousand homes went under the hammer per month.
Here’s the link explaining all this but its in Spanish:

What happens if you cant make the payments, mortgages or taxes? Accounts get frozen, and any money coming into your account is immediately taken to pay for those debts. You lose everything little by little and become poor or even fall below the poverty bracket into extreme poverty and indigence, losing it all and becoming homeless. That happened to hundreds of thousands. I know of several people that had to move back with their parents, other relatives of friends to live in their kitchens or living rooms for long periods of time, and those are the lucky ones. Those that didn’t have family to take them in, they ended up living on the streets.



Anonymous said...

One strategy here is to try and switch to an interest only. Stash the money you would've used to pay the capital somewhere safe (eg gold, silver, supplies), then if TSHTF and paying the mortgage becomes impossible when you lose your house you should still have significant resources to bring to your new location. If by some miracle the world takes the path to universal prosperity then you can convert your safe stores to cash and pay off the capital when it comes due.

Greek Caste System said...

Concerning Greece, we have witnessed a huge increase in taxes since crisis began in 2010:
1) VAT went from 18% to 23%
2) Income tax could be up to 44%!!!
3) I pay 423€/month for a crappy social security, while salaries are about 500-700 euros!
4)Property tax now is roughly equal or more to a month's rent payment.
For instance, if you could rent your appartment for 400 €/month, property tax is equal or more to 400 €/year.
5) Half of the gasoline/petrol price is tax. Many homes burnt wood for heating, resulting in smog.
And many more...
There is NO provision for unemployed people to not pay any of the above taxes.
A lot of people are unable to pay their taxes. It is still unclear what will happen to their debts to the state.
For more read my humble blog:

Greek Caste System said...

And yes, Jim, IMHO having a nomad mentality is the best strategy to survive when SHTF

Anonymous said...

If I may, it all depends on local laws. In general, expect some initial instability with no clear winner and then count on banks getting the upper hand, thanks to their partners in crime in government.

I remember when my dad bought his first home during the Keynesian "Brazilian Miracle". In Brazil as any where that Keynesian policies were implemented throughout history, it felt good at first, but they only set up an eventual collapse. In Brazil's case, the trigger was the 73 oil crisis, leading to high inflation and, eventually, to hyperinflation.

The home that my dad bought at the economic crest was directly from the builder. As the trough became evident, quickly, the payments could be paid with pocket money. Unexpectedly, the builder went bankrupt and my dad paid the house off. My dad got the better outcome, but the poor builder and his family fell into poverty and never recovered, to the best of my knowledge.

In the reigning inflationary environment, my dad had a roof over our heads, but his savings were decimated along with his income and career, ever settling for some income in whatever position.

But that builder was a small entrepreneur. Large construction companies and banks felt the sting, but quickly engaged their corrupt agents in the state. The rules were changed and many mortgages were retroactively modified to be indexed by inflation, unlike salaries. The result was that many people sold their homes to get out of the mortgages, typically to investors who turned them into rental properties.

Initially, rental properties abounded, but since rent was raised more quickly than income, more and more people had to find other living arrangements, often in the slums. This led to a backlash on politicians who, fearing for their reelection, enacted rent-controls. Again, at first, renters got the better outcome, but landlords preferred to leave the property unoccupied than subject to wear and tear for a miser rent. Again, the pendulum shifted and renters got shafted due to scarcity of rental properties, which led many to the slums.

Things went on pretty much in the same way, with one strike for the people and two strikes against the people and so on. The net result was a massive increase of poverty and an economic stagnation that took over two decades to sort out.

A whole generation - mine - grew up in an economic quagmire. Perhaps the second victim of it was the culture, which was shattered at its base as despair led many to extremes of selfishness that still shapes the Brazilian culture, in spite of the significant economic improvement in the last decade.

This time, in a world crisis, I hope to fare a little better than my dad. Not because I can control my income or my career, but because the only thing that I can control is where I park my modest savings: tangible assets and hard currencies. I witnessed that relatives and family acquaintances who came through the crisis were those who had acquired property during the boom or in the first stages of the crisis which, even when they were unoccupied, could later be sold for a profit, not to mention that sometimes relatives were kindly allowed to live in them for a symbolic rent.

Of course, in this world crisis, to a greater extent unlike the Brazilian one, the only hard currency is precious metals. Any piece of paper, whether a title or fiat money, is a liability by a counterpart either bound to fail or to betray the contract.

The running joke in Brazil about this world crisis is that as Brazil never became a first-world country, the first-world was becoming like Brazil. The world is Brazilian now, as Cypriots are learning.

Anonymous said...

Interesting story from our Brazillian friend. Something to be gained from that is how to survive and thrive in these economic times.

I think one solution is to have 3 yrs of expenses saved up. So while you can not pay off a mortgage in full, it's possible to keep paying for some time if you lost your job.

Anonymous said...

who can afford to have 3 years saved up? The best thing to do is to buy 5 acres of land with a couple of reliable water sources and live off the land.

Kris said...

Augustine, Thank you so much for sharing your story. It's very helpful to those of us trying to figure out what it looks like in the real every day world to see your currency crash. Your story makes a lot of sense, that the banks would collude with the government to modify mortgages for inflation. Many here think their mortgages will go away or that they will be able to pay them with a paycheck or two. That is foolishness.