September 2, 2007

The sub-prime issue

An interesting take on sub-prime loans and the Bush administration push for homeownership. He suggests that the entire mortgage industry has shifted from a long-term relationship of 15 or 30 years to an immediate profit at the point of sale. The problem comes when people who want to borrow enough for a 250k house, but get talked into a 350k loan because the lender makes more money immediately. The lender then sells the loan to someone else--removing the long term market force that would make them only loan what a person could actually pay back. It is really unconscionable when you think about it. People go into buy a house--after Bush has made a huge point of getting people into homes as owners--end up with far more loan than they can afford and with an adjustable rate that explodes on them. We are hearing about mortgage payments that triple and quadruple--all perfectly legally. But imagine your own situation and see how you would respond. People with good jobs and a steady income find themselves unable to make the payments.
Suddenly, after two years of thinking that you had it made by paying only the interest payments on a loan you could never afford in the first place, the interest-only term of your loan expired and your $500/month payment suddenly kicked up to $1,500. Things get tight for a few months, there is additional stress in the family as you can no longer afford vacations or dining out. After a few months of that, the floodgates open. With the Fed threatening to raise rates, your lender decides to adjust your mortgage rate up by 3.5%--completely within their right to do. Unfortunately, this means your payments skyrocket up to $2,800 per month. Unprepared for this change and in disbelief, you cover some short term expenses by maxing out two credit cards. You make the first mortgage payment and the second, but now you are short cash and start to miss one credit card payment, then another. Life at home becomes unbearably stressful and you start talking about a second job.

Yeah, I know, caveat emptor. No one actually forced these millions of people to sign these loans. But that doesn't mean we should encourage this kind of destructive loan practices. As we are seeing and will continue to see--these kinds of mortgage practices are not only unethical, but will harm everyone in the economy.

But while Bush's terrorism fetish filled the country with fear, his 'homeownership' mantra had the opposite effect: duping vast sections of the country into the thinking they owned homes, when in reality all they had done is sign themselves up for mortgages so rigged in the banks favor that they make credit card contracts look like birthday cards. Any honest financial planner would have looked at 99% of these 'sub-prime' and adjustable mortgages against the financial realities of the new home buyers and given vastly different advice about loan amounts. Somehow the simple questions never got asked--questions like, 'Are you sure you can handle this much debt over the next five years?' or 'Are you aware that these radical increases in your payments will likely happen in the next three years?' or 'Is it clear to you that housing prices at these levels cannot sustain themselves for more than 24 months, after which it is likely that prices will drop?'

Nobody asked the right questions that would have resulted in a slow expanse of responsible home buying boom and lessened the number of wildly foolish mortgages that Americans took. And nobody asked those questions because the President of the United States was busy giving mortgage sellers plenty of cover by convincing the American public that they were becoming 'homeowners' rather than 'debt buyers.'
I don't think this is what conservatism stands for. But then again, after 7 years of this disaster and listening to Republicans undermine our very system, I am not sure what conservatives stand for any more.

1 comment:

SOF said...

Don't forget about the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" passed by the Bush administration and the Republication congress.

This legislation makes it difficult for people to file for Chapter 7 bankruptcy protection. Although I'm sure some people abused the system, I suspect most did not. For most people it takes just one job loss or one bad medical emergency not covered by insurance, or predatory lending practices.

This legislation is a boon to credit card companies who push credit cards onto people with little or no ability to pay. Remember the story about the college student who committed suicide over his high debt.

I'm just so saddened about the zeal and acquisition of wealth that has overcome America at every socioeconomic level.

Sad...Just plain sad...