The Mortgage Mess – A Few ‘No Credit Needed’ Thoughts
It’s strange. Every day, I turn on the television and I see programs about the ‘sub-prime situation’. Banks and mortgage companies, desperate to attract customers during the housing-boom, loaned money to folks who didn’t have the ‘best’ credit scores. Many of the loans that were written were ‘adjustable’ – meaning that, over time, the interest rate associated with a particular loan could fluctuate. When most of the loans were written, interest rates were at or near historic lows. Now, as those loans begin to adjust, and rates are higher, many people are finding it difficult to pay their monthly mortgage payments. Slowly, but surely, more an more people are defaulting on their mortgages. Major financial institutions are losing millions of dollars, and investors are worried about the long-term effects of the sub-prime mortgage mess. (Please note, I am not a financial professional. I’m simply presenting a summary of the current situation, as I see it. I am sure that there are things about sub-prime mortgages and adjustable rates that I don’t know or understand.) Apparently, in an effort to keep people in their homes and to avoid a number of foreclosures, President Bush has announced a– the details of which I’ll not go into at this time.
Whew, I’m exhausted just thinking about the situation, and I don’t even have a mortgage, adjustable or otherwise. As I’ve mentioned before, I live in a home provided to me by my employer (as part of my compensation). So, it would be foolish for me to criticize anyone who borrows money, responsibly, for the purpose of buying a home. In fact, if I were to change jobs, I would, more than likely, take out a mortgage and buy a home. Of course, I would only do so AFTER I had the money for a 20% down payment and I would choose a fixed-rate mortgage, as opposed to an adjustable-rate mortgage. (As you can no doubt surmise from the title of my site, No Credit Needed, my goal is to live without borrowing money – even for a home purchase. So, until I am faced with the necessity of a home purchase, I’m saving as much money as I can, and I hope to eventually be able to buy a home – with cash.)
I’ve thought about the current situation a lot – and the situation appears, on some fronts, to be getting worse and not better. It’s pretty clear that the financial institutions loaned money to people who, historically, would not have qualified for mortgage loans. It’s also clear that many of these loans were written with the assumptions that housing prices would continue to rise – and that people who borrowed money would be able to sell their homes or refinance, before the adjustable rates began to ‘reset’ (go up). But, as with most assumptions, there were flaws. Housing prices have gone down – the market has ‘softened’ – and people cannot sell their homes or refinance. And now that those mortgages are ‘resetting’ – people cannot make their monthly mortgage payments. People are losing their homes and major financial institutions are losing millions (billions) of dollars.
What amazes me – and what continues to frustrate me – is that when I watch television reports about the mortgage mess, or when I read an article about the sub-prime situation, no one ever suggests that the underlying problem is that people are addicted to borrowing money. Is it really surprising that we find ourselves in this situation? We borrow money so that we can go to school, we use credit cards so that we can go out to eat, and we take out cash advances so that we can go on vacation. Instead of saving our money, we spend it. Instead of managing our finances, we ‘live-for-today’.
I cannot tell you how sorry I feel for folks who might lose their homes. I cannot imagine the fear associated with a foreclosure or a bankruptcy. But, I must admit, I find it troublesome that many of the people who are struggling to make their mortgage payments also have credit card debt and automobile debt. The truth is, many of the loans that were written should never have been written. Many of the folks who borrowed money would have been better off to rent a nice home, build up an emergency fund, get out of debt, and save up a good down payment.
It looks like all of us, not just borrowers and banks, will pay for the sub-prime situation. The stock market is all over the place – radically up one day and radically down the other. The Federal Reserve is cutting rates. This might be good for some, those who are trying to refinance or restructure their mortgages. But, it might be bad for others, perhaps leading to inflation and lower returns on basic savings accounts.
This is just another example of how debt, which is supposed to be a wonderful servant, can quickly become the master. Personally, I just don’t want to deal with debt, borrowing money, or worrying about interest rates. I am laying the foundation for a “debt-free, credit-free” life – and I’m shocked that so few financial writers or commentators are suggesting that folks should focus on debt reduction. Sure, a bail-out or an interest-rate freeze might help in the short-term, but neither will help us deal with our fundamental problem – an addiction to debt.