Tuesday, September 30, 2008

On mortgages

In light of the recent financial implosion, I have found myself thinking more and more... Was I a sub-prime mortgage?

Husband and I bought our condo right as we were getting married. Our landlord had decided he wanted to live in our apartment himself and evicted us (though we thought we had a lease that protected us, he argued that we didn't... it was a mess). Finding ourselves suddenly and unexpected forced out of our apartment with a newly adopted dog, we were sick of getting burned by dishonest landlords. And with a dog in tow, your rental options are ever narrowing. So we decided to see if we could buy a place.

We had been saving for a down payment and we were able to put 10% down, taking out a second mortgage for the other 10%. We paid off the second mortgage in less than a year. We borrowed about $100,000 less than the lender said we were qualified for. We were relatively conservative. And yet, 3 years later with rising food and gas costs, and fixed (NIH scale) incomes, we're definitely on a tight budget.

What if we hadn't been so aggressive in paying off our (high interest) second mortgage? What if we had actually borrowed as much as the lender told us we could afford? We'd be in big trouble right now. Despite our efforts to be to make smart choices, we'd be in a bad spot.

It was very tempting, as we shopped for a place to buy, to look above and beyond our agreed upon price range. Though we told our realtor what we were willing to spend, she was constantly sending us listings that were above our target price range. And they were so much nicer! What's $30,000?

We stayed conservative and bought a place that was at the low end of what we had figured we could spend... but what if we hadn't?

I think of the families whose homes are now in foreclosure, and I know that there but for the grace of (insert deity here)... We made relatively conservative decisions, but I often wonder if we had come asking for a loan 10 years ago, would we have been approved? Were we a high risk loan?

Though we used a reputable lending company, the lender definitely tried to lend us more money than we could have realistically handled. How many families were given a false sense of security when loan officers talked to them about how much they could afford? Predatory lending indeed.

I watched Bill Clinton on The Daily Show the other night. He said that the current mortgage crisis rose from the ashes of the Dot Com bust... speculators had to put their money somewhere, so they started speculating on real estate and development... they needed more customers to create demand and growth, and the lending institutions helped provide them. How much of this was deliberate? How much of it was bad judgment and greed? How much was ignorance? I don't know, but a lot of families are now paying the price.

Most of the financial analysts will blame the poor judgment of the families now in foreclosure, they blame predatory lenders. But what they don't talk about it just how widespread predatory lending practices were. It wasn't just the internet lenders. It was the credit union down the street and the big name national banks.

So what now? I support the idea of a bail out, because if we don't bail out these banks, everyone will suffer. And I mean everyone. I don't support Paulson's version (no oversight is what got us into this mess in the first place), but I do support a bailout plan. And I feel strongly that a moratorium on foreclosures should be part of that plan.

Even if I weren't dealing with my own set of home-related woes, the crumbling financial system and mortgage system is terrifying. If Husband gets a job this year and we put our house on the market next summer, will there be anyone lending to buyers?

It's a pretty frightening time to be a homeowner. Good thing I'm too poor to have anything invested in the stock market.


ScienceGirl said...

When I was shopping for a mortgage, I was offered 3 times what I decided I could afford. 3 times! I am soo glad I stuck to my own estimate, even though my lender kept telling me how much cheaper it would be to just borrow the whole amount they were offering.

The bean-mom said...

This was such a powerful post, Sciencemama.

I'm so glad that you and your husband were conservative in your choices. And yes, I'm terrified of this (seemingly crumbling) economy.

ScienceMama said...

Yeah, the loan officer kept trying to get us to take out a HELOC as well to "spruce up" our new place. I'm very glad that we stuck to our own calculations of what we could afford. But I think of all the families out there who got suckered in...

Janus Professor said...

When we applied for a home loan 6 months ago, we, too, were told by Bank of America (they are sooo evil) that we could borrow "much, much more." Even our real estate agent was showing us houses out of our price range.

We made up a proposed budget and chose a price point based on what we could afford to maintain our current life style. It did not match up with what our banker or realator was telling us. Indeed, they were predatory, and we chose not to listen to them.

Jennie said...

This was good to hear. My mom is currently home shopping and she is excited about how much money she can get with a loan. She is horrible at budgeting. I should make sure I sit down with her and look at what type of monthly payment her loan will require. The thing is that where we live even the max amount she qualifies for barely gets her a 2bed condo/apartment.
On the flip side, a lot of my family is telling me to buy a house because the market is so good. Um, hello, who buys a house when both members of the family are unemployed!!

My understanding is that the lenders preyed on low income families need for the 'American Dream' to own a home, since during the dot com bust they ran out of lenders and needed to expand their client base. Unfortunately low income families are usually those which just trust the lenders-which you didn't.

Candid Engineer said...

It doesn't sound like you were sub-prime to me.

Mortgage companies today have gone extreme in the other direction. My husband and I can get a loan with 10% down (and top-of-the-chart credit), but even then there are some properties that the loan companies will not allow us to buy because they are considered "too risky". Like a brand-new renovation. Not allowed to buy it.

Anyway, my husband and I feel like we can afford more than what they will give us. So we should be okay. Unfortunately, your money doesn't get you quite as far in this part of the country...