Sub-Prime Mortgage Fiasco

I am sick and tired of hearing about this sub-prime mortgage crisis. But I have a perspective on this that I have not heard anyone discuss. First, we need to stop blaming mortgage brokers for this in its entirety. Granted there is plenty of blame on their collective shoulders, but it doesn’t rest exclusively with them. Don’t worry. You still get to blame the banking industry as a whole.

As with most things that are catastrophically wrong with our country, the blame lies squarely with two segments of the population:

• President Bush
• The Banking Industry

I think the analysts and talking heads are missing something critical with their analysis of this issue. The increase in foreclosure rates is due (in my opinion) in large part to the changes in the bankruptcy laws sponsored and pushed through by Bush a couple years ago. I am not surprised that people have missed this connection. Frankly, most folks who analyze the markets and have a voice in the media don’t really think about bankruptcy in real-world terms. It’s just not something they can personally relate to. You see, I am one of those people. I have one of those high-risk, low-interest adjustable rate mortgages. I have gone through bankruptcy and financial hardship and had to make decisions about whether or not I could keep my home. So let me weigh in on this issue from the perspective of someone who’s been there.

Forget the macro-economic conditions that affect long term interest rates, declining wages, increased health care costs blah blah blah. Forget the pie charts and the graphs that depict the ever increasing rate of decline of the American economy and way of life. Instead, let’s focus in on a typical real life scenario for a minute and maybe the issue will become clear.

First, I don’t buy in to the idea that everyone who selected this type of mortgage is ignorant of what they were doing. Not everyone in this scenario was taken advantage of by predatory lending practices—at least not by their mortgage broker. Of course, there’s plenty of that going around, but some people simply analyzed the situation they were in and made a choice that at the time made sense for them. Let’s say you lose your job, get cancer, have an accident or are going through a divorce but want to keep your house. In the divorce example, in order to separate that asset from the marriage, the person keeping the house needs to re-finance on their own. In that case, you may not know for how long you can keep the house or what your job situation is going to be in 2 years. In that case, a 1.8% adjustable rate mortgage for a period of time lowers your short term costs until you can get back on your feet, find a job and settle in to your new life. So, in that case, an ARM makes sense. But here’s where that breaks down…

I think most folks can actually afford to make their mortgage payments. That’s not the problem. It’s managing the other debt you acquire while making a life transition that’s the problem. People end up in a scenario where they are using one of their 9 credit cards to pay the minimum monthly payments on their other cards. I’ll detail out the cycle in another post, but suffice it to say, the end result is a consumer with a mountain of high interest debt they cannot pay. The only way out of that catastrophic event is typically bankruptcy. Remember, you don’t lose your home in a bankruptcy; you can still keep that, your car, your TV etc. What you lose is the mountain of usurious debt piled on by predatory lenders outside of your mortgage company. If you can unload that high interest (28%+) debt load, you can pay your mortgage and make a fresh start and once again become a productive member of society who still owns a home where you can raise a family. It’s the path to redemption for people who’ve hit a bump in the road of life.

Well it was.

Not any more my friend. Along comes a change to the bankruptcy laws. Now it’s damned near impossible to get rid of that debt completely, you are still under the thumb of these predatory credit card lenders making escape from the cycle of usury impossible. When that minor interest increase to your ARM comes around adding that extra $100 a month to your mortgage payment the result is that you try and try to make good on your debt, always deciding who to pay this month until finally you’re overwhelmed and you lose everything.

So it’s not as simple as blaming people for entering into bad mortgages, or mortgage lenders for making risky loans… it’s the other egregious financial pressures placed on people who’s lives get turned upside down that are the real problem here. From the credit card company that jacks your interest rate up to 30% because you miss a payment, to the bank that charges you $180 in overdraft fees for checks totaling $20. That’s where the true burden is and that is what's causing this collapse.

You want someone to blame? Just go to the nearest bank branch and point your finger at the guy behind the counter. Even though it’s not his fault directly, he is as close to the problem as you’re likely to get without an armed escort.