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Why are people who can't afford a house so desperate to obtain 30 yrs of debt?


By dodgerfanjohn   Follow   Fri, 30 Mar 2012, 2:56am PDT   9,255 views   73 comments
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I notice many postings in online forums from people who are "frustrated" at being unable to mortgage a home in Southern California.

Inevitably, these are people with minimal savings using an FHA backed 3.5% down loan looking for homes at investor cash prices in the better neighborhoods in LA County.

So question....why havn't the outdated notions of "rent is like throwing money away" disapated? Why such a complete desperation to mortgage a home you can't really afford?

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marquismark   Sun, 1 Apr 2012, 3:17am PDT   Share   Quote   Permalink   Like   Dislike     Comment 34

What am I missing here? I bought a place. After tax credits, incentives, etc., I put down 40K. My mortgage, taxes, insurance, HOA dues are $300 less than the rent would be on this place. And, if you consider that I can write off the interest and prop taxes maybe $400 less. Over time (let's say 10 years), the rent will likely increase but my payments won't much, increasing the spread in my favor. I believe we're in for a long slow slog in RE, but, in 20 years, I simply can't believe that prices won't be higher. We got nowhere near Japan in terms of overvaluation. By the time I sell in 20 years, I will pretty much have this place paid of and rents will be MUCH higher than my mortgage. Therefore, I will pocket almost the entire selling price of my place.

I think there's a bit of hysteria and throwing out the baby with the bathwater mentality. If you buy at a truly reasonable price and live in the place (or rent it out) for a good chunk of time I think, in the end, you will be pleased.

It worked out well for my mother, my grandmother, my sisters, etc. As long as you don't overpay (or not by too much) I don't see why it wouldn't for you, arguments about the "new paradigm" aside.

bg   Sun, 1 Apr 2012, 3:22am PDT   Share   Quote   Permalink   Like   Dislike     Comment 35

marquismark says

It worked out well for my mother, my grandmother, my sisters, etc. As long as you don't overpay (or not by too much) I don't see why it wouldn't for you, arguments about the "new paradigm" aside.

Where are you? That will have a lot to do with that issue.

marquismark   Sun, 1 Apr 2012, 3:26am PDT   Share   Quote   Permalink   Like   Dislike     Comment 36

Los Angeles (mid City)

Rent4Ever   Sun, 1 Apr 2012, 4:27am PDT   Share   Quote   Permalink   Like (2)   Dislike (1)     Comment 37

tatupu70 says

Rent4Ever says

I think the vast majority of the general public have simply not done the math when it comes to this decision. They don't understand the hidden costs of owning a home (both $ and time), in addition they don't understand that you do not gain wealth through deductions.

On the contrary, I'd argue that you don't really understand the hidden payoffs of owning a home. Of course you gain wealth by deductions. A dollar not spent is the same as a dollar earned. Both equate to $1 saved.

In the end, it boils down to making sure the rent vs. own calculation is in your favor. The last study I saw showed that in 98 out of 100 cities, it was now cheaper to own. Of course I know the majority of people here livin in SF, and SF was one of the 2 cities where it's still cheaper to rent. (Honolulu is the other).

So you should definitely try to maximize deductions to gain wealth? How's that working out for you? Ha ha, what a joke.

The bottom line is, I have never heard a solid argument that can explain to me why homeownership is even something worth considering, unless the homes total value represents less than 10% of your overall networth. I would rather take all money (downpayment, taxes, insurance, lower rent payments, etc) and invest it in a well diversified portfolio getting a CONSERVATIVE 5% a year and end up way ahead than the home that appreciates at about the same rate as inflation. Not to mention having 70-90% of my networth in ONE asset is absolutely insane.

I'm the only one of my friends to have taken this route. They are all upside down, stuck in their homes, lost all their downpayment, have spent thousands updating the homes, taxes, insurance, etc with nothing to show for it. I am liquid and way ahead of the game.

dodgerfanjohn   Sun, 1 Apr 2012, 5:31am PDT   Share   Quote   Permalink   Like (1)   Dislike     Comment 38

E-man says

Laura,

Another great post by you. Thx for sharing.

John,

I'm disappointed that you keep on believing and posting this non-sense. Why such a complete desperation to mortgage a home they can't afford? WTH are you talking about? Have you gotten a mortgage lately, or even try to get one in the past 3.5 year? You still believe banks are still lending out money to those unqualified like the boom years? It's hell if one is self-employed.

I suggest you keep quiet and maybe then, you'd learn something new. I'm just a bit disappointed that our government would hire someone this uninformed to work for them. Maybe this explains why CA is having a huge budget deficit and the country as a whole.

Maybe major Chuck Reed is correct that CA is ungovernable. :(

Learn from your victory. Prosper from your failure.

Happy April Fools :)

dodgerfanjohn   Sun, 1 Apr 2012, 5:33am PDT   Share   Quote   Permalink   Like   Dislike     Comment 39

AnotherLaura says

I'm living in an apartment at present (in a lower-cost area of the country) and I plan to start looking for a house to buy this fall. I think that there will be massive inflation in the next few years, and that I will be able to pay off a house with "cheap money." But I am not unhappy with where I am at present, and I have plenty of time to pick and choose.

There wont be massive inflation. And for someone like me in a government job, we get screwed the most in an inflationary situation as our pay raises will lag several years. But theres not going to be massive inflation.

dodgerfanjohn   Sun, 1 Apr 2012, 5:35am PDT   Share   Quote   Permalink   Like   Dislike     Comment 40

marquismark says

I think there's a bit of hysteria and throwing out the baby with the bathwater mentality. If you buy at a truly reasonable price and live in the place (or rent it out) for a good chunk of time I think, in the end, you will be pleased.

Correct. No one is criticizing buying a house that you really want in an area you want to live in and a situation where you can reasonably afford it.

dodgerfanjohn   Sun, 1 Apr 2012, 5:37am PDT   Share   Quote   Permalink   Like   Dislike     Comment 41

SJ says

Well having savings is prudent and I believe in at least 20% down payment before buying real estate. California is overpriced and I am only here because of a good job. Otherwise, I'd rather be living in south Florida with lower cost of living and closer to the Caribbean for scuba diving but for now, I am here in bay area.

Correct. If 20% minimum down payment was required for a mortgage, the housing market in high priced locations would crumble to the ground. Evidence is the sick substantial discounts for even cosmetic fixers. 3.5% down people don't even have the money to paint the walls and fix the floors. But they have the access to loans to pay a 25%+ premium to mortgage lipstick on a pig.

dodgerfanjohn   Sun, 1 Apr 2012, 5:38am PDT   Share   Quote   Permalink   Like   Dislike     Comment 42

taxee says

We collectively all just bought houses we don't live in and we do have 30 years of debt. Most of us just don't know it yet. The people hoarding the property bought it with our money, effectively lowering our purchasing power so we have to rent from them instead of holding title ourselves. It was the crime of the century and very well orchestrated.

The landlords situation has nothing to do with you. DUCY?

BTW, your critical thinking skills are terrible. Either that or you are a realtor. Or both.

dodgerfanjohn   Sun, 1 Apr 2012, 5:39am PDT   Share   Quote   Permalink   Like   Dislike     Comment 43

SubOink says

Who knows how to live life right? Nobody. It's a complex equation, in hindsight you are always smarter. That's also why it makes no sense to overanalyze everything because it comes different anyways.

Requiring 20% downpayment would not allow people to make such important decisions so lightly.

tatupu70   Sun, 1 Apr 2012, 5:45am PDT   Share   Quote   Permalink   Like   Dislike     Comment 44

Rent4Ever says

So you should definitely try to maximize deductions to gain wealth? How's that working out for you? Ha ha, what a joke.

No, but you need to count deductions in your rent vs. buy decision. I thought that was obvious.

Rent4Ever says

I'm the only one of my friends to have taken this route. They are all upside down, stuck in their homes, lost all their downpayment, have spent thousands updating the homes, taxes, insurance, etc with nothing to show for it. I am liquid and way ahead of the game.

You need to get some new friends then. All of my friends that bought are WAY ahead right now. Looking at rent vs. buy will ensure that you don't buy into a bubble.... And as long as you don't, you'll come out ahead in the medium and long term.

B.A.C.A.H.   Sun, 1 Apr 2012, 5:51am PDT   Share   Quote   Permalink   Like   Dislike     Comment 45

Rent4Ever says

you should definitely try to maximize deductions to gain wealth?

A problem with this is that it assumes one will be in a high tax bracket for the duration. For most taxpayers, an extended period of unemployment will bring their bracket down so that less of the interest (and property tax) payment is deductible. Means more money out of pocket.
It's another card in that "house" of cards.

marquismark   Sun, 1 Apr 2012, 5:55am PDT   Share   Quote   Permalink   Like   Dislike     Comment 46

Rent4Ever says

I would rather take all money (downpayment, taxes, insurance, lower rent payments, etc) and invest it in a well diversified portfolio getting a CONSERVATIVE 5% a year and end up way ahead than the home that appreciates at about the same rate as inflation.

Yes, but you can't live in your portfolio...

tatupu70   Sun, 1 Apr 2012, 6:02am PDT   Share   Quote   Permalink   Like   Dislike     Comment 47

B.A.C.A.H. says

For most taxpayers, an extended period of unemployment will bring their bracket down so that less of the interest (and property tax) payment is deductible.

So, you base your financial decisions on a forecast of being unemployed for extended period?

I would think being unemployed for a significant amount of time makes all planning irrelevant.

B.A.C.A.H.   Sun, 1 Apr 2012, 6:36am PDT   Share   Quote   Permalink   Like   Dislike     Comment 48

tatupu70 says

being unemployed for a significant amount of time makes all planning irrelevant.

I don't agree. One can build dealing with that contingency into their overall planning.

Doing so is one reason that my partner and I don't quiver and quake at every scowl our bosses make. On the other hand we see, too often, folks with high living costs relative to their nest egg, get stressed out. Some people don't deal with stress too well.
http://chitralekhan.wordpress.com/2008/11/16/companies-blog-about-their-layoffs-laid-off-employee-driven-to-killing-ceo/

tatupu70   Sun, 1 Apr 2012, 9:19am PDT   Share   Quote   Permalink   Like   Dislike     Comment 49

B.A.C.A.H. says

I don't agree. One can build dealing with that contingency into their overall planning.

I agree, but I certainly wouldn't make tax decisions with the assumption that I will be laid off for an extended period. Unless you think the probability is high....

Make sure you have a sufficient nest egg to account for that possibility, yes. Use it as an excuse to never buy a house, no.

B.A.C.A.H.   Sun, 1 Apr 2012, 9:23am PDT   Share   Quote   Permalink   Like   Dislike     Comment 50

tatupu70 says

I agree, but I certainly wouldn't make tax decisions with the assumption that I will be laid off for an extended period. Unless you think the probability is high....

I don't disagree with you on that one. However, nor would I suggest to others that they "lockin" their expected cost of living as depending on the highest tax brackets to make it all work.

B.A.C.A.H.   Sun, 1 Apr 2012, 9:29am PDT   Share   Quote   Permalink   Like (2)   Dislike     Comment 51

tatupu70 says

Make sure you have a sufficient nest egg to account for that possibility, yes. Use it as an excuse to never buy a house, no.

"excuse"? That insinuates it is normal and expected for everyone to buy a house (even if it involves/requiring borrowing with tax deductible interest payments), unless they are excused with a permissible excuse. (Are you a RealtorĀ®?)

Owning/buying a house may be best for you but it is not for everyone. Not everyone needs

an excuse to never buy a house

SubOink   Sun, 1 Apr 2012, 1:16pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 52

dodgerfanjohn says

SubOink says

Who knows how to live life right? Nobody. It's a complex equation, in hindsight you are always smarter. That's also why it makes no sense to overanalyze everything because it comes different anyways.

Requiring 20% downpayment would not allow people to make such important decisions so lightly.

agreed.

RentingForHalfTheCost   Sun, 1 Apr 2012, 3:02pm PDT   Share   Quote   Permalink   Like   Dislike (1)     Comment 53

SubOink says

dodgerfanjohn says

SubOink says

Who knows how to live life right? Nobody. It's a complex equation, in hindsight you are always smarter. That's also why it makes no sense to overanalyze everything because it comes different anyways.

Requiring 20% downpayment would not allow people to make such important decisions so lightly.

agreed.

20% seems like the bare minimum people should need in order to be even considering buying. If it was my island, I'd have it at 50% or higher. That'll wipe out the hint of any foreclosures. People need skin in the game, otherwise it is really just a virtual game. Dumb people running important decisions if you ask me. All for the sack of fake wealth.

RentingForHalfTheCost   Sun, 1 Apr 2012, 3:04pm PDT   Share   Quote   Permalink   Like (1)   Dislike (1)     Comment 54

marquismark says

Rent4Ever says

I would rather take all money (downpayment, taxes, insurance, lower rent payments, etc) and invest it in a well diversified portfolio getting a CONSERVATIVE 5% a year and end up way ahead than the home that appreciates at about the same rate as inflation.

Yes, but you can't live in your portfolio...

But you can take the dividends you are receiving and pay some underwater home owner rent, so he can relocate to his new job.

rootvg   Sun, 1 Apr 2012, 3:31pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 55

RentingForHalfTheCost says

marquismark says

Rent4Ever says

I would rather take all money (downpayment, taxes, insurance, lower rent payments, etc) and invest it in a well diversified portfolio getting a CONSERVATIVE 5% a year and end up way ahead than the home that appreciates at about the same rate as inflation.

Yes, but you can't live in your portfolio...

But you can take the dividends you are receiving and pay some underwater home owner rent, so he can relocate to his new job.

Yes...but you probably can't do it and be married. Few women would put up with it.

I would also caution you that we won't always be in a down economy, either. California has been known since inception for its booms and busts.

tatupu70   Sun, 1 Apr 2012, 10:09pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 56

RentingForHalfTheCost says

But you can take the dividends you are receiving and pay some underwater home owner rent, so he can relocate to his new job.

Actually, there is no way in hell you could do that. The math doesn't even come close to adding up.

Rent4Ever   Sun, 1 Apr 2012, 10:30pm PDT   Share   Quote   Permalink   Like (2)   Dislike     Comment 57

rootvg says

Yes...but you probably can't do it and be married. Few women would put up with it.

I would also caution you that we won't always be in a down economy, either. California has been known since inception for its booms and busts.

I don't live in CA. I am married, rent a house on a lake with a landlord that hasn't raised rent in the 5 years I've been here and housing costs (rent, utilities, etc) of 8% of our income. Wife wasn't always onboard with the longterm renting idea, but after seeing with her own eyes the mistakes people have made buying and being stuck in a bad job and an upsidedown mortgage and what we've gained because we didn't buy, she is onboard 100% now. I'm not saying I will never own a home, but definitely not until a house represents about 10-20% of our networth.

I simply don't view a house as an investment, it is a thing, a place to live. I am someone that avoids buying things in general. Money is freedom, and that is what I want, freedom from work and the daily grind. Buying a house will just ensure that I work to 65.

Rent4Ever   Sun, 1 Apr 2012, 10:34pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 58

RentingForHalfTheCost says

marquismark says

Rent4Ever says

I would rather take all money (downpayment, taxes, insurance, lower rent payments, etc) and invest it in a well diversified portfolio getting a CONSERVATIVE 5% a year and end up way ahead than the home that appreciates at about the same rate as inflation.

Yes, but you can't live in your portfolio...

But you can take the dividends you are receiving and pay some underwater home owner rent, so he can relocate to his new job.

Exactly my point! With enough $ in a diversified portfolio you can absolutely do this. That is true freedom, living off yourself and not a paycheck.

tatupu70   Sun, 1 Apr 2012, 10:40pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 59

Rent4Ever says

Exactly my point! With enough $ in a diversified portfolio you can absolutely do this. That is true freedom, living off yourself and not a paycheck.

So, you're saying it's better to have enough money so you don't have to work? No kidding. That's for that insight.

How does it relate to the rent vs. buy decision?

Rent4Ever   Sun, 1 Apr 2012, 10:45pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 60

tatupu70 says

Rent4Ever says

Exactly my point! With enough $ in a diversified portfolio you can absolutely do this. That is true freedom, living off yourself and not a paycheck.

So, you're saying it's better to have enough money so you don't have to work? No kidding. That's for that insight.

How does it relate to the rent vs. buy decision?

Because you can make more money through a diversified portfolio than you can through buying a house.

tatupu70   Mon, 2 Apr 2012, 12:07am PDT   Share   Quote   Permalink   Like   Dislike     Comment 61

Rent4Ever says

Because you can make more money through a diversified portfolio than you can through buying a house.

Of course you can. No sane person buys a house as an investment solely for the capital appreciation.

The vast majority buy a house as shelter.

Investors buy housing for the cash flow (rent).

dodgerfanjohn   Mon, 2 Apr 2012, 12:26am PDT   Share   Quote   Permalink   Like   Dislike     Comment 62

tatupu70 says

Rent4Ever says

Because you can make more money through a diversified portfolio than you can through buying a house.

Of course you can. No sane person buys a house as an investment solely for the capital appreciation.

The vast majority buy a house as shelter.

Investors buy housing for the cash flow (rent).

Its not true that most people who mortgage a house in high(over?) priced areas....which is what we are discussing here...mortgage the house for shelter. Even now, almost everyone mortgaging a house in high priced coastal CA is doing so because they believe its a great investment. You might not get people to publicly admit it....they've been shamed into keeping it quiet...but they still stubbornly cling onto false beliefs, even in the face of a declining market and other negative prognosticating facorts.

tatupu70   Mon, 2 Apr 2012, 12:36am PDT   Share   Quote   Permalink   Like   Dislike     Comment 63

dodgerfanjohn says

Even now, almost everyone mortgaging a house in high priced coastal CA is doing so because they believe its a great investment. You might not get people to publicly admit it

I'm not sure how you know what almost everyone in high priced coastal CA thinks. Regardless, they are likely looking at the rent vs buy over a longer time period and not solely capital appreciation of the house vs. other investments.

rootvg   Mon, 2 Apr 2012, 12:47am PDT   Share   Quote   Permalink   Like   Dislike     Comment 64

tatupu70 says

dodgerfanjohn says

Even now, almost everyone mortgaging a house in high priced coastal CA is doing so because they believe its a great investment. You might not get people to publicly admit it

I'm not sure how you know what almost everyone in high priced coastal CA thinks. Regardless, they are likely looking at the rent vs buy over a longer time period and not solely capital appreciation of the house vs. other investments.

We bought because we got sick of giving away thousands of dollars each year not only in rent but taxes as well. We have two six figure incomes and each year it's more brutal than the last.

dodgerfanjohn   Mon, 2 Apr 2012, 2:20am PDT   Share   Quote   Permalink   Like   Dislike     Comment 65

rootvg says

tatupu70 says

dodgerfanjohn says

Even now, almost everyone mortgaging a house in high priced coastal CA is doing so because they believe its a great investment. You might not get people to publicly admit it

I'm not sure how you know what almost everyone in high priced coastal CA thinks. Regardless, they are likely looking at the rent vs buy over a longer time period and not solely capital appreciation of the house vs. other investments.

We bought because we got sick of giving away thousands of dollars each year not only in rent but taxes as well. We have two six figure incomes and each year it's more brutal than the last.

#1.) If you already bought, why are you still posting here and why would you care at this point about RE value?

#2.) Making a six figure income, you work 50-60 hours per week. How do you even have time to post here?

#3.) Is the decline in value worth the tax savings? 5% drop per year on a million dollar house is $50K the first year.....

dodgerfanjohn   Mon, 2 Apr 2012, 2:21am PDT   Share   Quote   Permalink   Like   Dislike     Comment 66

tatupu70 says

dodgerfanjohn says

Even now, almost everyone mortgaging a house in high priced coastal CA is doing so because they believe its a great investment. You might not get people to publicly admit it

I'm not sure how you know what almost everyone in high priced coastal CA thinks. Regardless, they are likely looking at the rent vs buy over a longer time period and not solely capital appreciation of the house vs. other investments.

Spun like a true realtor. Good job.

tatupu70   Mon, 2 Apr 2012, 2:26am PDT   Share   Quote   Permalink   Like   Dislike     Comment 67

dodgerfanjohn says

Spun like a true realtor. Good job.

I think you are giving realtors way too much credit...

It's not spin. It's basic finance. You think doing a rent vs. buy calculation is spin?

rootvg   Mon, 2 Apr 2012, 2:35am PDT   Share   Quote   Permalink   Like   Dislike     Comment 68

I post here because I want to. I'm not chronically angry at the world but it's entertaining to watch people who are.

We each make what we make working about fifty hours a week, much of it from home.

The area we bought in is almost completely homes in the 750K range but ours was a fixer and we got it for considerably less.

bubblesitter   Mon, 2 Apr 2012, 3:04am PDT   Share   Quote   Permalink   Like   Dislike     Comment 69

dodgerfanjohn says

#3.) Is the decline in value worth the tax savings? 5% drop per year on a million dollar house is $50K the first year.....

I mentioned this so many times before. Even seasoned bulls do underestimate the compounding effect of that loss over the period of loan(probably 30 years) - in some cases,too much focused on positive cash flow. In this case a loss of $50K,how much would that money have made if you had that money in your hand and invested else where - over the period of 30 years :)

zzyzzx   Mon, 2 Apr 2012, 3:09am PDT   Share   Quote   Permalink   Like (3)   Dislike (1)     Comment 70

Why are people who can't afford a house so desperate to obtain 30 yrs of debt?

It's because there are a lot or really stupid people out there. Always have been and always will be.

Rent4Ever   Mon, 2 Apr 2012, 3:21am PDT   Share   Quote   Permalink   Like   Dislike     Comment 71

bubblesitter says

dodgerfanjohn says

#3.) Is the decline in value worth the tax savings? 5% drop per year on a million dollar house is $50K the first year.....

I mentioned this so many times before. Even seasoned bulls do underestimate the compounding effect of that loss over the period of loan(probably 30 years) - is some cases,too much focused on positive cash flow. In this case a loss of $50K,how much would that money have made if you had that money in your hand and invested else where. :)

Yep. Opportunity cost is a bitch when you're on the wrong side of the decision.

I also have a hard time understanding why people buy large houses to begin with. No one, and I mean not a single married couple without kids needs a 2,000+ square foot home. It's absolutely absurd why anyone needs that much space except to store stuff/junk that they've acquired throughout their life. Even with 2 young kids, you don't need a 2,000 square foot house. The only time you actually might need that kind of space is when the kids are 12-18 and young adults that need privacy, etc. But that is only 6-8 years. Once they are off in college, you don't need a big house. People let their STUFF determine how big a house they need to live in.

zzyzzx   Mon, 2 Apr 2012, 3:51am PDT   Share   Quote   Permalink   Like   Dislike (1)     Comment 72

Rent4Ever says

Yep. Opportunity cost is a bitch when you're on the wrong side of the decision.

I also have a hard time understanding why people buy large houses to begin with. No one, and I mean not a single married couple without kids needs a 2,000+ square foot home. It's absolutely absurd why anyone needs that much space except to store stuff/junk that they've acquired throughout their life. Even with 2 young kids, you don't need a 2,000 square foot house. The only time you actually might need that kind of space is when the kids are 12-18 and young adults that need privacy, etc. But that is only 6-8 years. Once they are off in college, you don't need a big house. People let their STUFF determine how big a house they need to live in.

You need to watch a few episodes of Hoarders.

RentingForHalfTheCost   Mon, 2 Apr 2012, 6:12am PDT   Share   Quote   Permalink   Like   Dislike (1)     Comment 73

rootvg says

tatupu70 says

dodgerfanjohn says

Even now, almost everyone mortgaging a house in high priced coastal CA is doing so because they believe its a great investment. You might not get people to publicly admit it

I'm not sure how you know what almost everyone in high priced coastal CA thinks. Regardless, they are likely looking at the rent vs buy over a longer time period and not solely capital appreciation of the house vs. other investments.

We bought because we got sick of giving away thousands of dollars each year not only in rent but taxes as well. We have two six figure incomes and each year it's more brutal than the last.

Funny, I sold because I got tired of losing equity year over year and paying property taxes. Like you we have two six income figures and each year now is better than the last rather than worse when we owned. ;)

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