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 foreclosure relief plan – 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.

32 thoughts on “The Mortgage Mess – A Few ‘No Credit Needed’ Thoughts

  1. Dead on, all I can, dead on. Thanks for writing this and saying out loud what most people seem to be forgetting.

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  4. Jason,

    I am not sure why people take the risk when they know they can not afford the home that they bought. We have a very nice home in Ky. We paid 92,000.00 for it and believe me if we decided to buy another home we would “down size.” I would much rather have my husband home then pay a higher house payment. Why do we work just for more “stuff”?



  5. I was thinking about why people do the things they do. Like where I live, many people are paying so much for fancy pda phones with GPS, 3G, camera etc, when I’m sure most of them won’t use half the features they pay for.

    I think, people nowadays stop to think. They just follow the crowd. Same for buying cars, homes, toys they can’t afford. Because it seems that “everybody” have credit card debts or any other debts, they become OK to it too.

    I’m not sure “addicted” is the word to use, perhaps conditioned by peers and the fact that easy credit lowers the entry point of having “stuff”, people do it.

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  7. The part of the situation that makes me mad is that the bailout of these people who use credit without care is going to be financed by the rest of us taxpayers who do use credit responsibility.

  8. Here are four good rules of thumb for buying a house:

    1. At least a 20% down payment.

    2. Only sign a 15 year fixed rate mortgage.

    3. Only purchase a house with a mortgage payment of equal to or less than 25% of your household income.

    4. Only purchase a house when you have a solid emergency fund in place and very little debt (preferably none).

    If you do the above four things, you will never get into trouble with your mortgage AND you will pay off your house faster (yes that’s a good thing–if your financial adviser says otherwise, fire them).

  9. I totally agree with Alan. Why do the people without sense get the bailout? They weren’t responsible enough to calculate whether they can afford their house, why should they get the benefit of getting help after the fact?

    I am fortunate that I can afford my house and am smart and responsible. I guess this whole situation is just another ‘life is unfair’ moment and I guess I should count my blessings that I’m not the one crying for help right now.

  10. First, I love the post. Very well said. Though I don’t think “Bail Out” is the correct term. The government isn’t putting any money into this.

    @Alan / @Peachy:
    How? How am I going to finance this “Bail Out” (again I think that is the wrong term)?

  11. Jay-

    You are correct and I mis-read, there isn’t a bailout plan for now, just a freeze of the adjustment of rates. Even so, I wouldn’t be surprised to see some sort of bailout plan in the future. Its still incredibly frustrating that all of these people are in this situation and all of these financial institutions let them do it.

  12. According to Dave Ramsey, the housing mess is only affecting 3% of the homeowners. That means that 97% of homeowners in America (millions of them) are paying their mortgages on time and are managing their money well!!!!!

    Why, of why, according to Ramsey, is the media focusing on the small 3%??????? Why is so much attention being focused on the ‘doom and gloom’?

    The labor rates came out yesterday and 95% of Americans are working!!!!!! Even if the figures are off a few percentage points, the news basically is very, very good.

    Common sense (and I’ve been buying houses for over 35 years) is to put down as much as possible (at least 20%) when buying a home, keep your expenses/payments low and live within your means. Those who don’t (buyers and the banks and mortgage companies) will suffer the consequences. You can not change the rules of economics. The so called current ‘housing mess’ is just another example that you can not get-rich-quick scheme.

    Everything will work out in the end. It will take another year or two, but we’ll be OK.

    Keep investing and to anyone who ever dreamed of owning a home, if you follow the above rules, NOW is the best time to buy a home (and hold onto it for at least 10 years!)

  13. yup, why oh why is correct. it’s election year. freezing only delays the inevitable. let the people lose their homes and just get this whole mess over with is what I say. I have no sympathy for these people. They should have rented rather than buy a home they knew they couldn’t afford once the rates adjusted. there’s no rocket science in it.

    who ever said owning a home was what you had to do anyways? it’s like having to buy an engagement ring. there is nothing that says owning a home makes you whole. rather silly.

  14. People criticize the gold standard because it doesn’t give you as much ‘liquidity’ as BANKERS want. But being on the gold standard helps restrict the creation of credit – which is what caused this mess. The Fed creates too much money and introduces it into the market through banks (loans) to “help the economy grow”. In this the sub prime shouldn’t have opened. This was done so the right people could put billions in their pockets. Like always it’s the end users who get stuck with the B.S.
    best regards

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  16. Boomie wrote: “Everything will work out in the end. It will take another year or two, but we’ll be OK.”

    It is myopic to look only at the mortgage situation. There are many other factors that will cause the American economy to slip further.

    For instance, as of December 6, 2007, Iran has officially stopped trading oil in dollars. It will not accept American dollars for oil, stating it is an “unreliable” currency.

    This is just one of many factors negatively affecting the U.S. economy.

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  18. See, here’s where you all are wrong: When thinking about what one can or cannot afford, a consumer does not consider the gross price of the object, but merely the payment. Also, total cost of ownership is completely out the window.

    Here’s a typical example: I can just barely ‘afford’ that excalade at $500 a month. I’ll have to stretch, but I can do it. Maybe it means I’ll have to eat out 3 less times per month, but its worth it right? Its totally sweeter than the Jones’s Beamer.

    Of course what I neglected to consider here is that the total cost of that excalade, depending on where I live, is probably more like $1000 a month, after taking into consideration gas, maintenance, insurance etc.

    Then add in payments on the 52 inch plasma (only $92 a month!), home maintenance, a clogged sewer pipe repair, tax bills, a wii, netflix and gamefly, the hdtv cable package, 4 mobiles on the family plan with unlimited texting (even though junior is in 5th grade, all the other kids have them), this, that, and the other thing, and you get into a situation where all those ‘affordable payments’ are now unaffordable.

    Oh, and don’t forget, Christmas is coming…

    NCN, your article is spot on, as usual. Americans are going to have to learn how to make do with less in the coming years, and the really scary thing to me is I don’t think we know how to do that.

  19. 1st: the government shouldn’t bail out lenders!

    2nd: The Interest Rate Freeze is indeed a short-term fix (if you can even call it that…I’ll save the rant and the details). It appears the government is looking to forestall our crisis/correction…essentially spread it out over time so as the lessen it’s effects.

    Lastly, you raise a very valid point…one that I believe is overlooked to often. Overall, we’re instinctively inclined to want to spend more. In fact, we spend money easier than we earn it! We have a desire to want more…that luxury car…the fancy clothes, etc. Our spending is only constrained by our income! Otherwise, we’d keep spending more and more.

    So maybe it’s best that our market correction is taking it’s course the way it is in bringing forward tighter lending restrictions. It’s not that we’re saying “oh well, too bad.” But the fact is, statistics evidence that the major contributor to foreclosures is a Curtailment of Income as opposed to the ARM resets we’re seeing. Our correction is going to bring to light just how much of the American population has been living beyond their means.

    And enlightenment that should say hey, think before you spend…exercise frugal spending habits…and think outside the box (if you can get it cheaper somewhere else, then do so. Don’t just buy it because you want it right now!)

    Anyway, that’s me sharing my thoughts! Agree/disagree?

    Nice to meet ya! I’ll read you later!

  20. Well, the banks should have saw this coming even if the borrowers didn t. After the all banks are supposed to protect the investors. The whole adjustable mortgage thing is just plain stupid. But wasn t just caused by unqualified borrowers, it also was caused by real estate flippers who couldn t unload the property or got in over their heads with renovations and such. It was also caused by the inflation of food and energy that plagued
    the economy just months ago and strained budgets all over the place. Now the jobs are drying up and so the situation gets worse. These people who always blame the little guy
    the borrower for the economic really need to get a grip. It took years to build a middle class in this country after the great depression but it could take months to destroy it a the american way of life for decades to come.

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