I put "crisis" in quotes because I feel that term is far too overused. There was an article in the Wall Street Journal this week about a family "trapped" in the subprime mess.
There are clearly two ways to look at this article. One is that the family is a "victim" of unethical mortgage brokers. There is no way a family with $90,000 of combined income could afford a $567,000 mortgage, (2 yr ARM). Their mortgage payments alone (without regard to insurance, taxes, etc.) were $38,400/yr. That's over 42% of their pre-tax gross income. By any mortgage qualification threshold, that's far too high. And that's before any potential reset. The reset is moving them to $50,000/yr, or more than 55% of their gross. Plus, they had virtually no money down. The mortgage company was insane to lend to them.
But, and here's the libertarian in me talking, this family needed to take a little responsibility. How they ever thought they could afford the payments, even before any potential reset, is beyond me. I fully understand that many people don't understand basic finance concepts, but this example goes beyond the pale of irresponsibility. At a bare minimum, they should have recognized that they don't know what they're doing and should have conferred with a professional, i.e. a financial planner, an accountant, etc. I'd say their real estate attorney could have raised a flag, but the attorney may not have known anything about their income (I don't believe that my real estate attorney when I bought my house was privy to any of that information). As a result, the only person they probably conferred with financially was the mortgage broker, who was clearly irresponsible to begin with. I can't even believe they were talking with the same mortgage broker about arranging refinancing.
People have a responsibility to become minimally conversant in financial matters that affect them. I simply can't feel bad for this family because they were so irresponsible. My wife and I on a combined basis make a multiple of what these people make, and yet our mortgage is a fraction of theirs (and we only put 5% down on our house, so our mortgage isn't lower as if we simply had more money to begin with).
Though I doubt that the people who read my blog will cry "elitist!", let me point out that I come from a lower-middle class family, not wealth, and I started my career with college debt balance that equaled my starting pay. I was out on my own immediately after college, so I didn't live rent free with my parents and save up lots of money. The only thing my parents did "give" me was an upbringing that focused on the importance of education and, fortunately, inexpensive tastes. Oh, and I live in a pretty expensive part of the country, too, so an argument of "they had no choice" doesn't hold water either.
Finally, I recognized that unforeseen things can happen to people...illnesses, injuries, lay-offs, etc., but these people couldn't afford their decisions if everything went right.
I've been reading a lot lately about people getting in over their heads and about people who don't have enough saved for retirement. But, time and again, the articles mention all the things these people have bought or the vacations they have taken. My wife and I treat ourselves once and a while (which we can well afford), but we follow a simple rule that seems to be blasphemy to so many:
LIVE BELOW YOUR MEANS. Don't try to keep up with the Joneses, because it turns out the Joneses are living beyond their means as well.
Sorry, I know this is off-topic...however, how does one ever save enough money to participate in MFI if you can't follow that simple rule?
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2 comments:
I do agree with you to a large extent. Many people saw their friends and family getting rich from real estate and felt they could "afford" to borrow beyond their means as the rising tide would allow them to sell their house if needed (at a nice profit) before the cost went up.
I have little or no sympathy for lenders who made loans without proper downpayments and income levels. Sadly though, the liquidity crisis hurt many other firms (such as TMA) when the baby was thrown out with the bath-water.
I am in Denver right now, and I drove through a lower class neighborhood yesterday. I was shocked at how many homes were for sale and some did have foreclosure notes on them. So on a personal level, some people are feeling severe pain... and I don't think these are priced like the WSJ example.
mg, I don't doubt the pain people are going through. No doubt the people in the article that I'm commenting on feel that they're in the middle of a nightmare as well (although the WSJ would have done a better job if they had picked a less extreme example).
Fact is, the over-inflated house prices (and they ARE still overinflated) are a problem beyond simply the current "crisis". House prices remain ridiculously priced compared to incomes (at least that's true here in NJ). When my wife and I were looking for a house, we were stunned by the prices and what you could get for those prices. We commented at the time how unbelievable it was that two people making a decent living could barely afford an entry level home in a decent town. We wondered how other people did it. The answer? All too often, they overextended. Hence the current problems.
Plus, you had "irrational exuberance" causing a run-up in the housing market (many areas doubling in only several years). Houses going on the market one day and in bidding wars the next day. Low interest rates making it all possible. We lost out on two houses before we got the one we live in now. And we ended up living in a town with a so-so school system. You should see the towns with good school systems. My house and property would go for double in one of those towns.
Pure insanity. And, unfortunately, like the stock market in 2000, those over-valuations flowed everywhere, including the neighborhoods like the one you drove through. (Making it worse were speculators buying up properties even in poor neighborhoods for "investment").
Regardless, you make a fair point. Hope you're enjoying your trip, otherwise.
-A
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