Subprime Loans

I was reading about Bank of America’s buyout of Countrywide this morning, and I happened upon this article at The Wall Street Journal:

I normally read a lot of opinions and I can respectfully disagree with those who look at things from a different angle than me, but this really ticked me off.  The writer (David Gaffen) says: Expect lots of talk of the moral hazard, particularly now as it extends its reach (as it’s no longer just dumb bankers being covered for their financial engineering through the creation of the Entity, but a lot of regular people), and even a bit of snide, boorish comments from those saying everyone should take responsibility for their own actions (remarks most likely to come from millionaire commentators who have personal assistants to manage their lives).

Pardon me Mr. Gaffen, but I’m not a millionaire, I don’t have a personal assistant, and I don’t happen to think that people who believe in personal responsibility are “snide” or “boorish” – but I am going to comment on your article.  I’ve heard and read many comments on the subprime meltdown, but most leave out the role of the person who ASKED FOR the loan in the first place.  I’ll use myself as an example.

I had to relocate for my job in March, 2007.  I’m not a saver by nature (thankfully my wife is and she keeps my spending in line!) but we had managed to pay off our old house in about 15 years, so we had a good bit (about $140K) to use as a down payment on our new home.   I couldn’t find a decent house in the area we wanted for that, so I needed to get a loan.  I talked to Wells Fargo and Bank of America, and decided to go with Wells Fargo because they had a lower interest rate for a 15 year fixed rate mortgage.

Both Wells Fargo and Bank of America pre-qualified me for a loan of up to $200K on those terms.  Both encouraged me to get an adjustable rate loan with a low (teaser) interest rate fixed for the first three years – they said they could loan me up to $350K if went with an ARM.  “You can get a much nicer home” was a recurring phrase I heard.  The realtor was also pushing me to look at more expensive homes, and had to be persuaded that I really did want to live in a house that was less than I “can afford”.

I found a nice 30 year old home for about $190K, so I borrowed $50K on a 15 year fixed rate mortgage.  My house payments – including property taxes and insurance – are about $500/month, and I’m working on paying that off early, hopefully within about 7 or 8 years.  Had I listened to those selling me the mortgage and the house, I might be writing this from a very nice $450K house in Knoxville, TN – that’s a huge house here – with a payment of about $1500/month with the teaser %3 interest rate for the first 3 years.  I could afford it, so why didn’t I do it?

Because that teaser rate resets in 3 years.  I don’t know what interest rates will be 3 years from now, but I guarantee that they won’t be 3%.  Let’s just assume that it resets to 6% – which is probably on the low side.  That would make the payments go to over $2000/month.  I don’t know what I’ll be making in 3 years, but no matter what, paying an additional  $500/month won’t be fun.

So I’m in a decent house, with payments I can afford – anyone who can tell the difference between “a bottle in front of me” and a “frontal-lobotomy” could have done the same.  Am I supposed to feel sorry for the dumb asses who bought more house than they can afford?  Or for the dip shits that bought a house when they can’t keep a steady job and are surprised when the bank tells them they have to make payments?  And they expect me (via the government) to bail them out because they can’t do math?

Perhaps this is “boorish” and “snide”, but I don’t ask for money that I won’t be able to repay.  I expect the same responsible behavior from others.  When someone asking for a loan LIES about their income, expenses, debt load, or whatever in order to get money from someone else, they are committing a fraudulent act at the least – and plain stealing at the worst.   These home “owners” (perhaps squatters is a better term) are getting the least that they deserve – they should go to jail for fraud or theft.

And lest you think I’m one of the fortunate ones born with a silver spoon, I’ll add this: I left home in 1980 with $20 in my pocket and a change of underwear in a brown paper bag.  Everything I have today I’ve EARNED with my brain and muscles.  I’m tired of people saying they just can’t get ahead, or they weren’t as lucky, or they never had a chance because the convenience store or fast food restaurant owner (where they work) is greedy.  That’s bullshit.  Most of them are just too damn lazy to do what it takes to get out of their current position – they don’t expand their knowledge, they don’t go to school at night, they don’t work 2 jobs to pay off their cars, they can’t (or won’t!) do the math that says they can’t afford that big-screen TV, that new car, those designer jeans, purse, or sneakers. 

This type of person (you know who you are) habitually spends more than he/she makes – and then complains of bad luck when they lose a job or have a medical problem that prevents them from working and servicing the debt that they’ve accumulated.  Dave Ramsey says “act your wage” and it’s excellent advice.  If you spend less than you earn and put 5% or 10% of your take home pay into savings each month, you can ride out any temporary issues that come your way.  And you CAN’T be taken advantage of by hucksters promising you a great house for super low payments.

Because of jerks who didn’t think about the long term consequences of what they were doing, my house will be going down in value for the next few years as thousands of homes in this area go into foreclosure and are put on the market.  But guess what – because I bought less house than I could technically afford – I’ll still be ahead.  And maybe your stupidity will turn me into a millionaire when I buy your house at a rock bottom price because you can’t make the payments. 

Any questions?  🙂



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