Nationally, the sub-prime and fast-and-loose mortgage broker collapses continue to grow and spread. The tone darkened as a Bill Wheaton, an economist from MIT predicted that nationwide, several million folks will probably end up losing their homes.Overall, though, I have mixed feelings about this situation. Even in the boom, I wondered where the heck the government, investors, and brick-n-mortar banks were on watching these guys. It was absolutely ridiculous what people were pulling on these mortgage contracts – such as no income verification to speak of (put whatever you want down for your annual salary, etc). Too many people were getting into mortgages that even 10 years ago would have been laughed off the table. When I took a cursory look at some of the mortgage deals people were pushing through a few years back – I could tell these guys were used car salesmen at best. Now we hear lots of stories about people who got into a house or refinanced and were ‘tricked’ and ‘duped’ into these products. Yes, there is a lot of blame to be laid on these sleaze-ball lenders and front-men who are now slithering away to have the company take the fall for them – they definitely ruined lives when they themselves knew the products were bad for most people. Those front-line scum, and the managers that pushed it, should see jail time or at least lengthy loss of licensing for financial products. It’s also time for some
But wait a minute people – didn’t *we* do our homework? There is still a bit of blame to be placed on us as consumers for not picking up “Mortgages for Dummies” and doing the most basic, bare minimal amount of work you needed to do. Ten minutes looking at historical interest rates the last 20 years, understanding the bare minimum of how a sub-prime works, and doing some math with what your budget can take would have shown you what would happen. There’s definitely a shame-on-you that I’m sure many are now getting in very painful monthly doses right now each time their ARM goes up; or for that roof repair you didn’t plan for, or your car unexpected breaks down, etc. I don’t envy or place tons of blame on all consumers for what is happening. However, it’s time we grew up and learn that living paycheck to paycheck in NOT the way to run your life; and that proper budgeting involves much more than just thinking about what monthly payment you can afford next month – as this guy knows. I find it staggering that so many folks entered into the biggest investment of their lives and didn’t do any more homework than read a brochure they gave or just took their word for it. Just doing math to figure out your next monthly payment isn’t doing your financial homework or being a well-informed consumer – it’s a recipe for disaster. We can all read crazy amounts of stuff about the latest fad diet’s detailed food analysis, or which renewable resource our products are coming from and ban those we don’t like – but can’t spent 1 hour on the biggest outlays of cash in our lives? Did we all fail high-school economics? The question now is what do we do to ease these folks out of something they couldn’t afford in the first place; and have an orderly exit to keep the market from collapsing (which seems to be happening at a reasonable pace right now).
That’s right – and orderly exit for these folks. Not a bail-out. Not a subsidy for 20 years. People and families are going to lose houses – houses they should never have been in in the first place. Should they lose everything and end in bancruptcy – absolutely not. We have a duty to make sure it doesn’t become a whole-sale disaster. But it is time to be honest. If you cannot afford the home you bought, it’s time to get out and move into something you can afford. We as a nation should help ease that process with generous helping hands and creative helpful financing, but it’s time to live more sustainably – and I’m not just talking about paper or plastic.
As Americans, we are disgraceful financially. In China, the savings rate is about 40% – thats 40% of their take-home pay goes into savings/investment verses less than 1% rate in the US, while other industrial nations are at least in the 15% range (as were we until 10-20 years ago). In the US, almost 50% of all people don’t even have $1000 on hand for an emergency. While the average credit card debt spread over all American cardholders is more than $8000 (misleading – but true and climbing), the median balance on an American’s credit cards is still at $1900. It’s time we stopped feeling ‘entitled’ to living beyond our means with a bail-out always at our back. While I think it’s a bit overly-conservative, Dave Ramsey recommends that you buy no more home than you can pay off with: a 15 year fixed mortgage who’s monthly payment constitutes no more than 40% of your monthly take-home pay (after-taxes/15% saving), with a large enough down that you don’t need a second mortgage. Then, when you have that number, you go looking for houses in that range only. Yes, it’s smaller than you expected, but you can afford it. And afford to live a little, and afford emergencies and repairs that will always come up.
It brings up the question of always bailing someone out vs forcing personal responsibility down their throats. I’ve seen both methods fail, and have thought about this a lot recently. But more on that tomorrow….