Home Sweet Home

News stories about the collapse–or at least contraction–of the mortgage banking industry are once again in season. Foreclosures are up and foreclosures are bad for everyone. Families lose their homes and banks get stuck owning houses they don’t want. My sympathies would be with the families, except that it’s partly their fault.

The housing boom that has been driving much of the nation’s economy for the past few years has been based on tapping a new market; people without enough money to buy a house. I saw this firsthand a couple years ago, when we sold our old house. We got numerous offers on it, almost all of which were identical. People offered more than our asking price, but with no money down and on the condition that we paid their closing costs. Basically they were financing 100% of the cost of the house, plus closing costs and fees. This lets them get into a house, at the cost of a savage monthly payment. They have no margin in their payments (if they had any margin in their monthly budget, they’d have some money for a down payment) and any financial instability–being laid off, a major expense or two–is likely to cause missed payments, and quite possibly a foreclosure. Not to mention lacking the money to do any work on the house before moving in, the inevitable repairs, etc.

The mortgage industry calls these ‘sub-prime’ loans. Basically that means loans that the borrower is likely to default on, and as such they carry a heavy interest rate. That made the lenders a lot of money for a while, but now too many of the loans are going into foreclosure and the money is drying up.

(I started writing this yesterday, and what should pop up on the news today, but a story about a major sub-prime lender about to go bankrupt because too many of their borrowers aren’t paying them back. Expect to see more of that.)

I find it hard to work up much sympathy for the mortgage banking industry, though, after they’ve sucked the financial life out of so many families. The families should have known better than to sign on, of course, but it’s hard to blame them too harshly. They just wanted to buy a house and saw a way that appeared to let them do so. Few people who have never owned a house understand how expensive it can be, and how important it is to have a healthy cash reserve to cover emergencies and unexpected expenses.

It used to be that the need to save up a hearty pile of cash for a down payment acted as a filter on prospective home-owners. People without the financial means or discipline to save up that down payment would very likely run into trouble trying to keep up a house and mortgage. Only after proving your worth with this rite of passage could you join the ranks of the land-owning class.

For the past few years, pretty much all you’ve needed is the ability to fog a mirror.

Everyone has heard the line, “A man’s got to know his limitations.” It applies to finances too. If you exceed your limits, eventually a big, pissed-off bill is going to come along and kick your ass. Specifically, in this case, buying a house you can’t pay for is going to end badly for you.

If you’re smart, and lucky, you can expand those limits. But first, you have to know what they are.

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