Econo, do you think an O6 could afford a $500,000 house on his pay (including BAH)? A lot of them can't. Some might be able to do so if they have saved and stayed out of debt. Should anybody get their panties in a twist because I spoke the truth? I certainly hope people would show more sense.

PD, thank you for the support and contributions you make as a spouse of a service member. I deeply appreciate it. We're all on the same team. Mr. Denninger too. Good evening.

This post can help a lot of people and I think you are accurate on the business aspects of the decision.

The other impact that is rarely discussed is the tax issue. With the tax law change there is no liability for any loss that is forgiven, but no deduction if you take a loss on your home. In my opinion the tax implications give folks another 15-28% to think about before deciding to actually take a loss.

To all,

I would like to share my opinions in this matter as they are colored by my relative experience in matters of military, finance, and fraud.

As a former member of the US military, I was not the least bit offended by KD's Ticker. This is not said by way of being syncophantic, but by way of fixing the blame where it belongs.

First, a brief overview of my background.
I was in the US Navy, as an officer, during the entire duration of the 1990s. During that time, I was moved (PCS) 5 times. In all but one duty station, I received the BAH/VHA payments for my paygrade and duty station.

One of my assignments was as Administrative Division Officer for a squadron of 450 personnel, of which 85% were enlisted. As part of that assignment, I took upon myself the task of educating young, and often times uneducated, enlisted men in matters of basic personal finance and debt. This was due to the several "letters of indebtedness" that crossed my desk on their way to the Commanding Officer that concerned a young Petty Officer's or Airman's excessive debt and failure to honor that debt. In the armed forces, not honoring your civilian debts can often times be a punitive matter.

Anyone that is familiar with a Navy town is also familiar with the variety of pawn shops, payday loan centers, and sleaze-ball used car dealers that seek to take advantage of unwary military personnel in matters of selling them things they neither require nor have the reasonable ability to successfully make payments. Mostly, this was for automobiles and motorcycles, but could include boats and a variety of youthful recreational toys.

In the 1990s, it was almost exclusively young sailors buying too much automobile and finding out that they will face reposession.

Today, it is houses. I **** you not.

My squadron carried approximately 65-75 commissioned officers, who are the highest paid members of the squadron. Almost every one of these would make more than the E-7 (Chief Petty Officer, Gunnery Sgt., etc) in the example provided in today's Ticker. Even with combat pay, most of the officers in my squadron received a very healthy flight pay, and the officers on their second tour (Lt. Commanders, XO, CO) would have an even greater incentive bonus on top of their flight pay. Mid-grade Lieutenants (Army/USMC Captain) would make in the low $70Ks, and that was 15 years ago.

Of those 70 officers, we had precicely three that owned a house - 3! One was the Commanding Officer, who was married to a college professor, another was the Operations Officer that was married to a flight attendant, and the last was a Ltjg (pilot) that owned a very small house that he rented out to two others, while he lived in a finished attic.

Every other officer rented.

Today, I live in my hometown in Western Washington that is home to numerous Naval installations, all of which are staffed with uniformed personnel that make less than their aviator contemporaries. I keep close to the communities, as I attend community functions with many of them and my extended family all work, in some capacity, with the US Navy (it's the only industry here).

Guess what? Just about every commissioned officer, non-commissioned officer, and mid-grade petty officer owns his own home. By my estimates, it is well north of 80% for officers, and almost 50% for mid-grade enlisted (E-5 to E-7).

As we were fond of saying when I was flying, "Whiskey Tango Foxtrot?"

Why is this happening?

Well, back in the early 1990s, real estate was dead. It didn't appreciate and nobody saw anyone falling backwards into money, especially in New England.

Today, especially in the coastal regions (where most Naval installations are located), you have to be fall-down stupid not to make money in real estate - at least until 2006. So, what does everyone do?

They buy houses.

EVEN THOUGH THEY ABSOLUTELY KNOW THEY WILL BE MOVING WITHIN 2 TO 4 YEARS, AND THEY CAN'T WAIT IT OUT IF THE MARKET TURNS ON THEM!!!

Many people have visions of transferring to another duty station within the county, or keeping their home(s) until they come back and retire here.

Guess what? The slime-balls that normally got into the pockets of the uniformed personnel via pawn shops, payday loans, and used cars, are now wearing suits and ties and are schlepping mortgages and real estate, and they know they have a golden contact.

Why?

Letter of Indebtedness - the death blow to a member's security clearance or an officer's promotion.

Yes, the FBI, NIS and DIA all take a decidedly dim view of someone with a TOP SECRET security clearance having excessive debt.

Why is it any business of the military if a member has too much debt?

The gov't knows that a heavily indebted person is actually owned by someone else. The Soviet/Chinese/etc. security agencies also know this, and they use it to pressure people to reveal things they shouldn't.

I've been on both ends of penetrating FBI interviews concerning my TS clearance and those concerning members of my squadron and other military friends. They ask very personal questions regarding ANYTHING that can be used as blackmail or pressure. For my original TS clearance, the FBI interviewed my family members, college roommates, and former landlords. Number one line of questioning? Money management and debt.

It is one of the reasons that I am debt free to this day - nobody owns me, and I like it that way.

I know of several local examples of very junior officers that are in $500K worth of debt on houses that can't sell. It is only a matter of time before someone starts to notice this debt, and a Combat Information Center Officer on a US TRIDENT submarine is going to have a very difficult time doing his job, if his TS clearance is being negatively reviewed.

Sorry to those that took offense at KD's Ticker. Excessive home ownership by uniformed military is foolish and borderline irresponsible. Wearing your country's uniform is no excuse for not using your head. We can wave the flag all we want, but at the end of the day, someone gambled 5-7 year's income on a speculative asset they could only reasonably occupy for 2-3 years.

Back in my day, it was almost exclusively junior enlisted getting into trouble with cars. Today, it is the leadership class that is in trouble with houses.

For cars, it was strictly reaching beyond the grasp for a lifestyle choice. Today, it is that, plus a fair amount of greed.

Why weren't we all buying homes in 1995? No expectation of return. 10 years later, it was considered good financial planning ONLY BECAUSE OF THE EXPECTATION OF RETURN.

Also, to put this in perspective...

My mom lives two doors down from the former commander of every submarine in the US Pacific Fleet (a three star Admiral), and his house costs less than that of the aforementioned E-7.

Yep El.

Oh, by the way, I've had the folks doing the security clearances stop by and ask questions before (about someone else.) Their questions are, uh, rather probing.

As they should be.

I have also done work on projects that weren't "fully disclosed" and have experience with having to lock a disk cartridge containing said code in a vault when I go to take a*****, along with the obligation to keep the drive within my physical vision at all times while it is not secured in that same-said vault. While it has been a very long time and my obligations MIGHT have expired with regards to keeping my mouth shut, I'll leave it at that.

These people were exploited - pure and simple.

One of the most fundamental tenets of contract law is the idea of "efficient breach." In short, the law recognizes that when a commercial transaction ceases to be economically worthwhile, the law should not make it its objective to punish, or otherwise deter, breach. A typical example would be a contractor who bids a project in good faith, and then encounters unforeseen problems which increase his costs threefold. Contract law recognizes that the rational (and economically efficient) response in such a situation is for the contractor to breach the contract and pay damages. Contract law actually encourages such "efficient" breaches by limiting the amount of damages to that amount necessary to compensate the aggrieved party for his loss--AFTER requiring the aggreived party to "cover" (find a substitute contractor) and make other commercially reasonable efforts to mitigate his losses. Note that the law COULD, but ordinarily does not, grant specific performance (i.e., require the contractor to perform). The reason, once again, is that the law recognizes that when a transaction ceases to be economically efficient, it is better to allow the parties to cut their losses and move on. The "moral" perspective--the idea that "a deal is a deal"--is thus fundamentally opposed by the public policy considerations underlying the law of contracts.

I have some difficulty with this concept, because the sterile economic perspective does not take account of the more subtle costs to society of a public policy that allows a deal to be broken with impunity. Back in the time when a person's handshake was his bond, the transactional costs of contracts were very low. Nowadays, the simplest transaction entails a boatload of documents and a team of attorneys to protect the parties from one another. I'm not sure that's progress. Just a thought.

Gen's ticker was on target. As a military officer, I feel that I have an obligation to other members of the military to help educate them and have infact recommended the tickers and the forum in writing as a one of the sources for financial education. Is it complete, no. Is it a great resource to find a great deal of information to inform further research, yes. I also read the ticker as defending the individual and indicting the lenders. Keep up the good work Gen.

Karl,

I believe your inate generousity led you to be way too fast and loose with the loan amount you considered to be acceptable in your hypothetical. As I remember it, the rule is that 36 percent of the monthly income is for all debt. Mortgage loan is supposed to be based on a payment that is no more than 27 to 28 percent of monthly income. Or total loan less than 2.5 to 3.0 times annual income. Whichever loan amount is less. (20% down is assumed). You will have to force yourself to be more conservative with your lending standards if you decide to become a banker (which maybe you should, after all the bad banks fail, this country will need some good bankers).

Uh, Martin, that was basically what I said

This ticker is almost like "full circle" to when I first learned about KD last summer - he was the only one who seem to fully comprehend my article about subprime loan from affordability standpoint. :).

http://seekingalpha.com/article/32948-su....

Since then, I learned something new about affordability study: you should start the cash flow from everything else non-mortgage to decide whether or not someone will keep his/her house. We've been too generous Karl, and my company is paying for it due to my faulty analysis .

One thing the article doesn't mention is whether his wife works or not. This would shed a large light on whether he could have afforded a home for over $400,000 or not.

Thanks Eleua.

If the military teaches you something its accountability!

Many of our brave service men/women CHOSE to live within their means, to turn away from the lure of "hot money" that could compromise their careers, and perhaps the security of our country. Their living examples of doing it the right way, the Military Way.

For those who ELECTED to jump on "hot money" and lost; they remain accountable, and therefore should behave honorably. That's the Military Way!

How did we quietly overlook the fact that the subject of the article is an E-7 (there is only one higher grade of enlisted serviceman, for those who don't speak military)....he wasn't just born yesterday and, in all likelihood, has been down the housing route before.
I don't take to the idea that all these people-military or otherwise (and especially military, where there are numerous on-base advisory services available to counsel them through just about any "event" which they are likely to encounter)--are just victums of an elaborate ruse by the banks to put them into housing which is obviously way above their means. It takes two parties to make a contract....

Uh, Two more, E-9 is the top, at least in the Navy.

Couldn't agree with you more TBear!!

Accountability!! pure simple..to do any less, would discredit all the other fine Military families who did not waver in the face of daily solicitations of "free and easy" credit, lived within their means...and were proud of it.

just as Eleua mentioned in his email:

"My mom lives two doors down from the former commander of every submarine in the US Pacific Fleet (a three star Admiral), and his house costs less than that of the aforementioned E-7."

peace