How the Mortgage Business Will Ruin Us and How I Will Help
By Chad A. B. Wilson
Published March 14, 2007, 4:29 pm in Economic Issues.
I'm in the process of buying a new home, and my mortgage broker is happy to have me. I have good credit because I pay my bills, and I guess they determine that I'm a good risk. Even though 6% is pretty good, it's a far cry from the 4% people were getting a few years ago. Of course, the FED has something to do with this, but the ramifications are astounding.
Consider this: the mortgage business is hurting, not only because fewer people are actually buying but because more people are defaulting early on. It's still possible to get no money down loans, even though I don't believe they are usually the wisest decision. All of these programs with their creative financing affects the interest rate, but it really affects the buyers. Consider someone who has okay credit but doesn't have a lot of money; they mainly live paycheck to paycheck. Sub-prime mortage lenders will lend to them with some much-higher-than-normal rate, even though those people are still a huge financial risk.
What's happening is that there are more foreclosures, sure, but foreclosures are the final step. The bigger problem seems to be that people ar edefaulting on their loans earlier than they sued to. Whereas it used to be that it would take someone two to three years before they started defaulting on their loans, now it's happening just a few months into a mortgage. But it isn't worth it to the lender to foreclose at that point, because they haven't gotten any money out of the borrower yet. If they sell the foreclosed property at any kind of a discount, they have just lost money. Normally what happens is someone borrows $100,000 for a house, they pay off $20,000 of it, along with some unholy amount in interest. So the bank can foreclose at that point because they have made enough money to be able to sell the property at a foreclosure price.
Whose fault is this? In some ways, it's no one's fault. Because everyone just wants to make money, lenders will do whatever it takes to get clients. Sure, they want them to pay their mortgages because they make beaucoups of money from clients that pay their mortgages on time. They make money off of foreclosures, too, but not as much as they do off of the good risks. We can't really blame these people, I guess, but it seems as if they're lending to people with terms that encourage people to purchase properties outside their means. I realize that it's a part of the American dream to own a home, and I partially agree with this dream. But people on the poverty line need government backed loans, not loans from standard lenders with pricing so cheap but with such ungodly terms that the borrowers end up defaulting. The other side is that middle class borrowers start thinking about owning that McMansion for $500 grand when they can really only afford a ranchburger for $150. But the terms are so good that they go for it and then end up defaulting.
So it's really a fault of our system that encourages people to live beyond their means. People always want to have everything right now; they don't want to wait for something--that's why we have credit cards and home equity loans and no payments until 2009 on a new refrigerator. Perhaps that's the real problem.
But then again I'm the pot calling the kettle so black. Here I am trying to buy a house that I'm really not sure I can afford. No, I really don't know whether it's something that is going to get me in trouble or not. Why am I going for it? It's partially the house--it's beautiful, trust me. But partially it's wanting to keep up with my friends, whose income has long surpassed mine (I went into academia, while my friends went into medicine and business, for the most part). I am a part of that culture that says I must keep up with the people around me. I must send my children to "good" schools because that's what responsible parents do. I must have a backyard for my children to play in becuase that's what a good parent would do. I must live in a safe neighborhood because that's what a parent who really loved his or her child would do. So I must do these things. I must pay for a house that is beyond what I can actually afford in order to be able to say to everyone I know that I live in a safe, nice neighborhood with a good backyard and good schools. If I don't do this, I must explain to everyone why I chose differently.
I, too, am caught in the race to prove myself worthy.
Is there anything wrong with that. Not inherently, I don't think. Having a nice big house zoned to a good school in a safe neighborhood is not wrong, by any means, and there's nothing wrong with wanting it. After all, it's a part of the American dream, and it's what the suburbs were built to provide. But there is something wrong if I determine that I am not complete without those things. If I tell myself that I MUST have those things because without them, I am a failure, then I would have to reevaluate and determine what really matters. I can move out to the suburbs and have those things, after all, but I want to live near the action, not way out with an hour-long commute. I want to be in a certain type of house, too (mid-century modern, if you're wondering), so I'll have to pay more for that. Are those things worth going in over my head?
Now that I'm not really sure.
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